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Category: Corporate And Other Laws

High Value Debt Listed Entities – Corporate Governance Reforms

BACKGROUND

The Securities and Exchange Board of India (“SEBI”), in exercise of its powers under the SEBI Act, 1992 has introduced the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2025 (“LODR Amendments, 2025”) which has made a pivotal reform in corporate governance norms applicable to High Value Debt Listed Entities (“HVDLEs”)

SEBI has introduced a new governance regime under Chapter VA of the SEBI (LODR) Regulations, effective from 1st April, 2025, exclusively applicable to High Value Debt Listed Entities (HVDLEs)—defined as listed entities having outstanding listed non-convertible debt securities of ₹1,000 crore or more and does not have any listed specified securities. Notably, this chapter ceases to apply automatically if the outstanding listed debt falls below the ₹1,000 crore threshold for three consecutive financial years. In case outstanding debt equals or exceeds ₹1,000 crore during the financial year, the company shall ensure compliance with such provisions within six months from the date of such trigger.

This sunset clause introduces a dynamic compliance parameter, requiring ongoing monitoring of eligibility thresholds and continuity of governance obligations based on capital structure and market presence. This implies that secretarial, legal, and compliance teams must periodically reassess regulatory status and plan transition frameworks accordingly.

These reforms institutionalise greater transparency, board and committee efficacy, and stakeholder accountability, while introducing uniform compliance timelines and enhanced audit oversight. SEBI has reaffirmed its commitment to a resilient and investor-centric capital market framework that upholds market integrity and governance discipline.

BOARD COMPOSITION REQUIREMENTS

Chapter V-A mandates that the board of HVDLEs comprise of at least 50% non-executive directors and include at least one-woman director. Furthermore, directorship ceilings have been formalised—capping overall listed entity directorships at seven, and for whole-time directors acting as independent directors, the limit is set at three.

Where the Chairperson of Board of Directors is Non-Executive Director, at least one third of Board of Directors shall comprise of Independent Directors and where the listed entity does not have regular non-executive chairperson, at least half of Board of Directors shall comprise of Independent Directors. This structural alignment with entities having listed equity, promotes governance diversity, and encourages focused board participation.

For professionals advising on board constitution or holding multiple governance roles, this entails an essential review of existing mandates and directorship portfolios to ensure continued eligibility. Company Secretaries and Nomination and Remuneration Committees (‘NRC’) will be expected to institutionalise these checks through robust board database management and real-time compliance tracking tools.

MANDATORY CONSTITUTION OF BOARD COMMITTEES

The amended framework further strengthens mechanism by oversight by mandating the constitution of four key committees—Audit Committee, NRC, Stakeholders Relationship Committee, and Risk Management Committee.

The Audit committee shall have minimum of three directors as members out of which at least two-thirds of the members shall be independent directors. This brings HVDLEs in closer alignment with governance practices as applicable to entities having listed equity, but more importantly, it necessitates substantive engagement at the committee level.

Committee charters must be carefully formulated to reflect both statutory responsibilities and entity-specific risk environments. Professionals involved in board advisory, internal audit, and governance roles must support the formalisation of these committees through functional delineation, performance evaluation mechanisms, and governance reporting metrics.

RELATED PARTY TRANSACTION (RPT) POLICY AND APPROVALS

In a significant enhancement, the amendment mandates that HVDLEs formulate a policy on materiality of RPTs, to be reviewed at least once every three years. Notably, royalty or brand usage payments exceeding 5% of annual turnover are deemed material. All material RPTs as defined by the audit committee under sub-regulation (3) of regulation 62K, shall require prior approval from the audit committee and a No Objection Certificate from the debenture trustee.

Transactions entered with a related party individually or together with previous transactions during a financial year exceeding Rupees one thousand crore or ten percent of the annual consolidated turnover shall be considered material. While omnibus approvals are permitted, they are capped at a validity of one year.

This layered approval structure significantly strengthens the governance lens applied to inter-group or related party dealings. Professionals engaged in transaction advisory or guiding on setting up group governance frameworks must be mindful of procedural rigour, especially where prior approvals are required across stakeholders with differing interests. The compliance function must also be equipped to track omnibus approvals with adequate audit trails and expiry thresholds.

PERIODIC RPT DISCLOSURES

Entities are now required to submit half-yearly disclosures of all RPTs in a prescribed format alongside standalone financial statements to the stock exchanges. This increased disclosure frequency enhances transparency and reinforces market discipline around related party dealings.
It necessitates the integration of finance and secretarial functions to align reporting cycles, automate data extraction from accounting systems and ensure that all disclosures are reconciled with board approvals and audit committee records.

GOVERNANCE OF MATERIAL UNLISTED SUBSIDIARIES

To prevent governance arbitrage via unlisted arms, the amendment prescribes that material unlisted subsidiaries incorporated in India must have at least one independent director from the HVDLE on their board. Additionally, financials of such subsidiaries must be reviewed by the audit committee, and significant transactions must be disclosed by the holding company at the board level.

The Minutes of the meeting of the Board of Directors of the unlisted material subsidiary shall be placed at the meeting of Board of Directors of the HVDLE. Any disposal of shares or relinquishment of control in these subsidiaries requires a special resolution from shareholders.

This aligns group-wide governance structures and ensures that key strategic actions in subsidiaries receive full parent board visibility and shareholder scrutiny. From a legal perspective, this underscores the need for pre-transaction governance checks and documentation alignment between subsidiary and parent company.

OBLIGATIONS WITH RESPECT TO EMPLOYEES INCLUDING SENIOR MANAGEMENT, KEY MANAGERIAL PERSONNEL, DIRECTORS AND PROMOTER

A director cannot serve on board of more than ten committees or act as a chairperson on more than five committees across all listed entities which shall be determined as follows: –

a) For calculating the limit of the committees on which a director may serve, all public limited companies, whether listed or not, including HVDLEs and all other companies including private limited companies, foreign companies and companies under Section 8 of the Companies Act, 2013 shall be excluded

b) For the purpose of determination of limit, chairpersonship and membership of the audit committee and the stakeholders’ relationship committee alone shall be considered.

Directors must inform HVDLEs about their committee roles and updates. All board members and senior management must annually affirm adherence to the code of conduct. Senior management must disclose any financial or commercial transactions with potential conflicts of interest. Additionally, no employee, director, or promoter can enter into compensation or profit-sharing agreements related to securities dealings without prior board and shareholder approval. Such agreements, including those from the past three years, must be disclosed to stock exchanges and approved in upcoming board and general meetings, with all interested parties abstaining from voting.

SECRETARIAL AUDIT AND COMPLIANCE REPORTING

This regulatory amendment mandates secretarial audit not only for the HVDLEs but also for their Indian-incorporated material unlisted subsidiaries. Additionally, a secretarial compliance report must be submitted to the stock exchanges within 60 days from the end of each financial year. For practicing professionals in this space, this introduces an expanded scope of responsibility across the group and demands elevated diligence in maintaining verifiable documentation and audit evidence. Advisory teams must ensure that the governance processes implemented at the subsidiary level are harmonised with the parent’s frameworks and withstand regulatory scrutiny.

OTHER CORPORATE GOVERNANCE REQUIREMENTS

HVDLE must submit a periodic corporate governance compliance report, in a format prescribed by the SEBI, to recognized stock exchanges within 21 days of the end of the reporting period. This report should include disclosures of material related party transactions, any cyber security incidents or data breaches, and must be signed by either the compliance officer or the CEO.

Additionally, HVDLEs may include a Business Responsibility and Sustainability Report in their annual report, covering environmental, social, and governance (ESG) disclosures, as specified.

WAY FORWARD

These amendments, demand deeper engagement in board and committee processes, necessitate refined documentation and disclosure systems, and requires cross-functional alignment amongst legal, secretarial, finance, and strategy teams.

Implicitly, it raises the expectation of professionals, to act not just as compliance certifiers, but as enablers of robust governance architecture, particularly in a high-value debt context where stakeholder expectation and responsibilities are distinct from equity markets.

The following changes may be required way forward for effective implementation of the amendments:

  •  Shift From Reactive to Proactive Compliance

Listed entities must transition from reactive compliance to a proactive, technology-enabled governance framework, incorporating real-time dashboards and cross-functional coordination to ensure continuous regulatory alignment.

  •  Empowered and Data-Driven Board Committees

Board committees must be empowered with data-driven insights, independent expert access, and enhanced oversight capabilities to fulfil their fiduciary and statutory responsibilities with greater diligence and accountability.

  •  Elevating the Compliance Function

The compliance function must be redefined as a strategic pillar, with compliance officers, legal counsels, and corporate secretaries acting as proactive advisors on governance, ethics, and reputational risk.

  •  Reinforcing Transparency in KPIs and RPTs

Entities must implement robust protocols for KPI disclosures and related party transactions,  ensuring materiality, auditability, and arm’s-length standards in line with both domestic and global benchmarks.

Gift Or Will Or Settlement – What’s The Difference?

INTRODUCTION

Is a Gift Deed the same as an Instrument of Settlement, and are both of them the same as a Will? The answer is a resounding No!! However, what are the metrics used to distinguish one instrument from another? What tests would the Courts apply to decipher this question? The answers to all these questions and many others were given by the Supreme Court in its decision in the case of N. P. Saseendran vs.N. P. Ponnamma, CA No.4312/2025 Order dated 24th March, 2025. This decision can be considered somewhat a landmark decision since it has laid down various tests and has threadbare analysed 21 other landmark Supreme Court judgements on this point. This Article seeks to analyse the salient points of this judgement.

FACTS OF THE CASE

In Saseendran’s case (Supra), a father executed an instrument of settlement transferring his immovable property in favour of his daughter but at the same time reserving life interest for himself. He reserved the right to income generated from the property and also during his wife’s lifetime. He also had the right to mortgage the property up to a certain amount. Possession was transferred to his daughter. The daughter donee got the registration of the instrument done. After a period of 7 years, the father unilaterally executed a Deed of Cancellation and claimed that this was only a Will and not a Gift / Settlement and hence, he reserved the right to deal with the property as he pleased. Thus, the legal issue before the Supreme Court was whether the document was a gift or a settlement or a Will? The Court proceeded to examine the requirements of each of these documents and then gave its verdict on the nature of the document.

GIFT DEED

The Court examined the requirements of a valid gift under the Transfer of Property Act, 1882.

A valid Gift refers to an instrument by which there is voluntary disposition of one’s existing property (movable or immovable) without consideration to another and the donee should accept the same during the lifetime of the donor, implying imminent vesting of the right upon acceptance. Insofar as an immovable property is concerned, registration is mandatory, whereas, it is not mandatory to register a gift of a movable property, it can be effected by delivery also. Unilateral revocation is not possible. The donor may impose any condition in the deed, which has to be accepted for the gift to take effect.

SETTLEMENT DEED

The Specific Relief Act, 1963, defines the same to be a non-testamentary instrument whereby, there is a disposition or an agreement to dispose of any movable or immovable property to a destination or devolution of successive interest. “Settlement” under the Indian Stamp Act, 1899 refers to a non-testamentary disposition of any movable or immovable property in writing, in consideration of marriage or for the purpose of distributing the property of the settlor among his family or to those to whom he desires to provide or for the purpose of providing for some person dependent on him or for any religious or charitable purpose and includes an agreement in writing to make such a disposition. For immovable properties, the registration of the deed is mandatory. A settlement means a disposition of one’s property to another directly or to vest in any such person after successive devolution of rights on other(s). Further, the circumstances and reasons that led to the execution of such a settlement deed are described as its consideration, which need not necessarily be of any monetary value. More often than not, it consists of love, care, affection, duty, moral obligation, or satisfaction, as such deed are typically executed in favour of a family member. Also, a settlor is entitled to reserve a life interest either upon himself or upon others and impose any condition.

WILL

A will is a testamentary document dealt under the Indian Succession Act, 1925 and is defined as a legal declaration of the intention of the testator to be given effect after his death. Such a declaration is with respect to his property and must be certain. A person may revoke or alter a will at any time while he is competent to dispose of his property by will. The will comes into effect only after the person’s lifetime and he is at full liberty to revoke or alter his earlier will any number of times as long as he is in sound state of mind. Chapter VI of Part VI of this Act deals with construction of wills. The provisions consider the various rules regarding the construction of wills to determine the true intention of the testator and to ensure that the object of such testament is achieved. The rules prescribe the remedy to deal with certain errors and circumstances like misdescription, misnomer and the need for casus omissus – if the law does not provide for a situation, then the caselaw will provide for the same. They also lay down that the meaning is to be discerned from the contents of the entire will and every attempt must be made to give effect to every clause. Later clauses would prevail in case of the two conflicting clauses of gifts in the will, if they are irreconcilable.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT AND SETTLEMENT

The primary difference between the Gift and the Settlement is the existence of consideration in the settlement. A gift is always without any element of consideration whereas in the case of a settlement, consideration is a must. The Court relied upon its earlier decision in Ramachandra Reddy vs.Ramulu Ammal, 2024 SCC Online SC 3304 and held that consideration need not always be in monetary terms. It can be in other forms also.

The Court observed that there were similarities also between a gift and a settlement. Both could not be unilaterally revoked. Creation of a life interest did not affect the nature of the document. Delivery of possession of immovable property was not mandatory, but registration was. It was sufficient if the donee had accepted the same during the lifetime of the executor. The Court analysed various earlier decisions on this point. In K. Balakrishnan vs. K. Kamalam, (2004) 1 SCC 581, the Court held that there was no prohibition in law that ownership in property cannot gifted without its possession and right of enjoyment. Once a gift has been duly accepted it becomes irrevocable in law. A donor cannot unilaterally cancel a completed gift. In Renikntal Rajamma vs. K. Sarwanamma (2014) 9 SCC 445, it was held that in order to constitute a valid gift, acceptance must be made during the donor’s lifetime and whilst he is still capable of giving. If the donee dies before acceptance, the gift is void. Gift of immovable property must be made by a registered instrument, but delivery of possession is not mandatory. In Daulat Singh vs. State of Rajasthan (2021) 3 SCC 459 / Asokan vs. Lakshmikutty (2007) 12 SCC 210, it was held that acceptance of a gift must be ascertained from the surrounding circumstances in each case. It can be inferred by the implied conduct of the donee. In Satya Pal Anand vs. State of MP, (2016) 10 SCC 767 it was held that even if fraud is pleaded, the Registrar cannot unilaterally cancel a document; that right is only with the jurisdictional Court.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT AND WILL

Every will has an element of gift since there is a bequest, but the bequest takes effect only once the testator dies. Till he is alive, he can revoke and revise his will an unlimited number of times.

INTERPLAY BETWEEN AN INSTRUMENT OF GIFT, SETTLEMENT AND WILL

The element of voluntary disposition is common to all the three deeds. The element of gift is traceable to both “settlement” and “will”. The nomenclature of an instrument is immaterial, and the nature of the document is to be derived from its contents. Reservation of life interest or any condition in the instrument, even if it postpones the physical delivery of possession to the donee/settlee, cannot be treated as a will, as the property had already been vested with the donee/settlee. The Court referred to Navneet Lal vs. Gokul, (1976) 1 SCC 630 wherein it was held that the Court while interpreting a will is entitled to put itself into the armchair of the testator. The true intention of the testator has to be gathered not by attaching importance to isolated expression but by reading the Will as a whole, with all its provisions and ignoring none of them. When apparently conflicting dispositions can be reconciled by giving full effect to every word used in a document, such a construction should be accepted instead of a construction which would have the effect of cutting down the clear meaning of the words used by the testator. The cardinal principle of construction of wills was that to the extent that it was legally possible effect should be given to every disposition contained in the will. In P.K. Mohan Ram vs. B.N. Ananthachary (2010) 4 SCC 161, the court referred to the broad tests or characteristics as to what constitutes a will and what constitutes a settlement? It held that the consistent view was that while interpreting an instrument to find out whether it was of a testamentary character, which took effect after the lifetime of the executant or was it an instrument creating a vested interest in præsenti in favour of a person, the Court had to very carefully examine the document as a whole, look into the substance thereof, the treatment of the subject by the settlor / executant, the intention appearing both by the expressed language employed in the instrument and by necessary implication. It held that a document which was not a will in form, may yet be a will in substance and effect. The line between a will and a conveyance reserving a life estate was a fine one. The main test to find out whether the document constituted a will, or a gift was to see whether the disposition of the interest in the property was in praesenti in favour of the settlees or whether the disposition was to take effect on the death of the executant.

If the disposition took effect on the death of the executant, it would be a will. But if the executant divested his interest in the property and vested his interest in praesenti in the settlee, the document would be a settlement. The general principle was that the document should be read as a whole, and it was the substance of the document that mattered and not the form or the nomenclature the parties had adopted. The various clauses in the document were only a guide to find out whether there was an immediate divestiture of the interest of the executant or whether the disposition was to take effect on the death of the executant. If the clause relating to the disposition was clear and unambiguous, most of the other clauses were ineffective and explainable and could not change the character of the disposition itself. The Court referred to an old English decision and held that “if I make my testament and last will irrevocable, yet I may revoke it, for my act or my words cannot alter the judgement of the law to make that irrevocable which is of its own nature revocable.” Thus, if an instrument is on the face of it a will, the mere fact that the testator called it irrevocable did not alter its quality. The principal test to be applied was, whether the disposition made took effect during the lifetime of the executant of the deed or whether it took effect after his death. If disposition was of the latter nature, then it was ambulatory and revocable during his life.

In Mathai Samuel vs. Eapen Eapen, (2012) 13 SCC 80, while examining a composite document, the Apex Court outlined the requirements for both a will and a gift. A will is, revocable because no interest is intended to pass during the lifetime of the owner of the property. In the case of gift, it comes into operation immediately. The nomenclature given by the parties to the transaction in question, is not decisive. The mere registration of “will” will not render the document a settlement. In other words, the real and the only reliable test for the purpose of finding out whether the document constitutes a will, or a gift is to find out as to what exactly is the disposition which the document has made. A composite document is severable and in part clearly testamentary, such part may take effect as a will and other part if it has the characteristics of a settlement, and that part takes effect in that way. A document which operates to dispose of property in praesenti in respect of few items of the properties is a settlement and in future in respect of few other items after the deaths of the executants, it is a will. In a composite document, which has the characteristics of a will as well as a gift, it may be necessary to have that document registered otherwise that part of the document which has the effect of a gift cannot be given effect to. Therefore, it is not unusual to register a composite document which has the characteristics of a gift as well as a will. Consequently, the mere registration of document cannot have any determining effect in arriving at a conclusion that it is not a will. A will need not necessarily be registered. But the fact of registration of a will would not render the document a settlement.

The Court held that the act and effect of registration depend upon the nature of the document, which was to be ascertained from a wholesome reading of the recitals. The nomenclature given to the document was irrelevant. In case of a gift, it is a gratuitous grant by the owner to another person; in case of a settlement, the consideration is the mutual love, care, affection and satisfaction. The document must be harmoniously read to not only understand the true intent and purport, but also to give effect to each and every word and direction.

INCONSISTENCIES IN DOCUMENTS

The Court laid down various principles to deal with inconsistencies in the same document. In Mauleshwar Mani vs. Jagdish Prasad (2002) 2 SCC 468, it was held that if there is a clear conflict between what is said in one part of the document and in another where in an earlier part of the document some property is given absolutely to one person but later on, other directions are given which are in conflict with and take away from the absolute title given in the earlier portion, then the earlier disposition of absolute title should prevail and the later directions of disposition should be disregarded. When it is not possible to give effect to all of them, then the rule of construction is well established that it is the earlier clause that must override the later clauses and not vice versa. Where under a will, a testator has bequeathed his absolute interest in the property in favour of his wife, any subsequent bequest which is repugnant to the first bequeath would be invalid. The object behind this principle is that once an absolute right is vested in the first beneficiary, the testator cannot change this line of succession. Where a testator confers an absolute right on anyone, the subsequent bequest for the same property in favour of other persons would be repugnant to the first bequest in the will and has to be held invalid.

In Sadaram Suryanarayana vs. Kalla Surya Kantham (2010) 12 SCC 147, it was held that if a clause was susceptible of two meanings, according to one of which it had some effect and according to the other it had none, the former was to be preferred. While interpreting a will, the courts would, as far as possible, place an interpretation that would avoid any part of a testament becoming redundant. Courts will interpret a will to give effect to the intention of the testator as far as the same is possible. The meaning of any clause in a will must be collected from the entire instrument and all parts shall be construed with reference to each other.

In Madhuri Ghosh vs. Debobroto Dutta (2016) 10 SCC 805 it was held that if a will contains one portion which is illegal and another which is legal, and the illegal portion can be severed, then the entire will need not be rejected, and the legal portion can be enforced. The golden rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. The status and the training of the parties using the words have to be taken into consideration. It is well settled that in case of such a conflict the earlier disposition of absolute title should prevail and the later directions of disposition should be disregarded as unsuccessful attempts to restrict the title already given. An attempt should always be made to read the two parts of the document harmoniously, if possible. It is only when this is not possible e.g. where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.

In Bharat Sher Singh Kalsia vs. State of Bihar (2024) 4 SCC 318, the Court observed that three Clauses of a will – 3, 11 and 15 were in apparent conflict. It perceived a conflict between Clauses 3 and 11, on the one hand, and Clause 15 on the other, and concluded that Clauses 3 and 11 would prevail over Clause 15 as when the same could not be reconciled, the earlier clause(s) would prevail over the latter clause(s), when construing a deed or a contract. It followed the settled principle:

“The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later……….But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole”

VERDICT IN SASEENDRAN’S CASE (SUPRA)

In light of the above legal principles, the Court examined the instrument executed by the father in favour of his daughter. The opening phrase stated that the instrument was executed “In consideration of my love and affection towards you, the schedule below properties are herein conveyed to you ….. Till my lifetime, I shall be in possession of the schedule properties and shall take the yields from it and if necessary I shall have the right to pledge the schedule properties for a sum not exceeding `2000/- and to avail loan on that basis. After my lifetime, Janaki Amma, who is my wife and your mother, shall have the right to possess the property and take income from the property and utilize the same according to the will and wishes of the said Janaki Amma till the end of her lifetime and you have no right to restrain the said rights of Janaki Amma for any reasons. ”

The Court held that this demonstrated that there was consideration, conveyance, imposition of conditions and reservation of life interest by the father satisfying the requirements to classify the document as a “settlement”. The Court laid down that the postponement of delivery by creation of life interest was not an anathema to absolute conveyance in praesenti. Since life interest was reserved by the father and mother, he was holding only an ostensible possession while the true owner was the daughter. Reservation of life interest was permissible in a settlement but that did not affect the already vested rights. Hence, it concluded that the instrument was a settlement. It further held that delivery of possession is not mandatory to validate a gift or a settlement. All that is required to be proved is whether the gift has been acted upon during the lifetime of the donor. In the present case, the Apex Court found that the donee had unilaterally presented the deed for registration and this fact showed that the document was handed over by the father / donor to his daughter. Thus, the fact of acceptance could be derived from the conduct of the parties. The donee was in possession of the original title deed and had hence, accepted and acted upon the gift. Delivery of possession of the property was only one of the methods to prove acceptance but not the sole method. Receipt of original title deeds and registration of the instrument of settlement would amount to an acceptance of the gift and would satisfy all the requirements of the Transfer of Property Act. Once a gift has been completed, then the donor has no right to cancel the same in the absence of any reservation clauses in the deed. The Court thus held that the donor father had no rights to unilaterally cancel the transfer.

EPILOGUE

This is a very good decision which has examined three vital documents ~ gift, settlement and will. The decision has also brought out the interplay and differences amongst these. It also explains how to construct various documents and how to resolve inconsistencies. Anyone interested in a masterclass on construing documents would be advised to study this decision along with the various decisions that it has followed!!

Part A | Company Law

4. Caparo India Limited

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order: ROC/D/Adj/2022/Section 149(1)/6647

Date of Order: 24th November, 2022

Adjudication order for violation of section 149 of the Companies Act 2013 (CA 2013): Failure to appoint woman director

FACTS

  •  As per the financial statements filed by the company for the financial year ended 31st March, 2021, the paid-up share capital of the company was R195.80 Crores.
  •  The company is clearly required to appoint a woman director based on Rule 3(ii) of Companies (Appointment and qualification of Directors) Rules, 2014 as the paid-up share capital of the company was more than R100 Crores.
  •  A Show Cause Notice was issued to the company and its officers in default on 27th July, 2022 in this regard. The company vide letter dated 9th August, 2022 submitted its reply and as per request of company an opportunity of personal hearing was also given. The authorised representative of the company appeared and made submissions on behalf of the company.
  •  It was submitted that there was a woman director who had resigned from the company w.e.f. 19R March, 2020 due to some reasons. The date of the Board Meeting held immediately subsequent to the resignation of the previous woman director was 23rd March, 2020. The company made its efforts to appoint an appropriate person, but those efforts were not fruitful. However, subsequent to the issue of show cause notice, a woman director was appointed. It was submitted that in any case non-executive directors should not be liable to any penalty on this account.

EXTRACT OF THE RELEVANT PROVISIONS OF THE ACT:

Section 454(6):

(1) …………………………

Second Proviso:

Provided further that such class or classes of companies as may be prescribed, shall have at least one woman director.

Rule 3 of the Companies (Appointment and qualification of Directors) Rules, 2014: The following class of companies shall appoint at least one-woman director-

(ii)Every other public company having- (a) Paid-up share capital of one hundred crore rupees or more; or (b) Turnover of three hundred crore rupees or more:
…………………………………..

Provided further that any intermittent vacancy of a women director shall be filled-up by the Board at the earliest but no later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

Explanation- For the purposes of this rule, it is hereby clarified that the paid-up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account.

Non compliance of section 149 r/w Rule 3 of Companies (Appointment and qualification of Directors) Rules, 2014 would give rise to liability under section 172 which read as under:

Section 172: If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees , and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

FINDINGS AND ORDER

  •  As per second proviso to Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, the company had a period of three months from the date of resignation to appoint a woman director, however, the company failed to do so.
  •  Further, as per explanation to Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, the paid-up capital is being reckoned from the next date of latest audited financial statement i.e. one day after 26th November, 2021 (date of auditor report) and the period of default would continue till the issue of Show Cause Notice on 27th July, 2022 (this period is referred as default period).
  •  For the purpose of determination of penalty, the following data is to be considered :
  •  Duration of the default is from 27th November, 2021 to 27th July, 2022 i.e. period of 243 days
  •  Initial Penalty of ₹50,000 and ₹1,21,500 being Penalty for continuing default aggregating to ₹1,71,500 was levied.
  •  No penalty was levied for officers in default since the company had only non-executive directors.

5. M/s APTIA GROUP INDIA PRIVATE LIMITED

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No – ROC/D/Adj/Order/Section 56(4)(a)/APTIA/4831-4833

Date of Order: 30th December, 2024

Adjudication order issued against the Company and its Director for contravention of provisions of Section 56 of the Companies Act, 2013 with respect to delay in issue of share certificate to shareholders post incorporation of the Company.

FACTS

M/s AGIPL suo-moto filed an application with regard to violation of provisions of the Section 56(4)(a) of the Companies Act, 2013 stating that the company was required to issue the share certificate to both the Subscribers of Memorandum within 2 months of its incorporation i.e. till 7th September, 2023 but failed to do so due to delay in receipt of the subscription money in company’s bank account. Hence, there was a delay in issuance of share certificate to subscribers of 105 days.

Thereafter, office of Registrar of Companies, NCT of Delhi & Haryana i.e. Adjudication Officer (AO) issued Show Cause Notice for the said default to M/s AGIPL and its officer. A response against the notice was received wherein M/s AGIPL re-iterated the facts and also submitted that the delay in issuance of share certificates was unintentional and due to external factors beyond its control and the company had also taken steps to rectify the error.

Further Ms. C J, Company Secretary being the authorized representative of M/s AGIPL appeared for oral submission in the matter and requested to take a lenient view while levying penalty on the company and its officers as the company is newly incorporated.

PROVISIONS

Section 56 – Transfer and Transmission of Securities

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

ORDER

AO after consideration of the reply submitted by M/s AGIPL concluded that M/s AGIPL had failed to issue the share certificate to both subscribers of memorandum within 2 months of its incorporation which was not in compliance with the provisions of Section 56(4)(a) of the Companies act 2013. Hence, penalty of ₹50,000/- was imposed on M/s AGIPL and penalty of ₹50,000/- was imposed on each of its officers in default.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s AGIPL and its Directors.

Allied Laws

6. Inder Singh vs. The State of Madhya Pradesh

Special Leave Petition (Civil) No. 6142 of 2024 (SC)

21st March, 2025

Condonation of delay – Mere technicalities –Substantial justice – Merits to be examined – Liberal approach – Delay of 1537 days is condoned. [S. 5, Limitation Act, 1963].

FACTS

The Appellant had instituted a suit for declaration of title of the suit property/land. The suit property consisted of 1.060 hectares of land situated in Madhya Pradesh. According to the Appellant, the said land was allotted to him in 1978. The Respondent refuted the claim of the Appellants and contended that inter alia, the said property was part of government land. The learned Trial Court, after going into the merits of the claims made by both parties, dismissed the suit. Aggrieved, an appeal was filed before the First Appellate Authority. The First Appellate Authority allowed the appeal and directed the State (Respondent) to hand over the suit property to the Appellant. The Respondent, thereafter, filed a review petition which was dismissed on the grounds of inordinate delay in filing the review petition. Thereafter, the State filed a regular appeal before the Hon’ble Madhya Pradesh High Court with a delay of 1537 days. The State attributed the delay towards review applications pending before the Appellate Authority and corona virus pandemic. The delay was accordingly, condoned.

Aggrieved, a special leave petition was filed by the Appellant before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the suit property, according to the State, was a government property allocated for public purposes. Further, the Hon’ble Court observed that the claims made by both parties required thorough examination. Therefore, the Hon’ble Court opined that the appeal preferred by the State should not be dismissed only on the grounds of delay when its merits needed examination. Further, the Hon’ble Court noted that though delay should normally not be excused without sufficient cause, mere technical grounds of delay should also not be used to undermine the merits of a case. Thus, a liberal approach must be adopted while condoning the delay. The Hon’ble Court also relied on its earlier decision in the case of Ramchandra Shankar Deodhar vs. State of Maharashtra (1 SCC 317). Thus, the decision of the High Court was upheld, and the appeal was dismissed.

7. Arun Rameshchand Arya vs. Parul Singh

Transfer Petition (Civil) No. 875 of 2024 (SC)

2nd February, 2025

Registration – Stamp duty – Suit Property – Compromise between parties – No stamp duty payable. [Art. 142, Constitution of India; S. 17, Registration Act, 1908].

FACTS

Two separate applications were filed by both, Petitioner – husband and Respondent – wife under Article 142 of the Constitution of India for dissolving their marriage by mutual consent. The only contention was with respect to the source of funds utilised by the parties for acquiring the suit property. However, post counselling sessions as mandated by the Hon’ble Court, the Petitioner–husband consented to relinquish his entire rights in the suit property in favour of the Respondent–wife. Therefore, the only question of law that remained to be answered by the Hon’ble Court was whether the Respondent–wife had to pay any stamp duty for the transfer of the said suit property in her name.

HELD

The Hon’ble Supreme Court observed that as per Section 17(2)(vi) of the Registration Act, 1908, no stamp duty is payable if any compromise relates to any immovable property for which the decree is prayed for. The Hon’ble Supreme Court noted that indeed the suit property was the subject matter before it. Thus, the Hon’ble Court, after relying on its earlier decision in the case of Mukesh vs. The State of Madhya Pradesh and Anr.(2024 SCC Online 3832) held that the Respondent–wife is not entitled to pay any stamp duty on the transfer of the property. The applications were accordingly disposed of.

8. Mohammad Salim and Ors. vs. Abdul Kayyum and Ors.

S.B. Civil Writ Petition No. 4561 of 2025 (Raj) (HC)

26th March, 2025

Registration – Unregistered document –Admissible as evidence – Collateral purpose – To be taken as evidence subject to payment of requisite stamp duty and penalty. [O. VIII, R. 1A (3), S. 151, Code for Civil Procedure, 1908; S. 17, Registration Act, 1908].

FACTS

A suit was instituted by the Respondent (original Plaintiff) for the declaration of title of the suit property. During the Trial Court proceedings, the Petitioners (Original Defendants) filed an application under Order VIII, Rule 1A (3) r.w.s. 151 of the Code for Civil Procedure, 1908 for admission of certain documents including one partition deed allegedly entered between the parties. The admission of the said partition deed was objected by the Respondent on the ground that the same is an unregistered document and thus, cannot be accepted as evidence. The Petitioner (Original Defendant) contended that the said document, though unregistered, can be accepted as evidence for collateral purposes. The Trial Court, however, rejected to take the partition deed on record.

Aggrieved, a writ was filed under Articles 226 and 227 of the Constitution before the Hon’ble Rajasthan High Court (Jodhpur Bench)

HELD

The Hon’ble Rajasthan High Court observed that the partition deed, indeed required proper registration as mandated by Section 17 of the Registration Act, 1908. However, the said unregistered document could be used as evidence for any collateral purpose.

Relying on the decision of the Hon’ble Supreme Court in the case of Yellapu Uma Maheswari and another vs. Buddha Jagadheeswararao and others, (16 SCC 787), the Hon’ble Rajasthan High Court held that the said partition deed shall be taken into evidence subject to payment of stamp duty, penalty, its proof thereof and relevancy. Thus, the Petition was allowed.

9. Amritpal Jagmohan Sethi vs. Haribhau Pundlik Ingole

Civil Appeal No. 4595-4596 of 2025 (SC)

1stApril, 2025

Mesne Profits – Eviction of tenant – Calculation of mesne profits – Date of decree till handover of possession of the property [O. XX, R. 12, S. 2 (12) Code for Civil Procedure Code, 1908; Maharashtra Rent Control Act, 1999].

FACTS

The Respondent (landlord) had filed a suit for eviction of the Appellant (tenant) under various provisions of the Maharashtra Rent Control Act, 1999. Accordingly, the learned Trial court had granted for eviction of the tenant. Thereafter, a decree was passed for the possession of the property. In the said decree, the learned Trial Court had inquired into the ‘mesne profit’ to be received by the landlord. According to the directions given by the Trial Court, the mesne profits were to be calculated from the institution of the eviction suit till the date of handover of the possession of the property.

The tenant challenged the said calculation before the Hon’ble Supreme Court. According to the tenant, the calculation of mesne profits ought to have been calculated from the date of the decree being passed till the date of handover of the possession of the property.

HELD

The Hon’ble Supreme Court observed that mesne profits, as per Section 2(12) of the Code for Civil Procedure, 1908, refers to profits earned by a person who is in wrongful possession of the property. In the present facts of the case, unless and until the final decree was passed, there existed a legal relationship of landlord-tenant between the parties.

It is only after the decree is passed that the landlord can be said to be in wrongful possession of a property. Thus, the calculation of mesne profits was modified from the date of the decree till the date of handover of possession of the property.

The appeal was, therefore, allowed.

10. Union of India vs. J.P. Singh

Criminal Appeal No. 1102 of 2025 (SC)

3rd March, 2025

Money Laundering — Retention of records and Electronic documents — Even if the person is not an accused in the complaint — Seizure of property to continue till disposal of the complaint. [S. 8, 17, 44 Prevention of Money Laundering, 2002 (PMLA)].

FACTS

Based on an Enforcement Case Information Report (ECIR) against the respondent, a search and seizure took place wherein electronic records, cash and other documents were seized. Subsequently, a complaint was filed by the Enforcement Department on which cognizance was taken by the special court.

On appeal by the respondent, the appellate authority and High Court took a view that the order dealing with seized property would cease to exist after 90 days. The Department filed an appeal before the Supreme Court.

HELD

On the contention of the Respondent that he was not named in the complaint, it was held that for the purpose of section 8(3) of PMLA, he was named in the ECIR based on which the complaint was made. Therefore, he was not required to be named as an accused in the complaint. Further, it was held that even after the competition of 90 days, the order under the amended section 8(3) of PMLA was to continue till the disposal of the complaint.

The Appeal was allowed.

Rights Issue Simplified (SEBI ICDR Amendments, 2025)

CONCEPTUAL FRAMEWORK FOR RIGHTS ISSUE

A Rights Issue is a well-established capital-raising mechanism that enables companies to generate additional funds while preserving the pre-emptive rights of existing shareholders. The legal foundation for Rights Issue in India is enshrined in section 62(1)(a) of the Companies Act, 2013 (“Companies Act”), which mandates that any further issuance of capital must initially be offered to existing shareholders.

Unlike preferential allotments or public offerings, Rights Issue confer a distinct advantage by allowing companies to raise capital swiftly without requiring shareholder approval in a general meeting. Instead, the Board of directors is vested with the authority to approve and execute the Rights Issue under Section 179(3) of the Companies Act, subject to compliance with the statutory offer period, which must range between 15 to 30 days as stated in Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

For listed companies, the regulatory landscape extends beyond the Companies Act, with additional oversight by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). In view of cumbersome procedure, companies usually do not consider Rights Issue as preferred mode. Following chart below depicts that in past Issuers have preferred QIP and Preferential Allotment over Rights Issue.

The other major factor was that of involvement of the timelines to complete the process of Rights Issue. The chart below shows the time taken for Rights Issue process for listed companies:

As shown above, issuers have preferred fund raising mode like preferential issues or QIP which usually takes lesser time vis-à-vis Rights Issue. It was also observed that even though the existing shareholders have the first right to participate in fund raising activity of the issuer, the listed entities have preferred to raise fund though preferential issue by offering it to select few investors including promoters’ reason being swift fundraising, attracting strategic investors and increase in promoter’s stake.

SEBI CONSULTATION PAPER DATED 20th AUGUST 2024

To enable faster Rights Issue and to simplify procedures, SEBI initiated a comprehensive review of the Rights Issue framework and released the consultation paper on 20th August, 2024. This consultation paper aimed to address key inefficiencies, including extended timelines, disproportionate compliance costs, and structural constraints, which made Rights issues less attractive compared to alternative fundraising methods.

Some of the key Issues which were needed attention were-

  •  Rights Issue below ₹50 crore were exempt from the ICDR Regulations, creating an uneven compliance burden across different categories of issuers.
  •  high cost associated with mandatory merchant banker engagement, which was often disproportionate to the size of the issue.
  •  inefficiencies stemmed from challenges in handling unsubscribed shares, which restricted issuers from effectively managing excess demand or reallocating unclaimed shares.

In addition to above, the proposed Rights Issue guidelines also addressed the other shortcoming associated with the prevalent Rights Issue process such as lengthy time-period, requirements of filing detailed Draft offer letter, appointment of intermediaries, etc.

Following extensive industry feedback on this consultation paper, SEBI made significant amendments to ICDR Regulations on 3rd March, 2025, effective from 4th April, 2025 designed to streamline processes, enhance transparency, and improve overall market efficiency. These changes aim to ensure that Rights Issue remain a viable and competitive method of capital raising while fostering greater investor participation.

KEY AMENDMENTS RESHAPING THE RIGHTS ISSUE FRAMEWORK & THEIR LIKELY IMPACT

  •  Application of ICDR Regulations to Rights Issue Below ₹50 Crore

Prior to the amendments, Rights Issue below R50 crore were exempt from ICDR Regulations, creating regulatory disparities between small and large issuers. SEBI has now mandated uniform compliance with ICDR Regulations for all Rights Issue, irrespective of size, ensuring transparency, investor protection, and a level playing field across the market.

This amendment brings additional compliance requirements, particularly in terms of enhanced disclosures, financial reporting, and regulatory approvals. While this may increase regulatory costs for smaller issues, it also enhances investor confidence and credibility, potentially improving subscription rates.

  •  Reduction of Rights Issue Timeline from 317 Days to 23 Working Days

Prior to the Recent ICDR Amendments, while a fast-track Rights Issue typically took 12-14 weeks, a non-fast-track Rights Issue used to take approximately 6-7 months from the date of the board meeting approving the Rights Issue until the date of closure of the Rights Issue leading to valuation mismatches, investor resistance, and a lack of responsiveness to market conditions. The Recent ICDR Amendments provide that the Rights Issue may be completed within 23 working days from the date of the board of directors of the issuer approving the Rights Issue (except in case of Rights Issue of convertible debt instruments which require prior shareholders’ approval).

Reduction in timeline for completing a Right Issue from 317 days to just 23 working days will enhance efficiency, predictability, and responsiveness to market conditions, allowing companies to raise capital in a shorter timeframe and minimizing exposure to price fluctuations and the Investor will also get benefit that it will counter the volatility and enhance liquidity in the secondary market.

  •  Elimination of Mandatory Merchant Banker Requirement

SEBI has done away with the requirement of compulsory merchant banker involvement in Rights Issue, allowing issuers to self-manage the process or engage advisors selectively.

This will result in reduction in compliance costs and timelines, particularly for mid-sized and smaller companies, which previously incurred substantial fees for engaging merchant bankers and taking time for completing the process. This amendment will grant companies with greater control over the Rights Issue process, enabling them to structure offerings in a cost-effective and efficient manner.

  •  Improved Treatment of Unsubscribed Shares

Historically, the inability to effectively manage unsubscribed shares has been a significant challenge for issuers. SEBI’s amendment now permits issuers to reallocate unsubscribed portions to specified investors, thereby increasing the likelihood of full subscription and reducing the risk of undercapitalization. This change introduces greater flexibility for companies, allowing them to strategically distribute shares based on market demand. This amendment enhances the overall attractiveness of Rights Issue, as companies are now better equipped to manage excess demand and prevent subscription shortfalls. The companies need to ensure efficient allocation of unsubscribed shares while complying with SEBI’s revised guidelines, its legal enforceability. Also, companies must exercise due diligence to ensure compliance with the evolving framework, failing which it can lead to regulatory scrutiny and potential legal ramifications.

For professionals, this regulatory shift present both Challenges and Opportunities. The opportunity for compliance and advisory services shall witness a rise, as the role of Merchant Banker has substantially reduced at one hand and on the other hand regulatory environment has become more complex. This change opens opportunities for legal, accounting, and regulatory advisory services which includes preparation of comprehensive offer documents, ensure regulatory compliance, and reviewing disclosures. The compressed timeline necessitates faster regulatory filings, due diligence, disclosures, etc. which will open new opportunities for Chartered accountants (CAs) and Auditors.

FUTURE OF RIGHTS ISSUE IN THE CONTEXT OF INDIA’S CAPITAL MARKET

SEBI has effectively streamlined the Rights Issue process, contributing to a more predictable and efficient capital-raising environment, making Rights Issue a more attractive option for corporate Issuers.

To further strengthen the Rights Issue framework, adopting of digital platforms to streamline the application process, reducing the paperwork, and integrating blockchain technology for real-time subscription tracking, can improve transparency and allow for more effective monitoring of fund utilization.

For companies which are fully compliant having strong financials and credibility, expedited regulatory approvals may be granted under the concept of Green Route Channel, which could further enhance market efficiency. This would encourage greater participation from a diverse range of companies, making the Rights Issue process more accessible and attractive. Further relaxation of disclosure requirements for smaller issues may be provided in case companies adhere to stringent investor protection policies.

As capital markets evolve, various developments will also unfold but continued vigilance and proactive adaptation will be crucial for maintaining a competitive and investor-friendly capital-raising mechanism and retaining the trust in the integrity of the capital market ecosystem. These amendments reinforce SEBI’s emphasis on transparency, particularly through stricter fund utilisation monitoring mechanisms and enhanced investor protection measures.

Determination of ALP for Related Party Transactions

INTRODUCTION

“Everything is worth what its purchaser will pay for it”
– Publilus Syrus’ Maxim No. 847

One of the most important roles of the Board of Directors of a listed company and its Audit Committee is the review and approval of Related Party Transactions (RPTs). Related Party Transactions are prescribed under s.188 of the Companies Act, 2013 (“Act”) as well as the SEBI (Listing Obligations and Disclosure Requirements)Regulations, 2015 (“SEBI LODR”). The most crucial element in approving an RPT is determining whether the transaction is on an arms’ length pricing (ALP)? Let us examine some key facets in this respect.

STATUTORY FRAMEWORK

Regulation 2(zc) of the SEBI LODR defines a related party transaction to mean a transaction involving a transfer of resources, services or obligations between a listed entity on one hand and a related party of the listed entity on the other hand, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.

Under Regulation 23(2) of the SEBI LODR, all related party transactions and subsequent material modifications, shall require prior approval of the Audit Committee of the listed entity.

S.188 of the Companies Act, 2013 provides that all related party transactions require the approval of the Board of Directors if they are not on an arms’ length basis. The expression “arm’s length transaction” has been defined to mean a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

The Act / SEBI LODR does not provide any further guidance on this expression. Hence, one may refer to other statutes.

DICTIONARY DEFINITIONS

Various Dictionaries have defined the term arm’s length transaction as follows:

(a) The Black’s Law Dictionary, 6th Edition, defines it to mean a transaction negotiated by unrelated parties, each acting in its own self-interest; the basis for a fair market value determination.

(b) The Shorter Oxford English Dictionary, 5th Edition defines it as dealings between two parties where neither party is controlled by the other.

(c) Merriam-Webster’s 11th Collegiate Dictionary states that arm’s length is the condition or fact that the parties to a transaction are independent and on an equal footing.

(d) The Judicial Dictionary by KJ Aiyar, 13th Edition, states that arm’s length transaction is a transaction between unrelated persons in which there is no improper influence exercisable by one party over another and no conflict of interests.

ALP UNDER INCOME-TAX ACT, 1961

The expression “arm’s length price” features prominently in sections 92-92F of the Income-tax Act, 1961 in relation to transfer pricing provisions.

S.92C of this Act deals with the computation of an arm’s length price. It states that the arm’s length price in relation to a transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors.

The methods prescribed under this section to determine ALP are: —
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;

The Chennai ITAT in the case of Iljin Automotive Private Ltd vs. ACIT, (2011) 16 taxmann.com 225 has defined ALP as “What would have been the price if the transactions were between two unrelated parties, similarly placed as the related parties in so far as nature of product, conditions and terms and conditions of the transactions are concerned?”

In Arvind Mills Ltd. vs. ACIT [2011] 11 taxmann.com 67 (Ahd. – ITAT), it was held that the arm’s length principle is based on:

(i) a comparison of the conditions in a controlled transaction with the conditions in transaction between two independent enterprises i.e. uncontrolled transaction,

(ii) subject to adjustments to the price of uncontrolled transaction to carve out differences between these two type of transactions.

Hence, locating proper comparables i.e. comparable uncontrolled transactions is at the heart of an ALP.

Paragraph 1 of Article 9 of the OECD’s Model Tax Convention (which is the basis of bilateral tax treaties) provides as follows:

“(where) conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”

In Dy. CIT vs. Smt. Baljinder Kaur [2009] 29 SOT 9 (URO), the Chandigarh ITAT held that it was a well settled proposition that the concept of ‘fair market value’ envisaged under the Income-tax Act existence of a hypothetical seller and a hypothetical buyer, in a hypothetical market.

CUP METHOD

The Comparable Uncontrolled Price Method (“CUP method”) is the most direct assessment of whether the arm’s length principle is complied with as it compares the price or value of the transactions. As it is the most direct method, it should, be preferred to the other methods. Under the CUP method, the arm’s length price of an RPT is equal to the price paid in comparable uncontrolled sales including adjustments, if any.

In the case of M/s. Schutz Dishman Biotech Pvt. Ltd., Ahmedabad, ITA 554 / AHD / 2006, the Ahmedabad ITAT held that the CUP method is the most suitable method for determining ALP if market conditions in the territory of sale are the same.

Rule 10B of the Income-tax Rules, 1962 states that in determining the ALP, the comparable uncontrolled price method is a method, by which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Thus, the steps for determining ALP are as follows:

(i) Identify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions.

(ii) Adjust such price for differences, if any, between the RPT and the comparable uncontrollable transactions. Adjustments required only if these could materially affect the price in open market.

The adjusted price arrived at in (ii) above is to be taken as the arm’s length price.

According to Rule 10A(ab), “uncontrolled transaction” means a transaction between enterprises other than associated enterprises or related parties. For instance, A and B are related parties. C and D are independent parties (non-related). A transaction between C and D is an uncontrolled transaction as both A and B are concerned. A transaction between A and C/A and D is an uncontrolled transaction as far as B is concerned. A transaction between B and C/B and D is an uncontrolled transaction as far as A is concerned.

The Rule further states that the comparability of a transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

An uncontrolled transaction shall be comparable to an RPT if —

(i) none of the differences, if any, between the transactions being compared are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

In this respect, the United Nations Transfer Pricing Manual defines ‘comparable’ as under:

  •  To be comparable does not mean that the two transactions are necessarily identical.
  •  Instead it means that either none of the differences between them could materially affect the arm’s length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect.
  •  Thus, in determining a reasonable degree of comparability, adjustments may need to be made to account for certain material differences between the controlled and uncontrolled transactions.
  •  These adjustments (which are referred to as “comparability adjustments”) are to be made only if the effect of the material differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results.

The UN TP Manual also recognises that perfect comparables are often not available in an imperfect world. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions.

Comparable uncontrollable transactions are of two types:

♦ Internalcomparables – transactions entered into by related parties with unrelated parties. To be considered as an internal CUP also, a transaction has to be an independent transaction, i.e., between two entities, which are independent of each other – Skoda Auto India (P.) Ltd. vs. Asst. CIT [2009] 30 SOT 319 (Pune – Trib.)

♦ External comparables – transactions between third parties (i.e. transactions not involving any related party).

According to the OECD Guidelines, internal comparables would provide more reliable and accurate data than external comparables. This is because external comparables are difficult to obtain, incomplete and difficult to interpret. Hence, internal comparables are to be preferred over external comparables.

VALUATION UNDER THE CENTRAL EXCISE LAW

The concept of valuation in case of a related person also finds mention under the Central Excise Act. In this respect, the decision of the Supreme Court in the case of CCE vs. Detergents India P Ltd, (2015) AIR SCW 3304 is relevant:

“……transactions at arm’s length between manufacturer and wholesale purchaser which yield the price which is the sole consideration for the sale alone is contemplated. Any concessional or manipulative considerations which depress price below the normal price are, therefore, not to be taken into consideration. Judged at from this premise, it is clear that arrangements with related persons which yield a price below the normal price because of concessional or manipulative considerations cannot ever be equated to normal price. But at the same time, it must be remembered that absent concessional or manipulative considerations, where a sale is between a manufacturer and a related person in the course of wholesale trade, the transaction being a transaction where it is proved by evidence that price is the sole consideration for the sale, then such price must form the basis for valuation as the “normal price” of the goods………………”

Thus, as long as an unrelated price is comparable to a related party price, the related party price has been treated as a normal sale price.

VALUATION UNDER GST LAWS

The GST Laws also provide for determination of open market value in certain cases. For levying GST only that value should be used which is that of an unrelated buyer and supplier. The Central Goods and Services Tax (CGST) Rules, 2017 specify that the value of the supply of goods or services or both between related parties shall be the open market value of such supply.

The term “open market value” of a supply of goods or services or both has been defined to mean the full value in money, excluding GST payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made.

ICSI’S GUIDANCE NOTE

In this respect, the Guidance Note on Related Party Transactions issued by the Institute of Company Secretaries of India (ICSI) in March 2019 is relevant.

One of the Issues raised by the Guidance Note is “How do you satisfy the criteria of arm’s length pricing?” The Guidance Note replies as follows:

“One may check if there are comparable products in the market. If yes, check the terms of sale/purchase, etc. of similar transactions and try obtaining quotes from other sources. Price in isolation cannot be the only criteria. Terms of sale such as credit terms should also be considered”

The RPT as a whole and the entire bundle of the terms and conditions needs to be considered for determining whether the transaction is on an arm’s length basis. It further states that a simple way to prove that there is no conflict of interest in the RPT is to prove that existence of special relationship between contracting parties has not affected the transaction and its critical terms, including price, quantity, quality and other terms and conditions governing the transaction, by following industry benchmarks, past transactions entered by the company, etc.

Another issue raised by the Guidance Note is “What are the parameters to be considered by the Audit Committee while considering whether a transaction is on arm’s length basis? How should the Audit Committee decide such an issue?” The Guidance Note replies as follows:

“The Act does not prescribe methodologies and approaches which may be used to determine whether a transaction has been entered into on an arm’s length basis. Audit Committee may consider the parameters given in the company’s policy on transactions with related parties. Transfer pricing guidelines given under the Income-tax Act, 1961 may also be used. Depending on the nature of individual transaction, any appropriate method may be used by the Audit Committee”

Thus, the ICSI recommends obtaining quotations from unrelated parties as a basis for ascertaining the ALP and also using the methods under the Income-tax Act for determining the ALP.

SA 550 ON RELATED PARTIES

SA 550 is a Standard on Auditing issued by the ICAI on Related Parties. This Standard also provides guidance to the Auditor on how to verify whether the pricing for an RPT is indeed at an arm’s length:

  •  Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated parties.
  •  Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.
  •  Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.

RELIANCE ON QUOTATIONS – VALID

In Toll Global Forwarding India (P.) Ltd. vs. Dy. CIT [2014] 51 taxmann.com 342 (Delhi – Trib.) the validity of bona fide quotations as a means of ascertaining ALP was upheld:

“As long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. The price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression “price which….would have been charged or paid” is used in rule 10AB, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bona fide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price”

Accordingly, quotations from unrelated parties could serve as a valid basis for determining the arm’s length pricing. However, the terms of the quotes should be similar. For instance, the wife of the company’s Managing Director is selling a key raw material to the company. She runs her own business. The rate charged to the company is on the same basis as that charged by her to other unrelated customers. However, in the case of the company, the entire payment is received by her upfront whereas she provides a 6 months’ credit period to all other buyers. This would not be an arm’s length price.

SEBI’S NEW MINIMUM STANDARDS

Regulation 23(2), (3)and (4) of SEBI LODR requires RPTs to be approved by the audit committee and by the shareholders, if material. Part A and Part B of Section III-B of SEBI Master Circular dated November 11, 20241 (“Master Circular”) specify the minimum information to be placed before the audit committee and shareholders, respectively,for consideration of RPTs. In order to facilitate a uniform approach and assist listed entities in complying with the above mentioned requirements, the IndustryStandardsForum (“ISF”) comprising of the representatives from three industry associations, viz. ASSOCHAM, CII and FICCI, under the aegis of the Stock Exchanges, has formulated industry standards, in consultation with SEBI,for minimum information to be provided for review of the Audit Committee and shareholders for approval of RPTs. This has been mandated by SEBI’s Circular dated 14th February, 2025.

This SEBI Circular requires that if a valuation or other report of external party has been obtained for an RPT then the same shall be placed before the Audit Committee. If any such report has been considered, it shall also be stated whether the Audit Committee has reviewed the basis for valuation contained in the report and found it to be satisfactory based on their independent evaluation.

Further, in the case of the payment of royalty, information on Industry Peers shall be given as follows:

(i) The Listed Entity will strive to compare the royalty payment with a minimum of three Industry Peers, where feasible. The selection shall follow the following hierarchy:

A. Preference will be given to Indian listed Industry Peers.

B. If Indian listed Industry Peers are not available, a comparison may be made with listed global Industry Peers, if available.

(ii) If no suitable Indian listed/ global Industry Peers are available, the Listed Entity may refer to the peer group considered by SEBI-registered research analysts in their publicly available research reports (“Research Analyst Peer Set”). If theListed Entity’s business model differs from such Research Analyst Peer Set, it may provide an explanation to clarify the distinction.

(iii) In cases where fewer than three Industry Peers are available, the listed entity will disclose, that only one or two peers are available for comparison.

Additional details need to be provided for RPTs relating to sale, purchase or supply of goods or services or any other similar business transaction:

(a) Number of bidders / suppliers / vendors / traders / distributors / service providers from whom bids / quotations were received with respect to the proposed transactionalong with details of process followed to obtain bids – the Circular states that if the number of bids / quotations is less than 3, Audit Committee must comment upon whether the number of bids / quotations received are sufficient.

(b) Best bid / quotation received. If comparable bids are available, disclose the price and terms offered -the Circular states that Audit committee must provide a justification for rejecting the best bid /quotation and for selecting the related party for the transaction.

(c) Additional cost / potential loss to the listed entity or the subsidiary in transacting with the related party compared to the best bid / quotation received – the Audit Committee must justify the additional cost to the listed entity or the subsidiary.

(d) Where bids were not invited, the fact shall be disclosed along with the justification for the same.

(e) Wherever comparable bids are not available, the Company must state what is the basis to recommend to the Audit Committee that the terms of proposed RPT are beneficial to the shareholders.

Similar details are also required for proposed RPTs relating to sale, lease or disposal of assets of the subsidiary or of a unit, division or undertaking of the listed entity, or disposal of shares of the subsidiary or associate.

For proposed RPTs relating to any loans, inter-corporate deposits or advances given by the listed entity or its subsidiary – Comparable interest rates shall be provided for similar nature of transactions. If the interest rate charged to the related party is less than the average rate paid by the related party, then the Audit Committee must provide a justification for the low interest rate charged.

WHAT MUST THE AUDIT COMMITTEE DO?

Considering the above, Audit Committee of a listed entity must carry out the following process when concluding whether or not an RPT is on an arm’s length basis:

(a) Follow the SEBI prescribed industry standards on minimum information to be placed before the Audit Committee.

(b) Ask for independent quotes / bids / tender from non-related parties for the same transaction. The terms and conditions of the transaction must be the same for the related and the non-related parties.

(c) In some cases, such as, rental RPTs, a broker’s opinion on comparable rent instances could also be relied upon.

(d) Sometimes, it may not be feasible or practical to obtain independent quotes / bids either due to the specialised nature of the transaction or limited number of entities offering that service/ goods. In such cases, the Audit Committee could rely upon an expert’s opinion as to the ALP determination. While relying on this opinion, it should verify that the expert has considered relevant factors and has given a speaking, well-reasoned opinion. For instance, in one case, a listed company acquired a very large piece of land from a promoter company. The management furnished two expert opinions, one from an international property consultant and the other from a chartered valuer. Based on various market studies, sale instances, registration details, etc., both of them concluded that the price paid by the listed company was on an arm’s length basis.

(e) If appropriate, reliance may also be placed on statutory valuations, such as, stamp duty ready reckoner rates, customs’ valuation assessment, etc.

(f) In case of acquisition of shares, an expert’s valuation report may be relied upon.

(g) Ask the Internal Auditor to verify RPTs and give a certification that they are on an arm’s length basis. The Auditor should examine the process for determining ALP in the RPTs.

EXAMPLES FROM LISTED COMPANIES

The RPT Policies of listed companies throw some light on how the Boards should determine ALP. A few such policies are discussed below:

(a) Infosys Technologies Ltd – the Board will inter alia consider factors such as, nature of the transaction, material terms, the manner of determining the pricing and the business rationale for entering into such transaction and any other information the Board may deem fit.

(b) Wipro Ltd – All RPTs are at arm’s length and are undertaken in the ordinary course of business, i.e., the relationship with the transacting party should not confer on the Company or the transacting party any undue benefit / advantage or undue disadvantage / onerous obligations, that will be unacceptable if such transacting party was not a related party and / or the Company will not enter into a transaction which it will ordinarily not undertake. It also states that there must be no “conflict of interest” while negotiating and arriving at terms of such Related Party Transactions. For this purpose, “Terms” will not be merely confined to ‘price’ or ‘consideration’ but also other terms such as payment terms, credit period, sale whether ex-factory, FOB, CIF etc.

If in doubt, management shall seek advice on “arm’s length” from the Chief Financial Officer, General Counsel, of the Company and / or the Audit Committee, as appropriate. The Audit Committee’s decision on these aspects shall be final. Audit Committee could seek external advice to assist in decision making on these aspects or for that matter in dealing with any issues connected with RPTs.

(c) Grasim Industries Ltd – Terms will be treated as on ‘Arm’s Length Basis’ if the commercial and key terms are comparable and are not materially different with similar transactions with non-related parties considering all the aspects of the transactions such as quality, realizations, other terms of the contract, etc. In case of contracts with related parties for specified period / quantity / services, it is possible that the terms of one-off comparable transaction with an unrelated party are at variance, during the validity of contract with related party. In case the Company is not doing similar transactions with any other non-related party, terms for similar transactions between other non-related parties of similar standing can be considered to establish ‘arm’s length basis’. Other methods prescribed for this purpose under any law can also be considered for establishing this principle.

(d) Tata Steel Ltd – While assessing a proposal put up before the Audit Committee / Board for approval, the Audit Committee / Board may review the following documents / seek the following information from the management in order to determine if the transaction is at an arm’s length or not:

  •  Nature/type of the transaction i.e. details of goods or property to be acquired / transferred or services to be rendered / availed (including transfer of resources) – including description of functions to be performed, risks to be assumed and assets to be employed under the proposed transaction;
  •  Material terms (such as price and other commercial terms contemplated under the arrangement) of the proposed transaction, including value and quantum;
  •  Benchmarking information that may have a bearing on the arm’s length basis analysis, such as:
  •  market analysis, research report, industry trends, business strategies, financial forecasts, etc.;
  •  third party comparable, valuation reports, price publications including stock exchange and commodity market quotations;
  •  management assessment of pricing terms and business justification for the proposed transaction as to why the RPT is in the interest of the Company;
  •  comparative analysis, if any, of other such transaction entered into by the Company.

It also states that for this purpose, the Company will seek external expert opinion, if necessary.

CONCLUSION

Valuation is a very subjective exercise based on highly objective data! Hence, it is often remarked that “value lies in the eyes of the beholder!” This subjectivity takes a more dramatic turn when faced with a transaction which is between parties who are associated or related. In the famous English case of R vs. Sussex Justices, ex parte McCarthy, [1923] All ER Rep 233, Lord Hewart CJ laid down the principle ~ “Not only must Justice be done; it must also be seen to be done”. Similarly, when determining the ALP in case of related transactions,

“Not only must the value be fair; it must also be seen to be fair!”

This is where the Board’s expertise and experience would come in handy. They would need to examine the facts of the RPT and remember Grabel’s Law in each ALP determination:

“Two is Not Equal To Three, Even for Very Large Values of Two!”

Part A | Company Law

1. SMD STRATEGIC REAL ESTATE LIMITED & ORS.

Before the Regional Director, Western Region

Appeal Order No 454(5)/SMD Strategic/92/AB2222617/2024-25/962

Date of Order: 20th February, 2025

Appeal under Section 454(5) of the Companies Act 2013 (CA 2013) against order passed for offences committed under Section 92 of CA 2013

FACTS

The Registrar of Companies, Mumbai (ROC Mumbai) vide adjudication order dated 26th December, 2023 held the Company and its Officers / Directors, have defaulted and liable for penalty under Section 92(5) of the Act. The said default pertained to the period from 30th November, 2019 to 29th December, 2019 for not filing Annual Return for the Financial Year 2018-19 within sixty days from the date of Annual General Meeting. Adjudicating officer accordingly imposed a penalty of ₹53,000/- each on company and defaulting officer aggregating to ₹1,06,000/.

The Appellants filed appeal against the said order on 20th December, 2024. As per the provisions of Section 454(6) of CA 2013, every appeal u/s 454(5) is required to be filed within 60 days from the date of the receipt of the order. Thus, it was noticed that appeal was not filed within 60 days from the date of receipt of the order.

EXTRACT FROM THE RELATED PROVISIONS OF THE ACT IN BRIEF

Section 454(6):

Every appeal under sub section (5) shall be fled to within sixty days from the date on which the copy of the order made by the adjudicating officer is received by the aggrieved person and shall be in such form, manner and be accompanied by such fees as may be prescribed.

Rule 4(1) of the Companies (Adjudication of Penalties) Rules, 2014:

Every appeal against the order of the adjudicating officer shall be filed in writing with the Regional Director having jurisdiction in the matter within a period of sixty days from the date of receipt of the order of adjudicating officer by the aggrieved party, in Form ADJ setting forth the grounds of appeal and shall be accompanied by a certified copy of the order against which the appeal is sought:

FINDINGS AND ORDER

At the time of personal hearing, with regard to the delay in filing appeal, authorised representative stated that the said Adjudication Order was not received by the appellant.

Taking into consideration, submissions made by the Appellants in their application as well as oral submissions of authorized representative during the hearing, the Regional Director held as under;

“I am of the considered view that the appeal is barred by limitation and hence, is rejected without going in the merit of the matter as the appeal was filed beyond 60 days after the receipt of Adjudication Order dated 26th December, 2023. Accordingly, the Adjudication Order dated 26th December, 2023 passed by ROC, Mumbai is ‘CONFIRMED’ under Section 454(7) of the Act.

Note:We have been covering the orders of the Adjudicating Officers in the past. We thought it appropriate to cover the Appellate orders too. Sections 454(5) and 454(6) of CA 2013, provide that appeal against the order may be filed with Regional Director within a period of 60 days from the date of the receipt of the order setting forth the grounds of appeal and shall be accompanied by a certified copy of the order.

The purpose of such coverage is to have a 360-degree view of the approach of the MCA in handling defaults which are occasionally very trivial in nature too.

2. Tejas Cargo India Limited

Registrar of Companies, Delhi

Adjudication Order ID PO/ADJ/01-2025/DL/00052

Date of Order: 15th January, 2025

Adjudication order for violation of section 56(4) of the Companies Act 2013 (CA 2013): Failure to issue share certificates to subscribers to the memorandum within 2 months of incorporation

FACTS

  •  The company had submitted an application in Form GNL – 1 for adjudication of violation of the provisions of section 56(4)(a) of CA 2013.
  •  As per the said application, company was incorporated on 26th March, 2021 and as per the provisions of Section 56(4)(a) of CA 2013, the company was required to issue share certificates to the subscribers of memorandum within 2 months from the date of incorporation i.e. on or before 25th May, 2021.

The company in its application had further stated that the share certificates were issued on 7th August, 2021 and hence there was a delay of 74 days in issuance of share certificates to the subscribers of the memorandum of association (MoA). The company had further stated that delay occurred since there was a delay in receipt of share application money.

  •  A show cause was issued to the company and company in reply prayed adjudication of the matter on compassionate ground as the default occurred due to an oversight in procedural compliance.

EXTRACT OF THE RELATED PROVISIONS OF THE ACT IN BRIEF

(4) Every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted—
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
….
(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that the company failed to issue share certificate/s to both the subscribers to the MoA within 2 months of incorporation which was not in compliance with the provisions of section 56(4)(a) of CA 2013. The submission of the company for remission in the penalty cannot be considered as the relevant provisions of the act provides for a fixed penalty. The subject company is not a small company as defined u/s 2(85) of CA 2013.

Hence, adjudication officer imposed a penalty of ₹50,000 each on the defaulting company and subscribers to the MoA.

3. In the Matter of ANHEUSER BUSCH INVBEV INDIA LIMITED

Registrar of Companies, Mumbai

Adjudication Order No: ROC (M)/Sec 118/Anneuser/ADJ-ORDER2023-24/2965 to 2974.

Date of Order: 24th December, 2024

Adjudication Order passed imposing penalty under Section 454(3) for not complying with all the provisions of “Secretarial Standards” specified by the Institute of Company Secretaries of India with respect to General and Board Meetings which amount to violation of provisions of Section 118(10) of the Companies Act, 2013

FACTS

M/s ABNIIL filed suo-moto application dated 24.08.2024 for adjudication of offence before the Office of Registrar of Companies, Mumbai i.e. Adjudication officer (AO) under section 454 of the Companies Act, 2013 towards violation of Section 118(10) of the Companies Act, 2013.

M/s ABNIIL in its application stated that the provision of Sec 118(10) of the Companies Act,2013 which states that ” Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

However, M/s ABNIIL could not comply with all the provisions of Secretarial Standards with respect to General and Board Meetings specified by the Institute of Company Secretaries of India (ICSI) with respect to Board meetings for financial years 2020-21, 2021-22 and 2022-23.

Further, it was stated that non-compliance with respect to the Secretarial Standards mainly pertains to failure to furnish the following:-

i. Proof of sending of Notice and Agenda for the Board Meetings.

ii. Proof of sending of Draft Minutes and Copy of signed and certified minutes.

iii. Proof of circulation of some Board Resolutions passed by circulation along with their approval.

iv. Proof of sending Notice of General Meeting to the Directors and Auditors of the Company.

Thus, M/s ABNIIL had admitted that it was not in proper compliance with provisions of Section 118(10) of the Act and Secretarial Standards specified by (ICSI) and therefore, M/s ABNIIL and its officers in default are liable for penal action under Section 118 (11) of the Companies Act, 2013.

PROVISIONS

Section 118

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot

(1) Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

…

(11) if any default is made in complying total the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

ORDER

AO, after considering the facts and circumstances of the case and after taking into account the factors above, and submissions made by M/s ABNIIL in its application, imposed a penalty of ₹25,000/- (Rupees Twenty-Five Thousand only) on the Company for each financial year and a penalty of ₹5,000/- (Rupees Five Thousand only) each on officer in default for respective financial year for failure towards compliance with the provisions of Sec. 118(10) and Secretarial standards specified by the (ICSI) with respect to Board meetings for FY2020-21, 2021-22, 2022-23.

Thus, a total penalty of ₹1,50,000/- was imposed on M/s ABNIIL and its officers in default.

Allied Laws

1. Sachin Jaiswal v. Hotel Alka Raje and Ors.

Special Leave Petition (Civil) No. 18717 of 2022

27 February, 2025

Partnership Firm — Contribution – Introduction of property into the firm – Stock/Asset of the firm – Perpetual Property of the firm – Transfer of property in the name of the Partnership Firm by way of a relinquishment deed is valid transfer. [S. 14, Partnership Act, 1932; Transfer of Property Act, 1882].

FACTS

One Mr. Bhairo Jaiswal (deceased) had purchased one plot in 1965. Thereafter, in 1971, the deceased entered into an oral partnership agreement with his brother Hanuman Jaiswal. The same was reduced to writing and ‘M/s. Hotel Alka Raje’ (Respondent No. 1/Partnership Firm) was formed in 1972 wherein, the deceased introduced the plot as part of the firm’s assets. The Partnership Firm subsequently constructed a building on the plot and began operating a hotel business. Due to old age, Mr. Bhairo Jaiswal decided to retire from the firm and, on 9th March, 1983, executed a relinquishment deed stating that the said plot was relinquished in favour of Respondent No. 1 (Partnership Firm) and that his legal heirs shall have no right, title and interest in the said plot. Mr Bhairo Jaiswal died on May 30, 2005. Thereafter, the Appellant (legal heir of Mr. Bhairo Jaiswal) filed a suit for declaration of title over the said plot. It was contended by the Appellant that the plot was purchased in the name of Bhairo Jaiswal. Further, a property cannot be transferred in the name of the Partnership Firm by way of a relinquishment deed. This was for the reason that as per the Transfer of Property Act, 1882, sale, mortgage, gift, and exchange are the only recognised modes of transfer. However, both the learned Trial Court and Hon’ble Allahabad High Court dismissed the suit of the Appellant.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the plot was introduced as the property of the Partnership Firm by Mr. Bhairo Jaiswal as his contribution to the Partnership Firm. Consequently, the plot became the property of the Partnership Firm and ceased to be the exclusive asset of Mr. Bhairo Jaiswal. Relying on its earlier order in the case of Addanki Narayanappa v. Bhaskara Krishnappa (1966 SCC OnLine SC 6) and Section 14 of the Partnership Act, 1932, the Hon’ble Court reiterated that any property introduced into the Partnership Firm as an asset or stock shall become a perpetual property of the Firm.

The petition was therefore, disallowed and the Order of the Hon’ble High Court was upheld.

2. S. Sasikala vs. The State of Tamil Nadu and Ors.

AIR 2025 (NOC) 154 (Mad)

23 May, 2024

Guardianship – Appointment – Unwell husband – Family unable to sustain – Only option to relive properties of the husband – Wife appointed legal guardian of the husband. [Art. 226, Constitution of India; S. 7, Guardian and Wards Act, 1890].

FACTS

A Writ Petition was filed before the Hon’ble Madras High Court (Single Judge Bench) by one Mrs. S. Sasikala seeking appointment as the guardian of her husband who was unwell and in a vegetative / comatose state. The Petitioner argued that the family was facing financial problems as hospital bills had escalated to several lakhs of rupees, leaving them with no option but to liquidate properties registered in her husband’s name. Therefore, she sought guardianship to facilitate the necessary sale and manage his assets in his best interest. The Hon’ble Court, however, dismissed the said appeal and asked the Petitioner to approach the civil court.

Aggrieved, an appeal was filed before the Division Bench of the Hon’ble Madras High Court.

HELD

The Hon’ble Division Bench, relying on the decision of the Hon’ble Kerala High Court in Shobha Balakrishnan & Anr. vs. State of Kerala [W.P. (C) No. 37278 of 2018], held that although Section 7 of the Guardian and Wards Act, 1890, only allows for the appointment of a legal guardian for minors, the High Court, under its powers conferred by Article 226 of the Constitution, can appoint a guardian in exceptional cases for an unwell person or someone in a comatose state.

The Petition was therefore allowed.

3. Trident Estate Private Limited v. The Office of Joint District Register and Ors.

AIR 2025 Bombay 59

23 October, 2024

Auction – Property – Sold to the highest bidder – Fair Market Value for determination stamp duty payable – Auction conducted and approved by the Hon’ble Supreme Court – Stamp duty authority cannot determine the value of the property – Bound to accept FMV at the price sold to the highest bidder by the Hon’ble Supreme Court. [S. 32A, 33, Maharashtra Stamps Act, 1958; Registration Act, 1908].

FACTS

The Petitioner had purchased a property through auction under the sale-cum-Monitoring Committee constituted by the Hon’ble Supreme Court for liquidation of assets of one Citrus Check Inn Limited and Royal Twinkle Star Club Limited. The Petitioner had emerged as the highest bidder for the said property at ₹ 2,51,00,000/-Accordingly, a sale certificate was issued to the Petitioner. Thereafter, the Petitioner approached the office of Joint District Registrar (Respondent No.1) for registration of the said property under the provisions of the Registration Act, 1908. The Petitioner paid five per cent stamp duty on the consideration price. Respondent No. 1, however, refused to register the property on the ground that the fair market value of the property was at Rs. 16,72,11,000/- and therefore, stamp duty was payable at the rate of five per cent on the fair market value and not consideration price. Accordingly, a demand of ₹83,60,550/- (on account of stamp duty deficit) and ₹23,41,000/- (towards penalty) was raised on the Petitioner.

Aggrieved, a Writ Petition was filed before the Hon’ble Bombay High Court.

HELD

The Hon’ble Bombay High Court observed that the auction was carried out by the Hon’ble Supreme Court (or at least under the aegis of the Hon’ble Court). Further, it was observed that the method followed by the Hon’ble Supreme Court is one of the most open and transparent forms of sale. Further, the auction-based sale involves careful deliberation and multiple steps, including the fixation of a minimum price, assessment of the property’s present value, and ensuring a transparent bidding process. Even then, the Hon’ble Supreme Court also have a right to cancel the entire bid if it is in their opinion, the process was tainted or the property was sold at a very low price. In the present case, the sale was approved by the Hon’ble Supreme Court. Therefore, when a sale is conducted by the Hon’ble Supreme Court, the stamp authority cannot sit on an appeal and proceed to determine the true market value of the property. Therefore, the demand and penalty were deleted.

The Petition was allowed.

4. Balakrishna G. and Ors v. Sub Registrar Jayanagar District (Kengeri), Bangalore and Ors.

AIR 2025 Karnataka 43

19 July, 2024

Auction of property – Sold to the highest bidder – Registration denied by Stamp Authority – Reason – ED directed Stamp Office not to register any sale without its permission – No authority with the ED to give direction to the Stamp authority office [S. 89(4), Registration Act, 1908; Prevention of Money Laundering Act, 2002; Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002].

FACTS

The Petitioner had purchased a property through a public auction conducted by the Bank (Respondent No. 3) under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for liquidation of debt owed by one Acropetal Technologies Limited. Thereafter, the Petitioner approached the office of the Sub-Registrar (Respondent No. 1) for registration of the property on the strength of the sale certificate issued by the Bank (Respondent No. 3). However, Respondent No. 1 refused to register the said property on the ground that they had received one letter by the Enforcement Directorate (ED) (Respondent No. 2) directing the Sub-Registrar office not to register the said property without their permission.

Aggrieved, a Petition was filed before the Hon’ble Karnataka High Court (Bengaluru).

HELD

The Hon’ble Karnataka High Court after relying on a series of decisions held that the ED have no power under the provision of the Prevention of Money Laundering Act, 2002 (PMLA) to direct Respondent No. 1 to stop the registration of any property. Further, the Hon’ble Court also noted that the rights of a secured creditor under SARFAESI shall always prevail over the claim of ED under the PMLA Act. Further, the Hon’ble Court also observed that as per Section 89(4) of the Registration Act, 1908, it was incumbent upon Respondent No. 1 to register the property upon receipt of the sale certificate. Therefore, the Hon’ble Court directed Respondent No. 1 to register the said property in the name of the Petitioner.
The Petition was therefore allowed.

5. Palaniammal v. Thasi alias Sukkadan

AIR 2025 MADRAS 44

22 November, 2024

Settlement deed – Transfer of title and possession – Unilateral Cancellation deed executed – Challenged validity of Cancellation deed – Maintainability of suit – Suit did not seek declaration of title based on Settlement deed – Not required – Suit maintainable. [S. 31, 34, Specific Relief Act, 1963].

FACTS

A suit was filed for declaration of a ‘cancellation deed’ as null and void. A settlement deed was executed between the Plaintiffs (Appellants) and Defendants (Respondents) wherein, the title of the suit property was transferred over to the Plaintiff along with possession of the land. Thereafter, the Defendants cancelled the ‘settlement deed’ and unilaterally executed a ‘cancellation deed’ on various grounds. Therefore, a suit was filed for declaration of the ‘cancellation deed’ as null and void. However, it was contested by the Respondents, inter alia, that the suit was not maintainable since the Plaintiff had challenged only for declaration of the ‘cancellation deed’ as invalid without seeking any relief for declaration title based on the ‘settlement deed’..

HELD

The Hon’ble Madras High Court observed that the ‘settlement deed’ was mutually executed between the parties. Further, possession and title were given to the Plaintiff. The Hon’ble Court further noted that even after the execution of the unilateral ‘cancellation deed’, the Plaintiff were still in possession of the property. Therefore, the Hon’ble Court held that there was no need for the Plaintiff to seek relief for declaration of title based on the ‘settlement deed’. Therefore, the suit was maintainable.

The suit was therefore allowed.

Research Analyst Regulations – Re-Birth

INTRODUCTION

Research Analysts play a very important role as they analyse information on securities and provide recommendations, and investors normally rely on their advice. However, such advice is many times prone to conflicts of interest arising from preparation and dissemination of research reports with vested interest. Such research analysts include independent research analyst, an intermediary that employs any research analyst or research entity that issues any research report.

This led to the need for Research Analyst Regulations way back in 2013 to establish a regulatory framework to ensure impartial reporting, address conflict of interest, improve governance standards, minimise market malpractices, etc. In order to regulate and streamline the activities of individuals and entities offering research analyst (RA) services, The Securities and Exchange Board of India (Research Analysts) Regulations, 2014, were notified on 1st September, 2014. However, every regulation stands the test of time and must be revisited from time to time.

One such instance that required to re-consider the relevance of existing regulatory framework, has been the mismatch in the large investor base vis-à-vis the number of investment advisors (IA) which led to the proliferation of unregistered entities acting as IA’s & RA’s.

It was extremely crucial to place a conducive regulatory framework by simplifying, easing and reducing the registration requirements and cost of compliance for RA’s and bringing in regulatory changes commensurate with the continually evolving nature of their business and the large investor base.

With this backdrop, The Securities and Exchange Board of India (SEBI) has issued amendments to Research Analyst Regulations on 16th December, 2024 and issued operating guidelines vide circular dated January 8, 2025. The recent changes include:

i. registration of part-time research analyst,

ii. appointment of independent compliance officer,

iii. compliance audit requirements,

iv. segregation of research & distribution activities,

v. capping on fees,

vi. qualifications & certification requirements,

vii. deposit requirements,

viii. dual registration requirements, etc.

One of the eye openers has been, who shall be a classified as Research Analyst? Persons providing ‘research services’ for consideration shall only fall within the definition of research analyst.

This implies that research services rendered without any consideration shall be outside the ambit of these regulations.

The key changes outlining the changes in the RA industry are discussed below, most of which are to be implemented by 30th June, 2025, unless specified otherwise:

PART-TIME RESEARCH ANALYSTS

There are many persons who provides research services however their main activity is not that of providing research services. SEBI has now introduced specific provisions for part-time research analysts, acknowledging the diverse professional backgrounds of individuals and not engaged in business / employment related to securities market and does not involve handling/ managing of money / funds of client / person or providing advice / recommendation to any client /person in respect of any products / assets for investment purposes. Further, applicant engaged in in any activity or business or employment permitted by any financial sector regulator or an activity under the purview of statutory self- regulatory organisations such as Institute of Chartered Accountants of India (‘ICAI’), Institute of Company Secretaries of India (ICSI), Institute of Cost Accountants of India (ICMAI) etc. shall be considered eligible for registration as part-time RA.

This shall create more avenues for CA’s providing their statutory services. For example, a CA who shall be engaged in providing security specific recommendations to the client, which is not investor specific, even though as a part of tax planning/tax filing is required to seek registration as a Part time RA. This provision allows for flexibility in the industry, opening opportunities for professionals in other domains to engage in research analysis while adhering to regulatory frameworks. However, one must keep in mind the provisions of Code of Ethics of ICAI before engaging in such assignment.

Part-time RA shall be required to have similar qualification and certification requirements prescribed under RA regulations for full-time RAs. They shall provide an undertaking stating that it shall maintain arms-length relationship between its activity as RA and other activities and shall ensure that its services are clearly segregated from all its other activities at all stages of client engagement and a specific disclaimer may be given to that extent.

The investor should at all times keep in mind that no complaints can be raised to SEBI for the other services provided by a part-time RA.

APPOINTMENT OF COMPLIANCE OFFICER

With the objective of reducing the cost of compliance by having a fulltime compliance officer, Regulation 26 of the RA Regulations allows non-individual research analysts to appoint an independent professional who is a member of professional bodies like ICAI, ICSI, ICMAI, or other bodies specified by SEBI, provided the professional holds the relevant certification from NISM as required by SEBI. However, the principal officer of the firm must submit an undertaking to the SEBI’s Research Analyst Administration and Supervisory Body (RAASB)/SEBI affirming that they will be responsible for ensuring compliance with the Act, regulations, notifications, guidelines, and instructions issued by SEBI or RAASB.

In this case, Practising Chartered Accountants will have better opportunities to be appointed as independent professionals in regulated entities, however, there lacks clarity whether one independent professional CA can be appointed as compliance officer in various RA entities or whether any statutory restrictions as applicable to number of audits permissible by a practising CA shall apply.

COMPLIANCE AUDIT REQUIREMENTS

Regulation 25(3) of the RA Regulations requires RAs or research entities to conduct an annual audit to ensure compliance with the RA Regulations. Practising CAs shall ensure that the audit is completed within six months from the end of financial year and the compliance audit report. Such compliance report along with adverse findings, if any and action taken thereof, duly approved by RA shall be submitted within 1 month from the date of audit report but not later than 31st October.

SEGREGATION OF RESEARCH AND DISTRIBUTION ACTIVITIES

Regulation 26C (5) of the RA Regulations mandates client-level segregation between research and distribution services within the same group or family of a RA or research entity. Furthermore, new clients must choose between receiving research services or distribution services at the time of onboarding. One of the key changes is that Stock broking activities shall not be considered as distribution services for the purposes of this regulation.

Clients are allowed to retain their existing assets under their current research or distribution arrangements without being forced to liquidate or switch them. However, they must comply with the new segregation requirements for any future services provided. The PAN of the client serves as the key control record for identifying and segregating clients at the individual or family level.

A member of ICAI/ICSI/ICMAI or auditor have to confirm compliance with client level segregation requirements within six months from the end of financial year.

While giving such certification, the practising CA shall ensure that for individual clients, the “family” is considered a single entity, and the PANs of all family members are grouped together for segregation purposes. Further verification should be done, whether the client has provided an annual declaration or periodic updation in respect of dependent family members. Further, RAs providing research services exclusively to institutional clients and accredited investors may be exempt from these segregation rules, provided the client signs a waiver acknowledging this.

FEE STRUCTURE AND CLIENT CHARGES

The new regulations outline the maximum fees that research analysts can charge their clients, ensuring transparency in the fee structure and a level playing field for both IA’s & RA’s.

RAs can charge maximum fee of ₹1,51,000 annually per individual or Hindu Undivided Family (HUF) client and exclude non-individual clients, accredited investors, and institutional clients seeking proxy advisory services. For these clients, fees will be negotiated bilaterally and are not subject to the specified caps. RAs may charge fees in advance with the client’s consent, but the advance should not exceed one-quarter of the annual fee. However, statutory charges are not included in this fee cap. The statutory auditor and the compliance auditor shall ensure adherence to these limits during the course of the audits of such research analysts.

i. Changes in Qualification and Certification Requirements

No person can act as an RA without possessing a requisite qualification. SEBI has prescribed minimum qualifications for Research Analysts as under: –

A professional qualification or graduate degree or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association.

Or

A professional qualification by completing a Post Graduate Program in the Securities Market (Research Analysis) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute.

One of the major changes as compared to the erstwhile regulations is eliminating the need of having in place a graduate in any discipline with an experience of atleast 5 years in activities relating to financial products or markets or securities or fund or asset or portfolio management.

This change has led to a level playing field for new entrants as well as veterans in this field.

ii. Persons associated with research services shall, at all times, have minimum qualification of a graduate degree in any discipline from a university or institution recognized by the Central Government or any State Government or a recognized foreign university or institution.

iii. An individual registered as research analyst under these regulations, a principal officer of a non-individual research analyst, individuals employed as research analyst, person associated with research services and in case of the research analyst being a partnership firm, the partners thereof if any, who are engaged in providing research services, shall have, at all times, a NISM certification.

This has expanded its scope of bringing within its ambit “Persons Associated with Research Services” to have at all times minimum qualification as well as certification requirements, which shall also include all sales staff, service relationship & client relationship managers, who may not be involved in any research function but by virtue of being associated have to be qualified and certified.

DEPOSIT REQUIREMENTS FOR RESEARCH ANALYSTS

The new regulation has done away with the requirement of having a minimum net worth as it was identified that the RA’s provide research services broadly owing to their understanding and knowledge of the subject and their skills to arrive at a suitable advice/recommendation under a particular circumstance.

Further, the services provided are fee based and not related to management of client fund and securities and no significant infrastructure requirements, hence the concept of maintaining networth may not be aligned with the activities of RA.

To safeguard the interests of investors and enhance the financial credibility of research analysts, SEBI has introduced mandatory deposit requirements with immediate effect and for existing clients by 30 April 2025, based on the number of clients which is detailed as under:

  •  Deposit Structure Based on Numbers of Clients:
  •  0 to 150 clients: ₹1 lakh
  •  151 to 300 clients: ₹2 lakh
  •  301 to 1,000 clients: ₹5 lakh
  •  Over 1,000 clients: ₹10 lakh

This deposit must be maintained in a scheduled bank with a lien in favour of SEBI’s Research Analyst Administration and Supervisory Body (RAASB). This deposit shall be utilized for dues emanating out of arbitration and reconciliation proceedings, if RA fails to pay such dues.

DUAL REGISTRATION: INVESTMENT ADVISER AND RESEARCH ANALYST

SEBI has introduced provisions allowing individuals or firms already registered as Investment Advisers (IAs) to apply for dual registration as RAs subject to maintaining arms-length relationship between its activity as IA and RA and shall ensure that its investment advisory services and research services are clearly segregated from each other.

This provision was introduced considering the overlapping nature of activities under IA & RA services.

PRINCIPAL OFFICER DESIGNATION

The erstwhile Regulations did not mandate the requirement of designation of Principal Officer; however, the need was felt that the overall function of business and operations of non-individual RAs should be looked into by a responsible person.

Also, Regulation 2(1)(oa) of the RA Regulations mandates that if a partnership firm is registered as a research analyst, one of its partners must be designated as the principal officer and where no partner meets the necessary qualification and certification criteria, it must apply for registration as a research analyst in the form of an LLP or a body corporate.

This change must be made by 30th September, 2025, as per the SEBI directive.

USE OF ARTIFICIAL INTELLIGENCE (AI) IN RESEARCH

Any research analyst or research entity using artificial intelligence (AI) tools to provide services to clients is solely responsible for ensuring the security, confidentiality, and integrity of client data and also responsible to disclose the extent of AI tool
usage in their research services to clients and additional disclosures as may be necessary to enable informed decision of continuance or otherwise with the RA.

For existing clients, compliance with this requirement must be met by 30th April, 2025.

Research services provided by research analyst or research entity

Regulation 20(4) of the RA Regulations requires that research services provided by a RA or research entity must be supported by a research report that includes the relevant data and analysis forming the basis of the research. The RA or research entity must maintain a record of such research reports to ensure transparency and accountability.

Research services being provided by research analyst or research entity to any of its clients availing its other services as registered intermediary in another
capacity shall be considered as research services provided ‘for consideration’ even though no fee is charged by such research analyst or research entity directly from the client.

This implies that Research services provided by the research entity, who is also registered with SEBI as stock broker, to the clients availing its stock broking services are considered as research services ‘for consideration.

MODEL PORTFOLIO GUIDELINES

Regulation 2(1)(u) and 2(1)(wa) of the RA Regulations now define research services provided by research analysts to include the recommendation of model portfolios. In order to provide clarity on recommendation in respect of model portfolio by RA’s and to provide for safeguard of model portfolio, the guidelines issued shall ensure recommendations of model portfolio such as minimum disclosures, rationale for recommendations, nomenclature and performance of such recommendations.

The compliance auditor shall ensure as a part of its audit procedures check compliance with obligations set out under the model portfolio guidelines.

DISCLOSURE OF TERMS AND CONDITIONS TO THE CLIENT

Regulation 24(6) of the RA Regulations mandates that RAs or research entities must disclose the terms and conditions of their research services to clients and obtain their consent before providing any services or charging any fees. They should also include the Most Important Terms and Conditions (MITC), notified vide SEBI circular dated 17th February, 2025.

KYC REQUIREMENTS AND RECORD MAINTENANCE

Under Regulation 25(1) of the RA Regulations, RAs or research entities are required to follow Know Your Client (KYC) procedures for fee-paying clients and maintain KYC records as specified by SEBI.

WEBSITE REQUIREMENTS

RA Regulations mandates that RAs or research entities must maintain a functional website that includes specific details as outlined by SEBI.

CONCLUDING REMARKS

The new SEBI guidelines represent a significant step towards improving the transparency and accountability of the research analyst industry in India and also easing regulations to bridge the gap between number of investors vis-à-vis the number Registered RAs.

The change in the business model of research as a function also requires corresponding changes to the regulations to be at pace with the RAs, which include recognition of model portfolios within the definition of research services, introducing the concept of Part-time RAs, eliminating the need for experience, to allow ease of entry and participation of exuberant young minds in the securities market, etc.

Such changes demonstrate that the regulator has been watchful, supportive and in sync with the industry that it regulates while ensuring the investor trust and confidence is retained in the securities market.

Nomination and Remuneration Committee

INTRODUCTION

One of the important committees of the Board of Directors of a listed company is the Nomination and Remuneration Committee (“NRC”). The NRC plays a very important role in the corporate governance of a listed company. Recognising its importance,  the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) has prescribed various roles and responsibilities for the NRC. Let us analyse its relevance in the context of a listed entity.

MANDATORY REQUIREMENT UNDER THE ACT’

Under the Act and the LODR, the NRC is a mandatory committee that all listed entities have to constitute. The Companies Act also requires that the following unlisted public companies constitute an NRC:

(i) Public Companies having a paid-up share capital of ₹10 crore or more; or

(ii)Public Companies having a turnover of ₹100 crore or more; or

(iii)Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crore.

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account for the above purpose.

However, despite being covered by the above thresholds, the following companies need not constitute an NRC:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act

ADDITIONAL REQUIREMENTS UNDER THE LODR

In addition to the provisions of the Act, the LODR contains certain additional provisions for the NRC. The NRC must comprise of at least 3 directors of which all directors shall be non-executive directors and at least 2/3 of the NRC shall be independent directors. Non-executive directors would mean those directors who are not drawing any remuneration other than director’s sitting fees and commission. Thus, the members of the NRC would be either independent directors or non-executive non-independent directors. The requirement of having 2/3 of the NRC as independent directors is the same as in the case of the Audit Committee. However, unlike in the case of the Audit Committee (where members must be financially literate), there is no further qualification prescribed for the members of the NRC.

The quorum for a meeting of the NRC is either 2 members or 1/3 of the members of the committee, whichever is greater, including at least 1 independent director in attendance. Thus, if there is no independent director in attendance, then an NRC cannot have a meeting.

The LODR requires that the NRC meets at least once in a financial year. Thus, while the Audit Committee must meet once every quarter, the NRC can meet only once in a financial year.

CHAIRPERSON

The Chairperson of the nomination and remuneration committee must be an independent director, this again is the same as in the case of an Audit Committee. However, the Chairperson of the Company’s Board of Directors cannot be appointed as the Chairperson of the NRC but he can be a member of the NRC. This is so irrespective of whether he is an executive or a non-executive director.

The LODR provides that Chairperson of the NRC may be present at the AGM, to answer the shareholders’ queries. However, the Act states that the chairperson of the NRC constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Thus, unlike in the case of the Audit Committee Chairman, it is not mandatory for him to present at the AGM.It is up to the chairperson to decide who shall answer the shareholders’ queries.

ROLE UNDER ACT

The Act requires that the NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

It shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. While doing so, the Committee must ensure that—

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the report of the Board of Directors.

ROLE UNDER LODR

The responsibilities of the NRC as laid down under the LODR include the following which are in addition to those laid down under the Act:

(a) Formulation of the criteria for determining qualifications, positive attributes and independence of a director – this could also include additional requirements over and above those mandatorily laid down under the Companies Act, 2013 and the LODR. Listed entities are free to prescribe additional criteria for an independent director. For instance, while the Act prescribes 2 terms of a maximum tenure of 5 years per term, many companies prescribe a maximum tenure of 3 years per term.

For every appointment of an independent director, the NRC is required to evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

  •  use the services of an external agencies, if required;
  •  consider candidates from a wide range of backgrounds, having due regard to diversity; and
  •  consider the time commitments of the candidates.

(b) Recommending to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees – in the case of directors, it would include board fees and directors’ commission. In the case of KMPs and other employees, it would include, salary, bonus, variable pay, employee stock option plans, etc.

(c) Formulation of the criteria for evaluation of performance of independent directors and the board of directors – this could include external evaluation, internal questionnaires, surveys, benchmarking, etc.

(d) Devising a policy on diversity of board of directors – this could include diversity in terms of gender, experience, qualifications, etc.

(e) Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal. Any vacancy in a director must be filled up by the entity within 3 months.

(f) Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

(g) Recommend to the board, all remuneration, in whatever form, payable to senior management. The LODR now expressly provides that remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management (except those who are part of promoter) shall not require approval of the audit committee provided that the same is not material.

(h) The appointment / re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. For this purpose, the NRC must provide a detailed explanation and justification for recommending such a person for appointment or re-appointment.

For the above purpose, the term “senior management” meansthose officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Boardof Directors) and shall specifically include the functional heads, by whatever name called and the persons identified and designated as Key Managerial Personnel (KMP), other than the board of directors, by the listed entity.

Earlier, the NRC only considered appointment and remuneration of the KMP. KMP under s.203 of the Companies Act, 2013 comprises of the MD, Manager, CEO, Whole-time Director, CFO and Company Secretary. However, now even one level below the KMP is covered within the ambit of the NRC. For instance, if there is a change in Vice-President Finance, then the same would have to be placed before the NRC.

When it comes to the appointment of KMP, the provisions of the LODR and the Companies Act are both relevant and should be kept in mind by the NRC:

(a) A whole-time KMP cannot hold office in more than one company except in its subsidiary company.

(b) A KMP can be a non-executive Director of any other company with the prior permission of his Board of Directors.

(c) S.196 of the Act lays down the requirements for a person to be appointed as an MD. For instance, one of the important requirements is that he must be a resident of India and resident for this purpose has been specifically defined under the Act. Another important requirement is that he must not have been sentenced to imprisonment for any period OR to a fine exceeding Rs. 1,000 for the conviction of any offence under 19 specific Laws, one of them is the Income-tax Act, 1961. For instance, if a person has been convicted for an offence relating to Tax Deducted at Source, he may become ineligible to be appointed as an MD of a company. To appoint such a person, prior approval would be required from the Ministry of Corporate Affairs.

(d) A person can be a Managing Director of maximum 2 companies. However, the 2nd company appointing such person as MD must approve his appointment by a Board resolution with the consent of all the directors present at the meeting.

(e) While fixing the managerial remuneration, the Act provides that the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198. The Remuneration payable to non-executive directors cannot exceed 1% of the net profits of the company. However, sitting fees payable for attending Board Meetings is not included in this limit, but the maximum fees payable per committee / board meeting cannot exceed ₹1 lakh.

Further, Schedule V to the Act provides for the maximum managerial remuneration in case of a company that has inadequate profits. The NRC must be cognizant of these provisions when it fixes the remuneration of an MD / Whole-time Director, Director, etc.

(f) The Companies Act provides that if the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. However, the LODR provides that any vacancy in the office of Chief Executive Officer, Managing Director, WholeTime Director or Manager or CFO shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy. The LODR providing a more stringent requirement will override the provisions of the Act.

(g) The Compliance Officer (Company Secretary) of the Company shall be a whole-time employee of the listed entity, not more than one level below the board of directors and shall be designated as a Key Managerial Personnel.

(h) Any vacancy in the office of the Compliance Officer shall be filled by the listed entity within 3 months.

(i) In case of resignation of an independent director of the listed entity, detailed disclosures shall be made to the stock exchanges by the listed entities within 7 days from the date of his resignation. The NRC should ensure that these disclosures are made.

(j) In case of resignation of KMP, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date that such resignation comes into effect. The NRC should ensure that these disclosures are made.

The powers of the NRC were scrutinised by the Bombay High Court in the case of Invesco Developing Markets Fund vs. Zee Entertainment Enterprises Ltd. [2022] 232 COMP CASE 20 (Bombay). The Court held that there is no bar on a shareholder to appoint an Independent Director on the Board of a Company. S. 160 of the Act expressly gave powers to a shareholder to appoint a Director even if the same was not appointed by the NRC. The Court held that if this interpretation were upheld a shareholder of a listed company would not only be disabled from proposing Independent Directors, but such disability would extend to all other Directors. Effectively, even a majority shareholder of a listed Company would not be able to appoint a Director without identification by the NRC. The Court held that this was not the intent or purpose of the Act.

ESOP REGULATIONS

In addition to the Act and the LODR, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“the ESOP Regulations”) also prescribe a role for NRCs of those listed companies that have instituted an ESOP. ESOPs for this purpose, can also be in the form of employee share purchase schemes, stock appreciation rights, etc.

The ESOP Regulations require that a company shall constitute a Compensation Committee for administration and superintendence of the ESOP schemes. However, its NRC can act as this Compensation Committee.

The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOP schemes. Regulation 5(3) of the ESOP Regulations lays down the terms and conditions of schemes to be formulated by the Compensation Committee.

The Committee must also frame suitable policies and procedures to ensure that there is noviolation of securities laws, including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

CORPORATE GOVERNANCE REPORT

The corporate governance contained in the company’s Annual Report must contain the following disclosures regarding the NRC:

(a) brief description of terms of reference;

(b) composition, name of members and chairperson;

(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.

PENALTY

For any contravention of the provisions of Act relating to an NRC, the company shall be liable to a penalty of ₹5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹1 lakh. The LODR provides a fine of ₹2,000 per day of non-compliance with respect to the constitution of the NRC.

In the case of Max Heights Infrastructure Ltd, Adjudication Order No. Order/BM/GN/2024-25/30529, SEBI’s Adjudication Officer held that under the LODR, at least 2/3 of the directors of the NRC must be independent directors. However, in that case, the one director was incorrectly classified as an Independent Director and hence, the number of independent director was reduced by 1 compared to what it should have been. Hence the independence requirements of nomination and remuneration committee was not fulfilled.

The Registrar of Companies, NCT of Delhi & Haryana has passed an adjudication order (order no.RoC/D/ADJ/2023/Section 178/PFS/2511-2515). The findings were that a company which was a listed public company was mandatorily required to constitute anNRC and its total strength could not be reduced below 3. As far as the role of the NRC was concerned, the same was spelt out under the Act and it was seminal in identifying persons who were suitable for becoming directors in a company, it was also responsible for laying down the criteria qualifications, positive attributes and independence of a director, besides laying down policies for syncing remuneration with the performance benchmarks. Owing to the withdrawal of a nominee director by the holding company, the NRC became dysfunctional as the number of directors fell below 3. The RoC held in spite of this the company did not show any alacrity in reconstituting the NRC. Accordingly, it held that the company and its MD had failed to discharge their obligation under section 178 of the Companies Act 2013 thereby rendering themselves for penal actions.

CONCLUSION

The NRC is a very vital cog in the corporate governance wheel. It is vested with great powers as regards appointment of the Directors, KMP and senior management. It would also act as an important link between the shareholders and management of the company.

Part A | Company Law

18. Global One (India) Private Limited.

Registrar of Companies, NCT of New Delhi and Haryana

Adjudication Order No. ROC/D/Adj/Order/203/GLOBAL ONE/5224-5226

Date of Order: 31st January, 2025

Adjudication order for violation of section 203 of the Companies Act 2013(Act): Delay in appointing Whole Time Company Secretary.

FACTS

  •  The Company had earlier filed a compounding application before the Regional Director (NR) for the period starting from 1st November, 2013 to 1st May, 2023 for non-appointment of CS. During the hearing for compounding, it was indicated that for the period starting from 2nd November, 2018, the said default is under adjudication mechanism and accordingly, a separate application has to be filed before the ROC, NCT of Delhi & Haryana.
  •  In the adjudication application filed thereafter, it is stated that due to the financial constraints, the management was unable to find a suitable candidate for the purpose of appointment of Whole Time Company Secretary on Board.
  •  The CS could only be appointed on 1st May, 2023 and accordingly there has been a delay of 1642 days (i.e. from 2nd November, 2018 to 1st May, 2023) in the appointment.
  • Accordingly, a show cause notice for the default was issued to the company and its officer and a response was received to the notice. In its reply, the company put forth its business condition wherein it is submitted that the Company is part of the Orange Business Group i.e. multinational business group from France with Govt. of France. The Company had to carry certain business operations with Videsh Sanchar Nigam Limited (VSNL) but due to VSNL being wound up, this Company also did not pursue the business goals further. The company stated that it was neither carrying any business nor it had any revenue  from business operations so it could not appoint the CS to meet the requirement of the Companies Act. The company also requested for oral hearing in the matter.
  •  The authorised representative who appeared for oral submission in the matter requested to take a lenient view while levying penalty on the company and its officers as company is not making any revenue from its operations since many years.

EXTRACT FROM THE PROVISIONS OF THE ACT IN BRIEF:

Section 203 (Appointment of Key Managerial Personnel):

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and (iii) Chief Financial Officer:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or
Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,

(a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. ………

(5) “If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees”

Rule 8A (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 8A. Every private company which has a paid-up share capital for ten crore rupees or more shall have a whole-time company secretary.

FINDINGS AND ORDER

The Company has failed to appoint to whole time company secretary for a significant period. There has been a delay of 1642 days (i.e. from 2nd November 2018 to 1st May, 2023) in appointment of CS. Further, the submission of the company to grant any remission in the penalty cannot be considered as the law provides for a fixed penalty. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.

Thereafter in exercise of the powers conferred on the AO vide Notification dated 24th March, 2015 and having considered the reply submitted by the subject Company in response to the notice, the following penalty was imposed on the Company and its officers in default under Section 203 of the companies act 2013 for violation as follows:

  •  Penalty on Company of ₹5,00,000 being Maximum Penalty
  •  Penalty on each of the directors subject to Maximum of ₹5,00,000 per director

19. M/s HIND WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED

Registrar of Companies, Chandigarh

Adjudication Order No. ROC CHD/ADJ/ 860 TO 865

Date of Order: 27th November, 2024.

Adjudication Order for Non-disclosure of interest or concern in other body corporate or entities by the Directors in Form MBP-1at the first Board Meeting of the Financial Year as required under the provisions of the Section 184 of the Companies Act 2013.

FACTS OF THE CASE

Registrar of Companies (ROC) or Adjudication Officer (AO) during its inquiry on M/s HWAHMPL under Section 206 of the Companies Act, 2013 found that the directors had failed to disclose their interest or concern in other companies or body corporate, including their shareholding, at the first board meetings for the financial years 2020-21 and 2021-22 and necessary Form MBP-1 was not submitted/filed by the directors to the M/s HWAHMPL.

Thereafter, ROC issued a show-cause notice (SCN)on November 7, 2024 to directors for violation of Section 184 (1) of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules, 2014. However, directors did not provide any response or communication to the said SCN.

PROVISIONS

Section 184(1): “Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.”

Section 184(4): “If a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be liable to a penalty of one lakh rupees.”

Section 446B: “Notwithstanding anything contained in this Act, if penalty is payable for non­-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

Explanation. —For the pit/ poses of this section

(a) “Producer Company” means a company as defined in clause (1) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

Rule 3(12) of Companies (Adjudication of Penalties) Rules, 2014 “While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely.

a) size of the company

b) nature of business carried on by the company,

c) injury to public interest,

d) nature of the default,’

e) repetition of the default,’

f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default: and

g) the amount of loss caused to an investor or group of investors or creditors as a result of the default.

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.”

Rule 3(13) of Companies (Adjudication of Penalties) Rules, 2014 which read as under: “In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.”

ORDER

AO, after having considered the facts and circumstances of the case concluded that the directors of M/s HWAHMPL were liable for penalty as prescribed under section184(4)of the Companies Act 2013 for default made in complying with the requirements.

Hence, AO imposed an aggregate penalty of ₹5,00,000/- (Rupees Five Lakhs Only) i.e. ₹50,000/- (Rupees Fifty Thousand Only) on Each of the Director in default of M/s HWAHMPL for non-disclosure of interest or concern in other bodies corporate or entities at the first Board Meeting held for the Financial year 2020-21 and 2021-22 in form MBP-1 undersection 184 (4) of the Companies Act 2013 read with Section 446B of the Companies Act 2013.

Allied Laws

52. Sunkari Tirumala Rao and Ors. vs. Penki Aruna Kumari

2025 LiveLaw (SC) 99

17th January, 2025

Partnership Firm — Unregistered — Suit instituted by partners for recovery of money from another partner — Suit not maintainable — Registration of Partnership firm compulsory — Mandatory provision. [S. 69, Partnership Act, 1932].

FACTS

The Petitioners (Original Plaintiffs) had instituted a suit for recovery of money in their capacity as the partners of an unregistered partnership firm against the Respondent (Original Defendant), who was also a partner of the said unregistered firm. The Respondent had challenged the maintainability of the said suit on the ground that, as per section 69 of the Partnership Act, 1932 (Act), no suit can be filed by a partner of an unregistered firm. However, the learned Trial Court held that since the partnership firm had not commenced business, the Petitioners were entitled to file a suit for recovery of money under section 69 of the Act. In the revision proceedings before the Hon’ble Andhra Pradesh High Court at Amravati, the Hon’ble Court held that the provisions of section 69 are mandatory in nature, and a suit can only be filed by partners of a registered partnership firm.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court after relying on its earlier decision in the case of Seth Loonkaran Sethiya and Others vs. Mr. Ivan E. John and Others (1977) 1 SCC 379, along with other decisions, reiterated that provisions of section 69 are mandatory in nature and also apply to unregistered partnership firms that have not commenced their business. The Petition was, therefore, dismissed, and the order of the Hon’ble High Court was upheld.

53. Surendra G. Shankar and Anr. vs. Esque Finamark Pvt. Ltd. and Ors.

Civil Appeal No. 928 of 2025 (SC)

22nd January, 2025

Condonation of delay — Appeal — Appellate Court restricted to adjudicate the matter only on the delay aspect — Cannot adjudicate on merits.

FACTS

The Appellants had filed a complaint before the Maharashtra Real Estate Regulatory Authority (RERA) for possession of a flat. The said complaint was filed against the Respondent and one M/s. Macrotech Developers Ltd. (Respondent No. 2). Thereafter, Respondent No. 2 was discharged from the proceedings vide order dated 23rd July, 2019 citing no privity of contract between the Appellant and Macrotech Developers Ltd (Respondent No. 2). Thereafter, a final order was passed on 16th October, 2019 dismissing the complaint of the Appellant. Aggrieved, an appeal was preferred before the RERA Tribunal against the order dated 16th October, 2019. The Appellant also appealed against the order of the RERA dated 23rd July, 2019 (wherein Respondent No. 2 was discharged) along with an application for condonation of delay. However, the RERA Tribunal dismissed the delayed appeal. Thereafter, the appellants filed a second appeal before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court condoned the delay and thereafter proceeded to decide the issue on merits, resulting in the dismissal of the appeal.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that once the Hon’ble High Court had condoned the delay of the Appellant, it ought to have restored the matter back to the file of the RERA Tribunal since the scope of appeal was limited to the condonation of delay. This was further strengthened by the fact that the RERA Tribunal had not commented / adjudicated on merits. Therefore, the decision of the Hon’ble High Court was set aside, and the matter was restored to the file of the RERA Tribunal with a direction to decide the appeal on merits without being prejudiced by the observations made by the Hon’ble High Court. The appeal was, therefore, allowed.

54. Central Bank of India vs. Smt. Prabha Jain and Ors.

2025 LiveLaw (SC) 103

9th January, 2025

Suit Property — Possession Debt Recovery Tribunal — Powers / jurisdiction — Possession can be given only to the borrower or possessor. [S. 17, 34, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002; Order VII, Rule 11, Code for Civil Procedure, 1908.].

FACTS

Respondent No. 1 (Ms. Prabha Jain, Original Plaintiff) had instituted a suit for possession of the suit property. According to Ms. Prabha Jain, she had inherited a 1/3rd share in the suit property after the death of her husband in 2008. However, the suit property was illegally sold by one Mr. Sumer Chand Jain (brother of the deceased husband, Appellant / Original Defendant) to one Mr. Parmeshwar Das Prajapati (Appellant / Original Defendant). Thereafter, Mr. Parmeshwar Das Prajapati executed a mortgage deed in favour of Central Bank of India (Appellant-Bank) for obtaining a loan. Thereafter, the Appellant-Bank took over the possession of the suit property under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act, 2002 and published an advertisement for putting the suit property on auction. Consequently, Ms. Prabha Jain filed a suit to declare the said sale deed by Sumer Chand Jain to Mr. Parmeshwar Das Prajapati as illegal and to hand over the possession of the suit property to her. The Appellant-Bank, however, challenged the maintainability of the said suit on the ground that as per section 34 of the SARFAESI Act, no civil court has the jurisdiction to entertain any suit or proceedings in respect of matter which Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered to. The said contention of the Appellant-Bank was accepted by the learned Civil Court, which was, thereafter, reversed by the Hon’ble Madhya Pradesh High Court.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court by the Appellant-Bank.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Original Plaintiff (Ms. Prabha Jain) had prayed for three reliefs before the learned Civil Court. The first two reliefs related to declaring the sale deed by Sumer Chand Jain to Parmeshwar Das Prajapati and the consequent mortgage deed in favour of Appellant-Bank as invalid. The third relief was with regard to handing over the possession of the suit property back to the Plaintiff. At the outset, the Hon’ble Court observed that the first two reliefs, undisputedly, were under the jurisdiction of a civil court and not under the DRT. With respect to the third relief, the Hon’ble Supreme Court observed that according to section 34 r.w.s. 17(3) of the SARFAESI Act, the DRT has some power to ‘restore’ the suit property to an individual who is a borrower or a possessor of the property. However, in order to ‘restore’ the suit property, Ms. Prabha Jain (Original Plaintiff) was neithera borrower nor a possessor of the suit property when the Appellant-Bank took over the possession of the property. Therefore, the Hon’ble Supreme Court confirmed that DRT had no jurisdiction to entertain the suit, and Ms. Prabha Jain had rightly instituted the suit before the civil court. The Hon’ble Supreme Court further noted that if a plaint/suit is filed before the civil court wherein, the Plaintiff has urged multiples reliefs (as in the present case), and if it is noticed that some of the reliefs are barred by law, then, the Civil Court cannot reject the entire plaint under Order VII, Rule 11 of the Code for Civil Procedure, 1908. In such a scenario, the Civil Court must address the issues / reliefs which are not barred by the law and avoid commenting on issues/reliefs which are barred by law. Before parting ways, the Hon’ble Court opined a need for the Reserve Bank of India to develop a standardised and practical framework for preparing title search reports (by the bank officials) before a loan has been sanctioned by the banks. Further, the Court opined that in the said framework, the liability of the erring bank official who had sanctioned the loan must also be determined.

The appeal was thus allowed.

55. Rakesh Brijal Jain vs. State of Maharashtra

CRA No. 379 of 2016 (Bom)(HC)

21st January, 2025

Offence of money laundering — Punishment for money — laundering — Allowing the Criminal Revision application the Court awarded exemplary cost ₹1 lakh each on complainant and Enforcement Director ( ED) for invoking criminal action and harassing the Developer with criminal action — Breach of agreement – Purchaser and Developer — Law Enforcement Agencies like ED should conduct themselves within parameters of law and that they cannot take law in to their own hands without application of mind and harass citizens. [S. 3, 4, Prevention of Money Laundering Act, 2002; Indian Penal Code 1860, S. 120B, 406, 418, 420]

FACTS

The police station forwarded the charge sheet to the Enforcement Director (ED). The ED lodged a criminal case against a developer. Criminal Revision Application was filed challenging the legality and validity of the order dated August 08, 2014, issuing process passed by the learned Special Judge, Mumbai under the Prevention of Money Laundering Act, 2002. The Criminal Revision Application sought setting aside of the order, principally on the ground that prima facie no offence whatsoever was made out under Sections 406, 418, 420 read with 120B Indian Penal Code, 1860.

HELD

Allowing the petition, the Court held that a mere breach of promise, agreement or contract does not, ipso facto, constitute an offence of criminal breach of trust without there being a clear case of entrustment. Clearly, the allegation / charge under Section 406 of the IPC has no basis. Once it is established that there is no cheating involved under the IPC then there are no proceeds of crime involved under Section 2(1)(u) of PMLA and therefore there is no Money Laundering involved under Section 3 of PMLA in the present case prosecution. ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. At the highest, if the complainant is aggrieved due to delay in receiving possession, his remedy lies in a Civil Court under the Sale Agreement, which he has already invoked. No offense of cheating or Money Laundering exists qua the prosecution, and ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. ED has supported the complainant’s false case without application of mind or without going through the record delineated hereinabove. The attachment of the two flats and garage purchased by the Applicant is cancelled.

56. Tomorrowland Limited vs. Housing and Urban Development Corporation Limited and Another

2025 LiveLaw (SC) 205

13th February, 2025

Director’s Responsibility — Dishonour of Cheque — Twin conditions — in charge and responsible of management of company. [S. 141, Negotiable Instruments Act, 1881]

FACTS

The case involves a contractual dispute between the Appellant and Respondent regarding the allotment of land for a 5-star hotel at Andrew’s Ganj, New Delhi. In 1990, the Ministry of Urban Development (MUD) decided to develop a 71-acre land parcel in Andrew’s Ganj through HUDCO. HUDCO invited bids, including for a 99-year lease of land to develop a 5-star hotel and an adjacent car park. Tomorrowland emerged as the highest bidder and was issued an allotment letter. Disputes arose between the Tomorrow land (Appellant) and HUDCO (Respondent).

A complaint was lodged against the Appellant and the company’s directors regarding the dishonour of a cheque under the Negotiable Instruments Act, 1881. Seeking to have the complaint quashed, the Appellant approached the High Court, arguing that the said-director had no role in the company’s daily operations and was not a signatory to the cheque in question. However, the High Court declined to intervene, ruling that the matter required further examination. Consequently, the appeal was dismissed, and the Court imposed a monetary cost on the Appellant. Dissatisfied with this decision, the Appellant filed the present appeal before the Hon’ble Supreme Court.

HELD

It was inter alia held that, there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act. In the complaint, it must be alleged that the person who is sought to be held liable by virtue of vicarious liability, at the time when the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company. A Director who is in charge of the company and a Director who was responsible to the company for the conduct of the business are two different aspects. The requirement of law is that both the ingredients of sub-Section (1) of Section 141 of the 1881 Act must be incorporated in the complaint.

Appeal was allowed.

Reshaping Of the Prohibition of Insider Trading (PIT) Regulations, 2015

REGULATOR ADDRESSING CHANGING REALITY

PIT as a concept finds its origination way back in 1992 around the same time when SEBI Act, 1992 was enacted. The objective of the “The Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 is to prevent Insider Trading by prohibiting trading, communicating, counselling, or procuring ‘unpublished price sensitive information’ relating to a company to profit at the expense of the general investors who do not have access to such information”

SEBI (PIT) regulations have undergone various amendments from time to time based on changing market conditions and experience gathered through regulatory enforcement actions. The focus has always been on making the regulation more predictable, precise and clear by suggesting a combination of principle-based regulation and rules that are backed by principles.

Some of the key changes which have been implemented in the last one year include;

i. re-visiting the key elements of trading plan,

ii. amending the definition of connected person and relatives,

iii. bringing Mutual Funds Units under the ambit of PIT Regulations.

BROADENING THE REACH

In order to understand some of the key changes which include rationalizing the scope of expression of connected person and introducing the definition of ‘relative’, it is important to understand how these terms were defined prior to the amendment:
1. An ‘insider’, as defined in regulation 2(1)(g) of PIT Regulations, means any person who is i) a connected person; or ii) in possession of or having access to Unpublished Price Sensitive Information (UPSI).

2. A ‘connected person’ in terms of regulation 2(1)(d)(i) of the PIT Regulations is any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

3. ‘Unpublished price sensitive information’ as provided under Regulation 2(1)(n) of the PIT Regulations means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, de-listings, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel.”

4. The following categories shall be ‘deemed to be connected person’ unless the contrary is established: –

(a)an immediate relative of connected persons specified above; or

(b) a holding company or associate company or subsidiary company; or

(c)an intermediary as specified in section 12 of the Act or an employee or director thereof; or

(d)an investment company, trustee company, asset management company or an employee or director thereof; or

(e)an official of a stock exchange or of clearing house or corporation; or

(f)a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or

(g) a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or

(h) an official or an employee of a self-regulatory organization recognised or authorized by the Board; or

(i) a banker of the company

Such categories of persons that are “deemed to be connected” persons are the ones who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are in know of the company operations. However, it is observed by the regulator that certain other persons who are not deemed to be connected person as per the extant regulation may also be in a position to have access to UPSI by virtue of their proximity and close relationship with the “connected person” and hence can indulge in Insider Trading and present enforcement challenges.

To rationalise these challenges, the following additions are made to the categories of “deemed to be connected person”: –

(i) a concern, firm, trust, Hindu undivided family, company, or association of persons wherein a director of a company or his relative or banker of the company, has more than ten percent of the holding or interest

(ii) a firm or its partner or its employee in which a ‘connected person’ is also a partner; and

(iii) a person sharing household or residence with a ‘connected person’.

Though this amendment appears as simple, it poses a challenge on implementation and execution. For example, in case of a person, in a professional engagement with the company that allows him the access of UPSI, his firm, other partners, all employees of the firm are considered deemed to be connected persons. As all employees are covered there seems to be no distinction between Key Managerial Personnel and support staff. In a scenario, where a person has only 1 % share in the firm, it shall lead to all other partners and employees of that firm to be classified as deemed to be connected person.

The question further arises on the point (iii) above that, how one defines sharing household or residence with connected person, whether the stay is permanent or temporary, the nature of relationship, nature of sharing arrangement, etc. SEBI’s view in this is that the primary objective of this inclusion of household or residence sharing individual is to cover those who, by virtue of their close relation or co-habitation with the connected person, could come in possession of price-sensitive information and indulge in insider trading. Regarding concerns about the meaning of residence, duration of residence or the inclusion of individuals sharing a residence on a rental basis, it is important to emphasize that investigations are event-driven based on attendant facts and circumstances. The intent is to cover relevant individuals during the process of investigation based on their accessibility to UPSI, rather than limiting it by the time frames or residential arrangements.

Under the current framework, connected persons are presumed to possess UPSI unless they can prove otherwise. This creates a rebuttable presumption, placing the onus on the accused to demonstrate his innocence. This may be logical for an individual reasonably assumed to have access to UPSI, expanding the number of people falling under the definition of connected person significantly increases the number of people unjustly burdened by this presumption.

DEFINITION OF RELATIVE

The change in the definition from “Immediate Relative” to “Relative” further adds to the number of people falling under the definition of connected person.

The definition prior to amendment of “Immediate Relative” of a person means spouse / parent / sibling / child of such person or of the spouse, who is dependent financially on such person, or consults such person in taking decision relating to trading in securities. Regulator has been of the view that the communication of UPSI to a related person does not necessarily depend on whether the relative is financially dependent or consults in trading decisions.

Price-sensitive information can also be transferred to such relatives for reasons such as natural love and affection without being them financially dependent and they can potentially indulge in Insider Trading.

Therefore, in order to bring such persons within the regulatory ambit, “Relative” shall mean the following:

(i) spouse of the person;

(ii) parent of the person and parent of its spouse;

(iii) sibling of the person and sibling of its spouse;

(iv) child of the person and child of its spouse;

(v) spouse of the person listed at (iii); and

(vi) spouse of the person listed at (iv)

It is intended that the relatives of a connected person also become connected person for the purpose of these regulations with a rebuttable presumption that the connected person had UPSI. However, this amendment does not require any additional disclosures and shall be limited for the purpose of establishing insider trading during investigation.

As per Regulation 4 (1) of SEBI (PIT) Regulations, 2015, no insider shall trade in securities that are  listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

There have been judicial contours in the past wherein Securities Appellate Tribunal (SAT) had fully or partially set aside SEBI orders like in the matter of NDTV Ltd (2023 SCC Online SAT 855) on the grounds that SEBI had not deep dived into the issue of whether alleged trades were undertaken to take advantage of any UPSI that may have been in possession of the parties.

In one of the earlier judgements in the matter of SEBI v/s Abhijit Rajan (SEBI v/s Abhijit Rajan 2022 SCC Online SC 1241), which was also upheld by the Supreme Court, SAT held that in order to penalize an entity for insider trading, it is imperative to establish that entity’s trades were motivated by UPSI.

The onus of showing that a certain person was in possession of or had access to UPSI at the time of trading would therefore, be on the person levelling the charge after which the person who has traded when in possession of or having access to UPSI may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.

Therefore, it is important that various other additional parameters such as financial dependency, factors of commonalities between both relatives not being in the immediate relationship, Person Acting in Concert, alleged insider trading pattern vis-à-vis the UPSI, motives of making unlawful gains owing to the relationship status, etc, may also be considered for levelling the charge.

MOVE TO RE-DEFINE UPSI

In addition to the above, SEBI has released a consultation paper to include certain events in the definition of UPSI with the objective to bring greater clarity and uniformity of compliances by aligning the definition of UPSI with events from Para A and Para B of part A of Schedule III as enumerated under Regulations 30 of SEBI (LODR) Regulations, 2015.

Prior to April 2019, “material event in accordance with listing agreement” was part of UPSI.SEBI had conducted a study on a subject matter on material events disclosed to the stock exchanges and events classified as UPSI by listed entities wherein companies were limiting the classification of UPSI to items explicitly mentioned in Regulation 2(1)(n) of the PIT Regulations, often failing to align with the broader intent and spirit of the law.

This led to the need for reviewing the definition of UPSI which has been proposed vide consultation paper dated 09 November 2024 with the objective of bringing regulatory clarity, certainty and uniformity in compliance for the listed entities.

The recommendations aim to align the illustrative list of UPSI events with the material events enumerated in Para A and Para B of Part A of Schedule III of the LODR Regulations. This alignment would ensure that the revised definition does not adversely impact the ease of doing business or lead to undue compliance challenges for listed entities.

The proposal after considering the feedback from the market participants was discussed in the SEBI Board Meeting to include the following within the definition of UPSI(which are pending to be notified);

a. Change in rating/s other than ESG rating/s,

b. Fund Raising proposed to be undertaken,

c. Agreements by whatever name called which may impact the management or control of the company,

d. Fraud or defaults by the company, its promoter, director, key managerial personnel, senior management, or subsidiary or arrest of key managerial personnel, senior management, promoter or director of the company, whether occurred within India or abroad. Definition of fraud or default for the purpose of this clause was included,

e. Change in key managerial personnel, other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor,

f. Resolution plan/ Restructuring/one-time settlement in relation to loans/borrowings from banks/financial institutions,

g. Admission of winding-up petition filed by any party / creditors, admission of application by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process (CIRP) against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016,

h. Initiation of forensic audit, by whatever name called, by the company or any other entity for detecting misstatement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report,

i. Action(s) initiated or orders passed by any regulatory, statutory, enforcement authority or judicial body against the company or its directors, key managerial personnel, senior management, promoter or subsidiary, in relation to the company,

j. award or termination of order/contracts not in the normal course of business,

k. outcome of any litigation(s) or dispute(s) which may have an impact on the company,

l. Giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party, by the company not in the normal course of business,

m. granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals,

n. For identification of events, enumerated in this clause as UPSI, the guidelines for materiality referred at para B of Part A of Schedule III of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time, shall be applicable.

As the intent of law was not perceived by the market participants which were drafted on the back of a combination of “principles” and “rules backed by principles” are now shifting base to a rule-based approach. This shift seems to be the result of aggressive  ideas and white-collar crimes intended to circumvent the laws and take an undue advantage of the financial ecosystem.

Regulators are trying their best to curb such malpractices and give directives and principles on dealing in Securities Market, but cannot drive the intent of the person. In order to achieve minimum regulation and maximum governance, the onus lies on the market participants to abide by the laws in the right spirit.

Banning Of Unregulated Lending Activities

INTRODUCTION

Digital Lending platforms, unregulated ‘peer to peer’ lending platforms, lending apps have mushroomed in recent times. Several of these unregulated lending activities have caused a great deal of harm to the financial ecosystem and have also impacted naive and gullible borrowers. Recognising this malaise, the Finance Ministry, Government of India has proposed a Law titled the Banning of Unregulated Lending Activities (“the Law”). The Bill is currently in its draft stage. Let us have a look at this important law that should impact the lending space in India. The Bill states that it is enacted to provide for a comprehensive mechanism to ban the unregulated lending activities other than lending to relative(s) and to protect the interest of borrowers. A few years ago, the Government enacted the Banning of Unregulated Deposit Schemes Act, 2019 to ban unregulated deposit schemes and to protect the interest of depositors. This is a second similar law aimed at banning unregulated lending activities.

The provisions of this Law shall have effect notwithstanding anything contained in any other law for the time being in force, including any law made by any State or Union Territory. Thus, it overrides any other law that is contrary.

UNREGULATED LENDING

The Law applies to unregulated lending activities which are defined in an exhaustive manner to mean lending activities which are not covered under regulated lending activities, carried on by any person whether through digital lending or otherwise. Further, these activities must not be regulated under any other law for time being in force. It even states that the Law shall not apply to lending activities which are exempted under any other law for the time being in force.

LENDING

Interestingly, the all-important term lending has not been defined under the Law. One may draw reference to other similar laws and judicial decisions.

For instance, the Maharashtra Money Lending (Regulation) Act, 2014, defines the term “money lending” to mean the business of advancing loans whether in cash or in kind and whether or not in connection with or in addition to any other business.

The Supreme Court in Ram Rattan Gupta vs. Director of Enforcement, 1966 SCR (1) 651 has held as follows:

“What is the meaning of the expression “lend”? It means in the ordinary parlance to deliver to another a thing for use on condition that the thing lent shall be returned with or without compensation for the use made of it by the person to whom it was lent. The subject-matter of lending may also be money. Though a loan contracted creates a debt, there may be a debt created without contracting a loan; in other words, the concept of debt is more comprehensive than that of loan.”

The Supreme Court in JiwanlalAchariya vs. RameshwarlalAgarwalla, 1967 SCR (1) 93, in the context of the Bihar Money Lenders Act has defined the term loan to mean an advance, `whether of money or in kind, on interest made by a money-lender.’

The Usurious Loans Act, 1918 defines the term loan to mean a loan whether of money or in kind and includes any transaction which is, in the opinion of the Court, in substance a loan.

Black’s Law Dictionary, 6th Edition, West defines the phrase lending or loaning of money to mean transactions creating customary relation of borrower and lender, in which money is borrowed for fixed time on borrower’s promise to repay amount borrowed at stated time in future with interest at fixed rate — Bancock County vs. Citizen’s Bank & Trust Co., 53 Idaho 159, 22 P.2d 674.

DIGITAL LENDING

Lending can also be by Digital Lending which means a remote and automated public lending activity, largely by use of digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service. Thus, digital lending platforms are sought to be covered by this definition.

The phrase “Public lending activity” has been defined in the draft Law to mean the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind but does not include loans and advances given to relative(s). Interestingly, even the expression “business” has been defined exhaustively to mean an organised activity undertaken by a person with the purpose of making gains or profits, in cash or kind. Thus, profit-motive is an essential factor for a lending activity to be covered under this Law. In addition, the lending activity must be a business for the lender. Hence, if a person gives a loan to his friend / family, it would not be his business (even if the loan is interest-bearing) and hence, it would be outside the purview of this Law. To that effect, this Law is similar to the Money Lending laws.

However, any lending to a relative by a lender would be exempt even if it constitutes his business. Relative for this purpose means spouse, parents, children, members of an HUF, son-in-law and daughter-in-law, step-parents, step-children and step-siblings are also included in this definition.

REGULATED LENDING ACTIVITIES

Regulated Lending Activities have been defined to mean those lending activities that are specified in the Schedule to the Act. It refers to lending activities regulated under the provisions of the following Acts or that are exempted under the same:

  1.  Reserve Bank of India Act, 1934, e.g., lending by non-banking financial companies (NBFCs)
  2.  Banking Regulation Act, 1949, e.g., lending by Banks
  3.  State Bank of India (SBI) Act, 1955
  4.  The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970
  5.  Regional Rural Banks (RRB) Act, 1976
  6.  Export Import Bank of India (EXIM) Act, 1981 undertaken by EXIM Bank
  7.  Multi State Co-operative Societies Act, 2002
  8.  National Housing Bank (NHB) Act, 1987
  9.  National Bank of Agriculture and Rural Development (NABARD) Act, 1981
  10.  National Bank for Financing Infrastructure and Development (NaBFID) Act, 2021
  11.  Small Industries Development Bank of India (SIDBI) Act, 1989
  12.  Life Insurance Corporation of India (LIC) Act, 1956
  13.  Companies Act, 2013, e.g., loans to Directors under s.185
  14.  Chit Funds Act, 1982
  15.  Limited Liability Partnership Act, 2008
  16.  Co-operative Societies Acts of various States / UTs
  17.  The State Financial Corporations Act, 1951
  18.  State Money Lenders Acts, e.g., lending by money lenders under the Maharashtra Money Lending (Regulation) Act, 2014
  19.  The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  20.  The Factoring Regulation Act, 2011

LENDER

The term Lender has been defined to mean any person, who undertakes lending activities. Person for this purpose includes-

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a trust — it does not specify the type of trust and hence, both public and private trusts would be covered;

(e) a partnership firm;

(f) a limited liability partnership;

(g) an association of persons;

(h) a co-operative society registered under any law for the time being in force relating to co-operative societies;
or

(i) every artificial juridical person, not falling within any of the preceding sub-clauses;

BANNING OF UNREGULATED LENDING ACTIVITIES

Once the Bill becomes an Act, all unregulated lending activities (including digital lending) will be banned. Further, no lender shall, directly or indirectly, promote, operate, issue any advertisement in pursuance of an unregulated lending activity.

The penalty for contravention is imprisonment for a term which shall not be less than 2 years but which may extend to 7 years and with fine which shall not be less than ₹2 lakhs but which may extend to ₹1 crore.

Any lender who lends money whether digitally or otherwise and uses unlawful means to harass and recover the loan, shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 10 years and with fine which shall not be less than ₹5 lakhs but which may extend to twice the amount of loan.

Further, no person shall knowingly make any statement, promise or forecast which is false, deceptive or misleading in material facts or deliberately conceal any material facts, digitally or otherwise to induce another person to apply or take loan from lenders involved in unregulated lending activity. The penalty for this is imprisonment for a term which shall not be less than 1 year but which may extend to 5 years and with fine which may extend to ₹10 lakhs.

The Bill also provides a harsher penalty for repeat offenders. Whoever having been previously convicted of an offence, is subsequently convicted of an offence shall be punishable with imprisonment for a term which shall not be less than 5 years but which may extend to 10 years and with fine which shall not be less than ₹10 lakhs but which may extend to ₹50 crores.

In case of offences by non-individual lenders, every person who, at the time the offence was committed, was in charge of, and was responsible to, the lender for the conduct of its business, as well as the lender, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

The Bill also proposes that investigations can be transferred to the Central Bureau of Investigation if the lender, borrower, or properties are located across multiple states or union territories, or if the total amount involved is large enough to significantly impact public interest.

INFORMATION BY LENDERS

Every lender which commences or carries on its business as such on or after the commencement of this Act shall intimate the Authority constituted under the Act about its business in such form and manner and within such time, as may be prescribed.

DATABASE

The Central Government may designate an Authority to create an online database for information on lenders operating in India and which shall have the facility for public to search information about lenders undertaking regulated lending activities and shall also facilitate reporting of illegal lenders or cloned lenders.

CONCLUSION

This is an important enactment to prevent illegal lending activities and to protect the interests of borrowers. However, as with all Statutes it would have to be ensured that genuine cases are not harassed.

Part A | Company Law

15. Mrs. Anubama

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/ANUBAMA/ADJ/S.155/2024

Date of Order: 3rd October, 2024

Adjudication order for violation of section 155 of the Companies Act 2013(CA 2013): Applying, Obtaining or possessing two DINs.

FACTS

Mrs. Anubama had submitted an Adjudication application in GNL-1dated 28th August, 2024 for violation of Section 155 of the companies Act, 2013 and also submitted a physical application. The applicant submitted that she has obtained her first DIN on 9th January, 2018. After that she was appointed as a director in multiple Companies using this first DIN but later resigned from all the companies as director, and hence she was not a director in any of the said companies thereafter. The applicant has further obtained inadvertently the second DIN on 23rd April, 2013. The applicant was also appointed as Director in some of the companies using this second DIN and later resigned from all such positions. Further, the applicant was appointed as designated partner in two LLPs and was continuing thereafter. The applicant had applied in form No DIR-5 to surrender the second DIN. However, the form was returned for resubmission with remarks stating that “the DIN holder has taken second DIN in violation of Section 155 of the CA 2013 and required to be adjudicated. The applicant further stated that Hence, submitted the adjudication application as the aforesaid contravention was not committed with any malafide intent and no prejudice is caused to any stake holders.

Based on the adjudication application, this Adjudicating Authority (AO) had issued Adjudication Hearing Notice to the Company and its officers in default. Pursuant to hearing notice issued an authorized representative of the applicant appeared before the Adjudicating Authority and made submissions that, ‘the said violation mav be adjudicated as per section 159 of the Companies Act, 2013’.

PROVISIONS OF THE ACT

Section 155: Allotment of Director identification Number. No individual, who has already been allotted a Director identification Number under section 154, shall apply for, obtain or possess another Director identification Number.

Section 159 – Penalty for Default of certain Provisions: If any individual or director of a company makes any default in complying with any of the provisions of Section 152, section 155, and Section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues.

FINDINGS AND ORDER

It is noticed that the applicant, Mrs. Anubama obtained her first DIN on 9th January, 2008 and she was appointed as a director in multiple companies using this first DIN. Further, on 23rd April, 2013, the applicant has further inadvertently obtained a second DIN. The applicant was also appointed as Director in some of the companies using this second DIN, although the applicant continues to serve as a designated partner in two LLPs.

The applicant was holding 2 DINs from 23rd April 2013. Further, Mrs. Anubama has filed e-form DIR-5 to surrender the DIN which was obtained on 23rd April 2013. The form was returned with remarks to adjudicate the violation. After that she filed the adjudication application in e-form GNL-1 on 28th August 2024. Hence, there was a violation of Section 155 of the CA 2013 till 27th August 2024. The applicant is liable for penalty under Section 159 of CA 2013.

After considering the facts, AO concluded that Mrs. Anubama has violated Section 155 of the CA 2013 and accordingly he imposed a Penalty u/s 159 of CA 2013 amounting to `19,51,000/-.

• Penalty from 1st April, 2014 to 27th August, 2024: 3802 days i.e. `50,000 + (`500*3802=19,01,000) = `19,51,000.

16. Panama Wind Energy Private Limited

Registrar of Companies, Maharashtra, Pune

Adjudication Order No. ROCP/ADJ/Sec. 203/STA(V)/23-24/ 2072 to 2075

Date of Order: 12th December, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013): Violation arising out of non-filling of the vacancy of the whole time key managerial personnel within a period of 6 months.

FACTS

Company had submitted Form GNL-1 for filing an application before ROC, Pune under Section 454 of the Companies Act 2013 for adjudication of the offence committed under Section 203 read with rule 8 and 10 (Companies Appointment & Remuneration of Managerial Personnel Rules, 2014) of the Act.

It was stated in the application that Company Secretary was appointed by the Board of Directors in its Meeting held on 30th October 2019, with effect from 19th October, 2019. The said Company Secretary tendered her resignation from the post of Company Secretaryshipw.e.f. 23rd December, 2020, after serving the notice period of 30 days, and the same was approved by the board on 18th January, 2021. The Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. Further, the Company has appointed another incumbent as Company Secretary of the Company in the meeting of its Board of Directors with effect from 1st March, 2022, with the period of default from 21st July, 2021 to 28th February, 2022.

On receipt of the aforesaid application, a notice was sent to the company and Ex-Directors vide letter dated 06th August, 2024 to which the company replied vide its letter dated 20th August, 2024.

PROVISIONS OF THE ACT IN BRIEF

Section 203(4) of the Act provides that if the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Section 203(5) of the Act provides inter alia that if any company makes any default in complying with the provisions of section 203, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

FINDINGS AND ORDER

  •  The company, in its reply, accepted that the company is in violation of the provisions of the Act for non-appointment of the Company Secretary as required under the Act within a stipulated period of 6 (Six) months from the date of vacancy. The erstwhile Company Secretary had resigned w.e.f. 23rd December, 2020 and the same was approved by the board on 18th January, 2021. The company has filed the required form related to the resignation of the Company Secretary wherein the date of cessation is stated as 22nd January, 2021. Subsequently, the Company was required to appoint a Company Secretary within 6 (Six) months from the date of such vacancy i.e. 22nd January, 2021 till 21st July, 2021. However, the company appointed a Company Secretary with effect from 1st March, 2022, thereby defaulting for a period from 21st July, 2021 to 28th February, 2022 (223 days).
  •  On reading the provision of the Act, it is stated that the Act provides for a fixed penalty on the company and its officers in default for violating Section 203(4) of the Act.
  •  Section 203(4) clearly casts the obligation for appointment of a KMP in timely manner on the Board, making the entire Board of the company liable for the period in which the default occurred. Thus, it is required to identify the officers in default for the period of violation. On perusal of the records of the company, it is seen that the directors of the company for the relevant period of time are officers in default.
  •  Thus, in exercise of the powers conferred and having considered the facts and circumstances of the case besides submissions made by the Noticee(s) and after considering the factors mentioned herein above, AO imposed the penalty on the officers in default of an aggregate amount of `12,28,000/- as under:

* Ceased to be a director w.e.f. 30th November, 2021

17. In the Matter of M/s MACQUARIE GROUP MANAGEMENT (INDIA) PRIVATE LIMITED

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No – ROC/D/Adj/Order/Section 62 (2)/MACQUARIE/4651-4654

Date of Order – 11th December, 2024

Adjudication order issued against the Company and its Director for contravention of provisions of Section 62(2) of the Companies Act, 2013 with respect to not following Statutory period i.e. dispatched notice of right issue to all existing shareholders at least three days before the opening of the issue.

FACTS

M/s MGMIPL suo-moto filed application for adjudication of offence before the office of Registrar of Companies, NCT of Delhi & Haryana i.e. Adjudication Officer (AO) with regards to violation of the provisions of the Section 62(2) of the Companies Act, 2013 stating that M/s MGMIPL had proposed the issues of shares pursuant to section 62 (1) of the Companies Act, 2013 which provides for further issue of share capital viz rights issue of 80,000,000 equity shares of ₹1/- each to its existing shareholders.

Further, it was stated that M/s MGMIPL relied on the exemption issued by Ministry of Corporate Affairs (MCA) to the Private Companies on 5th June 2015, and accordingly dispatched notice on email mentioned under sub-section (2) of section 62 of the Companies Act, 2013 on 30th June 2021, and offer was opened on 1st July, 2021. However, M/s MGMIPL was required to arrange consent from 90% of the shareholders in case where the issue was opened before three days and the fact was admitted by M/s MGMIPL that it erroneously missed to arrange for a written consent of shareholders for opening the issue ahead of the statutory period of 3 days.

Accordingly, a Show Cause Notice (SCN) was issued to M/s MGMIPL and its officers for the default under section 62(2) of the Companies Act, 2013. M/s MGMIPL in its reply, had reiterated the facts as stated in its application and informed that the default was unintentional and involuntary, occurred without mala fide intent. Further, no objections have been raised by the shareholders of the company regarding this matter throughout the Company’s proceedings.

PROVISIONS

Section 62 (Further issue of share capital)

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply.

Section 450 (Punishment where no specific penalty or punishment is provided)

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded,given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of after the first during which the contravention continue, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person

ORDER

AO after consideration of the reply submitted by M/s MGMIPL, concluded that M/s MGMIPL had not adhered to the minimum time period of 3 days for opening of the offer [to be reckoned from the date of dispatch of the notice till the opening of the issue]. Further, by its own admission it did not take the benefit of obtaining a prior consent as per the proviso to the said sub-section so as to relax the minimum time specified therein. Hence, it had violated the provisions of Section 62(2) of the Company Act, 2013.

AO therefore imposed the penalty of ₹10,000/- on M/s MGMIPL and ₹10,000/- on each of its officers in default.

Thus, a total penalty of ₹40,000/- was imposed on M/s MGMIPL and its Directors.

Allied Laws

47. Leela and Ors. vs. Murugananthan and Ors.

Civil Appeal No. 7578 of 2023

2025 LiveLaw (SC) 8

2nd January, 2025

Will — Validity — Necessary to prove execution — Mere registration does not guarantee validity. [S. 68, Indian Succession Act, 1925; S. 68, Indian Evidence Act, 1872].

FACTS

The Respondents (first wife and children of one late Mr. Balasubramaniya) instituted a suit for partition. The Appellants (second wife and her children) contested the said partition, claiming that the deceased had already executed an unregistered Will in their favour in 1989. The Respondents — first wife and children of the deceased — contended that the suit property should be partitioned among themselves and the children of the Appellant (children of the second wife), but excluding the Appellant herself (second wife), on the ground that she is an illegitimate wife. The learned Trial Court accepted the contention of the Respondent — the first wife and declined to accept the unregistered Will propounded by the Appellant-second wife on the ground that the same was non-genuine. The same was confirmed by the Hon’ble High Court of Madras.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed several inconsistencies in the Will propounded by the Appellant-second wife. Further, the Appellants failed to establish the execution of the Will as per section 63 of the Indian Succession Act, 1925. The Hon’ble Supreme Court, relying on its decision in the case of MoturuNalini Shah vs. Gainedi Kaliprasad (dead through legal heirs) (2023 SCC OnLine SC 1488) reiterated that mere registration of a Will (let alone an unregistered Will, as in this case) does not confer validity unless its execution is duly proved.

The appeal was therefore, dismissed.

48. Vidyasagar Prasad vs. UCO Bank and Anr.

AIR 2024 Supreme Court 5464

22nd October, 2024

Insolvency Proceedings — Recovery — Limitation period of three years — Acknowledgement of debt in Balance Sheet and Audit Report — Limitation period extended from last acknowledgement made. [S.7, 238A, Insolvency and Bankruptcy Code, 2016; S. 18, Limitation Act, 1963].

FACTS

The Appellant is a suspended Director of a Corporate Debtor (Respondent No. 2). The Corporate Debtor had availed a loan from UCO Bank (Respondent No. 1) and other consortium banks in 2012. The said loan was defaulted by the Corporate Debtor and was declared a Non-Performing Asset. Subsequently, in 2019, Respondent No. 1 – UCO Bank had filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate a corporate insolvency resolution process against the Corporate Debtor. It was contended by the Appellant-Director that the application was barred by limitation, as it was filed after the expiration of the three year limitation period, leaving no remedy available. However, the argument was rejected by the Hon’ble National Company Law Tribunal as well as Hon’ble National Law Company Appellate Tribunal. It was held by both the authorities that the debt had been duly acknowledged by the Corporate Debtor in its financial statements and Auditor’s report, thereby extending the limitation period in accordance with Section 18 of the Limitation Act, 1963 (Limitation Act).

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court examined the balance sheet of the Corporate Debtor as of 31st March, 2017 and found a clear acknowledgement of the default in loan repayments. Further, the Court noted entries indicating the balance loan payable by the Corporate Debtor. The Court dismissed the argument that the balance sheet did not specifically name the creditor bank to whom the loan was owed, stating that such specificity was not required. Relying on a series of precedents, the Hon’ble Supreme Court held that entries in the balance sheet constituted an acknowledgement of debt as per Section 18 of the Limitation Act, 1963, thereby extending the limitation period for initiating recovery actions.

The Appeal was therefore dismissed.

49. Central Warehousing Corporation and Anr vs. Sidhartha Tiles & Sanitary Pvt Ltd.

SLP(c) No. 4940 of 2022 (SC)

21st October, 2024

Arbitration and Conciliation- Lease agreement —Dispute — To be resolved by arbitration mechanism only. [S. 11, Arbitration and Conciliation Act, 1996; Public Premises (Eviction of Unauthorised Occupants, 1971].

FACTS

A lease agreement was entered into between the Appellant — a statutory body incorporated under the Warehousing Corporations Act, 1962 and operating under the administrative control of the Ministry of Consumer Affairs and the Respondent — a company engaged in the business of trading. As per the lease agreement, the Appellants were to provide warehouse space to the Respondent-Company for a period of three years at a mutually agreed rate. The agreement included an arbitration clause for resolving disputes arising during the lease term. Subsequently, the Appellant unilaterally increased the lease rent and informed the Respondent that non-payment of the revised rate would result in eviction, and the Respondent’s occupancy being deemed illegal. In response, the Respondent approached the High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), seeking the appointment of an arbitrator to resolve the dispute. The Appellant however, contended that the Respondent-Company was illegally occupying the storage premises and that the matter fell under the ambit of the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 (Public Premises Act). The High Court declined to accept the contention of the Appellant and proceeded to appoint an arbitrator.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that the dispute arose between the parties during the existence of a lease agreement. Further, all the disputes emerging out of the said agreement must strictly be resolved through an Arbitration mechanism as per the said agreement. Rejecting the Appellant’s contention, the Court relied on its decision in SBI General Insurance Co. Ltd vs. KrishSpinning [2024 SCC OnLine SC 1754] and held that the provisions of the Public Premises Act cannot override the provisions of the Arbitration Act.

The appeal was therefore dismissed along with a cost of ₹50,000/- to the Appellant.

50. Purnima BhanuprasadGohil vs. State of Maharashtra and Ors.

AIR 2024 Bombay 370

3rd October, 2024

Registration — Settlement deed — Registration within four months from execution — Period for determination of stamp duty value by the stamp authority to be excluded. [S. 23, Registration Act, 1908; S. 34, Maharashtra Stamps Act, 1958].

FACTS

The Appellant and her ex-husband had executed a settlement deed on 20th December, 2011, following a long-drawn legal battle in the family court.

The said deed was deposited with the family court until both parties fulfilled their respective obligations. Subsequently, the family court issued a decree on 17th February, 2012. Subsequently, on 6th June, 2012, the Appellant filed an application before the Superintendent of Stamps for determination of stamp duty payable on the settlement deed for registration. The said application was processed by the authority on 28th August, 2012, and the stamp duty that was determined was paid within two days. Upon compliance with the settlement deed, the Appellant requested the family court to return the original deed on 12th September, 2012, for affixing the requisite stamps under the Bombay Stamp Act. It was received the following day. The Appellant then lodged the deed for registration on 16th November, 2012. However, the stamp authority refused to register the settlement deed on the ground that the deed was executed on 20th December, 2011, and as per Section 23 of the Registration Act, 1908, documents must be presented for registration within four months of execution.

Aggrieved, a petition was filed under Article 227 of the Constitution before the Hon’ble Bombay High Court.

HELD

The Hon’ble Bombay High Court held that from 20th December, 2011 (date of execution) till 17th February, 2012 (i.e. till the date of passing of decree), the period must be excluded as per the proviso to section 23 of the Registration Act. Further, relying on its earlier decision in the case of KritiJagdish vs. State of Maharashtra and Ors [Writ Petition No. 2662 of 2012], the Hon’ble Court held that for the purpose of calculating the period of four months, the period from 6th June, 2012 (date of application for determination of stamp duty) till 13th September, 2012 (receipt of settlement deed from the family court) must also be excluded. This was because such a period cannot be attributable to the Applicant. Therefore, after such period was excluded, it was observed that the Petitioner had lodged the settlement deed for registration within four months of execution.

The petition was therefore allowed.

51. KumudMahendra Parekh vs. National Insurance Company., Kochi and Ors.

AIR 2024 KERALA 189

17th July, 2024

Insurance — Medical insurance for travel —Hospitalisation — Claim of insurance — Mention of pre-existing disease in discharge papers —Non-disclosure of disease at the time of issuance of policy — Rejection of claim — Disease during childhood, 30 years ago and cured thereafter — No existing disease since last 30 years — Claim allowed. [S. 45, Overseas Medical Insurance for Trip].

FACTS

The Petitioner, a septuagenarian had availed medical insurance for her overseas travel after undergoing a detailed medical examination. During her trip, she fell ill with fever and shortness of breath, requiring hospitalisation for three days. Upon returning to India, she submitted an insurance claim, which the Respondent (insurance company) initially approved, and requested for hospitalisation documents for the claim processing. However, during the review, it was discovered that the discharge summary mentioned a history of bronchial asthma, which had not been disclosed at the time of availing medical insurance. Since the form specifically required the disclosure of any pre-existing diseases, the Respondent rejected the claim on the grounds that the Petitioner had withheld vital information regarding her medical history.

The Petitioner, however, maintained that she did not suffer from any existing disease. Further, discharge papers cannot be held as conclusive proof of any pre-existing disease. Furthermore, it was stated that the Petitioner suffered from bronchial asthma in her childhood and was cured almost 30 years ago therefore, the same was not needed to be disclosed. However, the Respondent, Grievance Cell of the Respondent as well as the Insurance Ombudsman, rejected the claim of the Petitioner.

Aggrieved, a petition was filed before the Hon’ble Kerala High Court (Eranakulam).

HELD

The Hon’ble Kerala High Court observed that, under the Overseas Mediclaim Insurance Policy for Business & Holiday Travel, a ‘pre-existing disease’ is defined as any ailment the insured had within 48 months prior to the issuance of the policy. It was undisputed that the Petitioner had bronchial asthma 30 years ago, well beyond the 48 month limit prescribed. Further, the condition had been cured, and therefore, there was no question of disclosure of any existing disease. Accordingly, the Hon’ble Court held that the insurance company was liable to accept the Petitioner’s claim.

The Petition was thus allowed.

SME IPOS: Regulatory Challenges and Proposed Reforms

BACKGROUND

Small and Medium Enterprises (SMEs) have long been considered the backbone of the global economy, driving innovation, creating jobs, and contributing significantly to economic growth. In India, SMEs are a critical segment of the business ecosystem, and over the past few years, many SMEs have turned to public markets to raise capital and expand their operations. The advent of the Small and Medium Enterprises (SME) Platform on stock exchanges, particularly the BSE SME Platform and the NSE SME Emerging Platform, has provided these companies with an opportunity to access a broader pool of investors, enhancing their growth prospects. However, as these companies increasingly tap into public investments, the risk of fraudulent activities and mismanagement has also grown, raising concerns over the integrity of the process. Additionally, that SME’s are promoter driven or family-run business with minimal private equity, which limits checks on promoter influence.

A striking example of this trend is the case of Trafiksol ITS Technologies Ltd., a company that specializes in providing intelligent transportation systems and automation solutions. Trafiksol filed its Draft Red Herring Prospectus (DRHP) for an Initial Public Offering (IPO) in May 2024, offering 64.10 lakh equity shares with the aim of raising funds for various purposes, including the purchase of software for its operations. However, soon after the subscription period, a complaint raised serious doubts about the company’s financial practices and the legitimacy of its business dealings, particularly its procurement of software from a vendor with questionable credentials. This led to a series of regulatory investigations and the subsequent halting of the company’s IPO listing.

The allegations against Trafiksol revealed the other side of the SME IPO market, where issues such as misleading prospectus disclosures, fraudulent vendor relationships, and concealment of material facts can lead to severe investor losses and erode trust in the market. As the investigation into Trafiksol unfolded, it became clear that the company had relied on a third-party vendor (TPV) with dubious financials, raising alarms about potential misuse of IPO proceeds and the company’s failure to conduct adequate due diligence.

This case serves as a stark reminder of the need for robust and urgent regulatory oversight in SME IPOs, as well as for greater transparency from companies seeking to raise public capital.

REGULATORY CONCERNS AND PROPOSED CHANGES TO THE SME IPO FRAMEWORK

The increasing participation of investors in Small and  Medium Enterprises (SMEs) listed on stock exchanges, coupled with growing regulatory concerns, has prompted the Securities and Exchange Board of India (SEBI) to  review and propose changes to the SME IPO framework. Investor participation in SME offerings has surged significantly, with the applicant-to-investor ratio rising from 4X in FY 2022 to 46X in FY 2023 and 245X in FY 2024. However, concerns have arisen about the governance practices of SME listed companies, many of which are promoter-driven and exhibit a high concentration of shareholding. There have been instances of fund diversion, revenue inflation, and circular transactions involving related parties, shell companies, and connected parties. SEBI has taken action against such companies in the past, but the issue of related party transactions (RPTs) remains a point of concern. SEBI has found that one in two SME listed entities have undertaken RPTs of over ₹10 crores, with one in seven involving more than 50 per cent of the company’s consolidated turnover. These risks underline the need for more stringent scrutiny of SMEs, with the ultimate goal of protecting investors’ interests.

To address these issues, SEBI has worked with stock exchanges, merchant bankers, and its Primary Market Advisory Committee (PMAC) to propose reforms aimed at strengthening both the regulatory framework for SME IPOs and the governance norms for these companies. These proposals focuses on the IPO process and migration from the SME platform to the Main Board, along with corporate governance norms and post-listing disclosures for SME-listed companies.

KEY PROPOSALS AND RATIONALES

  1. Increase in Minimum Application Size: SEBI has proposed raising the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh, or even ₹4 lakh, to reduce the risk of investor losses in high-risk SME stocks. This change would attract more informed, risk-taking investors rather than smaller retail investors who may be less prepared to deal with the risks inherent in SME investments. This proposal also aims to enhance the credibility of the SME segment by limiting participation to those with more risk tolerance.
  2. NII (Non-Institutional Investor) Allocation: To align SME IPOs with main-board IPOs, SEBI recommends that the NII category be split into two sub-categories: one for investments up to ₹10 lakh and another for amounts above ₹10 lakh. Additionally, it suggests moving from proportional allotment to a “draw of lots” method for the NII category, similar to the retail category. This aims to provide a more equitable distribution of shares in the case of oversubscription.
  3. Increase in Minimum Allottees: Currently, SME IPOs require a minimum of 50 allottees to be considered successful. SEBI proposes increasing this threshold to 200 to ensure broader investor participation and enhance the stability of the listing, which would help build investor confidence.
  4. Phased Lock-In for Promoters: The lock-in period for promoters’ holdings in excess of the minimum promoter contribution (MPC) is proposed to be phased, with 50 per cent remaining locked in for two years after the IPO and the remaining 50 per cent for one year. This gradual release is intended to prevent rapid exit by promoters after listing, ensuring they have a long-term interest in the company’s performance. SEBI also suggests extending the lock-in period to 5 years for the minimum promoter contribution for SME IPOs.
  5. Restriction on Offer for Sale: It is suggested to put restriction on OFS part of SME IPO to 20 per cent of issue size as OFS proceeds are not forming capital of issuer and they may limit for OFS in issue size as well as threshold may be prescribed for selling shareholders also which shall not exceed more than 20 per cent of their pre-issue shareholding on fully-diluted basis.
  6. Monitoring of Issue Proceeds: Mandatory Appointment of monitoring agency shall be applicable for issuer company if fresh issue size is higher than 20 Crore or for specified objects. They will certify on utilisation of proceeds and will ensure funds are used for the purposes disclosed in the offer document, thus reducing the risk of misuse or diversion. This will also bring more transparency for investors and accountability for issuer.
  7. Increased Tenure of Promoter Lock-In: Since, SME companies are mostly promoter driven, it is necessary to ensure that promoter continues to have certain skin in the game until the company is on the SME Exchange. It is proposed that lock-in on minimum promoter contribution (MPC) in SME IPO shall be increased to 5 years. Additionally, lock-in on promoters’ holding held in excess of MPC shall be released in phased manner i.e. lock-in for 50 per cent holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 year.
  8. Eligibility for SME IPO: To improve the quality of companies listed on SME exchanges, SEBI proposes stricter eligibility criteria. For instance, companies should only be allowed to list if they have an operating profit of ₹3 crore in at least two of the last three financial years. Additionally, the promoter group of the issuing company should not have been involved in any fraudulent activities, like being debarred from the capital markets or being labelled as wilful defaulters or fugitive economic offenders.
  9. Disclosure of Firm Arrangement for Financing: In cases where a project is partially funded by a bank or financial institution, SEBI suggests requiring issuers to disclose the details of the sanction letters and appraisals in the offer document. This will provide additional transparency and safeguard investor interests by ensuring the financial feasibility of projects.
  10. Public Availability of Offer Documents for Comment: Unlike main-board IPOs, which require a 21-day public comment period for the Draft Red Herring Prospectus (DRHP), SME IPOs currently lack such a provision. SEBI now proposes to extend this requirement to SME IPOs, ensuring that investors have ample opportunity to review and comment on the offer documents before they are filed with stock exchanges. This increase in transparency would allow for a more informed investor base and help identify potential issues early on.
  11. Convertible Securities: Similar to main-board IPOs, SEBI recommends that SME companies convert all outstanding convertible securities into equity before filing for an IPO. This would offer investors a clearer picture of the company’s capital structure.
  12. Applicability of RPT norms to SME: Applying RPT norms under LODR Regulations to SME listed entities would contain the risks of siphoning of funds through related parties. In view of the above, it is proposed that the applicability of RPT norms under LODR Regulations should be extended to SME listed entities other than those which have paid up capital not exceeding ₹10 crores and net worth not exceeding ₹25 crores. This will harmonize the applicability of RPT norms between SME listed entities and Main Board listed entities. However, materiality threshold under Regulation 23(1) of LODR Regulations for approval by shareholders for RPT shall be only for transactions exceeding 10 per cent of annual consolidated turnover, and not lower of ₹1,000 crore or 10 per cent annual consolidated turnover since SMEs may not enter into high value transactions exceeding ₹1,000 crores.
  13. Merchant Banker Due-Diligence Certification: SEBI proposes that Merchant Bankers must submit a due-diligence certificate to stock exchanges at the time of filing the draft offer document, aligning this requirement with the practices for main-board IPOs. This will help ensure that proper due diligence is conducted before the offering, providing more protection for investors.
  14. Post-Listing Exit Opportunity for Dissenting Shareholders: SEBI suggests introducing provisions for post-listing exit opportunities for dissenting shareholders in case there are changes in the objects or terms outlined in the offer document. This will ensure that investors are not unfairly impacted by such changes after the IPO.
  15. Clarification on Price Adjustments for Corporate Actions: SEBI has noted cases where issuers conduct corporate actions like bonuses or stock splits shortly before an IPO, resulting in a mismatch between the actual value of shares and the issue price. To address this, SEBI proposes that the price per share for determining eligibility for minimum promoters’ contribution should be adjusted for such corporate actions, ensuring consistency and fairness in the IPO process.

Out of the proposed changes, SEBI in its 208th board meeting conducted on 18th December, 2024 reviewed SME framework under SEBI (ICDR) Regulations, 2018, and applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies approved the following amendments to SEBI (ICDR) Regulations, 2018 and SEBI (LODR) Regulations, 2015:-

  • An issuer shall make an IPO, only if the issuer has an operating profit (earnings before interest, depreciation and tax) of ₹1 crore from operations for any 2 out of 3 previous financial years at the time of filing of its draft red herring prospectus (DRHP).
  • Offer for sale (OFS) by selling shareholders in SME IPO shall not exceed 20 per cent of the total issue size and selling shareholders cannot sell more than 50 per cent of their holding.
  • Lock-in on promoters’ holding held in excess of minimum promoter contribution (MPC) to be released in phased manner i.e. lock-in for 50 per cent promoters’ holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 years.
  • Allocation methodology for non-institutional investors (“NIIs”) in SME IPOs to be aligned with methodology used for NIIs in main board IPOs.
  • Amount for General Corporate Purpose (GCP) in SME IPO shall be capped to 15 per cent of amount being raised by the issuer or ₹10 crores, whichever is lower.
  • SME issues shall not be permitted, where objects of the issue consist of Repayment of Loan from Promoter, Promoter Group or any related party, from the issue proceeds, whether directly or indirectly.
  • DRHP of SME IPO filed with the Stock Exchanges to be made available for 21 days for public to provide comments on DRHP, by making public announcement in newspaper with QR code.
  • Further issue by SME Companies to be permitted without migration to Main Board subject to the issuer undertaking compliance of the provisions of SEBI (LODR) Regulations, 2015 as applicable to the companies listed on the Main Board.
  • Related party transaction (RPT) norms, as applicable to listed entities on Main Board, to be extended to SME listed entities, provided that the threshold for considering RPTs as material shall be 10 per cent of annual consolidated turnover or ₹50 crore, whichever is lower.

While the SME IPO market plays a crucial role in enabling small and medium enterprises to access capital and expand their operations, recent incidents have exposed the vulnerabilities within this space. The concerns regarding transparency, corporate governance, and the potential misuse of IPO proceeds highlight the need for stronger oversight and regulatory reforms. The proposed regulatory changes by SEBI aim to enhance investor protection, bolster corporate governance practices, and improve market transparency. By focusing on tightening eligibility criteria, implementing phased lock-in regulations, and conducting more stringent scrutiny of promoters, SEBI seeks to create a more secure and reliable environment for SMEs to raise funds, while protecting retail investors from unnecessary risks.

For SMEs to truly reach their full potential, it is essential that companies maintain the highest standards of accountability and governance. By fostering a transparent, investor-friendly ecosystem, we can ensure that legitimate, growth-driven businesses thrive without the threat of exploitation or fraud. This will not only safeguard investor interests but also cultivate a sustainable, long-term investment landscape that supports the ongoing growth and success of SMEs in India.

Property Owned By Hindu Females

INTRODUCTION

Is the property of a Hindu Female always her absolute property or does she have a limited rights in certain situations? Does not the Hindu Succession Act,  1956 (“the Act”) empower every Hindu female to own property?

It is interesting to note that these questions are not as completely settled as they appear and the issues have travelled all the way to the Supreme Court on numerous occasions and met with different responses! Thus, while it is quite easy to understand in theory that right to property is a vested right of a Hindu female under the Hindu Succession Act, it becomes quite difficult to understand its implications given the facts and circumstances of a particular case. The issue is thrown into sharper focus by the seeming dichotomy under sub-sections (1) and (2) of section 14 of the Hindu Succession Act, 1956, which deal with property of a Hindu female.

A recent two-Judge Supreme Court decision in the case of Tej Bhan (D) Through LR vs. Ram Kishan (D) through LRs, Civil Appeal No. 6557 of 2022, Order dated 9th December, 2024 has realised this difference of opinions amongst various decisions of the Apex Court and has directed the Court Registry to place the order before the Hon’ble Chief Justice of India for constituting an appropriate larger bench for reconciling the principles laid down in various judgments of the Supreme Court and for restating the law on the interplay between sub-section (1) and (2) of Section 14 of the Hindu Succession Act.

SECTION 14 OF THE ACT

The Act governs the position of a Hindu intestate, i.e., one dying without making a valid Will. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to such property and the order of preference among them.
S.14 which is the crux of the issue needs to be studied closely.

S.14(1) states that any property possessed by a female Hindu, whenever it may be acquired by her, shall be held by her as full owner thereof and not as a limited owner. Thus, the Act lays down in very clear terms that in respect of all property possessed by a Hindu female, she is the full and absolute owner and she does not have a limited / restricted right in the same. The explanation to this sub-section defined the term, “property” to include both movable and immovable property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by gift (from any person, whether a relative or not, before, at or after her marriage), or by her own skill or exertion, or by purchase or by prescription, or in any other manner whatsoever. Thus, an extremely wide definition of property has been given under the Act. Property includes all types of property owned by a female Hindu although she may not be in actual, physical or constructive possession of that property — Mangal Singh & Ors vs. Shrimati Rattno, 1967 SCR (3) 454. The critical words used here are “possessed” and “acquired”. The word “possessed” has been used in its widest connotation and it may either be actual or constructive or in any form recognised by law. In the context in which it has been used in s.14(1) it means the state of owning or having in one’s hand or power – Gummalapura Taggina Matada Kotturuswami vs. Setra Veerayya and Ors. (1959) Supp. 1 S.C.R. 968.The use of the words ‘female Hindu’ is also very wide in scope and is not restricted only to a ‘wife’ — Vidya (Smt) vs. Nand Ram Alias Asoop Ram, (2001) 1 MLJ 120 SC.

In Dindyal & Anr. vs. Rajaram, (1971) 1 SCR 298, it was held that, before any property can be said to be “possessed” by a Hindu woman as provided in s.14(1), two things are necessary (a) she must have a right to the possession of that property and (b) she must have been in possession of that property either actually or constructively. However, this section cannot make legal what is illegal. Hence, if a female Hindu is in illegal possession of any property, then she cannot validate the same by taking shelter under this section.

S.14(2) of the Act carves out an exception to s.14(1) of the Act. It states that nothing contained in sub-section (1) of s.14 shall apply to any property acquired by way of gift or under a will or any other instrument or under a decree or order of a civil court or under an award where the terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate in such property. Thus, if a female Hindu acquires any property under any instrument and the terms of acquisition, as laid down by such instrument, itself provided for a restricted or a limited estate in the property then she would be treated as a limited owner only. In such an event, she cannot have recourse to s.14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of s. 14 apply to a particular case depends upon the facts of the case — Seth Badri Pershad vs. Smt. Kanso Devi, (1969) 2 SCC 586. In this decision, it was further held that sub-section (2) of Section 14 is more in the nature of a proviso or an exception to Sub-section (1). It can come into operation only if acquisition in any of the methods indicated therein is made for the first time without there being any pre-existing right in the female Hindu who is in possession of the property. It further approved of the observations of the Madras High Court Rangaswami Naicker vs. Chinnammal, AIR 1964 Mad 387 that s.14(2) made it clear that the object of s. 14 was only to remove the disability on women imposed by law and not to interfere with contracts, grants or decrees etc. by virtue of which a women’s right was restricted.

DECISIONS ON S.14

Several decisions of the Supreme Court have analysed s.14(1) and s.14(2) in depth. Some of the important (and conflicting) ones are discussed below.

R.B.S.S. MUNNALAL AND OTHERS VS. S.S. RAJKUMAR,AIR 1962 SC 1493

The Supreme Court held that by s.14(1) the legislature converted the interest of a Hindu female, which under the customary Hindu law would have been regarded as a limited interest, into an absolute interest and by the Explanation thereto gave to the expression “property” the widest connotation. The Court held that the Act conferred upon Hindu females full rights of inheritance, and swept away the traditional limitations on her powers of dispositions which were regarded under the Hindu law as inherent in her estate. She was under the Act regarded as a fresh stock of descent in respect of property possessed by her at the time of her death.

NIRMAL CHAND VS. VIDYAWANTI, (1969) 3 SCC 628

If a lady is entitled to a share in her husband’s properties then the suit properties must be held to have been allotted to her in accordance with s.14(1), i.e., as an absolute owner in spite of the fact that the deed in question mentioned that she would have only a life interest in the properties allotted to her share.

ERAMMA VS. VERRUPANNA, 1966 (2) SCR 626

The Supreme Court held that mere possession of property by a female does not automatically attract s. 14(1) of the Act.

MST. KARMI VS. AMRU, AIR 1971 SC 745

A person died leaving behind his wife. His son pre-deceased him. He gave a life interest through his Will to his Wife. It was held that the life estate given to a widow under the Will of her husband cannot become an absolute estate under the provisions of the Act. S.14(2) would apply to such a situation and it would not become an absolute estate. The female having succeeded to the properties on the basis of her husband’s Will she cannot claim any rights over and above what the Will conferred upon her. This is one of the important decisions which have gone against the tide of conferring absolute ownership on the Hindu female.

V. TULSAMMA VS. SESHA REDDI, (1977) 3 SCC 99

In this landmark case, the Supreme Court clarified the difference between sub-sections (1) and (2) of Section 14, thereby restricting the right of a testator to grant a limited life interest in a property to his wife. case involved a compromised decree arising out of a decree for maintenance obtained by the widow against her husband’s brother in a case of intestate succession. The compromise allotted properties to her as a limited owner. The Supreme Court held that this was a case where properties were allotted in lieu of maintenance and hence, s.14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting sub-section (2)was that this subsection should be applicable only to cases where the acquisition of property is made by a Hindu female for the first time without any pre-existing right. Where, however, property is acquired by a Hindu female at a partition or in lieu of her pre-existing right to maintenance, such acquisition would be pursuant to her pre-existing right not be within the scope and ambit of s.14(2) even if the instrument allotting the property prescribes a restricted state in the property. Sub-section (2) must, therefore, be read in the context of sub-section (1) so as to leave as large a scope for operation as possible to sub-section (1) and so read, it must be confined to cases where property is acquired by a female Hindu for the first time as a grant without any pre-existing right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted state in the property. It further held that a Hindu woman’s right to maintenance is a personal obligation so far as the husband is concerned, and it is his duty to maintain her even if he has no property. If the husband has property then the right of the widow to maintenance becomes an equitable charge on his property and any person who succeeds to the property carries with it the legal obligation to maintain the widow. Though the widow’s right to maintenance is not a right to property, it is undoubtedly a pre-existing right in the property, i.e. it is a jus ad rem not jus in rem and it can be enforced by the widow who can get a charge created for her maintenance on the property either by an agreement or by obtaining a decree from the civil court.

SMT. GULWANT KAUR VS. MOHINDER SINGH, AIR 1987 SC 2251 / GURDIP SINGH VS. AMAR SINGH, 1991 SCC (2) 8

The provisions of Section 14(1) of the Act were applied because it was a case where the Hindu female was put in possession of the property expressly in pursuance to and in recognition of the maintenance in her / where the wife acquired property by way of gift from her husband explicitly in lieu of maintenance. This decision was affirmed by a three-Judge bench in Jaswant Kaur vs. Major Harpal Singh, (1989) 3 SCC 572

THOTA SESHARATHAMMA VS. THOTAMANIKYAMMA, (1991) 4 SCC 312

The Apex Court dealt with a life estate granted to a Hindu woman by a Will as a limited owner and the grant was in recognition of pre-existing right. Thulasmma’s decision was followed and s.14(1) was held to apply. The Supreme Court also held that the contrary decision in the case of Mst. Karmi cannot be considered an authority since it was a rather short judgment without adverting to any provisions of Section 14(1) or 14(2) of the Act. The judgment neither made any mention of any argument raised in this regard nor there was any mention of the earlier decisions on this issue.

NAZAR SINGH VS. JAGJIT KAUR, (1996) 1 SCC 35/ SANTOSH VS. SARASWATHIBAI, (2008) 1 SCC 465 / SUBHAN RAO VS. PARVATHI BAI, (2010) 10 SCC 235

Applying Thulasamma’s decision it was held that lands, which were given to a lady by her husband in lieu of her maintenance, were held by her as a full owner thereof and not as a limited owner notwithstanding the several restrictive covenants accompanying the grant. According to the Court, this proposition followed from the words in sub-section (1) of s.14, which insofar as is relevant read: “Any property possessed by a female Hindu … shall be held by her as full owner and not as a limited owner”

SHAKUNTALA DEVI VS. KAMLA AND OTHERS, (2005) 5 SCC 390

A Hindu wife was bequeathed a life interest for maintenance by her husband’s Will with a condition that she would not have power to alienate the same in any manner. As per the Will, after death of the wife, the property was to revert back to his daughter as an absolute owner. It was held that u/s.14(1) a limited right given to the wife under the Will got enlarged to an absolute right in the suit property.

SADHU SINGH VS GURDWARA SAHIB NARIKE, (2006) 8 SCC 75 / SHARAD SUBRAMANAYAN VS. SOUMIMAZUMDAR (2006) 8 SCC 91

The Supreme Court in these well-considered decisions held that the antecedents of the property, the possession of the property as on the date of the Act and the existence of a right in the female over it, however limited it may be, are the essential ingredients in determining whether sub-Section (1) of Section 14 of the Act would come into play. Any acquisition of possession of property by a female Hindu could not automatically attract s.14(1). That depended upon the nature of the right acquired by her. If she took it as an heir under the Act, she took it absolutely. If while getting possession of the property after the Act, under a devise, gift or other transaction, any restriction was placed on her right, the restriction will have play in view of s.14(2) of the Act. Therefore, there was nothing in the Act which affected the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act did not stand in the way of his separate properties being dealt with by him as he deemed fit. His Will could not be challenged as being hit by s.14(1) of the Act. When he validly disposed of his property by providing for a limited estate to his wife, the widow had to take it as the estate devolved on her. This restriction on her right so provided, was really respected by s.14(2) of the Act. Thus, in this case where the widow had no pre-existing right, the limited estate granted to her under her husband’s Will was upheld u/s. 14(2).

Any acquisition of possession of property (not right) by a female Hindu after the coming into force of the Act, cannot normally attract Section 14(1) of the Act. The Court distinguished Tulsamma’s decision as follows:

“….., it is clear that the ratio in V. Tulasamma vs. Shesha Reddy ………has application only when a female Hindu is possessed of the property on the date of the Act under semblance of a right, whether it be a limited or a pre-existing right to maintenance in lieu of which she was put in possession of the property. Tulasamma ………ratio cannot be applied ignoring the requirement of the female Hindu having to be in possession of the property either directly or constructively as on the date of the Act, though she may acquire a right to it even after the Act.

……….when a male Hindu executes a will bequeathing the properties, the legatees take it subject to the terms of the will unless of course, any stipulation therein is found invalid. Therefore, there is nothing in the Act which affects the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act does not stand in the way of his separate properties being dealt with by him as he deems fit. His will hence could not be challenged as being hit by the Act.”

The Court concluded that when a male validly disposed of his property by providing for a limited estate to his heir, the wife, she took it as the estate devolved on to her. This restriction on her right, was respected by the Act. It provided in Section 14(2) of the Act, that in such a case, the widow is bound by the limitation on her right and she could not claim any higher right by invoking Section 14(1) of the Act. In other words, conferment of a limited estate which was otherwise valid in law was reinforced by this Act by the introduction of Section 14(2) of the Act and excluding the operation of Section 14(1) of the Act.

JUPUDYPARDHASARATHY VS. PENTAPATI RAMA KRISHNA, (2016) 2 SCC 56

After analysing a host of decisions and the legal principles, the Supreme Court in Jupudy’s case held that the bequest under the Will to the 3rd wife was in the nature of maintenance even though the express words maintenance were not mentioned in the Will. She was issueless and the husband was duty bound to maintain her. Hence, he gave her the house and access to incidental facilities. Accordingly, s.14(1) applied and the limited right stood enlarged into an absolute estate by virtue of a pre-existing right of maintenance. The Court observed that no one disputed the genuineness of the Will and the fact that the 3rd wife continued to enjoy the said property in lieu of her maintenance.

TEJ BHAN’S CASE

A person purchased property under a sale deed executed by the wife of one Kanwar Bhan, the testator, who was the original owner of the property. Kanwar Bhan executed a will that created a life estate in favour of his wife. It stated that she was entitled to maintain herself out of the proceeds from the same but she was not be entitled to mortgage or sell the said land. Once she got the property after her husband’s demise, she executed a sale deed. This was objected to by other claimants under the Will. The lower Courts relied on decision in Tulsamma’s case and held that the property given to the wife of Kanwar Bhan was in the nature of maintenance and such a pre-existing right enlarged into a full estate. Accordingly, it upheld the right of the widow to sell the property. The High Court rejected this stand and held that the widow only had a limited right and hence, the correct principle was as laid down in the case of Sadhu Singh (supra).

CONCLUSION

The Supreme Court in Tej Bhan concluded that there were a large number of decisions which were not only inconsistent with one another on principle but have tried to negotiate a contrary view by distinguishing them on facts or by simply ignoring the binding decision. Accordingly, it was of the view that there must be clarity and certainty in the interpretation of Section 14 of the Act.

S.14(1) is a very important piece of legislation when it comes to ensuring protection of a Hindu female’s rights over property. It ensures that a lady is an absolute owner in respect of her property. However, it is also essential that this provision is used as a shield and not a sword. S.14(2) ensures that what was originally acquired as a limited owner does not automatically enlarge into absolute ownership. One important principle which emerges from the numerous Court cases is that applicability of these two sub-sections has to be tested on the facts of each case and there cannot be one straight-jacketed approach to all cases. One hopes that a Larger Bench of the Apex Court will conclusively settle this issue once and for all.

Part A | Company Law

12 In the Matter of:

M/s. Venkatramana Food Specialities Limited

Registrar of Companies, Puducherry

Adjudication Order No. ROC/PDY/Adj / Sec.203 / 02550/ 2024

Date of Order: 9th October, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013) by the Company: Failure to fill the vacancy arising from the resignation of the whole time Company Secretary within a period of 6 months.

FACTS

The company had appointed a Whole-time Company Secretary on 15th April 2019 as required under the provisions of Section 203(4) read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Subsequently, the said Secretary resigned and moved out of the company from 26th December, 2019.

The company was required to appoint a whole-time company secretary on or before 20th June, 2020 i.e. within 6 months from the date of resignation (26th December, 2019). However, the company appointed a whole-time secretary who joined w.e.f. 9th December, 2023. Thus, there was a delay of 1442 days in the appointment of the Company
Secretary. (From 27th December, 2019 to 8th December, 2023).

The show-cause notice was issued and hearing was fixed. The authorised representative explained that due to Covid it was not possible to appoint any CS even after many advertisements and it was difficult to appoint a whole time Company Secretary. However, the default was accepted for the adjudication.

PROVISIONS OF THE ACT IN BRIEF:

Section 203(4) of CA 2013:

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Note: Section 203(1) requires certain classes of companies to have a whole-time key managerial personnel which includes a Company Secretary.

Section 203(5) of CA 2013:

If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

FINDINGS AND ORDER

Considering the default and acceptance of the same by the company, the Adjudication Officer, imposed a Penalty of ₹20 Lakhs as under:

Penalty imposed on  Calculation Amount ( R)
Company As per the provisions of Section 203(5) 5,00,000
Each of the 3 directors [50,000+(R1000 per day for 1442 days) Subject to Maximum of R5 Lakhs per Director] X 3 15,00,000
Total 20,00,000

13 In the Matter of M/s. Shunmugam Traders Private Limited

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/SHUNMUGAM/ADJ/S.137/2024

Date of Order: 16th September, 2024

Adjudication order for violation of section 137 of the Companies Act 2013(CA 2013) by the Company: Non-Filing of Financial Statements.

FACTS

It was observed from the MCA records that the company has filed its financial statements only up to the financial year 2014-2015. Since the company and its directors have not filed its financial statements up to date, Section 137 of the Companies Act, 2013 has been contravened and the defaulters are liable for action under section 137 (3) of the Companies Act, 2013. Accordingly, on submission of the inquiry report by the officer, Regional Director, Ministry of Corporate Affairs, Chennai had directed to take necessary action against the defaulters under the provisions of the Companies Act, 2013 for the financial year 2015-2016 to till date.

(i.e. FY 2022-23)

PROVISIONS OF THE ACT IN BRIEF:

Section 137 of the Companies Act, 2013-

Copy of financial statement to be filed with the Registrar:

(1) A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly, adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed.

(2) Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under subsection(l), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed
(3) If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the periods specified therein, the company shall be liable to a penalty often thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the Directors of the company, shall be liable to a penalty often thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that no response was received from the company, the Adjudication Officer concluded that the company and its directors have violated Section 137(3) of the companies Act, 2013. For the purposes of levy of penalty, date of AGM was considered as 30th September of the respective financial year.

Financial Year for which
Penalty was levied		 Final Penalty imposed on the Company and the Officers in default (Amount in R)
2015-16 4,50,000
2016-17 4,50,000
2017-18 4,50,000
2018-19 4,35,800
2019-20 3,99,200
2020-21 3,62,700
2021-22 3,26,200
2022-23 2,38,200
Total 33,12,100

Further, in exercise of Section 454 (3) (b) of the Companies Act,2013 the company was directed to rectify the default by filing Financial Statements for the remaining periods i.e. from 2015-16 onwards and intimate the details of filings along with SRNs within 30 days from the date of the order.

14 In the Matter of M/s. Subh Laabh Polymers Private Limited,

Registrar of Companies, Cum Official Liquidator, Chhattisgarh

Adjudication Order No/ Reference no. to Show Cause Notice:ROC-cum-OL-C.G./008625/ATR/Adj/140/1/2024/611

Date of Order: 13th September, 2024

Adjudication order issued against Statutory Auditor of the Company for delay in filing of Resignation Notice in the prescribed e-form ADT-3 under provisions of Section 140 (2) of the Companies Act 2013.

FACTS

An inquiry under Section 206(4) of the Companies Act,2013 was carried into the affairs of M/s SLPPL and it was observed that M/s SLPPL had appointed M/s R.K.S.A as the Statutory Auditor of M/s SLPPLunder Section 139(1) of the Companies Act, 2013 for the period starting from 1st April, 2016 to 31st March, 2021 and M/s SLPPL had informed the same to ROC by filing form ADT-1 on 21st October, 2016, after receiving the consent letter from the Auditor on 20th August, 2016 and in between this period, M/s SLPPL further had appointed M/s NC&A as the Statutory Auditor for the period of 1st April, 2017 to 31st March, 2022.

Therefore, in accordance with Section 140(2) of the Companies Act, 2013, the auditor who had resigned from the Company must within a period of thirty days file in e-form ADT-3 his / her resignation with Registrar of Companies (ROC).The same was not complied by M/s R.K.S.A.

Thereafter on the direction of the Regional Director (RD), a Show Cause Notice (SCN) was issued to M/s R.K.S.A on 14th August 2024 and M/s R.K.S.A replied to the SCN via letter dated 4th September, 2024 which stated that the auditing firm was going through a constitution change in the Institute of Chartered Accountants of India by way of conversion into a Limited Liability Partnership (LLP) and name change. Due to engagement on the above matter, the auditing firm missed out on the filing of a notice of resignation in form ADT-3 to the Registrar of Companies. The firm realised its default in the year 2023 and soon after, the firm filed the ADT-3 form along with the applicable fees in addition to the applicable late filing fees.

PROVISIONS

“As per Section 140(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub- section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

ORDER

AO after consideration of facts and admission made by Auditor that the filing of ADT-3 form was delayed by period of 2077 days. Hence concluded that the auditor had violated the provisions of Section 140(2) read with Section 140(3) of the Companies Act, 2013 for which penalty of ₹2,00,000 (Rupees Two Lakhs only) was imposed.

Allied Laws

43 Rizwi Khan vs. Abdul Rashid and Ors.

AIR 2024 Jharkhand 167

12th July, 2024

Transfer of property — Gift deed — No title with the donor to start with — Illegal occupation over property — Gift deed invalid. [S. 122, Transfer of Property Act, 1882; O. 1, R. 10, Code for Civil Procedure, 1908].

FACTS

A suit was instituted by the Plaintiff (Rizvi Khan) for declaration of title over the suit property. The suit was filed on the strength of a gift deed executed by the donor (one Mr. Shamsher Ali, father of both Plaintiff and Respondents) in favour of the Plaintiff. The Respondents had argued, inter alia, that the said gift deed was null and void on the ground that the donor did not have a clear title over the suit property on the date of transfer of property.

HELD

The Hon’ble Jharkhand High Court observed that the suit property belonged to the state government, which was leased out to TISCO. Further, it was observed that the donor was illegally occupying the said land. Thus, relying on the legal maxim ‘Nemo dat quod non-habit’, i.e., one cannot give what he does not have, it was held that the gift deed was invalid.

The suit was, therefore, dismissed.

44 Parvati alias Parvati Mohapatra vs. Sadasiba Mohapatra (dead) and Ors.

AIR 2024 (NOC) 819 (ORI)

28th February, 2024

Succession — Void Marriage — Children from void marriage — Illegitimate children also have right over the property of parents. [S. 16, Hindu Marriage Act, 1955; S. 11, Hindu Succession Act, 1956].

FACTS

The Respondent (Original Plaintiff) had filed a suit for eviction of the Appellants (Original Defendant) from possession of the suit property. Plaintiff had contested that Defendant was staying with him for the last 30 years in the suit property. Thereafter, due to issues between the parties, the Plaintiff had asked the Defendant to vacate the property. The Defendant had contested the removal on the ground that the Defendant had been married (as per social norms) to the Plaintiff for the last 30 years and, therefore, she and their children had a legal right, title, and interest over the suit property and thus, cannot be evicted. Plaintiff had rebutted by stating that he was already married to somebody else and, therefore, Defendant was not his wife as per section 11 of the Hindu Marriage Act, 1956, and consequently, the children also did not possess any right, title and interest over the suit property. Thereafter, during the pendency, Plaintiff expired, and his legal heirs (children through his first wife) were made a party to the plaint. The Ld. Trial Court dismissed the plaint. Aggrieved, an appeal was filed before the Ld. division Bench. The Ld. Division Bench allowed the Plaintiff’s appeal.

Aggrieved, a second appeal was filed by the Defendant before the Hon’ble Orissa High Court.

HELD

On appeal, the Hon’ble Orissa High Court observed that the children of the Plaintiff and Defendant (Defendant 2 to 4) had become legal heirs to the suit property upon the death of the Plaintiff. Further, relying on section 11 of the Hindu Succession Act, 1956 and the decision of the Hon’ble Supreme Court in the case of Revanasiddapa and others vs. Mallikarjun and Others AIR 2023 Supreme Court 4707, it was held that Defendants 2 to 4 inherited right, title, and interest over the property even though they were born out of a void marriage.

The Appeal was, therefore, allowed.

45 Kripa Singh vs. GOI & Ors

2024 LiveLaw (SC) 970

21st November, 2024

Arbitration — Delay in filing appeal — Implications of the Limitation Act — Court of law to secure and protect appellants. [S.14, Limitation Act, 1963; S. 34, S. 37, Arbitration and Conciliation Act, 1996 (Act)].

FACTS

The appellant’s land was acquired by the Government vide an award. After receiving a certified copy of the award, the appellant filed an appeal before the High Court. Thereafter the appellant came to know about the appropriate action available, being the statutory remedy under Section 34 of the Act, and instituted proceedings under Section 34 of the said Act before the District Court.

The District Judge took up the application under Section 34 of the Act and dismissed the same on the ground that it was barred by limitation. An appeal under section 37 of the Act was also dismissed.

The appellant filed an appeal before the Supreme Court.

HELD

The substantive remedies under Sections 34 and / or 37 of the Act are by their very nature limited in their scope due to statutory prescription. It is necessary to interpret the limitation provisions liberally, or else, even that limited window to challenge an arbitral award will be lost. The remedies under Sections 34 and 37 of the Act are precious. Courts of law will keep in mind the need to secure and protect such a remedy while calculating the period of limitation for invoking these jurisdictions. Applying Section 14 of the Limitation Act, we hold that there is sufficient cause excluding the period commencing from the filing of the wrong appeal before the High Court to the filing of the correct appeal before the District Court will be excluded.

The Appeal was allowed.

46 Manohari R vs. The Deputy Tahsildar (Revenue Recovery) & Ors

2024 LiveLaw (Ker) 783

5th November, 2024

Writ Jurisdiction — Difference between Maintainability and Entertainability. [Art. 226, Constitution of India, S. 7 Kerala Revenue Recovery Act, 1968].

FACTS

The Appellant / Original Petitioner had challenged a notice issued under Section 7 of the Kerala Revenue Recovery Act, 1968 by filing a Writ Petition. The notice was issued by Respondent No.1, authorising the Village Officer, to seize the movable property of the Appellant for the defaulted amount of ₹1,10,096/- with interest due to the Kerala State Electricity Board (KSEB).

The Writ Petition was dismissed as not maintainable. Being aggrieved by the summary dismissal of the writ petition, the Petitioner filed appeal under Section 5 of the Kerala High Court Act, 1958.

HELD

There is a difference between the entertainability and maintainability of a writ petition. Even if the alternate remedy is available to the Petitioner, that cannot be a ground to hold the writ petition under Article 226 of the Constitution of India against an administrative authority as “not maintainable”. The powers under Article 226 of the Constitution of India can be exercised even if there exists an alternate remedy. However, it is in restricted circumstances, within well-defined parameters. As a matter of settled judicial practice, the jurisdiction under Article 226 of the Constitution of India is not exercised if there is an alternative efficacious remedy available and in such circumstances, the writ court may decline to “entertain” the writ petition. There is, therefore, a difference between maintainability and entertainability of a writ petition.

Therefore, the petition filed by the Appellant / Petitioner was maintainable. The impugned judgment was set aside, to decide whether the writ petition should be entertained.

The Appeal was allowed

Part A | Company Law

10 Case No 1/ December 24

In the Matter of

M/s. Holitech India Private Limited

Registrar of Companies, Kanpur Uttar Pradesh

Adjudication Order No. 07/01/Adj.134(3)(f) Holitech India Private Limited /5458

Date of Order: 13th November, 2023

Adjudication order for violation of section 134(3)(f) of the Companies Act 2013 by the Company and its Directors: Failure to provide explanations and comments in the Board Report on the qualification made by the Statutory Auditors in his Report.

FACTS

The Inquiry Officer (“IO”) during the course of his enquiry had observed from the Audit Report for the Financial Year ended as on 31st March, 2020, that the Statutory Auditor had given Qualified Report stating that the company did not have appropriate system regarding receipt and issue of inventories for production, overheads, trade payable which could potentially result in under statement and overstatement of financial of the company.

The Board Report for the said financial year did not include the comments or explanations by the Board on
Qualified Opinion made by the Statutory Auditor in his Audit Report.

Thereafter, Regional Director (“RD”) on basis of (IO) report, directed Adjudication Officer (“AO”) to take necessary action against M/s HIPL and its directors for non-compliance with provisions of Section 134(3)(f) of the Companies Act, 2013. Accordingly, the AO had issued

Show Cause Notice(SCN). However, the SCN was returned to the AO office as undelivered. Consequent to that, no hearing on this matter was fixed and neither any representative of M/s HIPL or its directors furnished their reply nor appeared before the AO.

Therefore, the AO decided to pass an order on this matter as per the provisions of the Companies Act, 2013.

PROVISIONS

Section 134(3)(f)

There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include, explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report; and by the company secretary in practice in his secretarial audit report

Penal section for non-compliance / default, if any

Section 134(8)

If a company is in default in complying the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer who is in default shall be liable to a penalty of fifty thousand rupees.

ORDER

The AO, after having considered the facts and circumstances of the case and after taking into account the factors above, imposed ₹3,00,000 (Rupees Three Lakh only) on the company and ₹50,000/- (Rupees Fifty Thousand only) on each director of the company under section 134(8) of the Companies Act 2013 for failure to comply with section 134(3)(f) of the Companies Act, 2013, and for not providing explanations or comments on Board Report for qualification made by the Statutory Auditor in his Audit Report for the Financial year ended as on 31st March, 2020.

11 11 Case 2 / December 2024

In the Matter of

M/s Dalas Biotech Limited Company

Registrar of Companies, Jaipur

Adjudication Order No. ROCJP/SCN/149/2024-25/1367

Date of Order: 31st July, 2024.

Adjudication Order for violation with regards to Non-Appointment / Non-filling up Causal Vacancy of an Independent Director in the Board within the prescribed time limit and not having minimum Independent Directors on its Board as provided in Section 149(4) of the Companies Act 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules, 2014.

FACTS

M/s DBL had two Independent Directors in its Board as on 28th March, 2015 and one of the Independent Directors Mr. BRS resigned from the Directorship from 23rd November, 2017, thereby creating a causal vacancy. The said vacancy of the Independent Director was required to be filled by the M/s DBL on or before 22nd February, 2018. However, M/s DBL filled the vacancy on 15th March, 2021.

Therefore, M/s DBL and its directors were in default since they had violated the provisions of Section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules,2014 for the period from 23rd February, 2018 to 14th March, 2021 as the new director Mr. MK was appointed in M/s DBL with effect from 15th March, 2021.

Further, Mr. VK gave his resignation which was effective from 30th March, 2021 and that created a new vacancy for an Independent Director in the Board of Directors of the M/s DBL which was required to be filled up on or before 29th June, 2021. Thereafter, M/s DBL appointed another independent director Mr. SY on 06th January, 2023, thereby violating the provisions of Section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rule, 2014 for the period from 30th June, 2021 to 05th January, 2023.

In view of the above, the Registrar of Companies (ROC)/ Adjudicating Officer (AO) issued a Show Cause Notice (SCN) to M/s DBL for furnishing reply.

M/s DBL had made a submission/reply to AO stating that M/s DBL was in search of appropriate skill in the market but was not able to find appropriate person. Also, there was massive panic during COVID-19 pandemic and hence, there was delay in fulfilment of causal vacancy. However, the said submission was not considered as a satisfactory reply by AO. Therefore, the AO fixed a date for hearing of this matter. However, no representative of the M/s DBL appeared on the date.

PROVISIONS

149(4): “Every listed public company shall have at least one-third of the total number of Directors as independent Directors and the Central Government may prescribe the minimum number of independent Directors in case of any class or classes of public companies.”

Rule 4(1) of the Companies (Appointment of Directors) Rules2014:

“The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

Provided further that any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.”

Penalty section for non-compliance / default, if any

172: “ If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.”

ORDER

AO, after having considered the facts and circumstances of the case and after considering the documents filed by the M/s DBL had concluded that the M/s DBL and its directors were liable for penalty as prescribed under section 172 of the Companies Act, 2013 for default made in complying with the requirements. Hence, AO imposed a penalty of ₹6,00,000 (Rupees Six Lakhs Only) on M/s DBL and ₹2,00,000 (Rupees Two Lakhs Only) on Mr.SR, Managing Director of M/s DBL under section 149(4) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Appointment of Directors) Rules, 2014 in respect of non-appointment / non-filling up causal vacancy of Independent Directors in the Board within the prescribed time limit and not having minimum Independent Directors on its Board.

From Speculation to Stability: SEBI’s Comprehensive Regulatory Measures in Derivatives Markets

BACKGROUND

Derivatives are a cornerstone of modern financial markets, providing a vast array of tools for speculation, risk management, and portfolio diversification. However, despite their usefulness, derivative instruments come with a set of inherent risks, especially when traded by retail investors who may not have the necessary expertise or tools.

Given the changing market dynamics in the equity derivatives segment in recent years with increased retail participation, offering of short-tenure index options contracts, and heightened speculative trading volumes in index derivatives on the expiry date, the regulator seeks to enhance investor protection and promote market stability in derivative markets, while ensuring sustained capital formation.

Dynamics of Derivatives with the Retail Segment

The retail segment in India has seen substantial growth in derivatives trading, particularly in the equity F&O (Futures and Options) market. However, recent studies conducted by the Securities and Exchange Board of India (SEBI) have raised concerns about the financial health of retail traders in the equity F&O segment. Significant trading activity happens during the day of expiry and significant speculative activity happens during the contract expiry period.

A recently updated study issued by Department of Economic and Policy Analysis, SEBI on individual traders in the equity F&O segment reveals alarming statistics about the financial outcomes for retail participants. The derivatives market turnover in India has significantly surpassed the cash market turnover. Reports suggest that Indian markets account for 30 per cent to 50 per cent of global exchange-traded derivative trades, aided by technology, increasing digital access and varied product offerings. The total number of Demat accounts in India rose to 15.8 crore as at the end of May 24, of which 12.2 crore accounts were opened since April 2020. Between FY22 and FY24, a staggering 93 per cent of over one crore individual F&O traders incurred average losses of ₹2 lakh each, factoring in transaction costs. A small fraction, around 3.5 per cent (about 4 lakh traders), faced even more significant losses, averaging ₹28 lakh per person. Only 1 per cent of traders were able to generate profits exceeding ₹1 lakh after accounting for transaction costs. These findings highlight the persistent struggle of retail investors in the high-risk world of equity derivatives.

The distribution of profits paints a stark contrast between individual traders and institutional players. While proprietary traders and Foreign Portfolio Investors (FPIs) generated substantial profits of ₹33,000 crore and ₹28,000 crore respectively in FY24, individual traders as a group faced collective losses of ₹61,000 crore. The lion’s share of these profits by larger entities came from algorithmic trading, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits attributed to automated systems. This suggests that individual traders, without access to such sophisticated tools, are at a significant disadvantage in the market. This poses a question whether derivatives are a product for the retailers.

Transaction costs also play a critical role in exacerbating the losses faced by individual traders. On average, retail participants spent ₹26,000 per person on F&O transaction costs in FY24. Over the three-year period from FY22 to FY24, these traders collectively spent about ₹50,000 crore on transaction costs, with brokerage fees accounting for 51 per cent and exchange fees contributing to 20 per cent. Transaction costs add a substantial burden to traders already struggling with poor market performance, further eroding their capital.

The study also notes an increase in participation from younger traders and those from smaller cities. The proportion of traders under 30 years of age in the F&O segment rose sharply from 31 per cent in FY23 to 43 per cent in FY24. Furthermore, 72 per cent of individual traders came from Beyond Top 30 (B30) cities, surpassing the proportion of mutual fund investors (62 per cent from B30 cities). This shift suggests a growing trend of younger and less affluent traders demonstrating penetration from emerging cities of India entering the F&O market, often without sufficient experience or understanding of the risks involved.

Despite the overwhelming evidence of losses, many individual traders continue to participate in the F&O market. Over 75 per cent of loss-making traders persisted with their trading activity, indicating a strong sense of urge or a reluctance to exit the market. This persistence, coupled with the increasing participation of younger and less experienced traders, calls for greater regulatory attention and more robust investor education programs to prevent further financial distress in the retail trader community.

The SEBI study clearly illustrates the challenges faced by individual traders in the equity F&O segment, particularly the high rates of loss, significant transaction costs, and the disparity in profits between retail traders and institutional investors. Additionally, the popularity of shorter-duration options in indices with few stocks and high volatility could amplify leverage.

According to the RBI’s bi-annual Financial Stability Report (FSR), trading volumes in the derivatives segment have grown exponentially in notional terms. However, when measured by premium turnover, the growth has been more linear. The ratio of premium turnover to the cash market has remained stable over the past three years. Additionally, the popularity of shorter-duration options in indices with few stocks and high volatility could amplify leverage. Retail investors might be impacted by sudden market movements without proper risk management, which could have knock-on effects on the cash market. However, it is crucial for retail traders to understand the risks involved in derivatives trading — especially in illiquid markets — and adopt prudent risk management strategies, including diversification, position sizing, and leveraging hedging tools effectively.

One such scenario includes trading in Illiquid options. Trading involves buying and selling options contracts that have low trading volumes and limited market participation. These options tend to be associated with less popular underlying assets, distant expiration dates, or strike prices that are far from the current market price of the underlying asset. Because of the reduced trading activity, illiquid options typically have wider bid-ask spreads, meaning the difference between the price a buyer is willing to pay and the price a seller is asking for is larger.

The primary risk of trading illiquid options is the difficulty in executing trades at favourable prices. With fewer market participants, large orders can significantly impact the price of the option, resulting in slippage — where the execution price is worse than anticipated. Additionally, illiquid markets can make it harder to close a position, as there may not be enough buyers or sellers at the desired price.

Recently SEBI has passed various adjudication orders on entities involved in trading in Illiquid stock options on Derivative Trading platform of BSE. SEBI observed large-scale reversal of trades in stock options leading to creation of artificial volume at BSE.

Pursuant to SEBI Investigation, it was observed that a total of 2,91,744 trades comprising 81.40 per cent of all the trades executed in stock options segment of BSE during the period were allegedly to be non-genuine in nature and created false or misleading appearance of trading in terms of artificial volumes in stock options and therefore to be manipulative or deceptive in nature.

The entities on which adjudication is passed by SEBI were involved in Reversal Trade. Reversal trades are considered to be those trades in which an entity reverses its buy or sell positions in a contract with subsequent sell or buy positions with the same counterparty during the same day. The said reversal trades are alleged to be non-genuine trades as they are not executed in the normal course of trading, lack basic trading rationale, lead to false or misleading appearance of trading in terms of generation of artificial volumes and hence are deceptive and manipulative.

The entities were adjudicated under provision of PFUTP Regulations, 2003.

This led to an urgent need for regulatory reforms to address these issues, including measures to reduce transaction costs, enhance transparency, and promote better risk management practices among individual traders. Additionally, increased investor education and support, particularly for young and inexperienced traders, could help mitigate the risks associated with derivatives trading. Without such interventions, the current trends of rising participation and continued losses could further harm the financial well-being of retail investors. SEBI has also been considering a review of the eligibility criteria for determining entry/exit of stocks in derivatives segment.

Identifying the Risk

Risk management is not possible without identifying the risks and understanding the consequence of not managing the risk effectively. This can be particularly problematic for retail traders who may lack sufficient expertise to manage these risks effectively. The key risks involved in derivative trading include:

Market risk refers to the risk of a decline in the value of the underlying asset. This can happen if there is a sudden change in market conditions, such as a global financial crisis or a natural disaster. If the value of the underlying asset falls significantly, the value of the derivative can also decline, potentially leading to significant losses for investors.

Leverage can enhance the impact of market risk. Since an investor is required to pay only the margin or premium, as the case may be, the actual exposure to the underlying would be a multiple of the amount paid. If the investor has not properly understood and put a significant amount of capital towards the margin or premium, the losses could be huge, potentially wiping the investor out financially.

Liquidity risk is another significant one. It refers to the risk that an investor may not be able to exit a position in the derivative market quickly or at a fair price. In the Indian securities markets, most actively traded derivatives contracts are short-term, so liquidity risk may not be much as the contract will expire soon.

Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events. While such instances could be rare, these incidents can lead to significant losses for investors who are unable to exit their positions in time.

Regulatory Measures to Strengthen Derivatives Framework for Increased Investor Protection and Market Stability

Recognising the growing risks and challenges faced by retail investors, SEBI has introduced several regulatory measures to strengthen the derivatives market and safeguard investor interests. Key regulatory reforms include the following:

  1. Upfront collection of premiums: Options being timed contracts with the possibility of fast-paced price appreciation or depreciation. Starting February 2025, the regulator requires that options buyers pay the full premium upfront. The upfront margin collection shall also include net options premium payable at the client level. This rule aims to reduce excessive intraday leverage and ensure that traders’ exposure to risk is in line with their collateral.
  2. Removal of calendar spreads: Effective from February 2025, calendar spreads (trading of offsetting positions across different expiry dates) will no longer be permitted on expiry days. Calendar spreads are seen as increasing market volatility and basis risk on expiry days, which can exacerbate price fluctuations and lead to higher market manipulation risks. Accordingly, on the day of expiry, the worst-case scenario loss shall be calculated separately for the contracts expiring on the given day and for the rest of the contracts.
  3. Intraday monitoring of position limits: Intraday monitoring of position limits from April 2025. Given the large volumes of trading on expiry day, there is a possibility of undetected intraday positions beyond permissible limits during the course of the day. Stock exchanges will be required to take a minimum 4 snapshots of traders’ positions during the trading day to ensure compliance with permissible limits, particularly during volatile expiry periods.
  4. Increase in minimum contract size: Starting November 2024, the minimum contract size for index derivatives shall not be less than ₹15 lakh at the time of its introduction in the market. Given the
    inherent leverage and higher risk in derivatives, this recalibration in minimum contract size, in tune with the growth of the market, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained as intended
  5. Rationalisation of weekly contracts: Expiry day trading in index options is largely speculative. Different Stock Exchanges offer short tenure options contracts on indices which expire on every day of the week. In order to specifically address this issue of excessive trading in index derivatives on expiry day, it has been decided to rationalize index derivatives products offered by exchanges that expire on a weekly basis. This measure seeks to curb excessive trading on expiry days and encourage more stable capital formation.
  6. Extreme loss margin (ELM): SEBI will impose an additional 2 per cent Extreme Loss Margin for all short options contracts expiring on a given day, effective from November 2024. This will help mitigate the risk of tail events and limit extreme price movements on expiry days.

The measures introduced by SEBI, including increased margin requirements, position limits, and stricter monitoring of speculative trading, are a step in the right direction to protect individual investors and ensure a more stable and transparent market environment.

Conclusion

The financial sector regulators, SEBI and RBI have always raised a concern on derivatives trading over increasing volumes in the F&O Market, highlighting its potential macro-economic impact. Recent measures introduced by SEBI are primarily aimed at reducing excessive speculative trading and ensuring better risk management practices. As market participants adapt to the new regulations in a phased manner, the potential for a more mature and stable derivatives market could emerge, benefiting both investors and the overall financial ecosystem in India.

“The aim is to enhance capital formation while ensuring capital protection”

X-X-X-X

Source: Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment, issued by SEBI.

SEBI Consultation Paper and Circular on Measures to Strengthen Equity Index Derivatives Framework for Increased Investor Protection and Market Stability.

Audit Committee: Role and Responsibilities

I. INTRODUCTION

The Board of Directors of a company carries out various roles and responsibilities in relation to a company. Many of these responsibilities are through various Board Committees. Of all the Committees of the Board, the Audit Committee is probably the most vital and is entrusted with the maximum tasks and duties. While an Audit Committee is mandatory for a listed company under the provisions of the Companies Act, 2013 (“the Act”) / the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), it is also mandatory for certain public limited companies under the provisions of the Act. Let us examine the salient facets of this very important Board Committee. Interestingly, neither the Act nor the LODR defines the meaning of the term Audit Committee. The Corporate Governance Institute defines it as

“An audit committee is a committee of a company‘s board of directors that is responsible for overseeing the financial reporting process, internal controls, and audit activities.”

Let us examine the key duties and powers of the Audit Committee.

II. REQUIREMENTS

2.1 Companies Act, 2013

S.177 of the Act states that every listed public company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee. The class of public limited companies prescribed in this respect are:

(i) Public Companies having paid up share capital of ₹10 crore or more; or

(ii) Public Companies having turnover of ₹100 crore or more; or

(iii) Public Companies that have, in the aggregate, outstanding loans, debentures, and deposits, exceeding ₹50 crore.

Thus, as per the Act, all listed companies and the above-mentioned unlisted public limited companies are required to mandatorily constitute an Audit Committee. Private limited companies and unlisted public companies not covered need not have an Audit Committee. However, they may voluntarily choose to have one.

The following types of public companies are exempted from constituting an Audit Committee:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.

2.2 LODR

Under the LODR, every Listed Company must constitute a qualified and independent Audit Committee.

III. COMPOSITION

3.1 The composition of the Audit Committee in the case of listed companies is determined by both the Act and the LODR (the higher requirements would prevail) and in the case of other companies by the Act. These are explained below:

Features Act LODR
Number of Members Minimum 3 Directors Minimum 3 Directors
Independent Directors

 

 The majority of members of the Committee should be Independent Directors.

 

 At least 2/3 of the members of the audit committee shall be independent Directors.

In case of a listed entity having equity shares with superior voting rights, the audit committee shall only comprise of independent directors.
Qualifications

 

 The majority of members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand, the financial statements.

 

 All members of the Audit Committee shall be financially literate and at least one member. Shall have accounting or related financial management expertise.

For the purpose of this regulation, “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and profit and loss account, and statement of cash flows.
A member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a CEO, CFO, or other senior officers with financial oversight responsibilities.
Chairman

 

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 The chairperson of the Audit Committee shall be an independent director.

 
Secretary

 

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 The Company Secretary shall act as the secretary to the Audit Committee.

 
Invitees

 

 The auditors of a company and the key managerial personnel shall have a right to be heard in the meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.

 

 The Audit Committee at its discretion shall invite the finance director or head of the finance function, head of the internal audit, and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee:

Provided that occasionally the Audit Committee may meet without the presence of any executives of the listed entity.
Quorum

 

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 The quorum for audit committee meetings shall either be 2 members or 1/3 of the members of the Audit Committee, whichever is greater, with at least 2 independent directors.

 
Frequency of Meetings

 

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 The Audit Committee shall meet at least 4 times in a year and not more than 120 days shall elapse between 2 meetings.

 
Maximum Number of Audit Committees / Directors

 

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 A Director can act as a Chairman of a maximum of 5 Audit Committees + Stakeholders’ Committees put together in the case of listed companies. In this case, unlisted public / private / s.8 companies are excluded.

Further, a Director can act as a member / Chairman of not more than 10 Audit Committees + Stakeholders’ Committees put together considering listed and unlisted public companies. For this purpose, private and s.8 companies are excluded.

IV. ROLE AND DUTIES

4.1 The Companies Act prescribes the following roles and responsibilities for every Audit Committee (whether of a listed / unlisted public company):

(i) the recommendation for appointment, remuneration, and terms of appointment of auditors of the company;

(ii) review and monitor the auditor’s independence and performance, and effectiveness of the audit process;

(iii) examination of the financial statement and the auditors’ report thereon;

(iv) approval or any subsequent modification of transactions of the company with a related party (explained in greater detail below);

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is necessary;

(vii) evaluation of internal financial controls and risk management systems;

(viii) monitoring the end use of funds raised through public offers and related matters.

(ix) The Audit Committee may call for the comments of the auditors about internal control systems, the scope of the audit, including the observations of the auditors and review of financial statements before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company.

(x) The Audit Committee shall have the authority to investigate any matter in relation to the items specified above or referred to it by the Board and for this purpose shall have the power to obtain professional advice from external sources and have full access to the information contained in the records of the company.

4.2 In addition, the LODR prescribes that the audit committee of a listed company shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice, and secure attendance of outsiders with relevant expertise if it considers necessary.

The LODR lays down the following additional duties for the Audit Committee of a listed company:

(a) oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible;

(b) recommendation for appointment, remuneration, and terms of appointment of auditors of the listed entity;

(c) approval of payment to statutory auditors for any other services rendered by the statutory auditors;

(d) reviewing, with the management, the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to:

  • matters required to be included in the director’s responsibility statement to be included in the Board of Director’s Report;
  • changes, if any, in accounting policies and practices and reasons for the same;
  • Major accounting entries involving estimates based on the exercise of judgment by management;
  • significant adjustments made in the financial statements arising out of audit findings;
  • compliance with listing and other legal requirements relating to financial statements;
  • disclosure of any related party transactions;
  • modified opinion(s) in the draft audit report;

(e) reviewing, with the management, the quarterly financial statements before submission to the board
for approval;

(f) reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document / prospectus / notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public issue or rights issue or preferential issue or qualified institutions placement, and making appropriate recommendations to the board to take up steps in this matter;

(g) Reviewing and monitoring the auditor’s independence and performance, and effectiveness of the audit process;

(h) approval or any subsequent modification of transactions of the listed entity with related parties;

(i) scrutiny of inter-corporate loans and investments;

(j) valuation of undertakings or assets of the listed entity, wherever it is necessary;

(k) evaluation of internal financial controls and risk management systems;

(l) reviewing, with the management, the performance of statutory and internal auditors, adequacy of the internal control systems;

(m) reviewing the adequacy of the internal audit function, if any, including the structure of the internal audit department, staffing, and seniority of the official heading the department, reporting structure coverage, and frequency of internal audit;

(n) discussion with internal auditors of any significant findings and follow up there on;

(o) Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board;

(p) discussion with statutory auditors before the audit commences, about the nature and scope of the audit as well as post-audit discussion to ascertain any area of concern;

(q) to look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends), and creditors;

(r) approval of the appointment of a chief financial officer after assessing the qualifications, experience, background, etc. of the candidate;

(s) Carrying out any other function as is mentioned in the terms of reference of the audit committee;

(t) reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding ₹100 crores or 10 per cent of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as of 1st April, 2019;

(u) Consider and comment on the rationale, cost-benefits, and impact of schemes involving merger, demerger, amalgamation etc., on the listed entity and its shareholders.

4.3 Moreover, the LODR provides that the audit committee shall mandatorily review the following information:

(a) Management discussion and analysis of the financial condition and results of operations;

(b) management letters / letters of internal control weaknesses issued by the statutory auditors;

(c) internal audit reports relating to internal control weaknesses; and

(d) the appointment, removal, and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.

(e) statement of deviations:

  • quarterly statement of deviation(s) including the report of the monitoring agency, if applicable, submitted to stock exchanges.
  • annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice.

V. VIGIL MECHANISM

5.1 The Act also states that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns. The companies prescribed are the following:

(a) the Companies which accept deposits from the public;

(b) the Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

5.2 The vigil mechanism shall provide for adequate safeguards against victimisation of persons who use such a mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The details of the establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

5.3 The companies which are required to constitute an audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a conflict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.

5.4 In the case of companies that are not required to mandatorily constitute an Audit Committee, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

5.5 In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

5.7 The LODR also provides that the listed entity shall devise an effective vigil mechanism/whistle-blower policy enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. The vigil mechanism shall provide for adequate safeguards against the victimization of director(s) employee(s) or any other person who avails the mechanism and also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases. The details of the establishment of the vigil mechanism / whistle-blower policy shall be disclosed on the website of the listed entity in a separate section. Also one of the functions of the audit committee is to review the functioning of the whistle-blower mechanism.

VI. RELATED PARTY TRANSACTIONS UNDER THE ACT

6.1 One of the most important roles of an audit committee is the review and approval of related party transactions. Related Party Transactions are prescribed under s.188 of the Act.

6.2 Under the Act, the audit committee is required to approve transactions of the company with a related party or any subsequent modification in the same.

6.3 It may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;

(i) The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following, namely:-

(a) the maximum value of the transactions, in the aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction that can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

d) review, at such intervals as the Audit Committee may deem fit, related party transactions entered into by the company pursuant to each of the omnibus approvals made.

(e) transactions that cannot be subject to omnibus approval by the Audit Committee.

(ii) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: –

(a) repetitiveness of the transactions (in the past or in the future);

(b) justification for the need for omnibus approval.

(iii) The Audit Committee shall satisfy itself for transactions of a repetitive nature and that
the company.

(iv) The omnibus approval shall contain or indicate
the following: –

(a) name of the related parties:

(b) nature and duration of the transaction;

(c) maximum amount of transactions that can be entered into;

(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and

(e) any other information relevant or important for the Audit Committee to make a decision on the proposed transaction. Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, the audit committee may make omnibus approval for such transactions subject to their value not exceeding Rs. 1 crore per transaction.

(5) Omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after the expiry of such financial year.

(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.

6.4 In case of transaction, other than related
party transactions referred to in section 188 of the
Act, where the Audit Committee does not approve
such transaction, it shall make its recommendations to the Board.

6.5 In case any transaction involving any amount not exceeding Rs. 1 crore is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorized by any other director, the director concerned shall indemnify the company against any loss incurred by it:

6.6 The Act also provides that this clause shall not apply to a transaction, other than a related party transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.

VII. RELATED PARTY TRANSACTIONS UNDER LODR

7.1 In addition to the above provisions under the Act, the LODR lays down certain additional duties for the audit committee in relation to related party transactions.

7.2 All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Only those members of the audit committee, who are independent directors, shall approve related party transactions. The audit committee of a listed entity shall define “material modifications” and disclose it as part of the policy on the materiality of related party transactions and on dealing with related party transactions.

7.3 As regards omnibus approvals for related party transactions, the LODR, in addition to the Act, provides that the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given. Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of
one year.

7.4 A related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover, as per the last audited financial statements of the listed entity. Thus, even if the listed entity is not directly a party to such transaction, its audit committee would need to approve the transactions of the subsidiary.

7.5 With effect from 1st April, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual standalone turnover, as per the last audited financial statements of the subsidiary.

7.6 However, for related party transactions of unlisted subsidiaries of a listed subsidiary, the prior approval of the audit committee of the listed subsidiary shall suffice. Thus, these would not require prior approval of the Audit Committee (if any) of the unlisted subsidiary.

7.7 The LODR also provides an exemption from the approval provisions for related party transactions in the following cases:

(a) transactions entered into between two government companies;

(b) transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval;

(c) transactions entered into between two wholly-owned subsidiaries of the listed holding company, whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

VIII. SEBI’S ORDERS

8.1 SEBI has passed some Adjudication Orders which have dealt with the issue of the role of the Audit Committee and its members. Some of the important ones have been highlighted below.

8.2 SEBI in its Adjudication Order in the case of Kwality Ltd, [ADJUDICATION ORDER No. Order/BS/SL/2024-25/30612-30613] has held that a member of Audit Committee it is the responsibility of the Audit Committee member to ascertain that there is proper internal risk control prevailing in the system. Before forwarding the audit report to the Board of directors in the Board Meeting, the Audit Committe should have raised concerns regarding net-off entries, writing off-trade receivables recovery process followed by the company for substantial over dues, granting capital advances, transactions entered in the nature of sales and purchases with customers and vendors, related parties, the internal control system for capital expenditure bills, material scheduling, credit assessment of entities, etc. The role of audit committee members is to exercise oversight of the listed entity’s financial reporting and the disclosure of its financial information to ensure that the financial statement is correct, sufficient, and credible as well as to the adequacy of internal control systems, etc.

8.3 In the case of Fortis Healthcare Limited [ADJUDICATION ORDER NO. Order/GR/KG/2022-23/16420-16458], the Adjudication Officer of SEBI has held that the formation and constitution of an audit committee is not a discretionary affair for a listed company, but rather a statutorily mandated formation. The said committee has statutorily mandated and therefore, inescapable obligations to perform. The obligation cast upon an audit committee is not merely towards the immediate company and its shareholders, but to the public and the economy at large. It is supposed to act as an objective and dispassionate internal oversight over the financial affairs of the company. In that sense, it can be considered as the first-level overseer of the financial health of a company. Further, if such a company is a listed company, then the role of an audit company is all the more significant since a listed company is entitled to raise capital from the public at large and the work of an audit committee is directly related to the capacity of a listed company to raise the said capital. The said capacity of a listed company to raise capital is largely dependent on the show of its performance and the audit committee’s primary mandate is certification of such performance. It is in this context, that the statutory role of an audit committee is premised. Therefore, the position of a member of an audit committee (especially in the case of a listed company) is not similar to that of other Directors in the same company. A member of an audit committee must possess the wherewithal to discharge various functions. An Audit Committee has been given significant powers under the successive Companies Acts/Listing Agreements to perform its role. The Audit Committee can ask the head of the finance function, head of an internal audit, and representative of the statutory auditors, to seek information from any employee, and obtain outside legal or other professional advice if it is considered necessary. If a member of the audit committee lacked the competence to understand the nuances of high-value financial transactions, the same ought to have been brought on record by the concerned member at the time of his/her induction into the audit committee or even better, the concerned individual ought to have desisted from being a part of the audit committee. Similarly, placing blind reliance on other officials of the company in the matters of its financial affairs, defeats the very purpose of the formation of an audit committee, as is evident from the submissions of the aforesaid three notices in this case. The Order held that the board of directors of the company has entrusted the audit committee with an onerous duty to see that the financial statements are correct and complete in every respect. In this background, the members of the audit committee cannot take shelter under the verifications made by the internal auditor and other professionals.

8.4 In the case of Southern Ispat and Energy Ltd. (ADJUDICATION ORDER NO: Order/GR/PU/2022-23/16559-16566) the Adjudication Officer held that the Chairman of the Audit Committee had an added responsibility to monitor the end-use of the funds that were raised by the issue of the GDRs and also ensuring their transfer to the accounts of the company in India.

IX. CONCLUSION

The Audit Committee is a very vital cog in the corporate governance wheel. A great deal of responsibility and power is cast upon this committee and members of the audit committee would be well advised to handle their role with more accountability.

Allied Laws

38 N Thajudeen vs. Tamil Nadu Khadi and Village Industries Board

Civil Appeal No. 6333 of 2013 (SC)

24th October, 2024

Gift — Valid gift deed — Unilaterally revoked — No rights for revocation in gift deed — Gift cannot be revoked. [S. 126, Transfer of Property Act, 1882].

FACTS

A suit was instituted by the Original Plaintiff / Respondent for declaration of title over the suit property. The suit was filed on the basis of a gift deed executed by the Original Defendant / Appellant (N. Thajudeen) in favour of the Respondent. According to the gift deed, the Appellant had gifted the suit property to the Respondent on the condition that the suit property shall be utilised only for the purpose of manufacturing Khadi lungi and Khadi yarn. Thereafter, somewhere in 1987, the Appellant had unilaterally revoked the gift deed by way of a revocation deed. In response, the Respondent instituted a suit before the Learned Trial Court, which was dismissed on the ground that the gift deed was not valid as it was never accepted by the Respondent. On further appeal, the District Court and Hon’ble High Court allowed the appeal on the ground that the gift was validly accepted, and further, in the absence of any provision for revocation of gift, a gift deed cannot be revoked.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the suit property was duly accepted, and possession was also taken by the Respondent. Further, the Respondent had also filed an application for mutation in the records of the property. Therefore, the gift deed was valid. Further, the Hon’ble Court observed that the gift deed had no mention of any rights with respect to the revocation of the gift deed. Further, the Appellant does not meet any of the exceptions carved out in section 126 of the Transfer of Property Act, 1882, for revocation of gift deed. Therefore, in the absence of any right of revocation reserved in the gift deed, a valid gift deed cannot be revoked.

The decision of the High Court was, therefore, upheld.

39 Akshay Verma vs. Sita Devi Verma

through legal heirs

AIR 2024 Rajasthan 136

4th April, 2024

Partnership Firm — Two partners — Death of one partner — Firm ceases to exist — Arbitration clause in the partnership deed — Valid and binding on the legal heirs / representative. [S. 42(c), Partnership Act, 1932; S. 11(6), Arbitration and Conciliation Act, 1996].

FACTS

An application was filed under section 11(6) of the Arbitration and Conciliation Act, 1996, by the Applicant (Akshay Verma) for the appointment of an arbitrator. The Applicant and Mrs. Sita Devi Verma (deceased / represented through legal heirs) were partners of one M/s. Verma and Company (a registered firm under the Partnership Act, 1932). During the lifetime of the Respondent, a dispute had arisen between the Applicant and Respondent when the Respondent Sita – Devi Verma addressed a communication to the Bank on 14th March, 2022 requesting closure of the accounts in the name of the firm. After the death of the Respondent — Mrs. Sita Devi Verma, the bank had sent a legal notice to the Applicant and the legal heirs of the Respondent for the repayment of the loan. It was the claim of the Applicant that, as per the partnership deed, all disputes had to be resolved by way of arbitration proceedings. On the other hand, the legal heirs of the Respondent stated that the partnership deed was executed between the Applicant and Respondent, and after the death of the Respondent, the partnership firm ceased to exist. The legal heirs had not become the partners of the firm either by way of operation of law or by any other act. Thus, the dispute, if any, cannot be said to be a dispute between the partners of the firm.

HELD

The Hon’ble Rajasthan High Court, relying on the decision of the Hon’ble Supreme Court in the case of Mohd. Laiquiddin and Another vs. Kamla Devi Mishra (Dead) by legal heirs and others [(2010) 2 SCC 407] held that in case where a firm has only two partners, the firm ceases to exist upon the death of one partner. This was held despite the fact that there was a clause in the partnership deed providing that death of any partner shall not have the effect of dissolving the firm. Therefore, the Hon’ble Rajasthan High Court held that the partnership firm ceased to exist on the death of the Respondent. However, the Hon’ble Court held that the arbitration clause contained in the partnership deed would still survive and bind the legal heirs/representatives of the deceased. Further, on the issue of non-arbitrability of the matter raised by the legal heir of the Respondent, the Hon’ble Court held that the facts suggested that the issue was arbitrable. Therefore, the Hon’ble Court proceeded to appoint an arbitrator.

40 Ramkalesh Mishra vs. Sunita alias Munni alias Sushila Krishnabhan Mishra and Ors.

AIR 2024 (NOC) 709 (MP)

2nd April, 2024

Succession — Widow — Remarriage — Not a valid ground for denying inheritance from first husband. [S. 24, Hindu Succession Act, 2005].

FACTS

A second appeal was preferred before the Hon’ble Madhya Pradesh High Court (Jabalpur Bench) for the removal of a share in the suit property of the Respondent. Mr. Rameshwar Prasad had two sons, Ramkalesh Mishra (Appellant) and Krishnabhan Mishra (deceased). The Appellant had preferred an appeal for the removal of any right/share of one Mrs. Sunita (Respondent/wife of Krishnabhan Mishra) in the property since she had solemnised a second marriage after the death of Krishnabhan Mishra. The Learned Trial Court, as well as the Appellate Court, dismissed the application of the Appellant (Ramkalesh Mishra).

HELD

On appeal, the Hon’ble Madhya Pradesh High Court held that subsequent to the deletion of Section 24 of the Hindu Succession Act, 1956, through the Hindu Succession (Amendment) Act, 2005, there was no restriction preventing a widowed woman from inheriting her share of the property (from her first husband) due to remarriage.

Therefore, the decision of the Appellate Court was upheld.

41 Punjab State Civil Supplies Corporation Limited and Anr vs. Sanman Rice Mills and Ors.

2024 LiveLaw (SC) 754

27th September, 2024

Arbitration — Possible view taken by the Tribunal — No illegality in award — Courts have limited scope of power. [S. 34, 37, Arbitration and Conciliation Act, 1996].

FACTS

The Appellant had entered into a contract with the Respondent for the supply of paddy mills. Thereafter, a dispute arose between the parties and the dispute was referred to the Arbitral Tribunal. The Tribunal passed an award in favour of the Appellant. Aggrieved, the Respondent filed an application under section 34 of the Arbitration and Conciliation Act, 1996 (Act) before the Hon’ble Punjab and Haryana High Court (Single Bench). The Hon’ble Court observed that there was no illegality in the award passed by the Tribunal. Therefore, the Hon’ble Court held that as per section 34 of the Act, there was no reason to interfere in the award passed by the Tribunal. Thereafter, an appeal was preferred under section 37 of the Act before the Hon’ble Punjab and Haryana High Court (Division Bench). The Hon’ble Court (Division bench) allowed the appeal, and the award of the Tribunal was set aside.

Aggrieved, a Special Leave Petition was preferred before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the scope of powers of a Court under sections 34 and 37 of the Act are very limited. Further, the Court observed that if an award is not reasonable or is a non-speaking one to a certain extent, even then, the Court cannot interfere with the award. Further, when two views are possible, and the tribunal has chosen one, the award remains valid. Therefore, the award was restored by the Hon’ble Supreme Court.

The appeal was, thus, allowed.

42 Dr. Shruti Sakharam Sorte, Nagpur and Ors vs. Anant Bajiro

Buradhkar and Ors.

AIR 2024 BOMBAY 299

29th April, 2024

Trust — Elections of the Committee — Challenge before Charity Commissioner — Change inquiry report awaited — Injunction — Not to carry out any official functions — Injunction bad in law — Injunction order without any reasons or findings – Elected committee cannot be injuncted to make decisions without any justifiable reasons. [S. 22, Maharashtra Public Trusts Act, 1950].

FACTS

A Petition was filed challenging the order of injunction passed by the Deputy Charity Commissioner, which restricted the Petitioner from making any policy decisions related to the administration of the Trust, including the employment conditions such as the appointment, suspension, and termination of Trust employees, until the conclusion of the change report inquiry. Pursuant to the directions of the Charity Commissioner, the election of the managing committee of the Trust had taken place. Aggrieved by the results, an application was filed by Respondents challenging the election procedure before the Charity Commissioner. Thus, an inquiry was initiated by the Commissioner, and a change report under section 22 of the Maharashtra Public Trust Acts, 1950 (Act) was awaited. In the meantime, the Charity Commissioner had injuncted the committee from making any policy decisions. Aggrieved by the injunction, the Petition was filed before the Hon’ble Bombay High Court (Nagpur Bench).

HELD

The Hon’ble Bombay High Court held that the Charity Commissioner had not recorded any reasons or given any findings to justify the injunction against a duly appointed managing committee from doing its democratic functions. The Hon’ble Court was also not impressed by the arguments that the committee was injuncted from functioning merely because a change inquiry report under section 22 of the Act was pending. Thus, the Petition was allowed, and the injunction order was cancelled.

Part A | Company Law

9. M/s Martin Realty Private Limited

Registrar of Companies, Coimbatore

Adjudication Order No. ROC/CBE/A.O/ 179/13718/2024

Date of Order: 28th March 2024

Adjudication order for violation of Section 179 of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules 2014:

Company and its Directors fail to exercise power of the Board at the meeting of the Board by way of passing a resolution thereto for grant of loans or give guarantee or provide security in respect of loans.

FACTS

A transaction was done by M/s MRPL (Company) amounting to ₹1,30,15,000 with M/s ABT. However, the payment was wrongly done by the Company instead of transaction to be done by Mrs LR. The amount was repaid by Mrs LR on the same day to M/s MRPL when the error was observed. However, as per the provisions of section 179(3)(f) of the Companies Act 2013, M/s MRPL was required to obtain specific resolution of the Board before entering into such transaction at its Board Meeting. However, M/s MRPL had failed to obtain such specific approval. Upon realisation, M/s MRPL filed a suo-moto application for adjudication.

Thereafter, Adjudication Officer (AO) in exercise of the powers conferred upon him under sub-section (4) of section 454 of the Companies Act 2013 (with a view to give a reasonable opportunity of being heard before imposing the penalty) fixed a personal hearing on 20th March, 2024 for adjudicating the penalty for violation of the provisions of section 179(3)(f) of the Companies Act 2013.

Ms MJ, Chartered Accountant, authorised representative of the Company, appeared on behalf of M/s MRPL before the AO and admitted the fact that M/s MRPL did not obtain specific Resolution of the Board of Directors for the said loan transaction.

RELATED PROVISIONS OF THE COMPANIES ACT, 2013:

Section 179(3)-The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:

179 (3) (f) to grant loans or give guarantee or provide security in respect of loans.

Penal section for non-compliance / default if any

Section 450- Punishment where no specific penalty or punishment is provided.

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

ORDER

The AO, after considering the circumstances of the case and the submissions made by the authorise drepresentative on behalf of the company and its directors, the company being a small company, imposed the penalty under the provisions of section 446B of the Companies Act 2013 on the company and its director of ₹1,75,000 for violation of section 179(3)(f) of the Companies Act 2013.

The AO directed that the penalty be paid by the company and its directors as per law and directed to submit the copies of challans once the payment was made. The order also instructed the company to file the form INC-28 with attachment of this order along with the copies of the challans.

Prevention Of Market Abuse In The Securities Market

BACKGROUND

“Prevention of market abuse and preservation of market integrity is the hallmark of securities law” which was noted by the Honourable Supreme Court of India in its judgment N Narayanan v/s Adjudicating Officer way back in 2013.

SEBI has noted that while the Indian capital market has witnessed tremendous growth and by increased participation of the public, ‘market abuse’ is a common practice in the securities market. In the aforesaid judgement, the court has defined ‘Market abuse’as the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump conclusions, on wrong premises, which is known to be wrong to the abusers. In general parlance, Market abuse is generally understood to include market manipulation and insider trading and such activity erodes investor confidence and impairs economic growth. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (PFUTP Regulations) deals with market abuse such as manipulative, fraudulent, and unfair trade practices.

The Court also went on to succinctly outline the duties and responsibilities of SEBI in regulating and ensuring market security and protecting investors from fraud and market abuse.

DEALING WITH MARKET ABUSE

The regulator’s journey for dealing with market abuse in the securities market has been an ongoing process with the emergence of markets, development of technology, information flow, and access to markets, which led to the need to review the securities law dealing with market abuse and the methods used for detecting, investigating and carrying out enforcement against such market abuse.
One such initial initiative was constituting a “Fair Market Conduct Committee” in 2017 to review the existing legal framework to deal with market abuse to ensure fair market conduct in the securities market especially the surveillance, investigation, and enforcement mechanisms being undertaken by SEBI to make them more effective in protecting market integrity and interest of investors from market abuse.

Their recommendations were in four separate parts dealing with:

i. market manipulation and fraud,

ii. insider trading,

iii. code of conduct relating to insider trading regulations and

iv. recommendations relating to surveillance, investigation, and enforcement process.

Such recommendations led to review and changes to relevant regulations including PFUTP and SEBI (Prohibition of Insider Trading) Regulations, 2015 framed by SEBI to deal with market abuse and to review the surveillance, investigation, and enforcement mechanisms being undertaken by SEBI to make them more effective in protecting market integrity and the interest of investors from market abuse.

Pursuant to this, moving forward in 2021, SEBI issued a Code of Conduct & Institutional mechanism for the prevention of Fraud or market abuse for Market Infrastructure Institutions (MII) such as Stock Exchanges, Clearing Corporations & Depositories obligating the MIIs for Issuing a Code of Conduct including;

i. To formulate a Code of Conduct to achieve Compliance with SEBI (Prohibition of Insider Trading) Regulations, 2015

ii. MD/CEO to frame the referred Code of Conduct.

iii. Identify & designate a Compliance Officer to administer the aforesaid Code of Conduct.

iv. Specify designated persons to be covered under the Code of Conduct.

MIIs shall put in place an institutional mechanism  for the prevention of fraud or market abuse including the following:

i. Adequate & effective implementation of internal control and administration of the same by Compliance officer.

ii. Annual Review by Regulatory Oversight Committee.

iii. Written Policies & Procedures for Inquiry including adequate protection to any employee reporting instances of fraud/suspicion of fraud or market abuse.

Thereafter, various measures have been introduced by SEBI from time to time to instill confidence among investors and retain trust in the securities market.

One of the many recent changes in July 2024, requires stock brokers to put in place an institutional mechanism for the prevention and detection of fraud or market abuse which has been introduced through the Stock Broker (Amendment) Regulations, 2024 giving the power to Brokers Industry Forum to frame the implementation standards including operational modalities. The effective date of implementation is different for various stock brokers, however, for Qualified Stock brokers it has been put into effect from 1st Aug, 2024.

RECENT ISSUES ON FRONT RUNNING

For ease of understanding, Front running is defined as an unethical and illegal practice where a broker, trader, or fund manager uses advanced knowledge of pending large transactions to gain a profit. For instance, if a mutual fund intends to purchase a significant number of shares in a company, a broker privy to this information might buy shares beforehand, selling them at a profit once the fund’s transaction influences the stock price.

There have been many instances of front-running in the past that have come to the notice of the regulators wherein broker-dealers, certain employees, and connected entities were found to have front-run the trades of the AMCs, Listed Companies, and FPIs. In one such case, SEBI has observed during its investigation that various entities connected to the Dealer have traded in different securities ahead of the impending orders placed on behalf of the Mutual Fund. Subsequently, soon after the Mutual Fund’s order was placed, these connected Noticees squared off their positions taken on the Exchange platform. In the process, substantial proceeds of profit were generated in the trading accounts of these connected entities, by placing orders ahead of and in anticipation of the price movement of scrips in a certain direction on account of the impending large buy / sell orders of the Mutual Fund. Such trades were executed from the trading accounts of the connected entities in a similar manner on numerous occasions during the Investigation Period.

Further, a recent case of front running of shares of an entity where the Employee (working in the Investment Department) was involved. The trading pattern of the alleged front runners during the investigation Period shows that orders for the first leg of their intraday trades were placed and executed just prior to the impending order(s) of entity and the orders for squaring off their trades i.e., second leg sell/ buy order(s) were placed at a limit price which is less/ more than the buy/ sell order limit price of the entity, ensuring that such sell/ buy order(s) would get matched with the buy/ sell order(s) of the company. It has also been prima facie observed that such trades were executed in a Buy-Buy-Sell (“BBS”) and/ or Sell-Sell-Buy (“SSB”) pattern.

In order to address such instances of market abuse including front-running and fraudulent transactions in securities, the consultation paper proposed to put in place a structured institutional mechanism at the end of AMCs, which can proactively identify and deter instances of such market abuse. It was noted that that there are no specific regulatory provisions that cast responsibility on the AMCs or their senior management personnel to put in place systems for deterrence, detection, or reporting of market abuse or fraudulent transactions. The possible instances / indicators of market abuse or fraudulent transactions in securities related to AMC’s transactions for Mutual Fund schemes are front-running, Insider Trading, Misuse of information by the AMC, its employees, distributors, broker-dealers, etc.

The regulatory framework for the institutional mechanism by AMCs for identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities was issued vide Circular dated 05 August, 2024 for AMCs.

This mechanism shall consist of enhanced surveillance systems, internal control procedures, and escalation processes such that the overall mechanism is able to identify, monitor, and address specific types of misconduct, including front running, insider trading, misuse of sensitive information, etc. Accountability for implementing this framework is assigned to the Chief Executive Officer (CEO) or Managing Director (MD) of MFs, or the Chief Compliance Officer (CCO) of AMCs.

Broad Requirements for AMCs to Implement Institutional Mechanisms

To effectively implement the required mechanisms, AMCs must ensure the following:

a) Develop and implement systems to generate and process alerts in a timely manner.

To develop robust surveillance systems, AMCs should begin by defining specific alert types that indicate potential misconduct, such as unusual trading patterns or communication anomalies. Back-testing these systems with historical data will help refine the parameters and minimize false positives.

b) Review all recorded communications, including chats, emails, access logs, and CCTV footage during alert processing, while maintaining entry logs for their premises.

Implementing a review of recorded communications requires the establishment of a secured, centralized repository for storing all relevant materials, including emails, chats, access logs, and CCTV footage. Automated monitoring tools can flag communications that trigger alerts for further investigation while maintaining detailed entry logs for accountability. Despite these measures, challenges arise in balancing employee privacy rights with the need for surveillance. Managing and analyzing large volumes of communication data can become resource-intensive, and compliance with data protection regulations is essential to avoid potential legal pitfalls.

c) Formulate SOP’s

To address potential market abuse, mutual funds should create comprehensive written policies that clearly define what constitutes market abuse and outline investigation procedures. Gaining board approval for these policies ensures alignment with organizational goals and regulatory requirements.

d) Action on Suspicious Alerts

Establishing clear protocols for investigating alerts and potential market abuse is essential for effective response. This includes developing investigation timelines, responsible parties, and guidelines for disciplinary actions such as suspensions or terminations based on findings. Thorough documentation of investigations and outcomes is critical for transparency.

e) Escalation Process

Establish an escalation process to inform the Board of Directors and Trustees about potential market abuse instances and the results of subsequent examinations.

A structured reporting framework for escalating potential market abuse cases to the Board of Directors and Trustees is crucial for oversight. This includes establishing regular updates on the status of investigations to keep the Board informed and engaged. Training Board members to effectively understand and respond to potential market abuse instances is also important.

f) Whistleblower Policy

Maintain a documented whistleblower policy in line with sub-regulation (29) of regulation 25 of the SEBI (Mutual Fund) Regulations, 1996.

Developing a clear and accessible whistleblower policy is essential for encouraging employees to report misconduct without fear of retaliation. This policy should outline reporting mechanisms and protections for whistleblowers, along with conducting awareness campaigns to educate staff about its importance. Establishing secure channels for anonymous reporting can further enhance participation.

g) Periodic Review

To ensure ongoing effectiveness, mutual funds should schedule regular reviews of their policies and systems, incorporating feedback from staff and audit results. Benchmarking against industry best practices and adapting to regulatory updates is also necessary for maintaining compliance. Fostering a culture of continuous improvement helps organizations adapt to new challenges.

h) Reporting to SEBI

AMCs shall report all examined alerts to SEBI along with the action taken, in the Compliance Test Report (‘CTR’) and the Half-yearly Trustee Report (‘HYTR’) submitted to SEBI.

WAY FORWARD

Regulations can set forth rules and impose penalties, yet they may not deter individuals whose intent is to engage in fraudulent activities. To truly mitigate the risk of unethical conduct, it is essential to address the motivations and attitudes that drive potential fraudsters. A regulatory framework alone cannot suffice; it must be accompanied by a profound cultural transformation that prioritizes honesty, integrity, and ethical decision-making.

This shift involves fostering an environment where ethical behavior is not merely a compliance obligation but a core value embraced in its systems and processes by all stakeholders. By cultivating such a culture, the financial sector can ensure that its actions resonate with the principles of trust and responsibility. Fair market conduct can be ensured by prohibiting, preventing, detecting, and punishing such market conduct that leads to ‘market abuse’. With the changing dynamic of the securities market, this will be an ongoing and evolving responsibility of the regulator to be vigilant and address the issues on an immediate basis by adopting the best of both worlds’ i.e., Rule-based and Principle-based regulations. The Regulator’s hands-on and vigilant approach has helped in immediately fixing the problem while also understanding the larger concerns. Several Reg Tech measures have been introduced to address these concerns as regulators have proactively increased their enforcement action. Early adoption of Artificial Intelligence can help in the early detection of such instances of market abuse, and prevention mechanisms can be built into the surveillance systems which shall identify and prohibit probable fraud and introduce early corrective actions. In India, SEBI being the key financial sector regulator, is duty-bound to protect the interest of the investors in securities and to promote the development of and regulate the securities market.

“Authority can be delegated but responsibilities cannot be diluted.”

Would IBC Prevail Over The PMLA?

INTRODUCTION

One of the recent issues which has gained prominence under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), would the Prevention of Money Laundering Act (PMLA) or an attachment under it have priority over the Code? Both the PMLA and the Code are special statutes that operate in the financial domain. The PMLA is an Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto. The IBC, on the other hand, is an Act to amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, and balance the interests of all the stakeholders. Of late, these two Statutes have been at loggerheads and an interesting battle is brewing between them.

PRIOR OFFENCES

The issue comes into focus if the violations were committed by the previous management of the corporate debtor which is undergoing insolvency resolution. Once a resolution applicant has submitted a resolution plan and the same has been blessed by the NCLT under the IBC, can the past offences of the corporate debtor continue to haunt the new management? If the IBC is a single-window clearance, then would not the acquirer not be liable for any offences to which it was not a party? Similarly, if under the PMLA, there is an attachment of assets of the corporate debtor, can such attachment continue once the CIRP is successful?

S.238 OF THE CODE

S.238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat& Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment…..”.

DOCTRINE OF CLEAN SLATE

The doctrine of a “clean” or a “fresh slate” as was originally propounded by the Supreme Court in Committee of Creditors of Essar Steel Ltd. vs. Satish Kumar Gupta (2020) 8 SCC 531. Itheld that a successful resolution applicant could not suddenly be faced with “undecided” claims after the resolution plan submitted by him had been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who would successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knew exactly what had to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant did on a fresh slate.

MORATORIUM

Once the insolvency resolution petition against the corporate debtor is admitted by the National Company Law Tribunal (NCLT) and after the corporate insolvency resolution process commences, the NCLT declares a moratorium prohibiting the institution or continuation of any suits against the debtor; execution of any judgment of a Court / authority; any transfer of assets by the debtor; recovery of any property against the debtor. The moratorium continues till the resolution process is completed. Thus, total protection is offered to the debtor against any suits / proceedings. The Supreme Court in P. Mohanraj vs. Shah Brothers Ispat P Ltd, [2021] 125 taxmann.com 39 (SC) has explained that the object of a moratorium provision such as s.14 of the Code was to see that there was no depletion of a corporate debtor’s assets during the insolvency resolution process so that it could be kept running as a going concern during this time, thus maximising value for all stakeholders.

INSERTION OF S.32A IN THE CODE

Inspite of the above non-obstante clause, an additional non-obstante clause was added in the form of s.32A in the Code, by the Amendment Act of 2020 w.e.f. 28th December, 2019. The said section deals with Liability of the corporate debtor for Past Offences.

The section provides that notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the NCLT, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was –

(a) Not a promoter or in the management or control of the corporate debtor or a related party of such a person; or

(b) Not a person with regard to whom the relevant investigating authority has, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court:

It further provides that if a prosecution had been instituted during the CIRP it shall stand discharged from the date of approval of the resolution plan.

No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP, where such property is covered under a resolution plan approved by the NCLT, which results in the change in control of the corporate debtor / sale / liquidation assets to anunconnected person (as defined above).

The Standing Committee on Finance while dealing with that Bill and the proposed Section 32A noted that this amendment was to safeguard the position of the resolution applicants by ring-fencing them from prosecution and liabilities under offences committed by erstwhile promoters. There was a need for treating the company or the Corporate Debtor as a cleansed entity for cases which resulted in change in the management or control of the corporate debtor to anunrelated person. The Committee felt that a distinction must be drawn between the corporate debtor which may have committed offences under the control of its previous management, prior to the CIRP, and the corporate debtor that is resolved, and taken over by an unconnected resolution applicant. While the corporate debtor’s actions prior to the commencement of the CIRP must be investigated and penalised, the liability must be affixed only upon those who were responsible for the corporate debtor’s actions in this period. However, the new management of the corporate debtor, which has nothing to do with such past offences, should not be penalised for the actions of the erstwhile management of the corporate debtor.

The Supreme Court in Manish Kumar vs. UOI, [2021] 225 COMP CASE 1 (SC) has explained that that section is intended to give a clean break to the successful resolution ~ while, on the one hand, the corporate debtor is freed from the liability for any offence committed before the commencement of the CIRP, the statutory immunity from the consequences of the commission of the offence by the corporate debtor is not available and the criminal liability will continue to haunt the persons, who were in in-charge of the assets of the corporate debtor, or who were responsible for the conduct of its business or those who were associated with the corporate debtor in any manner, and who were directly or indirectly involved in the commission of the offence, and they will continue to be liable. The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate.. The provision deals with reference to offences committed prior to the commencement of the CIRP.

ISSUE OF PRIMACY

The issue of primacy between the PMLA and IBC was well discussed by the Delhi High Court in its judgment in the case of Nitin Jain Liquidator PSL Limited Versus Enforcement Directorate, 2022 (287) DLT 625. It held that both the PMLA as well as IBC employed non- obstante clauses by virtue of Sections 71 and 238 respectively. Both enactments underwent amendments with PMLA seeing the passing of Finance (No. 2) Act, 2019 and the IBC which was amended by virtue of the Act of 2020 pursuant to which Section 32A came to be included in the statute book. The Court held that the two statutes essentially operated over distinct subjects and subserved separate legislative aims and policies. While the authorities under the IBC were concerned with the timely resolution of debts of a corporate debtor, those under the PMLA were concerned with the criminality attached to the offence of money laundering and to move towards confiscation of properties that may be acquired by commission of offences specified therein. Where in the exercise of their respective powers a conflict arose, it was for the Courts to discern the legislative scheme and to undertake an exercise of reconciliation enabling the authorities to discharge their obligations to the extent that the same did not impinge or encroach upon a facet which stood reserved and legislatively mandated to be exclusively controlled and governed by one of the competing statutes. The Court concluded that the power to attach as conferred by Section 5 of the PMLA would cease to be exercisable once any one of the measures specified in the Code came to be adopted and approved by the NCLT. It held that the bar that stood created under s.32A operated and extended only insofar as the properties of the corporate debtor were concerned. This injunctiondid not apply or extend to the persons in charge of the corporate debtor or the rights otherwise recognised to exist and vested in the respondent to proceed against other properties.

IBC OVERRIDES THE POWER TO ATTACH UNDER PMLA

The Gujarat High Court in AM Mining India P Ltd vs. UOI,R/Special Civil Application No. 808 of 2023, Order dated 24th August, 2023,has held that s.32A constituted the pivot by virtue of being the later act and thus governed the extent to which the non-obstante clause enshrined in the IBC would operate and hence, excluded the operation of the PMLA. When faced with a situation where both the special legislations incorporated non-obstante clauses, it was the duty of the Court to discern the true intent and scope of the two legislations. Even though the IBC and Section 238 constituted the later enactment when viewed against the PMLA which came to be enforced in 2005, the Court was of the opinion that the extent to which the latter was intended to capitulate to the IBC was an issue which must be answered on the basis of Section 32A. Through Section 32A, the Legislature has authoritatively spoken of the terminal point whereafter the powers under the PMLA would not be exercisable.The protection granted under the IBC would override the power of the Enforcement Directorate to attach the properties under the PMLA Act. Further Section 238 of the Act provided that the provisions of IBC would override anything inconsistent with any other law. Though the PMLA had similar provision under Section 71, the same was subservient to the provisions of IBC Act, since IBC Act was enacted after PMLA Act. When there were two enactments of non-obstante clauses, the enactment which was subsequent in time overruled the other in line with the ratio as laid down in Bank of India vs. Ketan Parekh and Ors., reported in (2008) 8 SCC 148. A decision similar to that of the Gujarat High Court has been rendered by the Delhi High Court in Rajiv Chakarborty Resolution Professional of EIEL vs. Directorate of Enforcement, W.P.(C) 9531/2020, Order dated 11th November, 2022.

OFFENCES COMMITTED PRIOR TO CIRP

The decision of the Bombay High Court in the case of Shiv Charan vs. Adjudicating Authority, WP (L) No. 9943 of 2023 & WP (L) No. 29111 of 2023, decided on 1st March, 2024 is quite interesting. In this case, four years prior to the commencement of the CIRP, various First Information Reports alleging, among others, offences of cheating and criminal breach of trust had been filed against the Corporate Debtor and its erstwhile promoters. The offences alleged, being “Scheduled offences” under the PMLA, an Enforcement Case Information Report (ECIR) was filed by the ED. Four bank accounts of the Corporate Debtor and 14 flats constructed by it were attached. The attachment continued even after the commencement of the CIRP, and further continued even after approval of the resolution plan. It was the continuation of such attachment which was disputed before the Bombay High Court.

The Bombay High Court upheld the supremacy of the Code and held that in view of s.32A, the liability of the corporate debtor for an offense committed prior to commencement of the CIRP shall cease. The corporate debtor is explicitly protected from being prosecuted any further for such an offense, with effect from the approval of the resolution plan. Once the ingredients of Section 32A(1) be met, it enables an automatic discharge from prosecution, for the corporate debtor alone. The provision takes care to ensure that the immunity is available only to the corporate debtor and not to any other person who was in management or control or was in any manner, in charge of, or responsible to, the corporate debtor for conduct of its business, or was associated with the corporate debtor in any manner, and directly or indirectly involved in the commission of the offense being prosecuted. Such others who are charged for the offense would continue to remain liable to prosecution. Effectively, all other accused remain on the hook and it is the corporate debtor who alone gets the statutorily-stipulated immunity, and that too only when a resolution plan is approved under Section 31, and such resolution plan entails a clean break from those who conducted the affairs in the past at the time when the offense was committed.

The Court laid down that the Code protected the property of the corporate debtor from any attachment and restraint in proceedings connected to the offence committed prior to the commencement of the CIRP. The provision explicitly stipulated that an “action against the property” of the corporate debtor, from which immunity would be available, “shall include the attachment, seizure, retention or confiscation of such property under such law” as applicable. It held that as a matter of law, once the resolution plan is approved with the attendant conditions set out in s.32A being met, further prosecution against the corporate debtor and its properties, would cease.

It laid down that the NCLT had all powers to direct the ED to raise its attachment in relation to the attached properties of the corporate debtor once a resolution plan that qualified for immunity under Section 32A was approved, and those very properties were the subject matter of the resolution plan. Once a resolution plan with the ingredients that qualified for immunity under Section 32A was approved, quasi-judicial authorities including the Adjudicating Authority under the PMLA, 2002 must take judicial notice of the development and release their attachment on their own. This was the only means of ensuring that the rule of law as stipulated in Section 32A of the IBC, 2016 ran its course. It had no hesitation in holding that there was no scope whatsoever for the attachment effected by the ED over the Attached Properties to continue once the Approval Order came to be passed.

MORATORIUM DOES NOT IMPACT ATTACHMENT

However, the Delhi High Court in Rajiv Chakarborty Resolution Professional of EIEL (supra)and the Madras High Court in Joint Director, Directorate of Enforcement Vs. Asset Reconstruction Company India Ltd, Writ Petition No.29970 of 2019 have held that it would be incorrect to state that the moratorium under s.14 of the Code would shut out an attachment under PMLA. A moratorium is on a different footing as compared to a resolution plan approved under the Code. Attachment under the PMLA was not an attachment for debt but principally a measure to deprive an entity of property and assets which comprised proceeds of crime.The passing of attachment orders neither result in confiscation of those properties nor do those properties come to vest in the Union Government upon such orders being made. The attached property comes to vest in the Union Government only upon the passing of such an order as may be passed by the Special Court under the PMLA. The Court concluded that the provisional attachment of properties would in any case not violate the primary objectives of Section 14 of the IBC. However, it added that through Section 32A of the Code, the Legislature had authoritatively spoken of the terminal point whereafter the powers under the PMLA would not be exercisable. It led to the erection of an impregnable wall which cannot be breached by invocation of the provisions of the PMLA.

CONCLUSION

The Courts have made an attempt to interpret both Statutes harmoniously. Holding a new acquirer guilty of offences which he was not party to would defenestrate the very objective of the Code. As observed by the Courts, this was a cleansing machine in which the corporate debtor began on a clean slate and hence, the PMLA would have to yield to the Code!

Allied Laws

34. OPG Power Generation Pvt. Ltd. vs. Enexio Power Cooling Solution India Pvt. Ltd.

Civil Appeal No. 3981, 3982 of 2024 (SC)

20th September, 2024

Arbitration — Method of calculating period of limitation — Possible view taken by the Tribunal — No patent illegality found in the award — Award does not violate fundamental public policy. [S. 34, 37, Arbitration and Conciliation Act, 1996; S. 18, A. 58, Limitation Act, 1963]

FACTS

The Appellant had entered into a contract with the Respondent for the construction of a power plant. Thereafter, a dispute arose over the Appellant’s unpaid amount of ₹6.75 crores to the Respondent. The Respondent invoked the arbitration clause, while the Appellant filed counterclaims. The Appellant alleged that ₹6.75 crores were deducted from the Respondent on account of liquidated damages, delayed project completion and towards customs duty paid by the Appellant. However, the Arbitral Tribunal rejected most of the Appellant’s counterclaims, ruling that they were barred by the statute of limitations. Aggrieved, the Appellant challenged the award of the Arbitral Tribunal before the Hon’ble Madras Hogh Court (Single Bench) under section 34 of the Arbitration and Conciliation Act, 1996 (Act). The Hon’ble Court held, inter alia, that the award passed by the Arbitral Tribunal suffered from patent illegality and was against the public policy of India since it adopted different dates to calculate the period of limitation for the claim and the counterclaim, which was not justified, given that both issues stemmed from the same contractual relationship. Aggrieved, an appeal was preferred before the Hon’ble Madras High Court (Division Bench). The Hon’ble Court (Division Bench) observed that the view taken by the Tribunal with regard to the dates for a period of limitation was a possible view. Therefore, there was no patent illegality in the award passed by the Tribunal. Thus, as per section 34 of the Act, the Hon’ble Court refused to interfere with the award passed by the Tribunal. The award of the Tribunal was accordingly restored.

Aggrieved, a Special Leave Petition was preferred before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that an arbitral award, even if inadequately reasoned, need not be set aside under Section 34 of the Act, provided it does not display any perversity. The Court emphasised that as long as there is no irrationality or serious legal flaw, the award should stand, with courts having the discretion to clarify or elaborate on the reasoning rather than dismiss it altogether. Further, with respect to the issue of the award being violative to the public policy of India [section 34(2)(b)(ii) of the Act], the Hon’ble Supreme Court held that for an award to be set aside, the violation must affect a fundamental policy of Indian law. Further, minor infractions of the law are not sufficient to render an award invalid.

Thus, the award of the Arbitral Tribunal was upheld.

35. Directorate of Enforcement vs. Rahil Chovatia

CRL.M.C. 5482/2022 (Delhi)

18th September, 2024

Money Laundering — Alleged massive scam in the country — Proceeds of crime / money routed through various layers of entities- Arrest on the ground of mere assumption — Bail granted. [S. 439(2), 482, Code of Criminal Procedure, 1973]

FACTS

A First Information Report (FIR) was filed against unidentified persons, marking the beginning of an investigation that allegedly unearthed a massive scam operating in the country. It revealed an extensive scheme of money laundering involving money being looted from the public through various mobile applications on the pretext of high returns on investments. According to the Petitioner, the money received from the public (i.e., Proceeds of Crime (PoC)) of approximately 250 crores were collected in the shell companies (first layer of entities). Thereafter, the money was layered and routed to several other companies (second layer of entities). Ultimately, the money was transferred out of the country under the guise of payments for imports before passing through a third layer of money laundering. During the investigation, the Respondent was arrested. It was alleged that the Respondent, director of a company (third layer of entity), had received funds from the first and second layer of entities. The Respondent had filed a bail application, which was granted by the learned Trial Court. Aggrieved, a petition was filed before the Hon’ble Delhi High Court for the cancellation of bail of the Respondent.

HELD

At the outset, the Hon’ble Delhi High Court highlighted the distinction between setting aside an unjust or illegal order and the cancellation of bail. Further, relying on the decision of the Hon’ble Supreme Court in the case of Madanlal Chaudhary vs. Union of India [(2022) SCC OnLine (SC) 929], the Hon’ble Delhi High Court reiterated that the ingredients constituting an offence of money laundering are to be strictly construed. Furthermore, the Hon’ble Court noted that the proceeds of crime which were allegedly received by the Respondent was merely an assumption made by the Petitioner. Therefore, the order of the Trial Court was upheld. The Petition was thus, dismissed.

36. Pramod vs. The Secretary, The Sultanpet Diocese Society and Anr.

2024 LiveLaw (Ker) 597

25th September, 2024

Eviction — Unpaid Rent — Fundamental duty — Cannot seek the protection of law from eviction — Rent must be duly paid. [S. 151, Code for Civil Procedure, Code, 1908]

FACTS

The Petitioners (Original Defendants) are the tenants of the Respondent. A suit was instituted for eviction and realization of unpaid rent from the Petitioners. The suit was admitted by the Trial Court. Thereafter, an interim application was filed by the Respondent (landlord) for payment of unpaid rent. The Court, under section 151 of the Code for Civil Procedure, 1908, accepted the interim application and directed the Petitioner to deposit the unpaid rent. Aggrieved by the interim application, a Petition (OP) was filed before the Hon’ble Kerala High Court (Ernakulam).

HELD

The Hon’ble Kerala High Court noted that the Petitioners had failed to discharge their fundamental obligation as tenants, i.e. paying rent to the Respondent. Further, the Hon’ble Court held that, a tenant who neglects this essential duty cannot expect the protection of the courts in matters of eviction. Furthermore, the Court also noted that a landlord holds the ultimate title to the property, and the tenant’s right to remain in possession hinges entirely on the payment of rent. Furthermore, the Court emphasised that permitting the tenant to prolong legal proceedings in such a scenario would amount to nothing less than an undue burden and harassment of the landlord.

Therefore, the Petition (OP) was dismissed.

37. The Catholic Diocese of Gorakhpur through its President vs. Bhola Deceased and Ors.

Second Appeal No. 461 of 2014 (Allahabad)

10th September, 2024

Transfer of property — Affidavit — No transfer of land through affidavit — Transfer only through recognised modes such as sale, gift, lease, mortgage and exchange. [S. 2(l), 8, 10, 26, The Urban Land (Ceiling and Regulation) Act, 1976; S. 118, Transfer of Property Act, 1882]

FACTS

The Respondent (Original Plaintiff) had instituted a suit for claiming his ‘bhumidari’ (ownership) rights over the disputed property against the Appellants, namely the Catholic Diocese (lessee) and the State of Uttar Pradesh (lessor). The State of Uttar Pradesh had leased the disputed property to the Catholic Diocese for the construction of a hospital. It was contended by the Plaintiff that the property was illegally acquired by the State of Uttar Pradesh, and hence, the consequent lease deed in favour of the Catholic Diocese was also illegal. Further, in support of the same, it was stated that the said property was never declared as surplus / vacant as per the provision of the Urban Land (Ceiling and Regulation) Act, 1976 (Urban Land Act). The Learned Trial Court, however, held that the Plaintiff had himself relinquished his title by submitting an affidavit before the Learned District Magistrate, and it was only thereafter, that the property was handed over to the State of Uttar Pradesh. Aggrieved, an appeal was preferred before the First Appellate Authority. The First Appellate Authority allowed the appeal and held that the Plaintiff was the owner of the property. Further, any constructions made by the Catholic Diocese (lessee) were directed to be removed at once.

Aggrieved, a second appeal was preferred before the Hon’ble Allahabad High Court.

HELD

The Hon’ble Allahabad High Court outrightly dismissed the contention of the Appellants that the property was transferred or the rights in the property were relinquished based on admissions made in affidavits by the Plaintiff. The Hon’ble Court held that rights in property can only be transferred as per the procedure established in the Transfer of Property Act, 1882, or under the Registration Act, 1908. Therefore, the Hon’ble Court held that the State of Uttar Pradesh had never acquired the title of the property legally, and had deprived the Plaintiff of his land for more than 32 years. The appeal was, therefore, dismissed with a cost of RTen lakhs on the Appellant. The order of the First Appellate Authority was upheld.

Reimagining Investment Advisory & Research Services

Editor’s Note: Late CA Jayant Thakur contributed to the Securities Law feature since 2006-07, since its inception, for nearly eighteen years on a month-on-month basis. After his passing the feature took a brief interval. We are delighted to restart this feature with new contributors CA Bhavesh Vora and CA Khushbu.

(Consultation Paper on Review of Regulatory Framework for Investment Advisers & Research Analysts)

BACKGROUND

SEBI (Investment Advisers) Regulations, 2013, and the SEBI (Research Analysts) Regulations, 2014, were established to regulate and streamline the activities of individuals and entities offering investment advisory and research analyst services. However, every regulation stands the test of time and must be revisited and redefined to commensurate with the evolving nature of business and adapt to the changing business trends.

In light of the growth in the securities market and a notable increase in investors, it is startling to see the current number of registered Investment Adviser (IAs) and Research Analysts (RAs) as compared to the large investor base. This discrepancy has resulted in a significantly low ratio of investment advisers per million individuals, leading to an increase in unregistered entities / individuals operating as IAs and RAs. It must be appreciated that SEBI has taken strict and timely action against such unregulated activities to protect the interests of investors.

At the same time, the Regulator has been a proponent for encouraging technological innovations in the best interest of the investors, to keep up with the changing trends in the industry. The regulators’ mindset to come one step closer to bringing parity to the role of investment advisers worldwide is demonstrated through its recent consultation paper.

“Investment Adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or groups of persons and includes any person who holds out himself as an investment adviser, by whatever name called.

“Research Analyst” means a person who is primarily responsible for:

a) preparation or publication of the content of the research report; or

b) providing research reports; or

c) making “buy / sell / hold” recommendations; or

d) giving price target; or

e) offering an opinion concerning the public offer

With respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’ and includes any other entities engaged in the issuance of research reports or research analysis

The Consultation Paper issued by SEBI regarding the Review of the Regulatory Framework for Investment Advisers and Research Analysts proposes several amendments aimed at establishing a regulatory landscape that is

a. Conducive to the evolving nature of IA and RA businesses

b. Adopting a principle-based approach

c. Simplifying compliance and reducing associated costs.

KEY HIGHLIGHTS OF THE PROPOSED CHANGES

1. Relaxation in Eligibility Criteria for IAs and RAs

The proposed regulatory changes by SEBI aim to attract young professionals and ease of entry to Investment Advisory (IA) and Research Analyst (RA) roles by lowering the minimum qualification requirements from a postgraduate degree to a graduate degree. Additionally, IAs and RAs would be required to obtain only their foundational certifications instead of taking the same before expiry from the National Institute of Securities Markets (NISM) upon registration, with periodic updates focused on regulatory developments.

The proposal also recommends the elimination of prior experience and minimum net worth requirements, acknowledging that these roles are fee-based and do not entail managing client funds. Instead, IAs and RAs would be required to maintain a specified deposit, lien-marked to the stock exchange, to cover potential dues arising from arbitration or conciliation proceedings.

2. Allowing Registration as Both Investment Adviser and Research Analyst

The proposal to allow individuals or partnership firms to register for both IA and RA services stems from the overlapping nature of activities in these roles. This proposal aims to enhance service offerings while preserving regulatory integrity and maintaining an arm’s length relationship between IA & RA Activities.

3. Registration as a Part-Time Investment Adviser / Research Analyst

The proposed amendments to the registration criteria for IAs and RAs will allow individuals or partnership firms engaged in non-securities-related businesses to register as part-time IAs or RAs. This change addresses previous concerns regarding the required separation between advisory activities and other business pursuits.

Under the new rules, part-time IAs and RAs cannot manage client funds or provide advice on non-regulated investment products. They must obtain a no-objection certificate (NOC) from their employer if employed, limit their client base to a maximum of seventy-five clients at any given time, maintain a separation of advisory services from other business activities, and include a disclaimer in communications about non-IA / RA services, clarifying that they are not under SEBI’s jurisdiction.

Eligible professionals include educators, architects, lawyers, and doctors who may register as part-time IA / RA. Ineligible candidates are those advising on assets such as gold, real estate, or cryptocurrencies. For instance, a Chartered Accountant is providing security – specific / recommendations to its client even though as Part of tax planning / tax filing, he is required to seek registration as a part-time IA / RA. However, in the existing regulatory guidelines, a member of ICAI who provides investment advice to clients incidental to the professional services are exempt from seeking registration under IA regulations.

A Chartered Accountant providing investment advice must ensure that their conduct aligns with these ethical principles. The ICAI’s Code of Ethics and Professional Conduct outlines the fundamental principles and rules that members must adhere to in their professional activities. These principles include integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

4. Relaxations in the Designation of ‘Principal Officer’

Currently, non-individual IAs are required to appoint a managing director or an equivalent as the Principal Officer. However, industry feedback indicates that in organizations with multiple lines of business, these individuals may not be directly involved in the day-to-day operations of the investment advisory division.

To address this, the proposal allows such organizations to designate the business head or unit head of the investment advisory services as the Principal Officer, ensuring that they are responsible for overseeing these activities. In contrast, entities engaged solely as IAs must still appoint a managing director or designated director as the Principal Officer. Additionally, partnership firms are required to designate one partner as the Principal Officer, and those without eligible partners will be granted a timeline to restructure as Limited Liability Partnerships (LLPs).

Furthermore, the proposal introduces a requirement for non-individual RAs and research entities to designate a Principal Officer, aligning the RA regulations with those of IAs. This move aims to ensure responsible oversight of business operations across both investment advisory and research functions.

5. Allowing Appointment of Independent Professionals as Compliance Officers

Currently, both IAs and RAs are required to appoint a compliance officer responsible for ensuring adherence to the SEBI Act and associated regulations. However, there have been industry requests to allow the appointment of independent professionals—such as Chartered Accountants (CAs), Company Secretaries (CSs), or Cost and Management Accountants (CMAs)—as compliance officers, rather than requiring a full-time officer.

Under the proposal, IAs and RAs can appoint independent professionals as compliance officers, provided that the Principal Officer submits an undertaking affirming their responsibility for compliance oversight. Additionally, independent professionals must hold relevant certifications from the National Institute of Securities Markets (NISM) to be eligible for this role. This approach seeks to enhance flexibility while ensuring robust compliance monitoring and reducing compliance costs within the IA and RA sectors.

6. Clarity in Activities that Can Be Undertaken by IAs — Scope of Investment Advice

IAs can offer financial planning that includes a mix of regulated securities and legally permitted unregulated assets. However, they may only provide investment advice on securities regulated by SEBI or products overseen by other financial regulators. Non-individual IAs wishing to advise on non-specified products must do so through a separate legal entity to maintain an arm’s-length relationship. Additionally, individual IAs are prohibited from advising on instruments outside those regulated by SEBI or other financial regulators. These changes aim to enhance client protection and ensure IAs operate within a clear regulatory framework, thereby reducing risks associated with unregulated advice and services.

7. Use of Artificial Intelligence (‘AI’) Tools in IA and RA Services

While AI tools can assist IAs and RAs in delivering personalized services tailored to client-specific needs, they may not always provide accurate or comprehensive outputs, especially in complex financial situations, and also raise concerns about data security, particularly regarding the sensitive information shared during interactions. Additionally, AI tools might lack transparency regarding the methodologies employed in generating recommendations, which is critical for ensuring compliance with risk profiling and suitability assessments.

To address these concerns, any IA or RA utilizing AI tools must fully disclose the extent of their use to clients, enabling informed decision-making regarding their services. Ultimately, the responsibility for data security and regulatory compliance remains solely with the IA or RA, regardless of how AI tools are employed in their advisory or research activities.

8. Flexibility for IAs to Change the Modes of Charging Fees to Clients

The proposed fee structure for IAs provides the liberty to switch between fixed fees mode (limited to R1,25,000 p.a.) and Asset under Advice (AUA) Mode at 2.5 per cent p.a. on AUA without any waiting time period, which under the existing regulations is a 12-month period. The maximum fee charged will be the higher of the two limits. For accredited investors, fee structures will be determined through bilaterally negotiated contractual terms, providing greater flexibility in fee arrangements while maintaining regulatory boundaries.

9. Relaxation in Requirement for Corporatisation by Individual IAs

The proposed changes to Regulation 13(e) of the IA Regulations would allow individuals to operate their advisory businesses without being compelled to transition into a corporate structure by broadening the requirement for compulsory corporatization of an individual IA i.e. 300 clients or fee collection of ₹3 Crore during the financial year, whichever is earlier.

10. Definitions of ‘research analyst’ and ‘research services

The IA Regulations require payment consideration for services rendered by investment advisors (IAs), but the current definition of “research analyst” under the RA Regulations does not explicitly mention any payment consideration, leaving room for arbitrary interpretation of the scope of services. To address this, a proposal suggests modifying the definition to state that only those providing research services “for consideration” should be classified as research analysts. “Consideration” would encompass any economic benefit, including non-cash benefits, received for such services.

Additionally, the proposal recognizes that some research analysts are currently offering services like model portfolios and stop loss target recommendations, which aren’t explicitly defined in the existing regulations. To adapt to industry practices, it is proposed that these services be included under the definition of research services provided by research analysts.

11. KYC Requirements and maintenance of record

Currently, investment advisors (IAs) must follow KYC procedures as specified by SEBI and maintain relevant records. However, research analysts (RAs) lack specific provisions for disclosing terms and maintaining client identification records. It is proposed that RAs also adhere to KYC procedures for fee-paying clients and maintain KYC records as mandated by SEBI. Both IAs and RAs are required to upload these records to the KRA system. Additionally, they must keep detailed client records, including personal information, service details, and fees charged. RAs must document disclosures of service terms and maintain records of client communications, while IAs providing execution services need to record client consent calls.

12. Clarity in the identification of ‘persons associated with research services’

The proposed changes to the RA Regulations aim to define “persons associated with research services” to align with existing definitions in the IA Regulations. This new definition will include any member, partner, officer, director, employee, or similar staff of a research analyst or research entity involved in providing research services to clients or the public. It specifically encompasses client-facing roles such as analysts, sales staff, and client relationship managers, regardless of their titles. However, it will exclude individuals performing purely clerical or administrative functions without any connection to research services or client interaction. This clarification seeks to enhance consistency and clarity in identifying personnel associated with research activities.

13. Exemption to Proxy Advisers from the RAASB framework

SEBI has established a framework for the administration and supervision of research analysts (RAs) through the RAASB, which also applies to proxy advisers (PAs) under the RA Regulations. This framework aims to effectively manage the anticipated growth in the number of RAs. However, SEBI has received requests from proxy advisers to be exempted from the RAASB framework, citing the distinct nature of their services and potential conflicts of interest when overseen by exchanges. In response, it is proposed that proxy advisers be exempt from the RAASB framework, with their administration and supervision falling solely under SEBI’s jurisdiction.

14. Eligibility of ‘partnership firm’ for registration as RA and certification requirement for its partners

Regulation 6(i) of the RA Regulations currently considers individuals, bodies corporate, and LLPs for registration as research analysts (RAs) and is proposed to be amended to explicitly include “partnership firm.” Additionally, Regulation 7(2) states that partners of a research analyst must hold a NISM certification. It is proposed to clarify that this requirement applies only to partners who are actively engaged in providing research services, aligning their qualification requirements with those outlined in Regulation 7(1).

15. Fees chargeable to clients by RAs

To establish a level playing field between Investment Advisors (IAs) and Research Analysts (RAs) regarding fee structures, it is proposed that RAs be subject to similar maximum fee limits as IAs. The proposed fee structure for RAs includes the following key points:

1. RAs may charge fees within limits set by SEBI, ensuring that fees are fair and reasonable.

2. RAs can charge a maximum of ₹1,25,000 per annum per family for individual clients, while this limit does not apply to non-individual clients, such as Qualified Institutional Buyers (QIBs), accredited investors, and institutional clients seeking proxy adviser recommendations.

3. RAs may charge fees in advance, but such advance payments cannot exceed one month’s fees.

4. If RA services are terminated prematurely, clients are entitled to a refund of proportionate fees for the remaining service period.

5. Unlike IAs, RAs cannot charge breakage, separation, or alienation fees upon early termination, as they do not incur the same fixed costs associated with client onboarding and assessments.

This framework aims to create consistency and fairness in fee structures across both roles.

16. Client-level segregation of research and distribution services by RAs

Currently, individual Investment Advisors (IAs) are prohibited from providing distribution services, and their family members cannot offer such services to clients advised by the IA. Additionally, if a client is receiving distribution services from other family members, the IA cannot provide advice to that client. Non-individual IAs must maintain client-level segregation between investment advisory and distribution services, ensuring an arm’s length relationship by operating through distinct departments.

This restriction is based on the principle that IAs should deliver unbiased advice, which could be compromised if they receive payments from product issuers under a distribution model. Similarly, Research Analysts (RAs) are expected to provide independent research, necessitating a clear separation between their research activities and any distribution services to avoid conflicts of interest.

To align RAs with the existing provisions for IAs, it is proposed that RAs also implement client-level segregation between research and distribution services. However, IAs and RAs providing advisory or research services exclusively to institutional clients and accredited investors may be exempt from these segregation requirements, provided that the investors sign a standard waiver acknowledging this arrangement.

17. Guidelines for recommendation of ‘model portfolio’ by RAs

According to Regulation 2(1)(u) of the RA Regulations, Research Analysts (RAs) are authorized to provide “buy / sell / hold” recommendations and price targets for securities listed or to be listed on a stock exchange. However, RAs have begun issuing “model portfolios,” which offer recommendations for multiple securities based on specific parameters, for which there are no existing guidelines for model portfolio recommendations regarding minimum disclosures, rationale, nomenclature, and performance.

To address this gap, it is proposed that SEBI shall issue guidelines for model portfolios created by RAs. This framework will include a clear definition of model portfolios and establish standardized reporting and disclosure requirements, which will be developed by the Industry Standards Forum (ISF) in collaboration with the RAASB and SEBI.

18. Disclosure of terms and conditions of services to the client

Currently, the RA Regulations do not mandate the disclosure of terms and conditions or clients’ rights, which may leave clients unaware of their entitlements in the event of grievances. To enhance transparency, it is proposed that Research Analysts (RAs) be required to provide explicit client consent and documentation outlining service conditions. Similar to Investment Advisors (IAs), RAs will also need to adhere to Know Your Customer (KYC) procedures for their fee-paying clients and maintain KYC records, as specified by SEBI.

These records should be uploaded to the KRA system according to SEBI guidelines. RAs and IAs will be required to keep comprehensive records of clients, including client lists, PANs, details of the services provided, and fees charged. Additionally, RAs must document disclosures regarding the terms and conditions of their services. Both RAs and IAs should maintain records of all communications with clients related to their services, including physical documents, emails, and messages. For IAs offering implementation or execution services, it is essential to record calls where client consent for such services is obtained.

19. Other regulatory changes concerning both IAs and RAs:

It is proposed to clarify the registration requirements for individuals providing investment advisory (IA) and research analyst (RA) services under Indian regulations based on the client’s domicile and the type of securities involved according to the provided matrix under:

Sr No. Domicile of Client / Investor Securities / asset class (Indian / Global) on which IA / RA services are provided

 

 Whether a person providing

IA / RA services for

consideration (irrespective of

whether he is located in or

outside India) is required to

obtain registration as IA / RA

from SEBI
1

 

 Person resident in India / NRI / PIO

 

 Indian

 

 Yes

 
2

 

 Person resident in India / NRI/ PIO

 

 Global (indices containing Indian securities as underlying) / Global (exclusively foreign securities)

 

 No

 
3

 

 Other than a Person resident in India / NRI PIO

 

 Indian / Global (indices containing Indian securities as underlying) / Global (exclusively foreign securities) No

 

Additionally, persons located outside India can issue research reports on Indian securities without registration, provided they have an agreement with a registered RA or research entity. However, this arrangement does not impose regulatory responsibilities on the external party.

To ensure accountability, it is proposed that individuals outside India intending to provide research services to clients located in India related to securities listed or proposed to be listed on a stock exchange in India must obtain registration as RAs under the RA Regulations, by establishing a subsidiary or office in India for this purpose. This change aims to create clarity and regulatory oversight in cross-border advisory and research services.

20. Compliance Audit Requirements

Under the proposed regulations, IAs and RAs are required to undergo compliance audits. Currently, the regulations mandate audits conducted by members of ICAI / ICSI. However, the amendments allow firms to select auditors from various professional bodies such as ICMAI, enhancing flexibility in compliance audits. The proposal seeks to streamline the auditing process while ensuring adherence to regulatory standards.

21. Clarity in the applicability of IA Regulations / RA Regulations to trading call providers

If a trading call is given after assessing the client’s risk profile and product suitability, it is considered a “one-to-one” service and falls under IA Regulations. Conversely, if the trading call is made without such assessments, it is classified as a “one to many” service and falls under RA Regulations.

NAVIGATING THE ROAD AHEAD

As the Indian financial landscape evolves, the above changes seek to enhance accessibility and adaptability within the research and advisory sector, encouraging a greater pool of professionals to enter the market. However, while the intentions behind these proposals may be commendable, they raise critical questions that merit careful consideration within the context of these proposed changes, summarized as under:

  • The Balancing Act

Balancing compliance with operational efficiency is crucial to ensure that advisory firms can thrive without being overwhelmed by regulatory demands.

  • Segregation of Services

Maintaining a clear separation between research and distribution services is vital to upholding unbiased advisory practices.

  • Interplay of Technology & Data Privacy

While the use of AI tools can enhance service efficiency, the Indian financial advisory sector faces unique challenges in terms of data privacy and security and their co-existence can shape the future of the advisory industry.

  • Client Protection & Grievance Redressal

The expansion of IAs’ scope to include advice on unregulated assets can lead to significant risks, especially in a market where awareness of such products is limited. The potential for conflicts of interest in ancillary services, such as tax planning or real estate investment, can compromise the fiduciary duty owed to clients. A Separate Identifiable Grievance redressal channel will have to be developed for regulated and unregulated assets by the IA’s.

  • Bridging the Gap Between Experience & Young Minds

Given the complex nature of financial products, the lack of prior experience requirements for new entrants may create a gap in sound practical knowledge and understanding of market dynamics.

In summary, while the proposed changes aim to make investment advisory and research services more accessible and adaptable to evolving market dynamics, addressing these concerns comprehensively is essential to ensure that the regulatory framework not only promotes growth with the changing dynamics but also protects the interests of investors and maintains high standards of professional conduct.

Note from Authors:

The “Securities Law” feature of the BCAJ was contributed by the Late CA Jayant M. Thakur for many years with his insightful, exceptional, and thoughtful analysis. Those contributions have significantly benefitted many readers. We are deeply humbled to take his dedication forward and continue his commitment to excellence for the benefit of members.

Debentures – An Analysis

INTRODUCTION

Debentures are one of the most popular and common forms of instruments by which a company can raise funds. In spite of that, there is a lot of confusion and many myths surrounding them. The interesting part is that several laws deal with debentures and this has added to the complexity. Dealing with all of them in detail, as well as the tax issues concerning debentures would be a mammoth exercise but let us understand some of the key regulatory aspects pertaining to debentures.

MEANING UNDER THE COMPANIES ACT

The Companies Act, 2013 (“the Act”) defines debentures in an inclusive manner as including debenture stock, bonds, or any other instrument of a company evidencing a debt, whether or not constituting a charge on the assets. Thus, the Act places bonds and debentures on the same footing. The word debt is not defined under the Act. A simple but clear definition of the word is found in Webb vs. Stenton [1883] 11 Q.B.D. 518, wherein it was defined as “……a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro.”. The Supreme Court in Kesoram Industries & Cotton Mills Ltd. vs. CIT, [1966] 59 ITR 767 (SC) has defined it as being applicable to a sum of money which has been promised at a future day as to a sum now due and payable. Debts were of two kinds: solvendum in praesenti and solvendum in futuro . . . A sum of money which was certainly and in all events payable was a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, was not a debt or did not become a debt, until the contingency had happened.

The Full Bench of the Monopolies & Restrictive Trade Practices Commission in D.G. (I&R) vs. Deepak Fertilizers & Petrochemicals Corpn. Ltd., [1994] 1 SCL 239 (MRTPC — Delhi) has given an elaborate definition of debentures. It held that a debenture is a choice in action and is in the nature of actionable claim and as such is subject to equities. It held that “Choices in action is a term which has its origin in English law and would ordinarily include, debts, benefits of the contract, damages for breach or tort, stocks, shares, and debentures”. Ordinarily a debenture constituted a charge on the undertaking of the company or some part of its property, but there may be debentures without any such charge, and under the law, it was not necessary that the debentures should create a charge. It also relied on the UK Commentary, Palmer on Company Law which stated that in modern commercial usage, a debenture denoted an instrument issued by the company, normally but not necessarily called on the face of it a debenture, and providing for the payment of a specified sum at a fixed rate with interest thereon. The Bench further held that Debentures were clearly not shares. They were simply specialty debts due from the company, which may or may not be secured by a charge on the company’s assets. A debenture-holder as such was not a member, but a creditor of the company. He had no share in the capital of the company, and his right to payment was not dependent on its profits. He had not, as a shareholder had, a voice in the management of the company’s affairs. Debentures were borrowed money capitalized for purposes of convenience. It further held that shareholders were the owners of the company till the company was folded up fully while debenture holders were only creditors of the company, sometimes secured and sometimes unsecured, and that too for a defined period. The rights of the shareholders and debenture holders were different as also were their remedies. A debenture was thus like a certificate of loan or a loan bond evidencing the fact that the company was liable to pay a specified amount with interest and although the money raised by the debentures became a part of the company’s capital structure it did not become share capital. Debentures are neither ‘stock’, nor ‘shares’.

Another important case dealing with debentures is the Supreme Court in Narendra Kumar Maheshwari vs. UOI, 1989 AIR(SC) 2138. It held that a debenture has been defined to mean essentially an acknowledgment of debt, with a commitment to repay the principal with interest. A debenture may be secured or unsecured. A compulsorily convertible debenture does not postulate any repayment of the principal. Therefore, it does not constitute a debenture in its classic sense. Even a debenture, which is only convertible at option has been regarded as a hybrid debenture. A non-convertible debenture need not be always secured.

Under the Companies Act, 2013, a debenture is not a loan. Unlike the 1956 Act, the 2013 Act does not state that a loan includes debentures. Hence, an investment in debentures would no longer be treated as a loan.

TYPES OF DEBENTURES

Debentures could be of various types:

(a) Listed or unlisted — even private limited companies are eligible to list their debentures on stock exchanges;

(b) Convertible (optionally / partly / fully / compulsorily) or non-convertible debentures (NCDs). The Supreme Court in Sahara India Real Estate Corpn. Ltd. vs. SEBI, [2012] 25 taxmann.com 18 (SC) has held that hybrid securities generally means securities that have some of the attributes of both debt securities and equity securities which, in terms of a debenture, encompass; and it has an element of indebtedness and element of equity stock as well. It held that optionally fully convertible debentures were hybrid securities but remained within the definition of the term ‘securities’ in section 2(h) of the Securities Contract Regulation Act;

(c) Bearer debentures where the amount is payable upon presentation by the holder;

(d) Transferrable or non-transferrable;

(e) Debenture stock where separate certificates for different debentures are not issued but one consolidated certificate is issued for the entire value raised by the debentures;

(f) Secured or unsecured- one myth prevalent is that unsecured debentures cannot be issued. Nothing could be further than the truth. If the debentures are secured, then charge creation formalities under the Act must also be fulfilled.

(g) Fixed term or perpetual debentures — unlike preference shares, the Companies Act does not prescribe any fixed tenure for debentures. Debentures can also be perpetual in nature. This is one of the most interesting facets of debentures. The issuer could also have an early call option under which perpetual debentures could be redeemed at the discretion of the issuer.

PROCEDURE FOR ISSUE OF DEBENTURES

S.71 of the Companies Act deals with the issue of debentures. In addition, Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 deals with certain procedures such as the issue of secured debentures, appointing of debenture trustees in case of secured debentures, etc. S.42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 with a private placement of debentures.

If a company issues convertible debentures, then in addition to the above, it must comply with the provisions of s.62(1) of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 pertaining to issue of shares on preferential basis. This Rule applies to an issue of fully / partly / optionally convertible debentures.

DEBENTURE REDEMPTION RESERVE

The Act requires the creation of a Debenture Redemption Reserve (DRR) for the purposes of redemption of debentures. The DRR is created out of the profits of the company available for dividend payment. Different limits of DRR are prescribed based on the type of company and type of debentures. For instance, for unlisted companies, the DRR is 10 per cent of the value of debentures. DRR is only required if there is a profit. Further, DRR is only required up to the non-convertible portion of a debenture.

ARE DEBENTURES DEPOSITS?

The Companies (Acceptance of Deposit) Rules, 2014 state that secured debentures / compulsorily convertible debentures would be outside the purview of the definition of deposit under s.73 of the Companies Act. The amount raised by the issue of debentures should not exceed the market value of assets on which security is created. If the debentures are compulsorily convertible debentures, then they must be converted within 10 years.

Further, listed non-convertible debentures would also not be treated as deposits. This means that optionally convertible / partly convertible, unsecured, unlisted debentures would constitute a deposit under the Act unless they can be exempted under other exemption clauses of Rule 2(1) of the above-mentioned Rules.

ARE DEBENTURES SECURITIES?

The Securities Contracts (Regulation) Act, of 1956 defines “securities” to include debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other body corporate. Thus, debentures are securities.

ARE DEBENTURES GOODS?

The Monopolies &Restrictive Trade Practices Commission in J.P. Sharma vs. Reliance Petrochemicals Ltd. [1991] 70 Comp. Cas. 378 (MRTPC) has held that in the definition of ‘goods’, as given in section 2(vii)of the Sale of Goods Act, debentures as such are not included though stocks and shares have been included. In Deepak Fertilizers (Supra), it was held that a debenture was issued to a debenture holder in accordance with the Companies Act and thereafter, a certificate of debenture was issued. Before a certificate of debenture was issued, a charge had to be created and the Certificate of Registration, endorsed on the debenture certificate. Debenture certificate in its deliverable state came into existence only then. It held that up to the stage of allotment, the money received by the company from the subscribers was merely subscription money and had to be kept in a separate account in accordance with provisions of the Companies Act. At this stage, the question of selling or trading in the debentures could not arise. Till the debentures were, therefore, actually allotted, the question of the company having issued debentures as transferable property did not arise as the debenture holder did not have any domain over the debentures. Accordingly, it concluded that debentures could not be regarded as ‘goods’.

The same view has been taken by the Supreme Court in R.D. Goyal vs. Reliance Industries Ltd (2003) 1 SCC 81. It held that debentures would not come within the purview of the definition of goods as it was simply an instrument of acknowledgement of debt by the company whereby it undertook to pay the amount covered by it and till then it undertook further to pay interest thereon to the debenture-holders.

DEBENTURES AND IBC

The Supreme Court in Pioneer Urban Land & Infrastructure Ltd. vs. UOI, [2019] 108 taxmann.com 147 (SC) observed that debenture holders were financial creditors under the Insolvency & Bankruptcy Code, 2016.

In T. Prabhakarv. S Krishnan (Nippon Life India AIF Management Ltd.), [2022] 135 taxmann.com 346 (NCLAT — Chennai) it has been held that to sustain an application under the Code, an applicant ought to establish an existence of ‘debt’ which is due from the ‘corporate debtor’. The NCLAT held that a debenture holder was undoubtedly a ‘financial creditor’. There was no fetter in Law for the ‘debenture holder’ to file an application seeking to initiate corporate insolvency resolution without adding the ‘debenture trustee’.

DEBENTURES UNDER FEMA

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 deal with FDI in an Indian company. It states that “equity instruments” means equity shares, convertible debentures, preference shares, and share warrants issued by an Indian company. “Convertible debentures” are defined to mean fully, compulsorily and mandatorily convertible debentures. Thus, partly / optionally / non-convertible debenture is treated as debt under these Rules and would be governed by the Foreign Exchange Management (Debt Instruments) Regulations, 2019 or the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. For instance, permission is given for FPIs to invest in listed / unlisted NCDs issued by Indian companies; for NRIs / OCIs to invest in listed NCDs on repatriation / non-repatriation basis. Any other debenture would be treated as an External Commercial Borrowing and would be governed by the applicable ECB Regulations. This would include, rupee-debentures, rupee-bonds and masala bonds (Rupee denominated bonds listed on overseas exchanges).

STAMP DUTY

The Indian Stamp Act, of 1899 levies a duty @ 0.005 per cent on the issue of debentures. The earlier requirement of these debentures being marketable debentures has since been removed. The earlier confusion of whether debentures could be chargeable to duty as bonds has been removed and now, they would only be covered under the Article dealing with debentures. Transfer of debentures now attracts duty @ 0.0001 per cent.

DEBENTURES AND SEBI REGULATIONS

The SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021 deal with the procedure for listing of debt securities, which are non-convertible with a fixed maturity period. These include bonds, debentures, green debt securities, perpetual debt instruments, etc., issued by a private / public / listed company a Real Estate Investment Trust (REIT), or an Infrastructure Investment Trust (InvIT).

If a company whose equity shares are listed wishes to issue convertible debentures, then the issue of the same would be treated as a preferential issue and would be governed by the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

DEBENTURES AND NBFC DIRECTIONS

NBFCs are permitted to issue Debentures. However, they need to consider whether the issuance would be a public deposit and hence, would the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 apply? For instance, the definition of public deposit excludes any amount raised by secured debentures or which would be compulsorily convertible into equity shares. Further, any amount raised by issuance of NCDs with maturity > 1 year and minimum subscription of ₹1 crore / investor would also be excluded from this definition.

In addition, the RBI (Non-banking Financial Company — Scale Based Regulation) Directions, 2023 contain certain directions. For instance, NBFCs-Middle Layer can augment their capital funds of issuing perpetual debt instruments. Such debt would be eligible for inclusion as Tier 1 Capital to the extent of 15 per cent of total Tier 1 Capital.

DEBENTURES ARE ACTIONABLE

CLAIMS

The Transfer of Property Act, 1882 defines an actionable claim to mean a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. The Supreme Court in R.D. Goyal (supra) has held that debentures, having regard to the definition of ’actionable claim’ as defined in s. 3 of the Transfer of Property Act, would constitute actionable claims except where they are secured by mortgage of immovable property or hypothecation or pledge of immovable property.

Under s.130 of this Act, the transfer of an actionable claim can be only by the execution of a written instrument, and thereupon all the rights and remedies of the transfer or shall vest in the transferee. However, the Act also provides that these provisions would not apply to debentures which are by law or custom negotiable.

The Constitution Bench of the Supreme Court in Standard Chartered Bank vs. Andhra Bank, 2006 (6) SCC 94 has held as follows:

“A debenture is an actionable claim. However, Section 137 of the Transfer of Property Act exempts debentures inter alia from the provisions of Sections 130 to 136 of the TP Act. Thus, with respect to debentures, there is no prescribed mode of transfer of property under the TP Act.”

ARE DEBENTURES NEGOTIABLE INSTRUMENTS?

Is a debenture a type of a negotiable instrument? There is no express provision on this. However, an old decision of the Bombay High Court in the case of Mercantile Bank of India Limited vs. Capt. Vincent L. D’Silva, AIR 1928 Bom 436 held that debentures issued did not have the ordinary form of a negotiable instrument and were not negotiable instruments either under the Negotiable Instruments Act, 1881 or otherwise in the absence of evidence of custom or usage.

One of the types of debentures that can be issued is a bearer debenture, i.e., anyone who holds it can claim interest on due dates and repayment of principal on maturity. A register of holders of bearer debentures is not maintained by the issuer. While there is no express provision on this, considering the wordings of the Negotiable Instruments Act, of 1881 it could be construed that a bearer debenture would be covered within the definition of a bearer promissory note and hence, would become a negotiable instrument.

CONCLUSION

An issue of Debentures requires adherence to various myriad laws. When the tax and accounting issues are added, one gets an entire spectrum of provisions that should be kept in mind while raising funds by the use of debentures.

Allied Laws

29 Sri Bhaskar Debbarmaand Ors vs. State of Tripura and Ors

AIR 2024 (NOC) 640 (TRI)

22nd May, 2024

Electronic evidence — Certification-Condition Precedent — Mandatory Requirement. [S. 65B, Indian Evidence Act, 1872].

FACTS

A Petition was filed under Article 226 of the Constitution before the Hon’ble Tripura High Court challenging the actions of a Learned District Magistrate (D.M.) who conducted a raid at a marriage hall during the COVID-19 pandemic. The Petitioners were accused of violating strict lockdown protocols by holding a wedding beyond curfew hours. The Petitioner further claimed that the Learned D.M., accompanied by a team of over a hundred members, illegally raided the venue, abused his authority by mistreating guests, making unlawful arrests, and forcibly dispersing the gathering. The Petitioners further alleged that the entire incident was recorded on video, shared widely on social media, and is now presented as evidence before the Hon’ble Court in the form of a Compact Disk (CD). However, it was argued by the Respondents that the said CD was not certified as per the compulsory mandate of section 65B and section 65B(4) of the Indian Evidence Act, 1872 (Evidence Act).

HELD

The Hon’ble Court, relying on the decision of the Hon’ble Supreme Court in the case of Arjun Panditrao Kothkar vs. Kailash Kushanrao Gorantyaland Ors [(2020) 7 SCC 1], held that certification of electronic evidence under Section 65B(4) of the Evidence Act is a condition precedent and under no circumstances provisions of section 65B of the Evidence Act can be diluted. Therefore, the CD cannot be taken into evidence.

The Petition was, thus, dismissed.

30 Chitta Ranjan Meher and Ors. vs. Soudamini Meher

AIR 2024 Orissa 118

14th May, 2024

Registration — Part Performance of contract — Unregistered agreement to sale- Payment of stamp duty along with penalty — Cannot cure the defect of non-registration. [S. 53A, Transfer of Property Act, 1882; S. 35, Indian Stamps Act, 1899; S. 17(1-A), Registration Act, 1908].

FACTS

The Appellants (Original Plaintiff) had entered into two agreements to sell two properties to the Respondent (Original Defendant). The Respondent paid the agreed consideration, and possession of the properties was handed over. However, since the properties were subject to consolidation, and the proposed sale could lead to fragmentation, the Appellants submitted applications under Section 34 of the Orissa Consolidation of Holdings and Prevention of Fragmentation of Land Act, 1972, seeking permission from the consolidation authority. The agreements stipulated that the deeds of conveyance would be executed once this permission was obtained. Unfortunately, the permission could not be secured within the agreed time frame. Subsequently, the Appellants filed a suit seeking a declaration that the two agreements should be declared null, void, and inoperative. In response, the Respondent filed a counterclaim for specific performance of the contract. The agreements, being not properly stamped, were impounded by the Court, but the Respondent remedied this by paying the requisite stamp duty and penalty under section 35 of the Indian Stamps Act, 1899 (Stamps Act). The Learned Trial Court held that since the Respondent had paid the stamp duty and penalty, she was the rightful owner of the suit properties, leading to the dismissal of the Appellants’ application. This decision was subsequently upheld by the Learned District Court.

Aggrieved, a second appeal was preferred before the Hon’ble Orissa High Court (Cuttack Bench).

HELD

The Hon’ble Orissa High Court observed that the Appellants had handed over the possession of the suit property to the Respondent. Further, the respondent duly made the payment. Therefore, the counterclaim of the Respondent was in the nature of part performance (of the agreements to sell) as per the provisions of section 53A of the Transfer of Property Act, 1882 (TOPA) and not that of specific performance. The Hon’ble Court held that payment of stamp duty and penalty as per section 35 of the Stamps Act cannot cure the defect of non-registration as provided in Section 17(1-A) of the Registration Act, 1908 (Registration Act). Further, there is no provision by which it can be held that mere payment of stamp duty or penalty would validate the contract for the purpose of section 53A of the TOPA, thereby overcoming the bar of section 17(1-A) of the Registration Act. The Hon’ble Court, therefore, held that the counterclaim of part performance could not be entertained, and the appeal of the Original Plaintiff seeking for nullity of the agreement to sell was confirmed.

The appeal was, thus, allowed.

31 Shabna Abdullah vs. Union of India and Ors.

Criminal Appeal No. 3082 of 2024 Supreme Court

20th August, 2024

Judicial discipline — Earlier decision of co-ordinate Bench — Subsequent co-ordinate Bench cannot come to an alternate finding- Ought to have referred to larger Bench. [A. 22(5), Constitution of India; S. 3, Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974].

FACTS

Mr. Abdul Rao (detenue and brother-in-law of the Petitioner) was arrested along with other co-accused under section 3 of the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 for allegedly sending contraband gold concealed in compressors of refrigerators along with unaccompanied baggage. The defence and the other co-accused were served with detention orders and grounds of detention. However, they were not supplied with material information, such as audio recordings of the voice messages pertaining to the WhatsApp conversations relied upon by the Detaining Authority for making such arrests. Therefore, a Writ Petition was filed before the Hon’ble Kerala High Court by the other co-accused, challenging the non-supply of critical information, which led to the arrests of the co-accused. The Hon’ble Kerala High Court (Division Bench) held that the non-supply of information vitally affected the rights of the accused under Article 22(5) of the Constitution, and thus the said detention was bad in law. Similarly, the sister-in-law of the detenue (i.e., Petitioner) had also filed a Writ Petition before the Hon’ble Kerala High Court. However, the Hon’ble Kerala High Court (Division Bench) dismissed the said Petition.

Aggrieved, an appeal was preferred before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that when the same grounds for detention and the same material were relied upon by the detaining authority, which the Hon’ble Kerala High Court (Division Bench) had rejected, another Division Bench of the same Court should not have disregarded the conclusion and come to an alternate finding. Further, the Hon’ble Supreme Court also noted that the subsequent Division Bench ought to have referred the matter to the larger Bench if they were of the view that the earlier decision was not correct in law. Therefore, the appeal was allowed, and the detention was revoked.

32 The President vs. The State Information Commissioner

AIR 2024 Madras 239

6th June, 2024

Right to Information — Co-operative Society — Does not fall within the ambit of public Authority [S.2(h), Right to Information Act, 2005].

FACTS

Respondent No. 4, Mr. K. Jeeva, is a member of Petitioner’s Co-operative Society. Mr. Jeeva had filed a Right to Information (RTI) application before Respondent No. 3 (i.e., Deputy Registrar of Co-operative Society seeking information regarding loans extended by Petitioner-Co-operative Society to farmers between 2015 and 2021. Respondent No. 3 forwarded the application to the Petitioner-Co-operative Society and requested it to furnish the details of the same, to the extent possible, to Mr. Jeeva. Aggrieved by such a shocking request, Mr. Jeeva filed an appeal before the Joint Registrar of Co-operative Society (Respondent No. 2), requesting it to submit the relevant information regarding the Petitioner-Co-operative Society. Respondent No. 2, however, forwarded the application to Respondent No. 3 since Respondent No. 3 was the competent authority to provide the necessary information. Respondent No. 3 once again sent the application to the Petitioner-Co-operative Society with the same request. Aggrieved by the action of Respondent No. 2 and Respondent No. 3, Mr. Jeeva filed a second appeal before the State Information Commissioner (Respondent No. 1). The State Information Commissioner directed the Petitioner- Society to provide all the information sought by Mr. Jeeva.

Aggrieved by the order, a Petition was filed before the Hon’ble Madras High Court under Article 226 of the Constitution.

HELD

The Hon’ble Madras Court observed that the Petitioner-Society was registered as a society under the Tamil Nadu Co-operative Societies Act, 1983, and was an autonomous body. Further, as per section 2(h) of the Right to Information Act, 2005, a society does not fall within the definition of public authority. Therefore, relying on the decision of the Hon’ble Supreme Court in the case of Thalappalam Service Cooperative Bank Ltd. and Others vs. The State of Kerala and Others [2013 (7) MLJ 407 (SC)], the Hon’ble Court held that Co-operative Societies do fall under the ambit of the RTI Act.

Thus, the Petition was allowed, and the order of the State Information Commissioner was set aside.

33 C/M Arya KanyaPathshala Samiti and Ors. vs. State of U.P. and Ors.

AIR 2024 Allahabad 238

25th April, 2024

Society Registration — Election for Committee Members — Election result placed before Registrar for recognition- Election invalidated by Registrar — No jurisdiction to invalidate elections — Ought to have referred to prescribed authority. [S. 25(2), Societies Registration Act, 1860].

FACTS

The Petitioner is a society registered under the Societies Registration Act 1860 (Act). Following a resolution passed on 30th October, 2021, the Society held elections to appoint members to the committee of management. The results of these elections were then submitted to the Assistant Registrar for official recognition. However, the Registrar declared the results invalid under section 25(2) of the Act, following a complaint from the Society’s President, who claimed that the resolution had not been signed by her.

Aggrieved by the Order, a Petition was filed before the Hon’ble Allahabad High Court under Article 226 of the Constitution.

HELD

The Hon’ble Allahabad High Court noted that the Registrar failed to provide the Petitioner an opportunity to present their case before declaring the elections invalid. Further, the decision was made solely on the basis of the President’s complaint without gathering any supporting facts. The Court also observed that, under section 25(2) of the Act, the Registrar does not have the authority to cancel or invalidate an election. Instead, the matter should have been referred to the prescribed authority in accordance with section 25(2). Thus, the Hon’ble Court set aside the Registrar’s order.

The Petition was allowed.

Part A | Company Law

8 In the Matter of:

M/S Lions Co-Ordination of Committee of India Association

Registrar of Companies, Chennai

Adjudication Order No. ROC/CHN/ADJ/LIONS CO/S.134(3)(b)24

Date of Order: 25th June, 2024

Adjudication Order on Company and its Directors for Non-disclosure of details of the Number of Board Meetings conducted and the Dates of Board Meetings held during the financial years 2018–19 and 2019–20. This amounts to violation of the provisions of Section 134(3) (b) with Secretarial Standard-4 of the Companies Act, 2013, and hence, penalty was imposed under Section 134(8) of the Companies Act, 2013.

FACTS

An inquiry was conducted in the matter of M/s LCCIA by officer authorised by Central Government (CG), wherein it was observed that:

M/s LCCIA had not disclosed number of Board meetings conducted and dates of Board meetings in its Director’s Report for the Financial Year (FY) 2018–19.

Further, it was observed that in the Director’s Report for the FY 2019–20, the Company had disclosed that the maximum interval between any two meetings was well within the maximum period of 120 days. However, as per provisions of Section 134(3)(b) of the Companies Act, 2013 (CA 2013), “Number of Board Meetings conducted” should be disclosed and as per Secretarial Standard-4, the company should disclose “Dates of Board Meetings” conducted by the Company during the year.

Thereafter, the officer submitted his Inspection Report to the Regional Director (RD) of Chennai, and the office of RD had directed to initiate necessary action against the defaulters.

Thereafter, the Adjudicating Authority / Officer issued a Show Cause Notice (SCN) on 8th September, 2023 to M/s LCCIA and its directors. Mr Shri VPN was the only Director of M/s LCCIA who had filed a suo-moto Adjudication application in form GNL-1 dated 25th November, 2023. Therefore, on the basis of such application received from Mr Shri VPN, the AO imposed penalty on him for violation of Section 134(3)(b) of CA 2013.

Since no reply / information was received from M/s LCCIA and its other directors, the AO decided to fix a final hearing on 8th April, 2024 to complete the adjudication proceedings and issue notice to M/s LCCIA and all its Directors except Mr Shri VPN.

Pursuant to the notice, Mr PPK, Company Secretary appeared on behalf of the directors Mr VKL, Mr JPS, Mr NJKM and Mr RS before Adjudicating Authority and submitted that violation may be adjudicated.

RELEVANT PROVISIONS OF CA 2013:

134. Financial statement, Board’s Report, etc.

(3) There shall be attached to statement laid before a company in general meeting, a report by its Board of Directors, which shall include-

(a) the web address, if any, where annual return referred to in sub-section (3) Section 92 has been placed

(b) number of meetings of the Board;

(8) If a company is in default in complying with the provisions of this section, the Company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees

Part I- SS-4: Secretarial Standard on the Report of Board of Directors: Board Meetings:

The number and dates of meetings of the Board held during the year shall be disclosed in the Report.

ORDER

After considering the facts and circumstances of the case, the AO concluded that M/s LCCIA and its directors had violated Section 134(3)(b) of CA 2013 and were liable for penalty as prescribed under Section 134(8) of CA 2013 for the FYs 2018–19 and 2019–20.

AO, accordingly, imposed penalty on the Company and its Officers in default aggregating to ₹ 24 lakhs. The said amount of penalty was to be paid through online mode by using the website www.mca.gov.in (Misc. head) within 90 days of receipt of this order, and intimate with proof of penalty paid.

Part A : Company Law

In the Matter of M/s Bluemax Capital Solution Private Limited

Registrar of Companies, Chennai

Adjudication Order— ROC/CHN/BLUEMAX/ ADJ/S.134/2024

Date of Order: 30th April, 2024

Adjudication Order on Company and its director for non-disclosure of related party transaction which amounts to violation of the provisions of Section 134(3) (i) of the Companies Act, 2013, and penalty was imposed as per Section 134(8) of the Companies Act, 2013.

FACTS

Based on the Inspection of books and accounts of M/s BCSPL carried out under Section 206(4) of the Companies Act, 2013 by Officer authorized by the Central Government it was observed that —
The particulars of contracts or arrangements with related parties referred to in Section 188(1) had to be mentioned in form AOC-2, but in the Directors Report for the Financial years ended 2015–16,2016–17,2017–18 it was mentioned that ‘The Company did not make any related party transaction during the financial year’. So Form AOC-2 was not applicable to the “Company” and consequently no particulars in Form AOC-2 were furnished.

However, in the Balance Sheet Note 4- “Other Long-Term Liabilities” for the Financial Year 2015–16, 2016–17, and 2017–18 ‘Dues to Directors and others amounting to ₹19,20,291, ₹32,23,697.46 and ₹32,63,015.30
respectively are mentioned, which showed that M/s BCSPL had transactions falling under section 188(1) of the Companies Act, 2013.

Thus, on the submission of the inspection report, the Regional Director (RD) of Chennai directed to office of the Registrar of Companies, Chennai (“ROC”) to initiate the necessary action against the defaulters. Thereafter a Show Cause Notice (SCN) was issued dated 13th June, 2023.

Shri. RA requested for some time through a reply dated 29th June, 2023, however after that no reply was received from M/s BCSPL and its directors and the adjudication hearing notice was fixed on 23rd January, 2024.

Pursuant to the notice Shri I.B.H, Company Secretary appeared on behalf of M/s BCSPL and its directors before the Adjudicating Officer (AO) and made a submission that violation may be adjudicated.

PROVISIONS

Section 134 of the Companies Act, 2013 — Financial statement, Board’s Report, etc.

(3) There shall be attached to statements laid before a company in general meeting, a Report by its Board of Directors, which shall include —

(h) particulars of contracts or arrangements with related parties referred to in sub-section

(1) of section 188 in the prescribed form;

Rule 8(2) of the Companies (Account) Rules 2014 provides:

(2) The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form AOC-2.

Section 188. Related party transactions:

(l) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to —

(a) sale, purchase, or supply of any goods or materials;

(b) selling or otherwise disposing of or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company

Section 134 (8) provides —

If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees, and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

ORDER

After considering the facts and circumstances of the case the AO concluded that M/s BCSPL and its directors had violated Section 134(3)(h) of the Companies Act, 2013 and thereby were liable for penalty as prescribed under Section 134(8) of the Act for the FYs 2015–16, 2016–17 and 2017–18.

The details of the penalty imposed on the company and Officers in default are given in the table below:

Name of Company / person on whom penalty imposed The maximum limit for a penalty (₹) in each year Penalty

Imposed (₹)

 

FY 2015–16

 Penalty

Imposed (₹)

 

FY 2016–17

 Penalty

Imposed (₹)

 

FY 2017–18

 Total Penalty

Imposed (₹)
M/s BCSPL 3,00,000 3,00,000 3,00,000 3,00,000 9,00,000
Shri. RA 50,000 50,000 50,000 50,000 1,50,000
Shri. B 50,000 50,000 50,000 50,000 1,50,000
Shri. SG 50,000 50,000 50,000 50,000 1,50,000
TOTAL 4,50,000 4,50,000 4,50,000 13,50,000

Further, the said amount of penalty was to be paid within 90 days of receipt of the order, and compliance was required to be intimated to AO office with proof of penalty paid.

NBFCs: Scale-Based Regime

INTRODUCTION

Non-Banking Financial Companies or NBFCs are often called shadow banks since they perform quasi- banking activities. Considering their importance from a financial system perspective, the RBI strictly regulates NBFCs. However, a one-size fits all NBFCs approach was often considered very oppressive to the smaller NBFCs. Recognising this anomaly, the RBI in 2023 issued the Reserve Bank of India (NBFC Scale-Based Regulation) Directions, 2023 (“the Directions”). What the Directions seek to do is to classify NBFCs into four layers: Base, Middle, Upper and Top. As the layer increases, the quantum of compliance and regulations increase. Hence, a Top Layer NBFC would have maximum regulations whereas a Base Layer NBFC would have least compliances and regulations. Let us examine some facets of this scale-based classification.

DETERMINATION OF NBFC STATUS

Any company which carries on the business of a non- banking financial institution as its principal business as defined in section 45-I(c) read with section 45-I(f) of the RBI Act, 1934 shall be treated as an NBFC and requires registration under section 45-IA of the RBI Act. However, certain companies have been exempted by the RBI from registering as NBFCs, even though they otherwise satisfy all the tests. These include, a merchant banking company, a stock broker, a venture capital company, an insurance broker, a Core Investment Company not accepting public funds, etc.

PRINCIPAL BUSINESS TEST

The term “principal business” has not been defined in the RBI Act, 1934. Hence, in order to identify a company as an NBFC, the Principal Business Criteria as set forth in Press Release dated 8th April, 1999 shall be referred, which considers both the assets and the income pattern as evidenced from the last audited balance sheet of the company. These criteria areas under:

A company will be treated as an NBFC, if its Financial Assets (e.g., investments, stock of shares, loans and advances, etc.) appearing in the Balance Sheet are more than 50 per cent of its total assets (netted off by intangible assets) and Income (e.g., dividend, interest, capital gains from financial assets, etc.) from financial assets appearing in the Profit and Loss Statement is more than 50 per cent of its gross income. Both these tests are required to be satisfied as the determinant factor for determining principal business of a company.

For this purpose, investments in bank fixed deposits are not treated as financial assets and receipt of interest income on fixed deposits with banks is not treated as income from financial assets as these are not covered under the activities mentioned in the definition of “financial institution” in section 45-I(c) of the RBI Act, 1934.

AUDITOR’S REPORT

Under the Master Direction – Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2016, the auditor’s report on the accounts of an NBFC shall include a statement on:

(a) Whether it is conducting Non-Banking Financial Activity without a valid Certificate of Registration (CoR) granted by the RBI?

(b) If it has a CoR, then whether that NBFC is entitled to continue to hold such CoR in terms of its Principal Business Criteria?

(c) Whether the NBFC is meeting the required net owned fund requirement?

Every NBFC must submit a certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution which requires it to hold a CoR under section 45-IA of the RBI Act and that it is eligible to hold it. A certificate from the Statutory Auditor in this regard with reference to the position of the company as at end of the financial year ended 31st March may be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, within one month from the date of finalisation of the balance sheet and in any case not later than 30th December of that year.

Where, in the auditor’s report, the statement regarding any of the above items is unfavourable or qualified, the report shall also state the reasons for such unfavourable or qualified statement. Where the auditor is unable to express any opinion on any of the items, his report shall indicate such facts together with reasons thereof. In case of an adverse / qualified report, it shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned Regional Office of RBI.

In addition to the above, the provisions of the Companies (Auditor’s Report) Order, 2020 are also relevant in this aspect. One of the questions which the Auditor is required to address is ‘Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained?’ Connected to this is the second question of ‘Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid CoR from the Reserve Bank of India as per the Reserve Bank of India Act, 1934?’

The Guidance Note on CARO 2020 issued by the ICAI throws some light on the audit of NBFCs. It states that the auditor should examine the transactions of the company with relation to the activities covered under the RBI Act 1934 and directions related to NBFCs. The auditor should examine the financial statements with reference to the business of a non-banking financial institution, as defined in the RBI Act, 1934.

Thus, a great deal of onus has been cast on the auditor in terms of determining whether or not a company is an NBFC. Accordingly, it is essential that knowledge of the RBI Act and NBFC Directions is a very crucial aspect for any auditor. If an auditor is ignorant about these provisions and ends up making an error in his reporting, he could face penal consequences.

CLASSIFICATION MATRIX

The regulatory structure for NBFCs comprises four layers based on their size, activity and perceived riskiness.

(a) NBFCs in the lowest layer are known as NBFCs-Base Layer (NBFCs-BL). The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1,000 crore and (b) NBFCs undertaking the activities of NBFC- Peer to Peer Lending Platform (NBFC-P2P), NBFC-Account Aggregator (NBFC-AA), Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface. The NBFCs which were earlier called NBFC-ND (i.e., non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL. A non-systemically important NBFC was one which had an asset size of less than ₹500 crore. Correspondingly, systemically important NBFCs were those which had an asset size of ₹500 crore or more.

For the purpose of NBFCs not availing public funds, “Public Funds” include funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures, etc. However, it excludes funds raised by Compulsorily Convertible Preference Shares / Debentures convertible into equity shares within a period not exceeding five years from the date of issue.

(b) NBFCs in the middle layer are known as NBFCs- Middle Layer (NBFCs-ML). The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFCs-D), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1,000 crore and above and (c) NBFCs undertaking the following activities (i) Standalone Primary Dealer (SPD),
(ii) Infrastructure Debt Fund-NBFC (IDF-NBFC), (iii) Core Investment Company (CIC), (iv) Housing Finance Company (HFC) and (v) NBFC-Infrastructure Finance Company (NBFC-IFC). Hence, all CICs irrespective of size would always be NBFCs-ML. All NBFCs which were earlier referred to as NBFC-D (i.e., deposit taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) shall now mean NBFC-ML or NBFC-UL, depending upon their size.

(c) NBFCs in the upper layer are known as NBFCs Upper Layer (NBFCs-UL). The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as provided by the RBI. The top 10 eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor. Currently, the RBI has identified 15 NBFCs as NBFCs-UL. Once an NBFC is categorised as NBFC-UL, it shall be subject to enhanced regulatory requirement, at least for a period of five years from its classification in this layer, even in case it does not meet the parametric criteria in the subsequent year/s. In other words, it will be eligible to move out of the enhanced regulatory framework only if it does not meet the criteria for classification for five consecutive years. Within three years of identification as NBFC-UL, such NBFCs must be mandatorily listed.

Once an NBFC is identified for inclusion as NBFC-UL, the NBFC shall be advised about its classification by the RBI, and it will be placed under regulation applicable to the Upper Layer. For this purpose, the following timelines shall be adhered to:

  • Within three months of being advised by the RBI regarding its inclusion in the NBFC-UL, the NBFC shall put in place a Board-approved policy for adoption of the enhanced regulatory framework and chart out an implementation plan for adhering to the new set of regulations.
  • The Board of Directors shall ensure that the stipulations prescribed for the NBFC-UL are adhered to within a maximum time period of 24 months from the date of advice regarding classification as an NBFC-UL from the RBI.
  • The roadmap as approved by the Board towards implementation of the enhanced regulatory requirement shall be submitted to the RBI and shall be subject to supervisory review.

(d) The Top Layer is ideally expected to be empty and is known as NBFCs-Top Layer (NBFCs-TL). This layer can get populated if the RBI is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer. As of now, none of the NBFCs-UL have been upgraded to NBFCs-TL.

CLASSIFICATION OF MULTIPLE NBFCS IN ONE GROUP

If a Group has more than one NBFC, then classification is not on a standalone basis. The total assets of all the NBFCs in the Group shall be consolidated to determine the threshold for their classification in the Middle Layer. If the consolidated asset size of the NBFCs in the Group is r1,000 crore and above, then each NBFC-ICC, NBFC- MFI, NBFC-Factor and NBFC engaged in micro finance business, lying in the group shall be classified as an NBFC in the Middle Layer. However, this consolidation provision is not applicable for determining NBFC-UL.

For this purpose, “Companies in the group” means an arrangement involving two or more entities related to each other through any of the following relationships: Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter–promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies, a related party (defined in terms of AS 18), common brand name and investment in equity shares of 20 per cent and above.

The Statutory Auditors are required to certify the asset size (as on 31st March) of all NBFCs in the Group every year. The certificate shall be furnished to RBI’s Department of Supervision under whose jurisdiction NBFCs are registered.

NBFC-ML STATUS

Once an NBFC reaches an asset size of ₹1,000 crore or above, it shall be treated as an NBFC-ML, despite not having such assets as on the date of last balance sheet. All such non-deposit taking NBFCs shall comply with the regulations / directions issued to NBFCs-ML from time to time, as and when they attain an asset size of ₹1,000 crore, irrespective of the date on which such size is attained. If the asset size of an NBFC falls below ₹1,000 crore in a given month, which may be due to temporary fluctuations and not due to actual downsizing, the NBFC shall continue to meet the reporting requirements and shall comply with the extant directions as applicable to NBFC-ML, till the submission of its next audited balance sheet to the RBI and a specific dispensation from the RBI in this regard.

Net Owned Fund Requirements

₹10 crore is the Net Owned Fund (NOF) requirement for an NBFC-ICC, NBFC-MFI and NBFC-Factor to commence or carry on the business of non-banking financial institution. The RBI has permitted NBFCs-BL to gradually ramp up their NOF:

Type of NBFC Starting NOF NOF needed by 31st March, 2025 NOF needed by 31st March, 2027
NBFC-ICC ₹2 crore ₹5 crore ₹10 crore
NBFC-MFI ₹5 crore ₹7 crore ₹10 crore
NBFC-Factor ₹5 crore ₹7 crore ₹10 crore

NBFCs failing to achieve the prescribed level within the stipulated period are not eligible to hold the Certificate of Registration (CoR) as NBFCs.

For NBFC-P2P, NBFC-AA and NBFC not availing public funds and not having any customer interface, the NOF requirement is ₹2 crore. For NBFC-IFC and IDF-NBFC, the NOF requirement is ₹300 crore.

The leverage ratio of NBFCs (except NBFC-MFIs, NBFCs-ML and above) shall not be more than 7 at any point of time. Leverage ratio means the total Outside Liabilities divided by Owned Fund.“Owned Fund” means aggregate of paid-up equity capital, compulsorily convertible preference shares, free reserves, share premium and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any.

AUDITOR’S APPOINTMENT

NBFCs can appoint Auditors for a continuous period of three years, subject to the firms satisfying the eligibility norms each year. The time gap between any non-audit works (services mentioned at section 144 of Companies Act, 2013, internal assignments, special assignments, etc.) by the Auditors for the Entities or any audit / nonaudit works for its group entities should be at least one year, before or after its appointment as Auditors. However, non-deposit taking NBFCs with asset size below ₹1,000 crore can avoid the above restrictions of rotating auditors after three years.

CONCLUSION

The scale-based regime is a welcome move by the RBI since it regulates NBFCs based on their size. The larger an NBFC, the stricter the regime. Probably, the time has come for other regulators and laws to also consider a scale-based regime. For instance, listed companies could be subject to listing obligations and disclosures based on their market capitalisation. Till such time as we have a horses for courses approach, this is a step in the right direction by the RBI!

Allied Laws

Shankar Vithobai Desai and Ors vs. Gauri Associates and Anr.

Comm. Arbitration Application (L) No. 21070 of 2023 (Bom HC)

16th July, 2024

24. Arbitration — Development Agreement between Society and Firm — Dispute — Individual members of the society cannot invoke Arbitration clause — [S. 11, Arbitration and Conciliation Act, 1996].

FACTS

A Development Agreement (DA) was executed between society and the Respondent (i.e., Gauri Associates). The Applicants (thirteen individual members) are among the forty members of the society. A dispute arose between the Applicants and the Respondent. Therefore, the Applicants, issued a letter / notice to the Society and to the Respondent invoking arbitration clause in the DA. Interestingly, the Society had not authorised / consented to the Applicants on whose behalf the said notice was issued.

An application was filed before the Hon’ble Bombay High Court by the thirteen individual members of the society, on behalf of the society for the appointment of an Arbitrator.

HELD

The Hon’ble Bombay High Court observed that the DA was executed between the Society and the Respondent and not between individual members of the Society and the Respondent. Further, the Hon’ble Court relied on the decision of the Hon’ble Bombay High Court in the case of Ketan Champaklal Divecha vs. DGS Township Pvt Ltd (2024 SCC OnLine Bombay 10), wherein, it was held that individual members of the society give up their desire and identity by submitting to the collective will of the housing society. Therefore, the Court held that individual members of the Society could not invoke the arbitration clause as they were not the signatories of the DA.

The Application was thus, dismissed.

Ram Briksha Singh and Ors vs. Ramashray Singh and Ors.
Civil Miscellaneous Jurisdiction 1824 of 2018 (Patna HC)
11th July, 2024

25. Evidence — Certified copy of sale deed — Public document — Relevance of sale deed — Maintainability of a certified copy of sale deeds as a public document — [S. 74, 75, 76 Indian Evidence Act, 1872; S. 57(5), Registration Act, 1908].

FACTS

The Respondent (Original Plaintiff) had instituted a suit for title against Petitioners (Original Defendants). It was the case of the Plaintiffs, that a mortgage deed was executed between the Plaintiff and Defendant. However, after the Plaintiff repaid the money, the Defendants refused to re-convey the property. Consequently, the Plaintiff filed a suit against the Defendant. During the pendency of the suit, the Plaintiff filed an application to admit a certified copy of the sale deed executed by the Plaintiff in favour of a third party, as evidence in the form of a public document. However, the Defendants objected by arguing that the said sale deed was irrelevant and could not be considered as a public document. The Learned Trial Court, after examining the facts, admitted the sale deed and marked it as an exhibit.

Aggrieved, a Petition was filed before the Hon’ble Patna High Court under Article 227 of the Constitution.

HELD

The Hon’ble Patna High Court, at the outset, observed that merely marking a document as an exhibit does not infer that the said document is admissible evidence. Further, the aggrieved party is not barred by objecting to its admissibility when the document is marked as exhibit. Further, relying on the decision of the Hon’ble

Supreme Court in the case of Appaiya vs. Andimuthu Thangapandi and Ors (Civil Appeal No. 14630 of 2015, S.L.P. (C) No. 10013 of 2015) and relying on sections 74 to 76 of Indian Evidence Act, 1872 read with section 57(5) of the Registration Act, 1908 the Hon’ble Court held that certified copy of a registered sale deed would fall under the category of public document and the same can be admitted into evidence. However, the Hon’ble Court cautioned that the certified copy would only prove the contents of the original document and not be proof of execution of the original document.

Thus, the Petition was dismissed.

Late Shivraj Reddy (Through his Legal Heir) and Anr. vs. S. Raghuraj Reddy and Ors.

AIR 2024 Supreme Court 2897

16th May, 2024

26. Partnership Firm — Partnership at will — Death of a Partner — Automatic termination of Partnership Firm [S. 42(c), Partnership Act, 1932; S. 3, Limitation Act, 1963].

FACTS

A suit was instituted in 1996 for the dissolution of the Partnership Firm and rendition of accounts by Respondent No. 1 (Original Plaintiff). The Respondent No. 1 along with Defendants No. 2 to 4 and one Mr. Late Balraj Reddy had constituted a Partnership Firm (i.e. Defendant No. 1, the firm) in 1978. The Learned Trial Court allowed the suit and passed a decree dated 26th October, 1998. Subsequently, an appeal was filed before the Hon’ble Andhra Pradesh High Court (Single Bench) by the Defendant No.1 (the Firm) and the Defendant No. 2 (Appellant). The Hon’ble Court observed that the one Mr. Balraj Reddy (partner of the firm) had expired in the year 1984. Therefore, as per section 42(c) of the Partnership Act, 1992 (Act), the said Partnership firm stood automatically dissolved. Thus, the original suit which was filed by Respondent No.1 in 1996 for rendition of accounts, was barred by limitation. Aggrieved by the Order, an appeal was filed before the Division Bench of the Hon’ble Andhra Pradesh High Court. The Division Court reversed the decision passed by the Hon’ble Single Bench on the ground that the issue of limitation was never raised during the proceedings before the Learned Trial Court.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the Partnership was at will. Further, it was not disputed that one partner, namely Mr. Balraj Reddy had expired in 1984. Therefore, relying on section 42(c) of the Act, the Court held that the Partnership Firm stood automatically dissolved and thus, the Original Suit (of 1996) was barred by limitation. Coming to the question of the limitation issue which was raised for the first time before the Hon’ble High Court, the Hon’ble Supreme Court held that even if the plea of limitation is not taken up as a defense, the Court is bound to dismiss the suit if it is barred by limitation. Furthermore, relying on the decision of the Hon’ble Supreme Court in the case of V.M. Salagaocar and Bros vs. Board of Trustees of Port of Mormugao and Anr[(2005) 4 SCC 613], the Hon’ble Court reiterated that it is the duty of the Courts not to proceed with the application if it is made beyond the period of limitation prescribed.

Thus, the Petition was allowed, and the decision of the Hon’ble Andhra Pradesh High Court (Single Bench) was restored.

Mool Chandra vs. UOI & Anr

Civil Appeal No. 8435-8436 of 2024 (SC) 5th August, 2024

27. Condonation of Delay — Delay of 425 days — Tribunal rejected the appeal for condonation of delay — High Court affirmed the order of Tribunal — On SLP Hon’ble Supreme Court condoned the delay — It is not the length of delay that would be required to be considered while examining the plea for condonation of delay rather the cause for the delay — Directed the Tribunal to decide on merits. [S. 21, Central Administrative Tribunal Act, 1985].

FACTS

The Appellant was appointed to Indian Statistical Services in 1982. He was suspended on 13th October, 1997, on account of desertion of his family for another woman. There was ongoing litigation between the Department and the assessee for reinstatement, promotion, and financial benefits. In one instance the Appellant was unaware that his counsel had withdrawn the application directing the Respondent to dispose of his review petition. It came to his notice much later and he immediately filed a Miscellaneous Application against the same. This was rejected by the Tribunal on account of the delay of 425 days. The High Court affirmed the order of the Tribunal.

On SLP to the Supreme Court.

HELD

No litigant stands to benefit in approaching the courts belatedly. It is not the length of delay that would be required to be considered while examining the plea for condonation of delay, it is the cause for the delay which has been propounded that will have to be examined. If the cause for delay falls within the four corners of “sufficient cause”, irrespective of the length of delay same deserves to be condoned. However, if the cause shown is insufficient, irrespective of the period of delay, the same would not be condoned.

Ramkripal Meena vs. Directorate of Enforcement SLP(Crl) No. 3205 of 2024 Supreme Court 30th June, 2024

28. Money Laundering — Bail granted in the predicated offense — But arrest by Enforcement Directorate under PMLA — Section 45 of PMLA is relaxed — Conditions imposed. [S. 45, Prevention of Money Laundering Act, 2002; S. 120-B, 302, 365, 406, 420, Indian Penal Code, 1860].

FACTS

The Petitioner was accused of leakage of question paper and use of unfair means in the Rajasthan Eligibility Examination for Teachers (REET) exam 2021. The Petitioner was working as a manager of the school and had access to the strong room from where the Petitioner had allegedly stolen one copy of the question paper and leaked it. The Hon’ble Supreme Court, however, had granted bail to the Petitioner vide order dated 18th January, 2023 subject to various conditions on the predicated offense mentioned in the First Information Report (FIR). Subsequently, the Respondent arrested the Petitioner again on 21st June, 2023, based on First Information Report No. 298/2021 (Second FIR). The Second FIR was registered under Sections 302, 365, and 120B of the IPC and Sections 3(2)(v) of the Scheduled Castes and Schedule Tribes (Prevention of Atrocities) Act, 1989 (SC/ST Act). However, the Petitioner was not charge-sheeted under the SC/ST Act by the Respondent. Thus, the only Scheduled offense against the Petitioner under the Prevention of Money Laundering Act (PMLA) was with respect to Section 420 of the IPC.

HELD

The Hon’ble Supreme Court noted that the Petitioner was in custody for over a year, and the only offense against him was under section 420 of the IPC. Further ₹1.06 crore out of the sum of ₹1.2 crore were recovered. Further, on a specific query asked by the Court, the Counsel of the Respondent informed the Hon’ble Court that the case was pending at the stage of framing of charges, and twenty- four witnesses are yet to be examined, which would take a considerable amount of time. Thus, taking into consideration the time spent by the Petitioner in custody, along with the progress of the case, apart from the fact that the Petitioner was already on bail in the predicate offense, the Hon’ble Supreme Court held that rigors of section 45 of PMLA have to be relaxed. Further, directed the passport to be submitted before the Special Court with a list of assets and bank accounts that can be seized by the Enforcement Directorate.

Thus, the Petitioner was granted bail.

Part A | Company Law

6 In the Matter of M/s Nextgen Animation Media Limited

Registrar of Companies, Mumbai

Adjudication Order No. ROC(M)/NEXTGENMEDIALTD/ADJ-ORDER/92/101

Date of Order: 3rd June, 2024

Non-filing of Annual Return within a period of 60 days from the due date of Annual General Meeting amounts to violation of Section 92 of the Companies Act, 2013.

FACTS

The Registrar of Companies, Mumbai, Maharashtra (ROC) observed from MCA 21 database that NAML had defaulted in filing of Annual Return for the financial year ended on 31st March, 2019. Hence M/s NAML had not complied with the provisions of Section 92 of the Companies Act, 2013 by not filing Annual Return. A default period of 326 days was noticed.

Thereafter, a show-cause notice was issued to NAML and its officer in default on 21st October, 2020 under section 454 of the Companies Act, 2013, for adjudication of offence under Section 92(5) of the Companies Act, 2013.

However, no reply was received from NAML and its officers in default.

PROVISIONS

Section 92(4): Every company shall file with the Registrar a copy of the annual return, within sixty days from the date on which the annual general meeting is held or where no annual general meeting is held in any year within sixty days from the date on which the annual general meeting should have been held together with the statement specifying the reasons for not holding the annual general meeting, with such fees or additional fees as may be prescribed.

Section 92(5): If any company fails to file its annual return under sub-section (4), before the expiry of the period specified [therein], such company and its every officer who is in default shall be liable to a penalty of [ten thousand rupees] and in case of continuing failure, with further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of [two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default].

HELD

Adjudication Officer (AO) has considered the facts and circumstances of the case that NAML and its officer in default had failed to reply or neglect or refuse to appear as required. Hence, AO imposed the penalty on NAML and its officer in default. AO imposed a penalty of ₹1,65,200 (one lakh, sixty-five thousand and two hundred only) on NAML and its officer in default (who is Mr. KKS being Managing Director of the NAML and considered as officer in default).

The AO further ordered to pay the penalty amount through MCA portal and proof of payment was asked to be produced for verification within 90 days of receipt of the order.

Burden of Proof in Case of Cheque Bouncing Cases

INTRODUCTION

Section 138 of the Negotiable Instruments Act, 1881 (“the Act”) is a very well-known provision even amongst laymen. It imposes a punishment in the form of an imprisonment in case a cheque, which has been issued, bounces. Whilst this is a very simplistic explanation of this very important provision, a very vital ingredient is what is the burden of proof in case of a cheque bouncing case and who is it on? The Supreme Court in its verdict in the case of Rajesh Jain vs. Ajay Singh, 2023 AIR(SC) 5018 has laid down clear-cut guidelines on the same. In the case on hand, the accused had borrowed funds from the complainant and was not returning the same. Finally, he issued a post-dated cheque which bounced on presentation. Accordingly, the complainant filed a case under Section 138 of the Act.

The Trial Court held that the only question which remained for determination was whether a legally valid and enforceable debt existed qua the complainant and the cheque in question was issued in discharge of the said liability / debt? The Trial Court answered the issue in the negative. It held that the complainant had failed to prove his case beyond reasonable doubt. It has been observed that the defence led by the accused has created a doubt regarding the truthfulness of the complainant’s case. Accordingly, the Trial Court dismissed the case against the accused.

The Punjab & Haryana High Court also found no merit in the appeal and upheld the order of acquittal passed by the Trial Court. The High Court reasoned that the accused had discharged his onus in rebutting the statutory presumption raised under Section 139 of the Act. The onus, then, once again had shifted to the complainant to prove that the cheque had been issued in respect of a legally enforceable debt, and the complainant had failed in discharging the onus to prove that cheque was issued in respect of a legally enforceable debt.

The matter, thus, travelled up to the Supreme Court.

The Apex Court held that the limited question to be considered was whether the accused could be said to have discharged his ‘evidential burden’, for the lower courts to have concluded that the presumption of law supplied by the Act had been rebutted?

ESSENCE OF SECTION 138

At the outset, one must understand the essence of Section 138 of the Act. In Gimpex Private Limited vs. Manoj Goel (2022) 11 SCC 705, the Supreme Court had explained the ingredients forming the basis of the offence under Section 138 of the Act as follows:

(a) The drawing of a cheque by person on an account maintained by him with the banker for the payment of any amount of money to another from that account;

(b) The cheque being drawn for the discharge in whole or in part of any debt or other liability;

(c) Presentation of the cheque to the bank arranged to be paid from that account;

(d) The return of the cheque by the drawee bank as unpaid either because the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount;

(e) A notice by the payee or the holder in due course making a demand for the payment of the amount to the drawer of the cheque within 30 days of receipt of information from the bank in regard to the return of the cheque; and

(f) The drawer of the cheque failing to make payment of the amount of money to the payee or the holder in due course within 15 days.

In K. Bhaskaran vs. Sankaran Vaidhyan Balan, (1999) 7 SCC 510 the Apex Court had summarised the constituent elements of the offence in fairly similar terms by holding:
“14. The offence Under Section 138 of the Act can be completed only with the concatenation of a number of acts. The following are the acts which are components of the said offence:

(1) drawing of the cheque,

(2) presentation of the cheque to the bank,

(3) returning the cheque unpaid by the drawee bank,

(4) giving notice in writing to the drawer of the cheque demanding payment of the cheque amount,

(5) failure of the drawer to make payment within 15 days of the receipt of the notice.”

BURDEN OF PROOF

The Court laid down principles of burden of proof and held that there were two senses in which the phrase “burden of proof” was used in the Indian Evidence Act, 1872:

(a) One was the burden of proof arising as a matter of pleading — this was called the “legal burden” and it never shifted during a case. The legal burden was the burden of proof which remained constant throughout a trial. It was the burden of establishing the facts and contentions which supported a party’s case. If, at the conclusion of the trial, a party failed to establish these to the appropriate standards, he would lose to stand. The incidence of the burden was clear from the pleadings and usually, it was incumbent on the plaintiff or complainant to prove what he pleaded or contended.

(b) The other was the one which deals with the question as to who has first to prove a particular fact — this was called the “evidential burden” and it shifted from one side to the other, Kundanlal vs. Custodian Evacuee Property (AIR 1961 SC 1316). The evidential burden could shift from one party to another as the trial progressed according to the balance of evidence given at any particular stage; the burden rested upon the party who would fail if no evidence at all, or no further evidence, as the case may be was adduced by either side.

PRESUMPTIONS

The Court next explained the meaning of presumptions — it literally meant “taking as true without examination or proof”. Presumptions were of two kinds: presumptions of fact and of law.

Presumptions of fact were inferences logically drawn from one fact as to the existence of other facts. Presumptions of fact were rebuttable by evidence to the contrary.

Presumptions of law may be rebuttable or irrebuttable (conclusive presumptions), so that no evidence to the contrary may be given. A rebuttable presumption of law was a legal rule to be applied by the Court in the absence of conflicting evidence. Rebuttable presumptions could be further bifurcated into discretionary presumptions (“may presume”) and compulsive or compulsory presumptions (“shall presume”).

EVIDENCE UNDER SECTION 139

The Court further held that Section 139 of the Act was an example of a reverse onus clause and required the accused to prove the non-existence of the presumed fact, i.e., that cheque was not issued in discharge of a debt / liability.

It held that the Act provided for two presumptions: Section 118 and Section 139:

(a) Section 118 of the Act inter alia directed that it shall be presumed, until the contrary was proved, that every negotiable instrument was made or drawn for consideration.

(b) Section 139 of the Act stipulated that “unless the contrary is proved, it shall be presumed, that the holder of the cheque received the cheque, for the discharge of, whole or part of any debt or liability”. The Court held that the “presumed fact” directly related to one of the crucial ingredients necessary to sustain a conviction under Section 138. As per the Court, Section 139 of the Act, which took the form of a “shall presume” clause was illustrative of a presumption of law. Because Section 139 required that the Court “shall presume” the fact stated therein, it was obligatory on the Court to raise this presumption in every case where the factual basis for the raising of the presumption had been established. However, this did not preclude the person against whom the presumption is drawn from rebutting it and proving the contrary as was clear from the use of the phrase “unless the contrary is proved”.

The Court also held that it will necessarily presume that the cheque had been issued towards discharge of a legally enforceable debt / liability in two circumstances.

Firstly, when the drawer of the cheque admitted issuance / execution of the cheque and secondly, in the event where the complainant proved that cheque was issued / executed in his favour by the drawer. The circumstances set out above form the fact(s) which bring about the activation of the presumptive clause. [Bharat Barrel vs. Amin Chand] [(1999) 3 SCC 35].

In Bir Singh vs. Mukesh Kumar, (2019) 4 SCC 197, the Supreme Court held that that presumption took effect even in a situation where the accused contended that “a blank cheque leaf was voluntarily signed and handed over by him to the complainant”. Therefore, the Court concluded that mere admission of the drawer’s signature, without admitting the execution of the entire contents in the cheque, was now sufficient to trigger the presumption. It further held that as soon as the complainant discharged the burden to prove that a cheque was issued by the accused for discharge of debt, the presumptive device under Section 139 of the Act helped shift the burden on the accused. The effect of the presumption, in that sense, was to transfer the evidential burden on the accused of proving that the cheque was not received by the bank towards the discharge of any liability. Until this evidential burden was discharged by the accused, the presumed fact will have to be taken to be true, without expecting the complainant to do anything further.

REBUTTAL

The Apex Court held that in order to rebut the presumption and prove to the contrary, it was open to the accused to raise a probable defence wherein the existence of a legally enforceable debt or liability could be contested. The words “until the contrary is proved” occurring in Section 139 did not mean that accused must necessarily prove the negative that the instrument was not issued in discharge of any debt / liability, but the accused had the option to ask the Court to consider the non-existence of debt / liability so probable that a prudent man ought, under the circumstances of the case, to act upon the supposition that debt / liability did not exist, Basalingappa vs. Mudibasappa (AIR 2019 SC 1983).

Thus, as per the Court, the accused had two options:

(a) Proving that the debt / liability did not exist. This was to lead defence evidence and conclusively establish with certainty that the cheque was not issued in discharge of a debt / liability.

(b) Prove the non-existence of debt / liability by a preponderance of probabilities by referring to the particular circumstances of the case. The preponderance of probability in favour of the accused’s case could be even 51:49 and arising out of the entire circumstances of the case, which included the complainant’s version in the original complaint, the case in the legal / demand notice, complainant’s case at the trial, as also the plea of the accused in the reply notice, his statement at the trial as to the circumstances under which the promissory note / cheque was executed. All of them could raise a preponderance of probabilities justifying a finding that there was “no debt / liability”.

It also held that the nature of evidence required to shift the evidential burden did not have to necessarily be direct evidence, i.e., oral or documentary evidence or admissions made by the opposite party; it could comprise circumstantial evidence or presumption of law or fact.

The accused may adduce direct evidence to prove that the instrument was not issued in discharge of a debt / liability and, if he did so, then the burden again shifted to the complainant. At the same time, the accused may also rely upon circumstantial evidence and, if the circumstances so relied upon were compelling enough, then the burden again shifted to the complainant. It was open for him to also rely upon presumptions of fact. The burden of proof may shift by presumptions of law or fact.

It further alluded that once the accused gave evidence to the satisfaction of the Court that on a preponderance of probabilities there existed no debt / liability in the manner pleaded in the complaint, the burden shifted back to the complainant and the presumption “disappeared” and does not haunt the accused any longer. The onus having now shifted to the complainant, he was now obliged to prove the existence of a debt / liability as a matter of fact and his failure to prove would result in dismissal of his complaint case. Thereafter, the presumption under Section 139 did not again come to the complainant’s rescue. Once both parties have adduced evidence, the Court had to consider the same and the burden of proof lost all its importance, Basalingappa vs. Mudibasappa, AIR 2019 SC 1983; Rangappa vs. Sri Mohan (2010) 11 SCC 441.

FINDINGS OF THE COURT

In the backdrop of the above legal analysis, the Supreme Court examined the conduct of the accused to ascertain whether there was evidence against him or had he rebutted it?

It noted the following fallacies and inconsistencies in the conduct of the accused:

(a) He neither replied to the demand notice nor has led any rebuttal evidence in support of his case.

(b) He had suggested that an employee of his had colluded with the complainant and falsely given a blank cheque containing his signature to the complainant. This was denied by the employee and the evidence was not sustained in cross-examination. Further, the Court noted that no action had been taken by way of registering a police complaint in order to prosecute the alleged illegal conduct of his blank cheque having been misused.

(c) The Court noted that on an overall consideration of the record, it found that the case set up by the accused was thoroughly riddled with contradictions. It was apparent on the face of the record that there was not the slightest of credibility perceivable in the defence set up by the accused.

(d) It also noted that the accused in some of his statements agreed that he had taken a loan from the complainant, but later on he stated that he had no financial dealings with the complainant.

(e) The Court observed that the signature on the cheque having not been disputed, and the presumption under Sections 118 and 139 having taken effect, the complainant’s case satisfied every ingredient necessary for sustaining a conviction under Section 138.

The case of the defence was limited only to the issue as to whether the cheque had been issued in discharge of a debt / liability. The Court concluded that the accused having miserably failed to discharge his evidential burden, that fact will have to be taken to be proved by force of the presumption, without requiring anything more from the complainant.

The Supreme Court also held that there was a fundamental flaw in the way both the lower Courts proceeded to appreciate the evidence on record. Once the presumption under Section 139 was given effect to, the Courts ought to have proceeded on the premise that the cheque was, indeed, issued in discharge of a debt / liability. The entire focus would then necessarily have to shift on the case set up by the accused, since the activation of the presumption had the effect of shifting the evidential burden on the accused.

The nature of inquiry would then be to see whether the accused has discharged his onus of rebutting the presumption. If he failed to do so, the Court can straightaway proceed to convict him, subject to satisfaction of the other ingredients of Section 138. If the Court found that the evidential burden placed on the accused has been discharged, the complainant would be expected to prove the said fact independently, without taking aid of the presumption. The Court would then take an overall view based on the evidence on record and decide accordingly.The course of action when the courts concluded that the signature had been admitted should have been to inquire into either of the two questions (depending on the method in which accused has chosen to rebut the presumption):

(a) Had the accused led any defence evidence to prove and conclusively establish that there existed no debt / liability at the time of issuance of cheque?

(b) In the absence of rebuttal evidence being led the inquiry would entail: Had the accused proved the nonexistence of debt / liability by a preponderance of probabilities by referring to the “particular circumstances of the case”?

The Supreme Court came down heavily on the Trial Court’s perverse approach. According to the Trial Court, the question to be decided was “whether a legally valid and enforceable debt existed qua the complainant and the cheque in question was issued in discharge of said liability / debt”. The Supreme Court observed:

“When the initial framing of the question itself being erroneous, one cannot expect the outcome to be right.”

The onus instead of being fixed on the accused had been fixed on the complainant. Lack of proper understanding of the nature of the presumption in Section 139 and its effect resulted in an erroneous Order being passed by the Trial Court.

It next took up the erroneous approach by the High Court. The High Court had found that the complainant has proved the issuance of cheque, which (as per the Apex Court) meant that the presumption would come into immediate effect. Further, the High Court rightly observed that the burden was on the accused to rebut such presumption.

However, as per the Supreme Court, in the very next paragraph, the High Court found that the accused had rebutted the presumption by putting questions to the complainant. There was no elucidation of material circumstances / basis on which the High Court could have reached such a conclusion. The Supreme Court held that the High Court rather shockingly concluded that:

“If the complainant had given loans on various dates, he must have maintained some document qua that, because it was not a one-time, loan but loan along with interest accrued on the principal, ….”

Therefore, according to the High Court, “the burden was primarily on the complainant to prove the debt amount”. This as per the Apex Court was a fundamental error. The High Court had questioned the want of evidence on part of the complainant in order to support his allegation of having extended loan to the accused, when it ought to have instead concerned itself with the case set up by the accused and whether he had discharged his evidential burden by proving that there existed no debt / liability at the time of issuance of cheque.

Finally, the Supreme Court set aside the acquittal verdict given by the High Court and allowed the complaint filed under Section 138 of the Act and convicted the accused.

CONCLUSION

This decision has explained very clearly the process of alluding evidence in cases of cheque bouncing and when and how the onus shifts from one party to another.

Allied Laws

20 Central Bank of India vs. Shanmugavelu

AIR 2024 Supreme Court 962

2nd February, 2024

Auction of property — Highest bidder — Earnest money paid — Unable to pay the balance — Sale terminated by the bank — Earnest money forfeited by the bank — Banks not liable to refund earnest money. [R. 9(5) Security Interest (Enforcement) Rules, 2002; S. 73, 74, Indian Contracts Act, 1872].

FACTS

A property was set up for auction by the Appellant Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2022 (SARFAESI Act). The Respondent emerged as the highest bidder and purchased the property after paying 25 per cent as earnest money. However, he was unable to pay the remaining 75 per cent of the balance amount owing to a delay in acquiring the loan. Thus, the Appellant Bank cancelled the auction sale and refused to refund the earnest money as per the provisions of Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 (SARFAESI Rules). Aggrieved by the refusal of refund money and cancellation of the sale, the Respondent filed an application before the Debt Recovery Tribunal. The Tribunal held that the Respondent was entitled to refuse the refund of the earnest money. However, the same was limited only to the extent of loss or damage caused to the Appellant Bank as envisaged in sections 73 and 74 of the Indian Contracts Act, 1872 (Contracts Act). Therefore, the Appellant Bank was directed to refund the earnest money after deducting a minuscule amount as expenditure/loss incurred. Aggrieved, the Appellant bank approached the Madras High Court. However, the decision of the Tribunal was confirmed by the High Court with a slight enhancement of expenditure/loss amount.

Aggrieved by the decision of the High Court, an appeal was filed before the Supreme Court (Three-Judge Bench).

HELD

The Supreme Court held that the provisions of sections 73 and 74 of the Contracts Act do not apply to the auction process conducted under the SARFAESI Act. Further, the Court also noted that the SARFAESI Act was a special legislation which overrides the general legislation. Furthermore, the Court also held that Rule 9(5) of the SARFAESI Rules cannot be read down just because of its harsher consequence. Thus, the appeal filed by the Appellant Bank was allowed and the order of the Madras High Court was set aside.

21 N.H.A.I vs. Hindustan Construction Company Ltd

2024 LiveLaw (SC) 361

7th May, 2023

Arbitration — Majority Award — Appeal to courts only if an award is in violation of the public policy of India — Courts cannot sit in appeal over Arbitral Tribunal’s interpretation of contract [S. 34, 37, Arbitration and Conciliation Act, 1996].

FACTS

The Appellant had awarded a four hundred crore contract to the Respondent for road construction in the Allahabad Bypass project. Thereafter, a dispute arose between the parties and the parties were referred to an Arbitral Tribunal (Tribunal). The Arbitral Tribunal after taking into consideration the contract agreement and the facts of the case, passed an award (2:1) in favour of the Respondent and directed the Appellant to pay additional cost to the Respondent. Aggrieved by the award of the Arbitral Tribunal, a petition under section 34 of the Arbitration and Conciliation Act, 1996 (Act) was filed before the Delhi High Court (Single Judge Bench). The High Court, however, dismissed the appeal on the ground that the view taken by the majority needed no interference from the Court. Aggrieved, an appeal was filed under section 37 of the Act before the Division Bench of the Delhi High Court. The appeal was, however, dismissed by the Hon’ble Court on similar grounds.

Aggrieved by the order of the Delhi High Court (both, Division and Single Bench), an appeal was preferred before the Supreme Court.

HELD

The Supreme Court, at the outset, observed that the jurisdiction of the courts is very limited under section 34 of the Act, and the restrictions are even greater while adjudicating cases under 37 of the Act. The Supreme Court, concurring with decisions of the Delhi High Court, held that only when the award is in conflict with the public policy of India, the Court would be justified in interfering with the arbitral award. Further, when a court is applying the ‘public policy’ test to an arbitration award, it does not act as a court of appeal over the findings and interpretation of the arbitrator.

Thus, the award of the Tribunal was confirmed.

22 Dell International Service India Pvt Ltd vs. Adeel Feroze and Ors

W.P. (C) 4733 of 2024 (SC)

2nd July, 2023

Evidence — Admissibility of electronic data/evidence — Mandatory Certification required — [S. 65B, Indian Evidence Act, 1872].

FACTS

A plea was filed by the Respondent before the Consumer Dispute Redressal Commission (District Commission) against the Petitioner. The Learned District Commission had refused to condone the delay by the Petitioner in filing its written submission. The counsel for the Petitioner had contended before the District Commission that he had not received the copy of the entire complaint along with all the annexures and it was received by him much later. However, the Learned District Commission after going through postal receipts of the documents held that the application of condonation of delay of the Petitioner was not bonafide. Thus, an appeal was filed by the Petitioner before the Delhi State Consumer Dispute Redressal Commission (State Commission). The State Commission also dismissed the appeal on the ground that the condonation of delay application was not bonafide.

Aggrieved, a Petition was filed under Articles 226 and 227 of the Constitution before the Delhi High Court.

HELD

The Petitioner in its plea before the Delhi High Court demonstrated by way of screenshots of WhatsApp chats between the Petitioner and the Respondent regarding the missing annexures of the complaint copy. However, the Delhi High Court observed that the said screenshots of WhatsApp chats were not certified as mandated by section 65B of the Indian Evidence Act, 1872. Therefore, the Hon’ble Court held that the screenshots cannot be taken into evidence.

Thus, the Petition was dismissed and the orders of the District and State Commission were not interfered with.

23 Bano Saiyed Parwaz vs. Chief Controlling Revenue Authority and Inspector General of Registration and Controller of Stamps and Ors.

2024 LiveLaw (SC) 426

17th May, 2024

Stamp Duty — Registration – Conveyance deed — Stamp duty paid — Fraud — Cancellation thereof – Refund Application — Cancellation Deed — Cancellation deed executed after making application of refund — Mere technicalities — Refund granted. [S. 47, 48, Maharashtra Stamps Act, 1958.].

FACTS

A conveyance deed, for purchase of property was executed by the Appellant and the vendor on 13th May, 2014. The stamp duty was duly paid by the Appellant on the same day. Thereafter, the Appellant came to know that the property was already sold by the vendor to some other party. Therefore, she (Appellant) decided to cancel the conveyance deed. On 22nd October, 2014, the appellant filed an application before the stamp duty authority (Respondent) seeking a refund for the stamp duty already paid by her on 13th May, 2014. However, she was unable to execute a cancellation deed due to the non-availability of the vendor. It was only with the help of law enforcement that the Appellant was able to execute a cancellation deed on 13th November, 2014 (i.e. six months and one day after registration of the original conveyance deed). The Respondent refused the application on the ground that the said cancellation deed was time-barred as per the provision laid down in section 48 of the Maharashtra Stamp Act, 1958 (Act). Further, the cancellation deed was executed after the application for refund was made. Aggrieved, a writ was filed before the Bombay High Court. The disallowed the petition.

Aggrieved, a Special Leave Petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the Appellant had immediately filed for a refund as soon as she gained knowledge of the fraud. Further, she was unable to execute the cancellation deed due to the unavailability of the vendor, and the same was done only with the help of law enforcement. Thus, there was no lax approach on the part of the Appellant. Therefore, the Supreme Court held that the Respondent was not justified in denying a refund to the Appellant on mere technicalities. The Court further held that since the application was filed before six months (though registration was done after six months), the Appellant was not time-barred as per section 48 of the Act.

Thus, the Petition was allowed, and the Respondent was directed to refund the stamp duty.

Dematerialisation of the Securities of Private Company

INTRODUCTION

Dematerialisation (Demat) of securities has gained its importance for a very long time. The Government has, from time to time, widened the scope and applicability of the same from listed companies to closely held public companies and now private limited companies.

As per the Companies Act, 2013, it is mandatory for all listed companies to have their shares and other securities1 in demat form for their smooth trading on Stock exchanges. The Ministry of Corporate Affairs (MCA), vide notification dated 10th September, 2018, inserted Rule 9A in the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’), mandating every unlisted public company to hold and issue securities only in demat form.

1.“Securities” shall include all kinds of securities – shares, debentures, preference shares etc.

Recently, the Ministry of Corporate Affairs (MCA) vide notification No. GSR 802 (E) dated 27th October, 2023, has introduced Rule 9B after Rule 9A vide — Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023 (‘Present Amendment’), and has extended such requirements for private companies.

Compliances under the new notification for the dematerialisation of the Securities shall have twofold compliances to be observed: One by Companies and the other by the security holders of such companies, making this a very important provision to be understood by the private limited corporate entities as well as security holders.

UNDERSTANDING THE COMPLIANCES TO BE FOLLOWED BY THE COMPANIES:

Every private company that is not a small company as per the audited financial statements as on the last day of the financial year ending on or after 31st March 2023, shall, within 18 months from the closure of such financial year, ensure that it:

  • issues the securities in dematerialised form only;
  • facilitates the dematerialisation of its securities;

in accordance with the provisions of the Depository Act, 1996 (22 of 1996) and regulations made thereunder.

and

  • dematerialises the entire holding of securities of its promoters, directors and key managerial personnel before making any offer for the issue of any securities, buyback of securities, issue of bonus shares or rights offer after the above-ascribed timelines.

With this Notification, all private Companies which are not small companies as of the last date of the financial year end on or after 31st March, 2023 are under a mandatory requirement of dematerialising their securities.

The applicability test begins with deciding the status of the company, whether a company being a private company is a small company or not. As per the revised definition of the “small company” (as per the amended Rule under the Companies (Specification of Definition Details) Amendment Rules, 2022, effective from 15th September, 2022), a small company is such a company,

a. Whose paid-up capital does not exceed ₹4 crore and

b. Whose turnover [as per profit and loss account for the immediately preceding financial year (for this Rule, it is 31st March, 2022] does not exceed ₹40 crores.

c. There are other categories of companies which are exempted from the definition of the small company, i.e., they are not considered as a small company irrespective of their paid-up capital and turnover.;

i) a holding company or a subsidiary company;

ii) a company registered under section 8; or

iii) a company or a body corporate governed by any special Act;

Let us understand these criteria with the help of the following examples:

Paid-up capital and Turnover as of the last date of the financial year ending on (Paid capital R4 core or more and Turnover above R40 crore or more) Demat applicability (mandatory)
31st March, 2022 31st March, 2022 31st March, 2022 Effective date (18 months from the date of such financial year end when the private Company cease to be a small company.
Company A -Less than the limit prescribed -small company. -Less than the limit prescribed –small company. -Less than the limit prescribed –small company. Not applicable.
Company B -More than the limit prescribed –Not a small company. -Less than the limit prescribed – small company. -Less than the limit prescribed –small company. To demat before 30th September, 2024.
Company C More than the limit prescribed – not a small company. More than the limit prescribed – not a small company. Less than the limit prescribed –small company. To demat before 30th September, 2024.
Company D Less than the limit prescribed –small company. More than the limit prescribed –Not a small company. Less than the limit prescribed –small company. To demat before 30th September, 2025.
Company E Less than the limit prescribed –small company. Less than the limit prescribed –small company. More than the limit prescribed –not a small company. To demat before 30th September, 2026. (Company E shall cease to be a small company as of 31st March, 2025)
A Holding Company, A Subsidiary Company, a Section 8 Company (except a company limited by guarantee), a company or body corporate governed by any special Act; Not a small company by definition, irrespective of paid-up capital and turnover Not a small company by definition, irrespective of paid-up capital and turnover Not a small company by definition, irrespective of paid-up capital and turnover To demat before 30th September, 2024.
a Government Company. Not a small company by definition, irrespective of paid-up capital and turnover Not a small company by definition, irrespective of paid-up capital and turnover Not a small company by definition, irrespective of paid-up capital and turnover Not applicable, as the Government company is not covered

 

CONCERNS FOR PRIVATE LIMITED COMPANIES

Correctly identifying the promoters and Key Managerial Personnel (KMP)

To observe the proper implementation of the rules, the Government has also mandated events relating to share capital like right issues, bonus issues, private placement, etc., which can be exercised by the Company only and only if the securities held by the promoters, directors and KMP of the Company are dematerialised before making any such offer for the issue of any securities.

This means that the persons who are promotors, directors and KMP as of 31st March, 2023 and thereafter must have their respective securities in demat form.

This could be a challenging exercise as the private companies are not under a mandatory requirement of appointing KMP under Section 203 of the Companies Act, 2013, except for the appointment of a Company Secretary on exceeding the threshold limit of paid-up capital of ₹10 Crores or more. Hence, such Companies shall exercise due care in identifying the promoters and KMP as per the Companies Act, 2013 and rules made thereunder before making any further issue of the securities.

Transfer of securities

Private companies, by their Articles, restrict/control the transfer of securities, with the Board having the power to approve or deny the said transfer in the best interest of the Company.

It was possible to adhere to these provisions of the Articles of Association where the shares are in
physical form. Now, with the dematerialisation of securities, the shares become freely tradable, and the Depository Act, of 1996, do not restrict any such transfer. It may lead to a dangerous situation for Private Limited Companies and may result in hostile takeovers. In addition to that, these provisions may result in transfer-related issues wherein the Articles relating to the transfer of shares, especially the clause related to the “Right of First Refusal”, may need to be amended or redrafted in accordance with the said amendment.

One solution to the above problem could be to use the facility of freezing one’s account with the Registrar and Transfer Agents (RTA). RTA provides ‘freeze–unfreeze’ options to the companies, wherein the debit of securities is frozen by the RTA under the company’s mandate and shall only unfreeze for a day or more as per the company’s instructions in writing. The companies will have to check for the cost involved in the same for the arrangement with RTA.

Non-Applicability of Rules

As per Rule 9B sub-rule 6 of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, the provisions of these rules are not applicable to Government Companies.

In conclusion, a company which is not a small company as defined above and which meets the criteria mentioned in the table above, needs to demat its securities by 30th September, 2024 or any other date, as may be applicable.

Procedure for Dematerialisation of Securities

To comply with the abovementioned provisions of the Companies Act, 2013 and the Rules made thereunder, a company should take the following steps:

a. Appoint RTA for Dematerlising its securities

b. Register itself with Depository (NSDL/CSDL). (India has two registered depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).)

c. Obtain ISIN (International Security Identification Number) for all existing securities issued by the Company;

d. Facilitate dematerialisation of all existing securities (as and when a request is received from the holder of such securities);

e. Ensure that the entire holding of its promoters, directors and KMP are held in dematerialised form only prior to making any offer for issuance or buyback of securities on or after 30th September, 2024, or any other applicable relevant date.

f. Issue all securities in dematerialised form only after the due date;

Compliances by a Security Holder

Each holder of the securities of a private company that satisfies the abovementioned conditions shall mandatorily dematerialise the securities before

  • initiating the transfer of such securities

and

  • subscribing to any private placement offer, bonus shares or rights offer of such private company.

Process to be followed by a Security Holder

1. A Security holder needs to have a PAN or obtain a PAN number (This is also mandatory for foreign security holders)

2. Depository: India has two registered depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

3. Depository Participant (DP): The Investors (security holders) have to interact with the Depository through DPs, which are entities like public financial institutions, stock brokers, banks, clearing corporations/clearing houses, etc. The investor can choose a DP and either of the depositories to have their shares into a demat account.

4. Open a demat account with Indian Depository Participants (List of SEBI registered participants can be accessed through the NSDL and CDSL site.) and undertake the process of demat by filing a demat request form. If the investor already has a demat account then, he need not open a separate account.

5. Deposit the share certificates along with the DRF (Dematerialised Request Form) and all other documents and forms as required by the Depository Participants (DP).

6. The DP shall take up the further process and on cross-checking the correctness of all documents with the RTA, shall register the dematerialisation of shares.

Key points to be noted by the Security Holders

– Security holder can dematerialise only those security certificates that are already registered in the security holder’s name in the records of the issuing company/its RTA. i.e., he shall be a registered owner.

– The shares must be free from any lien, charge or encumbrance.

– In a case, where the security certificates are in joint names, the demat account shall also be opened in the same order of names.

– The new Rules do not mandate the security holders to have the securities in demat; they can continue to have the securities in physical form. However, after the due date, they will not be able to transfer the securities unless they are demated. Similarly, they will not be able to subscribe to new securities unless they have a demat account.

Private limited companies which are under the ambit of provisions under Rule 9B of Companies (Prospectus & Allotment of Securities) Second Amendment Rules, 2023, shall note the following:

– After 30th September, 2024, the securities which are in physical form will not allowed to be transferred unless they are dematerialised. (The securities can be transferred before 30th September, 2024).

– The security holders will not be able to subscribe to any private placement offer, bonus shares or rights offer of such private company unless the securities are demated.

– The Companies will mandatorily be required to issue and approve the transfer of the securities from the said date, on or after 30th September, 2024 (or the relevant date).

– A security holder, unless a promoter, director or KMP, may continue to hold shares in physical form even after 30th September, 2024. However, the said securities will not be permitted to transfer until dematerialised.

– Further, the security holder will be able to subscribe to any further issue only after ensuring the dematerialising of the securities. Also, the security holder will have to ensure that he has a demat account.

– The private companies are required to ensure compliances applicable to unlisted public companies under sub-rule (4) to (10) of Rule 9A (RULE 9A: (applies mutatis mutandis to private companies) with respect to payment of timely fees to depository and RTA agent, maintaining the security deposit at all times, adhering to SEBI and Depository guidelines to the extent applicable, grievances to be addressed to Investor Education and Protection Fund Authorities etc.

– Private companies will be required to file Form PAS-6 to the ROC within sixty days from the conclusion of each half-year. Therefore, for the half-year period from April to September, the due date to file Form PAS-6 will be 29th November, and for the period from October to March, the due date will be 30th May every year.

Advantages of Demating Securities

Although there could be teething troubles in following procedural and technical aspects to dematerialise the securities, the demat of securities is a very beneficial and welcome step taken by the Government for the private companies as well as the shareholders. There are certain benefits which are enumerated as under;

1. There is a well-defined electronic system which is well regulated by laws (under SEBI -Securities and Exchange Board of India) for keeping the securities in the demat form.

2. As there are no physical securities, it is safe to hold the securities of a company. There is no fear of loss, deface, mutilation or stealing.

3. Convenient — can be easily transferred electronically from one person to another.

4. Instant transfer of securities on authorisation, No stamp duty on transfer of securities.

5. There is no risk of bad delivery of shares — fake share certificates, delays, bad delivery, missing certificates, etc., Minimal paperwork.

6. Reduction in transaction costs and legal costs for the security holders. However, there is a possibility of an increase in cost due to annual maintenance charges of the demat account by RTA.

7. As there is no security certificate, even one share can be transferred without long paperwork and hassles.

8. All information of the security holder is easily maintained and stored electronically and can be easily amended and changed as required.

9. Automatic credit to account on stock split, bonus, right issues etc.,

10. A single demat account of an investor can hold multiple securities.

11. Better transparency of securities.

12. The security holder can have easy access to his security holding status.

CONCLUSION

The complete essence of the said provisions can only be achieved if it is followed and complied with by the company and its shareholders in their true spirit.

All in all, it is a good move towards disciplining private limited companies and removing manipulations in the case of physical securities. It will also enable investors to find all their holdings in one place and it will help successors to lodge claims and transfer securities in their names.

Part A | Company Law

5 In the Matter of M/s EIT Services India Private Limited

Registrar of Companies, Koramangala, Bengaluru

Adjudication Order No.ROC(B)/Adj.Order/454-118(1)/EITServices/Co.No.026968/2023

Date of Order: 05th January, 2024

Adjudication Order for not properly/consecutively numbering the pages of the minute book of the Board Minutes and a few pages of the book were left blank without crossing the same with initials of the Chairman, which amounts to a violation of section 118 (1) of the Companies Act, 2013 (CA 2013) read with the Secretarial Standard — I (SS-1) issued by the Institute of Company Secretaries of India

FACTS

It was observed during an inquiry conducted by the Inquiry Officer (“IO”) for violation of section 118(1) of CA 2013 that the Minute Book of the Board Minutes of M/s ESIPL dated 19th January, 2017, 23rd December, 2017 and 23rd March, 2018 did not contain proper pagination and few pages were left blank without crossing the same with the initials of the Chairman of the Board.

The Registrar of Companies, Koramangala, Bengaluru i.e., Adjudication Officer (“AO”) issued an adjudication notice dated 24th February, 2023 to M/s ESIPL and its directors. M/s ESIPL responded vide letter dated 12th March, 2023 accepting the default stating that due to management change and oversight, there was a non-compliance of section 118 of CA 2013 read with SS-I.

Relevant provisions of CA 2013:

Section 118(1) “Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of the resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.”

Section 118(10) “Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

Section 118(11) “If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.”

AO held a physical hearing which was attended by an Authorized Representative (AR) on behalf of M/s. ESIPL and its directors and made submissions. Further, AR submitted that M/s ESIPL has made good the offence and displayed the minutes book of the Board Meetings to the AO.

HELD

AO after considering the facts of the case and submissions made, for the non-compliance of the provisions of Section 118(1) read with SS-1, in the exercise of the powers vested under section 454(3) of CA 2013 imposed a penalty in the following manner on M/s ESIPL and its directors.

The amount of penalty was ordered to be paid through the MCA website, within 90 days of the receipt of the order and to be intimated by filing Form INC-28 attaching a copy of the order and payment challans. In case of directors, such penalty amount was ordered to be paid out of their own funds.

Arbitration Clauses in Unstamped Agreements

INTRODUCTION

An agreement often contains a clause for arbitration. An agreement is an instrument under the meaning of the Stamp Act and if it falls within the Articles contained in the Schedule to the Stamp Act, then the agreement needs to be stamped. An interesting question arose as to what would be the status of the arbitration clause in an event where the underlying agreement itself is inadequately stamped? Would the reference to arbitration survive since the main agreement itself is not properly stamped? A seven-judge Bench has given its final opinion on this issue in the case of Re Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 And The Indian Stamp Act 1899 Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020.

Judicial History

A three-judge Bench of the Supreme Court in its decision N N Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd. (2021) 4 SCC 379 held that an arbitration agreement, being separate and distinct from the underlying commercial contract, would not be rendered invalid, unenforceable, or non-existent. The Court held that the non-payment of stamp duty would not invalidate even the underlying contract because it is a curable defect.

However, this decision of the Supreme Court was at variance with an earlier decision of a co-ordinate bench of the Court in the case of Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1. In that case, the Court had held that an agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. Accordingly, it was concluded that an arbitration agreement does not exist if the agreement is illegal or does not satisfy mandatory legal requirements. It concluded that an invalid agreement is no agreement.

Reference to Larger Bench

The Supreme Court in NN Global (supra) noted the earlier contrary decision and hence, referred the matter to a larger five-judge bench of the Supreme Court. The question framed was whether non-payment of stamp duty would also render the arbitration agreement contained in such an instrument, as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument.

The five-judge Bench in N N Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd 8 (2023) 7 SCC 1,by a majority of 3:2, held that the earlier decision in NN Global (supra) did not represent the correct position of law. It concluded that:

(a) An unstamped instrument containing an arbitration agreement was void under the Contract Act;

(b) An unstamped instrument, not being a contract and not enforceable in law, could not exist in law. The arbitration agreement in such an instrument could be acted upon only after it was duly stamped;

(c) The “existence” of an arbitration agreement contemplated under the Arbitration Act was not merely a facial existence or existence in fact, but also “existence in law”;

(d) The Court acting under the Arbitration Act could not disregard the mandate of the Stamp Act requiring it to examine and impound an unstamped or insufficiently stamped instrument; and

(e) The certified copy of an arbitration agreement must clearly indicate the stamp duty paid.

Curative Petition

Subsequent to the above five-judge Bench Decision, several other cases reached other three-judge and five-judge Benches of the Apex Court on the same issue. Considering the larger ramifications and consequences of the five-judge decision in the 2nd NN Global Case, a curative petition was referred to a seven-judge Constitution Bench of the Supreme Court. It was requested to reconsider the correctness of the view of the five-judge Bench.

Verdict of seven-Judge Bench

Scheme of Stamp Act

The Court analysed the entire framework of the Indian Stamp Act, of 1899 (which was the charging Stamp Act in the case at point). It noted that section 17 of the Stamp Act provided that all instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. Section 62 inter alia penalised a failure to comply with Section 17. However, despite the mandate that all instruments chargeable with the duty must be stamped, many instruments were not stamped or are insufficiently stamped. The parties executing an instrument may, contrary to the mandate of law, attempt to avoid the payment of stamp duty and may therefore refrain from stamping it. Section 33 provided that every person who has authority to receive evidence (either by law or by consent of parties) shall impound an instrument which is, in their opinion, chargeable with duty but which appears to be not duly stamped. The power under Section 33 may be exercised when an instrument is produced before the authority or when they come across it in the performance of their functions. In terms of Section 35, an instrument which was not duly stamped was inadmissible in evidence for any purpose and it shall not be acted upon, registered, or authenticated. The Collector was conferred with the power to impound an instrument under Section 33. If any other person or authority impounded an instrument, it must be forwarded to the Collector under clause (2) of Section 38. The Collector may also levy a penalty, as provided.

It noted that in terms of Section 42 of the Stamp Act, an instrument was admissible in evidence once the payment of duty and a penalty (if any) was complete. Once an instrument has been endorsed, it may be admitted into evidence, registered, acted upon or authenticated as if it had been duly stamped.

Section 36 of the Stamp Act provided that where an instrument was admitted in evidence, the admission of an instrument was not to be questioned at any stage of the same suit or proceeding on the ground that the instrument was not duly stamped.

Difference between inadmissibility and voidness

It held that the admissibility of an instrument in evidence was distinct from its validity or enforceability in law. The Contract Act provided that an agreement not enforceable by law was said to be void. The admissibility of a particular document or oral testimony, on the other hand, refers to whether or not it can be introduced into evidence. An agreement can be void without its nature as a void agreement having an impact on whether it may be introduced in evidence. Similarly, an agreement can be valid but inadmissible in evidence.

A very important distinction was made by the Court as follows:

“When an agreement is void, we are speaking of its enforceability in a court of law. When it is inadmissible, we are referring to whether the court may consider or rely upon it while adjudicating the case. This is the essence of the difference between voidness and admissibility.”

Unstamped does not mean Void

The Court held that the effect of not paying duty or paying an inadequate amount rendered an instrument inadmissible and not void. Non-stamping or improper stamping did not result in the instrument becoming invalid. The Stamp Act did not render such an instrument void. The non-payment of stamp duty was accurately characterised as a curable defect. The Stamp Act itself provided for the manner in which the defect may be cured and set out a detailed procedure for it. The Court observed that there was no procedure by which a void agreement can be “cured.”

The Supreme Court held that in Hindustan Steel Ltd. vs. Dilip Construction Co. (1969), 1 SCC 597 held that the provisions of the Stamp Act clearly provided that an instrument could be admitted into evidence as well as acted upon once the appropriate duty had been paid and the instrument was endorsed.

The Court held that the negative stipulations in Sections 33 and 35 of the Stamp Act were specific, albeit not so absolute as to make the instrument invalid in law. A “void ab initio” instrument, which was stillborn, had no corporeality in the eyes of law. It did not confer or give rights or create obligations. However, an instrument which was “inadmissible” existed in law, albeit could not be admitted in evidence by such person, or be registered, authenticated or be acted upon by such person or a public officer till it was duly stamped.

An instrument which is void ab initio or void, could not be validated by mere consent or waiver unless consent or waiver undid the cause of invalidity. However, after due stamping as per the Stamp Act, the unstamped or insufficiently stamped instrument could be admitted in evidence, or be registered, authenticated or be acted upon by such person.

It held that to hold that an insufficiently stamped instrument did not exist in law will cause disarray and disruption.

Harmonious Construction

The Court stated that the challenge before it was to harmonize the provisions of the Arbitration Act and the Stamp Act. The object of the Arbitration Act was to inter alia ensure an efficacious process of arbitration and minimize the supervisory role of courts in the arbitral process. On the other hand, the object of the Stamp Act was to secure revenue for the State. It was a cardinal principle of interpretation of statutes that provisions contained in two statutes must be, if possible, interpreted in a harmonious manner to give full effect to both the statutes — Jagdish Singh vs. Lt. Governor, Delhi, (1997) 4 SCC 435. The challenge, therefore, before the Court was to preserve the workability and efficacy of both the Arbitration Act and the Stamp Act.

Supremacy of Arbitration Act

The Apex Court laid down an important principle that the Arbitration Act was legislation enacted to inter alia consolidate the law relating to arbitration in India. It will have primacy over the Stamp Act and the Contract Act in relation to arbitration agreements.

The Arbitration Act was a special law and the Indian Contract Act and the Stamp Act were general laws and it was a settled proposition that a general law must give way to a special law — LIC vs. D.J. Bahadur 7 (1981) 1 SCC 315.

The issue in this case was not whether all agreements were rendered unenforceable under the provisions of the Stamp Act but whether arbitration agreements, in particular, were unenforceable. Hence, the special law in this case was the Arbitration Act. The Court held that the Arbitration Act was a special law in the context of the case because it governed the law on arbitration, including arbitration agreements — Section 2(1)(b) and Section 7 of this statute defined an arbitration agreement. In contrast, the Stamp Act defined ‘instruments’ as a whole and the Contract Act defined ‘agreements’ and ‘contracts.’ As observed by the Supreme Court in Bhaven Construction vs. Sardar Sarovar Narmada Nigam Ltd (2022) 1 SCC 75, “the Arbitration Act is a code in itself’.

It further observed that the Arbitration Act contained a non-obstante clause in section 5 by virtue of which must take precedence over any other law for the time being in force. Any intervention by the courts (including impounding an agreement in which an arbitration clause is contained) was, therefore, permitted only if the Arbitration Act provided for such a step, which it did not. The five-judge Bench held that this non-obstante clause did not mean that the operation of the Stamp Act, in particular, the power to impound would not have any play. The Constitutional Bench of the Supreme Court disagreed with this view and held that section 5 was rendered otiose by the aforesaid interpretation. The Court held that it must be cognizant of the fact that one of the objectives of the Arbitration Act was to minimise the supervisory role of courts in the arbitral process.

It also held that Parliament was aware of the Stamp Act when it enacted the Arbitration Act. Yet, the latter did not specify stamping as a pre-condition to the existence of a valid arbitration agreement.

The Arbitral Tribunal had full Powers

The Supreme Court held that section 16 of the Arbitration Act, empowered the arbitral tribunal to rule on its own jurisdiction. This included the authority to decide the existence and validity of the arbitration agreement. As per Section 16, an arbitration agreement was an agreement independent of the other terms of the contract, even when it was only a clause in the underlying contract. The section specifically stated that a decision by the arbitral tribunal holding the underlying contract to be null and void did not lead to ipso jure the invalidity of the arbitration clause. The existence of an arbitration agreement was to be ascertained with reference to the requirements of the Arbitration Act. In a given case the underlying contract may be null and void, but the arbitration clause may exist and be enforceable. The invalidity of an underlying agreement may not, unless relating to its formation, result in invalidity of the arbitration clause in the underlying agreement.

The Court held that it was the arbitral tribunal and not the court which may test whether the requirements of a valid contract and a valid arbitration agreement were met. If the tribunal found that these conditions were not met, it would decline to hear the dispute any further. If it found that a valid arbitration agreement existed, it may assess whether the underlying agreement was a valid contract.

The Court held that once the arbitral tribunal has been appointed, the Tribunal will act in accordance with the law and proceed to impound the agreement under Section 33 of the Stamp Act if it sees fit to do so. It has the authority to receive evidence by consent of the parties, in terms of Section 35 of the Stamp Act. The procedure under Section 35 may be followed thereafter. The arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility. The interpretation of the law in this judgment ensures that the provisions of the Arbitration Act are given effect while not detracting from the purpose of the Stamp Act.

The interests of revenue were not jeopardised in any manner because the duty chargeable must be paid before the agreement in question was rendered admissible and the dispute between the parties adjudicated. The question was at which stage the agreement would be impounded and not whether it would be impounded at all.

The seven-judge Bench held that the decision of the five-judge Bench in N N Global 2 (supra) gave effect exclusively to the purpose of the Stamp Act. It prioritised the objective of the Stamp Act, i.e., to collect revenue at the cost of the Arbitration Act). The impounding of an agreement which contained an arbitration clause at the stage of the appointment of an arbitrator under Section 11 (or Section 8 as the case may be) of the Arbitration Act will delay the commencement of arbitration. It was a well-known fact that Courts were burdened with innumerable cases on their docket. This had the inevitable consequence of delaying the speed at which each case progressed. Arbitral tribunals, on the other hand, dealt with a smaller volume of cases. They were able to dedicate extended periods of time to the adjudication of a single case before them. It concluded that if an agreement was impounded by the arbitral tribunal in a particular case, it was far likelier that the process of payment of stamp duty and a penalty (if any) and the other procedures under the Stamp Act were completed at a quicker pace than before courts.

Conclusive Findings

The Supreme Court summarised its findings as follows:

(a) Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;

(b) Non-stamping or inadequate stamping is a curable defect;

(c) An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;

(d) Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and

(e) The five-judge decision in NN Global stood overruled on this issue.

Epilogue

This is a very good decision by the Apex Court which will uphold arbitrations rather than referring disputes to lengthy and time-consuming Court procedures.

Allied Laws

16 Atanu Mondal vs.The State of West Bengal and Ors.

AIR 2024 Calcutta 144

9th January, 2024

Auction of property — Sale Certificate issued by Bank officer — Market Value higher than bid value — Bank Officer deemed to be a Revenue Officer — Stamp duty payable on Bid value and not Market value. [S. 47A, Stamps Act, 1899].

FACTS

A property was set up for auction by the United Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2022 (SARFAESI Act). The Appellant emerged as the highest bidder and purchased the property at ₹39,00,000/-. The Authorised Officer of the bank issued a sale certificate to appellant after payment was made by the appellant. However, during registration of the said property, the stamp duty officer ascertained the market value of the property at ₹1,71,19,140/- and directed the Appellant to pay stamp duty at 6 per cent on the ascertained market value of the property as against the purchased value. Aggrieved, the appellant filed a writ petition before the Hon’ble Calcutta High Court (Single Bench). The Hon’ble Court dismissing the petition, held that the registration authority was empowered under section 47A of the Stamps Act, 1899 (Stamps Act) to determine the correct market value of the property and calculate the stamp duty payable thereon.

Aggrieved by the said order, an appeal was filed before the division bench of the Hon’ble Calcutta High Court.

HELD

The Hon’ble Court observed that the property was sold in an auction by the bank under the provisions of the SARFAESI Act. Further, an Authorised Officer of the bank conducting such a sale shall be deemed to be a Revenue Officer and a certificate issued by him shall be evidence of sale. Furthermore, the Court noted that such a sale by a revenue officer is exempted from the provision of section 47A of the Stamps Act. Furthermore, the Court also noted the market value of the property is a changing concept and the value fetched after it is sold in the open market pursuant to advertisement and publication, the invitation of bids shall be exempted from scrutiny under the Stamps Act. Thus, the appeal was allowed.

17 Sivarajan vs. Jagadamma

AIR 2024 (NOC) 372 (KER)

6th December, 2023

Will or Gift Deed — Entire property rights transferred — Only life interest was reserved to reside — Gift deed — No saleable rights after property transferred / gifted. [S. 63, Succession Act, 1925; S. 122, Transfer of Property Rights, 1882].

FACTS

The Plaintiff (Respondent- Jagadamma) had instituted a suit for declaration of title and peaceful possession of property against the Defendant (Appellant – Sivarajan). The Plaintiff, relying on a gift deed, had contested that the property in dispute was allegedly gifted to her by her mother. Whereas, Defendant had contested that the said property was sold to her by the mother of Plaintiff through a conveyance deed. Further, the Defendant also contested that the alleged gift deed was actually a Will and not a gift deed. Furthermore, the Defendant also contested that the time period for instituting the said suit began immediately after the death of her mother. Thus, since the suit was instituted after a period of three years from the death of the mother, the Defendant contended that the said suit was barred by limitation as per the provisions of the Article 58 of the Schedule of the Limitations Act, 1963 (Act).

HELD

The Hon’ble Kerala High Court observed that the alleged deed / Will gave the entire rights of the property to the Plaintiff. Further, only life interest was reserved by the mother of the Plaintiff to reside in the house until death. Thus, the Hon’ble Court concluded after relying on section 122 of Transfer of Property Rights, 1882 that the document was in fact a gift deed and not a Will. Further, the Hon’ble Court held that once the property was gifted to the Plaintiff, she (mother) had no saleable interest in the property and thus, the conveyance deed would not have any legal effect. Furthermore, the Hon’ble Court held that the period of limitation shall be as per the provisions of Article 65 (providing limitation period for suit for possession based on title) of the Schedule of the Act, i.e., a period of twelve years from the date of death of the mother and not as per Article 58 (providing limitation period for suit for obtaining a declaration) of the Act.

Thus, the appeal of the Defendant was dismissed.

18 Ramesh Tiwary vs. Sheo Kumari Devi

AIR 2024 (NOC) 393 Patna

3rd May, 2023

Power of Attorney — Attorney holder cannot depose for the acts of Principal — Spouse of the parties to the suit — Can depose as a witness to the extent of personal knowledge. [O. 3, R. 1 and 2, Code for Civil Procedure, 1908; S.120, Indian Evidence Act, 1872].

FACTS

The Respondent (Original Plaintiff) had instituted a suit against the Appellant (Original Defendant) for declaration of title over a property. Since the Plaintiff was an eighty-year-old woman suffering from various diseases, she had executed a power of attorney in favour of her husband (Respondent no. 2) to adduce evidence on her behalf. The Appellant, however, objected by relying on Order 3, Rules 1 and 2 of the Code for Civil Procedure, 1908 (CPC) that a power of attorney holder can adduce evidence or depose for the principal only in respect of acts done by the attorney holder in pursuance to said power. Further, the Appellant also argued that an attorney holder cannot depose on behalf of the principal in respect of acts done by the principal itself or where the principal is the only person who has personal knowledge about the facts. However, the Learned Trial Court dismissed the objections of the Appellant and allowed Respondent No. 2 to adduce evidence on behalf of her wife (Original Plaintiff).

Aggrieved by the said dismissal, a Civil Miscellaneous Application was filed under Article 227 of the Constitution before the Hon’ble Patna High Court.

HELD

The Hon’ble Patna High Court observed that Order 3, Rules 1 and 2 of the CPC restricted an attorney holder to adduce evidence only in respect of acts done by itself. However, the Hon’ble Court also noted that section 120 of the Indian Evidence Act, 1872 empowers the spouse of the parties to the suit to depose as a witness. Therefore, the Hon’ble Court held that Respondent No. 2 cannot adduce evidence in place of his wife (Original Plaintiff) but can adduce evidence as a witness only to the extent of his personal knowledge.

Thus, the Miscellaneous Application was partially allowed.

19 People Welfare Society vs. State Information Commissioner and Ors.

AIR 2024 Bombay 54 (Nagpur Bench)

1st March, 2024

Right to Information — Supply of Information — Public Trust running educational institution from government fund/grant — Substantial grant — Duty bound to provide information about the educational institution — Charity Commissioner is not bound to supply information regarding Public Trust — [S. 2(h), 4, 6 – Right to Information Act, 2005; S. 18, Maharashtra Public Trust Act,1950].

FACTS

The moot question which was referred to the full bench of the Hon’ble Bombay High Court (Nagpur Bench) was whether a public trust registered under the provisions of Maharashtra Public Trusts Act, 1950, which is running an educational institution and receiving a grant from the state is duty bound to supply information sought from it under the provisions of Right to Information Act (RTI Act)?

HELD

The Hon’ble Bombay High Court held that if the information solicited under the RTI Act is regarding the Public Trust, which has not received substantial government largesse to implement the aims of the Public Trust, then, in that case, there is no obligation to supply information if that Public Trust does not fall within the ambit of section 2(h) of the RTI Act. Further, the Hon’ble Court also held that in case the information is solicited in respect of an educational trust or other institution, which is run by that Public Trust, in case financial support from the government is found to be substantial, (which is a plea to be decided by the Information Commissioner), information relating to such Educational or other Institutions can be directed to be supplied. Furthermore, the Charity Commissioner would also not be legally obliged to supply such information, which may be collected by him, in respect of the Public Trust, under the provisions of the Maharashtra Public Trusts Act, 1950 in case such information falls under the exempted category mentioned in Section 8(j) of the RTI Act and the demand does not have statutory backing.

20 Vivek Jain vs. Deputy Commissioner vs. Ors

2024 LiveLaw (Kar) 248

4th June, 2024

Gift Deed — Father to son — Property — Gift cannot be cancelled for failure to maintain if no condition is specified in the Gift deed to maintain father. [S. 23, Maintenance and Welfare of Parents and Senior Citizen Act, 2007].

FACTS

Respondent No. 3 (father) had gifted a property by way of a gift deed to his son (Respondent No. 4). Thus, Respondent No. 4 became a lawful owner of the property. Subsequently, Respondent No. 4 sold the property by way of a sale deed to the Petitioner. Two years after the sale deed, the father (Respondent No. 3) filed an application before the Learned Assistant Commissioner under section 23 of the Maintenance and Welfare of Parents and Senior Citizen Act, 2007 (Act) to set aside the gift deed and the subsequent sale deed. The Learned Assistant Commissioner observed that the son (Respondent No. 4) had failed to maintain his father, thus, he cancelled the said gift deed and subsequent sale deed.

Aggrieved by the said order, a Petition was filed by the Purchaser of the property (the Petitioner) before the Hon’ble Karnataka High Court.

HELD

The Hon’ble Karnataka High Court observed that section 23 of the Act mandates for a condition to be mentioned in the gift deed for maintaining the father. Thus, in absence of any such condition mentioned in the gift deed, the Hon’ble Court quashed the order of the Learned Assistant Commissioner.

The Petition was allowed.

Part A | Company Law

4 In the Matter of M/s MITHLANCHAL PROFICIENT NIDHI LIMITED (MPLNL)

Registrar of Companies, Bihar

Adjudication Order No. ROC/PAT/Sec.143/19970/1918

Date of Order: 12th March, 2024

Adjudication Order against “Auditor” of the Company for failure to report violations / non-compliance made by the Company in its Audit Report under Section 143(3)(e) and Section 143(3)(j) of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“ROC”) observed non-compliance in the audited financial statements (based on the records on MCA Portal in the E-form AOC-4 filed by MPNL for the financial year ending on 31st March, 2017, 31st March, 2018 and 31st March, 2019). The Chartered Accountant Mr. VP was the auditor of MPNL during these financial years.

It was observed that MPNL while preparing the financial statements has contravened the provisions of Schedule III, Section 129 and Section 133 of the Companies Act, 2013 read with Accounting Standard-3. Further, Mr. VP the auditor of MPNL had not made any comments or not reported such non-compliance of MPNL in its Audit Report, leading to a violation of Section 143 of the Companies Act, 2013 by the auditor of the Company. Hence this was a failure on the part of Mr. VP the auditor of MPNL with respect to the non-reporting of violations/non-compliance in its Audit Reports.

The details of non-compliance while preparing the financial statements of MPNL and Non reporting of compliance by auditor Mr. VP in the Reports are as follows:

Sr. no.

Contravention of the provisions by MPNL

 Non-compliance by MPNL while preparing the financial statements

Violation of Section 143 of the Companies Act, 2013 by Not reporting or No comments offered on the Non-Compliance of MPNL by auditor Mr. VP in its Report
1.

Section 129, Section 133 and Section 2(40) of the Companies Act, 2013 read with Accounting  Standard- 3:

For the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019. The “Cash Flow Statement” was not attached along with the Financial Statements as required by the Companies Act, 2013.

Non-Compliance as mentioned alongside
2. Section 129, Section 133 of the Companies Act, 2013 read with AS-18

In the Financial Statements for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019, MPNL had not disclosed the “Name of the related Party” and “Nature of the related party relationship where control exists irrespective of whether there have been transactions between the related parties”

Non-Compliance as mentioned alongside
3. Section 129 and Section 133 read with Schedule III of the Companies Act, 2013

i. In the Financial Statements for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019 had shown “short term borrowings” amounting to  ₹2,36,15,116, ₹3,08,15,080 and ₹45,66,443 respectively, however, failed to “Sub-classify” such Short-term borrowings whether it was Secured / Unsecured as per Schedule III of the Companies Act, 2013.

Non-Compliance as mentioned alongside

ii. In the Financial Statements for the financial years ending of 31st March, 2018 and 31st March, 2019, had shown “Loan to Members” under the head of “Short Term Loans and Advances” amounting to ₹2,02,95,743 and ₹1,55,95,667. However, failed to “Sub-classify” such short-term loan advances whether it was Secured / Unsecured as per Schedule III of the Companies Act, 2013
4. Section 129, Section 133 read with Schedule III Item-6F(ii) of the Companies Act, 2013

i. In the Financial Statements for the financial years ending as of 31st March, 2019 the Schedules Forming Part of the said Balance Sheet shows “Deferred Tax Liability-Schedule-3″ whereas no effect of the said Deferred Tax Liability-Schedule-3 has been shown in the Balance Sheet,

ii. In the Financial Statements for the financial years ending as on 31st March, 2019 amount of ₹1,45,66,443 has been shown as “Short Term Borrowings”. However, failed to “Sub-classify” such Short-term borrowings whether it was Secured / Unsecured.

Non-Compliance as mentioned alongside

5.

Section 129, Section 133 read with Schedule III Item-6R(ii) of the Companies Act, 2013

In the Financial Statements for the financial year ending on 31st March, 2019 an amount of ₹1,56,14,109/- was shown as “Short Term Loans and Advances” in the Balance Sheet whereas the said amount was not sub-classified as (a) Secured, considered good; (b) Unsecured, considered good; (c) Doubtful.

 Non-Compliance as mentioned alongside

Accordingly, the auditor of MPNL, Mr. VP had violated the provisions of Section 143(3)(e) and Section 143(3)(j) of the Companies Act, 2013 and the office of Adjudication Officer (“AO”) had issued Show Cause Notice (“SCN”) for default under section 143 of the Companies Act, 2013. Thereafter, no reply or revert from Mr. VP, auditor of MPNL was received at the office of AO.

Section 450 of the Companies Act, 2013 stated that:

Punishment where no specific penalty or punishment is provided:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

ORDER / HELD

On non-receipt of any reply from Mr. VP, auditor of MPNL, the AO had concluded that the provisions of Section 143 of the Companies Act, 2013 have been contravened by him and hence he was liable for penalty under Section 450 of the Companies Act, 2013 for the financial years ending as on 31st March, 2017, 31st March, 2018 and 31st March, 2019.

The AO had imposed an amount of ₹10,000 as a penalty for each of the financial years 2016–17 to 2018–19. The AO, further ordered that the auditor of MPNL should pay the amount of penalty individually by way of e-payment within 90 (ninety) days of the order.

Related Party Transactions: The Purpose & Effect Test

INTRODUCTION

Related Party Transactions (“RPTs”) are a very significant matter for listed companies. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the LODR”) have laid down strict guidelines on how listed companies should deal with RPT. The idea always is that the minority shareholders of the listed entity should be protected and not be put at a disadvantage in any manner. The LODR has undergone a fundamental change with the introduction of the Purpose and Effect Test for RPTs. Let us examine what are the consequences of this change.

WHO IS A RELATED PARTY?

As per Regulation 2(zb) of the LODR, a “related party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards. S.2(76) defines the following persons as a related party for a company:

(i) a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director or and holds along with his relatives, more than 2 per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary;or

(C) an investing company or the venturer of a company;

(ix) a director (other than an Independent Director) / Key Managerial Personnel of the Holding Company and will include his relative.

Ind AS 24 (para 9) on Related Party Disclosures contains additional definitions on the meaning of the term related party.

In addition, the LODR provides that:

(a) any person or entity forming a part of the promoter or promoter group of the listed entity; or

(b) any person or any entity, holding equity shares of 10 per cent or more, with effect from April 1, 2023 in the listed entity either directly or on a beneficial interest basis as provided under section 89 of the Companies Act, 2013, at any time, during the immediate preceding financial year;

shall be deemed to be a related party.

WHAT IS A RELATED PARTY TRANSACTION?

As per Regulation 2(zc) of the LODR, a “related party transaction” means “a transaction involving a transfer of resources, services or obligations between:

(i) a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

(ii) a listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from 1st April, 2023

regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions in a contract.”

Hence, with effect from 1st April, 2023, a transaction by a listed entity with an unrelated entity would also be treated as an RPT, if the purpose and effect of such unrelated transaction is to benefit a related party of the listed entity. When one reads this definition, three cumulative factors emerge:

(i) There must be a transaction between a listed entity and an unrelated entity;

(ii) There must be a purpose and effect of this transaction; and

(iii) Such purpose and effect must be to benefit a related party of the listed entity or its subsidiary.

Accordingly, if an unrelated party is interposed in a transaction with no commercial rationale other than to indirectly confer a benefit upon a related party, then such transaction would also fall within the purview of an RPT.

EXAMPLE

Goods Ltd, a listed company supplies engineering equipment to Works P Ltd, a construction / EPC company. Works P Ltd is entirely unrelated to Goods Ltd, the listed company. This EPC company uses the aforesaid engineering equipment for a turnkey contract for Tower Ltd, one of the related parties of the listed company. Thus, there are two on the face of it unrelated transactions ~ one between Goods Ltd and Works P Ltd and the other between Works P Ltd and Tower Ltd. However, as per the new definition a transaction by a listed entity with an unrelated entity would also be treated as an RPT, if the purpose and effect of such unrelated transaction is to benefit a related party of the listed entity. Thus, if the purpose and effect of Goods Ltd supplying equipment to Works P Ltd was to benefit Tower Ltd, then the transaction between Works P Ltd and Goods Ltd would also become a related party transaction for Goods Ltd, the listed company. Accordingly, in that event, it would have to ensure compliances which a listed company needs to undertake for a related party transaction (detailed below).

BACKGROUND

SEBI had constituted a Working Group on Related Party Transactions which submitted its Report in January 2020. One of the findings of the Report was that Shell or apparently unrelated companies, controlled directly or indirectly, by such persons were purportedly used to siphon off large sums of money through the use of certain innovative structures, thereby circumventing the regulatory framework of RPT. It recommended broadening the definition of RPTs to include transactions which are undertaken, whether directly or indirectly, with the intention of benefitting related parties. The Report stated that this concept is also captured in the legislation of other jurisdictions, such as the U.K.

SEBI had also issued a Memorandum dated November 2021 to review the regulatory provisions with respect to Related Party Transactions. This stated that it was desirable to include transactions with unrelated parties, the purpose and effect of which was, to benefit the related parties of the listed entity or any of its subsidiaries. It was important to consider the substance of the relationship and not merely the legal form as a part of good governance practice. Hence, the doctrine of substance over legal form has now found its way into the SEBI Regulations also.

MEANING OF TERMS

Interestingly, while the Regulation uses some important terms it does not define them. To apply this definition it also becomes very crucial to better understand the meaning of the two terms “purpose” and “effect”. It is important to bear in mind that the presence of both is mandatory for this definition to get attracted. While the terms are two, the purpose is more important than the effect.

MEANING OF ‘PURPOSE’

Black’s Law Dictionary, 6th Edition defines this term to mean that which one sets before him to accomplish or attain; an end, intention or aim, object, plan, project. The term is synonymous with ends sought, an object to be attained, an intention, etc.

P Ramanatha Aiyar’s The Law Lexicon, 4th Edition defines the word Purpose to mean that which a person sets before himself as an object to be reached or accomplished, the end or aim to which the view is directed in any plan, manner or execution, end or the view itself, design, intention.

In Kevalchand Nemchand Mehta v CIT, [1968] 67 ITR 804 (Bom) it was held that the word purpose implied “the thing intended or the object and not the motive behind the action.”

In Ormerods (India) (P.) Ltd. v CIT, [1959] 36 ITR 329 (Bom) it was held that Purpose may, in some context, suggest object; and purpose may sometimes: suggest motive for a transaction. The word purpose has to be read in its legal sense to be gathered from the context in which it appears. The meaning, as far as possible should be found out from the language of the section itself and without attributing to the Legislature a precise appreciation of the technical appropriateness of its own. But whatever way one reads the word “purpose” it cannot certainly mean a motive for a transaction.

In Smt. Padmavati Jaykrishna v CIT, (1975) 101 ITR 153 (Guj) the Court held that Purpose meant a design of effecting something. Motive was a force which impels a person to adopt a particular course of action. It was highly subjective in character and could be found out mainly from a course of conduct. But purpose was more apparent and had immediate connection with the result which is brought about.

In Newton v Federal Commissioner of Taxation, Privy Council of Australia, [1958] ALR 833 the Court held that the purpose of a contract, agreement or arrangement must be what it was intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect. “The word ‘purpose’ meant, not motive, but the effect which it is sought to achieve the end in view. The word ‘effect’ meant the end accomplished or achieved.”

MEANING OF ‘EFFECT’

Black’s Law Dictionary, 6th Edition defines effect to mean to do, to make, to bring to pass, to execute, enforce, accomplish.

P Ramanatha Aiyar’s The Law Lexicon, 4th Edition defines it as a result which follows a given act; consequence, event; something caused or produced as a result.

MEANING OF ‘BENEFIT’

The pivot on which this definition hinges is whether such a transaction confers a “benefit” upon a related party of the listed entity. The word benefit has been defined in P Ramanatha Aiyar’s The Law Lexicon, 4th Edition to mean “advantage, profit, gain,..”

In State Of Gujarat & Ors vs Essar Oil Ltd., (2012) 1 SCALE 397, the Supreme Court has defined the term “benefit” as follows:

“Now the question is what constitutes a benefit. A person confers benefit upon another if he gives to the other possession of or some other interest in money, land, chattels, or performs services beneficial to or at the request of the other, satisfies a debt or a duty of the other or in a way adds to the other’s security or advantage. He confers a benefit not only where he adds to the property of another but also where he saves the other from expense or loss. Thus the word “benefit” therefore denotes any form of advantage”

Hence, one possible view is that unless there is some benefit / advantage to the related party of the listed entity which would otherwise not have been available to it, the aforesaid definition should not apply. The idea behind enacting the purpose and effect test is to catch those transactions which are not in the ordinary course of business but which are inspired by the sole or dominant motive of benefiting a related party. One or more layers of unrelated parties have been interposed in the transaction but the chain between the listed entity, and the related party as the eventual beneficiary, is clear and visible. To apply this test, the effect of benefiting the related party must be both clear and direct. One touchstone for determining whether there is a benefit is whether the transaction with the unrelated party is in the ordinary course of business / on an arm’s length pricing for the listed entity? If yes, then there would not be any case for stating that there is a benefit which has been extended by the listed entity to the related party.

The above principle draws support from the UK’s Financial Conduct Handbook on which the aforesaid SEBI LODR definition of related party transaction is based. Para 7.3.3 of this Handbook expressly states that the purpose and effect test would not apply to a transaction or arrangement in the ordinary course of business between a listed entity and an unrelated entity which is concluded on normal market terms. However, it may be noted that such an express exemption is not found in the LODR.

Similarly, the Federal Court of Appeal of Canada, in The Queen v Ellan Remai (2009) FCA, 340 has also stated that:

“..whether the terms of a transaction reflect “ordinary commercial dealings between parties acting in their own interests” is not a separate requirement of the legal tests for determining if a transaction is at arm’s length. Rather, the phrase is a helpful definition of an arm’s length transaction…”

Comparable wordings are found in Chapter X-A of the Income-tax Act, 1961 dealing with General Anti-Avoidance Rules or GAAR. According to this, an impermissible avoidance agreement would be one which lacks commercial substance and creates rights which are not on an arm’s length basis. Having an accommodating party in a transaction shows that there is lack of commercial substance. An accommodating party is one who is interposed and the main purpose of that is to claim a (tax) benefit. Thus, the GAAR provisions use the word main purpose to determine whether a party is an accommodating party. This is an entity used to create an illusion of commercial substance to circumvent anti-avoidance rules. The Supreme Court in VNM Arunachala Nadar v CEPT (1962) 44 ITR 352 (SC) has held that whether or not the main purpose of a transaction was defeating anti-avoidance provisions was more a question of fact than a mixed question of fact and law.

COMPLIANCES FOR RPTs

In the event that the purpose and effect test is applicable, then the listed company would need to ensure the following compliances for the RPTs:

(a) All related party transactions and subsequent material modifications shall require prior approval of the audit committee of the listed entity. Only those members of the audit committee, who are independent directors, can approve related party transactions.

(b) A related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year exceeds 10 per cent of the annual consolidated turnover, as per the last audited financial statements of the listed entity.

(c) With effect from 1st April, 2023, a related party transaction to which the subsidiary of a listed entity is a party but the listed entity is not a party, shall require prior approval of the audit committee of the listed entity if the value of such transaction whether entered into individually or taken together with previous transactions during a financial year, exceeds 10 per cent of the annual standalone turnover, as per the last audited financial statements of the subsidiary.

(d) All material related party transactions and subsequent material modifications shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

A transaction with a related party shall be considered material, if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ₹1,000 crores or 10 per cent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower. In addition, the Board of the listed company is required to formulate a Policy on Materiality of Related Party Transactions and on dealing with related party transactions, including clear threshold limits for the same.

WHAT CAN AUDIT COMMITTEES DO?

It may so happen that a listed company transacts with an unrelated party, which in the ordinary course of its business, transacts with a related party of the listed company. At a later date, the listed company realises this but by now prior approval of the Audit Committee has not been obtained for the related party transaction. What can the Audit Committee do in such a case?

Listed Companies could be asked to supply their suppliers / dealers with a list of related parties and instructed that if the suppliers / dealers intend to transact with any of those related parties, then they should first approach the listed companies. This would pre-empt a scenario of the listed company coming to know at a subsequent stage that a dealer has transacted with one of its related parties.

Secondly, when it is faced with a purpose and effect type of RPT, the Audit Committee should examine the nature of benefit, if any, to the related party. The terms of the contract between the listed entity and the unrelated entity, the pricing, the reasonableness, comparison with unrelated transactions, is it in the ordinary course of business, economic substance, etc., are some of the tests which could be applied.

CONCLUSION

Related Party Transactions cannot be done away with altogether. What is important is that they are disclosed adequately and they do not confer any undue benefits on related parties. The purpose and effect test is an important step by SEBI in this respect. Listed companies would be well advised to pay heed to compliances related to RPTs. A slip up could prove very costly!

Allied Laws

11 Bar Of Indian Lawyers Through its President Jasbir Singh Malik vs. D.K. Gandhi PS National Institute of Communicable Diseases

2024 Live Law (SC) 372

14th May, 2024

Advocates — Professionals — Highly skilled — Success depends on various factors — Cannot be compared with business — Cannot be held for deficiency of service. [S. 2(1)(o), Consumer Protection Act, 1986]

FACTS

The Appellant, an advocate was hired by Mr. DK Gandhi (Respondent) for legal services. Disputes arose between them and the Respondent filed a consumer complaint before the district forum for deficiency in services. The District forum decided the complaint in favour of the respondent. The State Commission held that the services of lawyers /advocates did not fall within the ambit of “service” defined under section 2(1)(o) of the CP Act, 1986. The NCDRC, however in the Revision Application preferred by the respondent passed the impugned order holding that if there was any deficiency in service rendered by the Advocates / Lawyers, a complaint under the CP Act would be maintainable.

Being aggrieved by the said impugned order passed by the NCDRC, the present set of appeals has been filed by the Bar of Indian Lawyers, Delhi High Court Bar Association, Bar Council of India.

HELD

With regard to the nature of the work of a professional, which requires a high level of education, training and proficiency and which involves skilled and specialized kind of mental work, operating in the specialized spheres, where achieving success would depend upon many other factors beyond a man’s control, a Professional cannot be treated equally or at par with a Businessman or a Trader or a Service provider of products or goods as contemplated in the CP Act.

The appeal is allowed.

12 Umesh Kumar Gupta vs. Collector Rewa

AIR 2024 MADHYA PRADESH 57

12th January, 2024

Borrower — Non-performing assets — Financial institutions can invoke arbitration clauses as well as recourse under SARFAESI. [S. 11, 14, 35, 37 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI); S.36, Arbitration and Conciliation Act, 1996 (ACA)].

FACTS

The Petitioner is a borrower while respondent No. 2 is a financial institution which had extended a loan facility to the petitioner and to secure the same, the petitioner had mortgaged a certain piece of land. Petitioner defaulted in repayment of the loan leading to the loan account becoming NPA and the financial institution took recourse under SARFAESI. During the SARFAESI proceedings, the Petitioner objected stating that the financial institution had already invoked the arbitration clause in the agreement between the petitioner-borrower and financial institution whereafter award had been passed in favour of the financial institution. The objection was rejected and hence this Petition.

HELD

No doubt Section 11 of the SARFAESI Act mandates disputes to be resolved by way of conciliation and arbitration. Section 35 of the SARFAESI Act stipulates that provisions of the SARFAESI Act shall have overriding effect over anything inconsistent with any other law for the time being in force or any instrument having effect by virtue of any such law. Section 37 prescribes that the provisions of the SARFAESI Act are mandated to take effect in addition to and not in derogation of several statutes. Meaning thereby that the overriding effect of the SARFAESI Act mandated in Section 35 of the SARFAESI Act is diluted to a considerable extent by Section 37 of the SARFAESI Act by providing that the provisions of SARFAESI Act would be in addition to and not in derogation of various enactments referred to in Section 37 of the SARFAESI Act, and also any other law for the time being in force, including Arbitration and Conciliation Act. Hence, no fault can be found with the respondent financial institution invoking Section 14 of the SARFAESI Act by approaching the District Magistrate, Rewa.

13 Binita Dhruv Karia vs. Aashna Dhruv Karia

AIR 2024 (NOC) 194 (BOM)

2nd May, 2023

Guardian — Appointment of Guardian — Mental retardation not covered under “mental illness” — No remedy other than Writ — Mother was allowed to be appointed as the guardian of her major daughter to manage the properties for the well-being of her daughter. [S. 7, Guardians and Wards Act, 1890].

FACTS

The Petitioner is the mother of the ward, a major and sought to be appointed as her legal Guardian. Since the ward was the joint owner of immovable property, it was necessary for the Petitioner to be appointed as the guardian to make decisions for the well-being of her child who suffered from mental retardation. However, there was no remedy other than filing this Writ Petition.

HELD

The child was suffering from mental retardation which is not considered a “mental illness” under section 2(s) of the Mental Health Act, 2017 and the Guardians and Wards Act, 1890 only allows for the appointment of a Guardian for minors. Having considered the peculiar facts, the mother / petitioner was allowed to be appointed as the guardian of her major daughter to manage the properties for the well-being of her daughter as the said properties were jointly owned by her daughter.

The Petition was allowed.

14 Maya Gopinath vs. Anoop S. B. & Anr

SLP (Civil) 13398 of 2022

24th April, 2024

Hindu Law — Stridhan — Wife’s absolute property — Husband has no rights.

FACTS

The Appellant was the wife of the Respondent. On the occasion of their marriage, she was gifted with gold and cash by her family, which was misappropriated by her husband to clear old liabilities. The couple drifted apart and she filed a case for recovery of her assets. The trial court held in favour of the appellant. The High Court reversed the order on the requirement of evidence.

Aggrieved by the said order, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the Stridhan is an absolute property of the wife and the husband has no title. The same can be used by the husband in times of distress and it is his duty to restore the same. In the interest of justice and the passage of time, as compensation for the gold and cash, the apex court directed the husband to pay a sum of R25 lakhs within six months.

15 Shonali Dighe vs. Ashita Tham and others

AIR 2024 (NOC) 242 (BOM)

8th November, 2023

Will — Execution of Will — Under suspicious circumstances — Probate not granted. [S. 63, Succession Act, 1925; S. 68, Evidence Act, 1872].

FACTS

On 20th June, 2003, Mr. Bipin Gupta executed a Will while undergoing treatment for renal failure and hip fracture in Bombay Hospital which is the subject matter of the present suit proceedings. The two Executors named in the Will were Mr. Vasant Sardal and Mr. Behram Ardeshir whereas Will was attested by Mr. Santosh Raje and Mr. Anil Sardal as attesting witnesses. By this Will, Mr. Bipin Gupta bequeathed his entire estate to charity to the exclusion of his family members/legal heirs and indirectly to the Executors. On 04th September, 2003, Mr. Bipin Gupta expired in Flat No. 2, Firdaus Building. The Executors and the attesting witnesses without informing any of his family members took his body for cremation. Neighbours informed the Defendants (family members) about the demise of Mr. Bipin Gupta.

Disputes arose among the parties, the said petition was filed by Mr. Vasant Sardal one of the executors of the Will.

HELD

The Court made several observations such as the doctor treating the deceased is not an attesting witness, the bequest was obscure and in the name of a charitable trust controlled by the executors, the executor and witnesses were related parties, no evidence of who drafted the Will, signatures on each page were not identical and unnatural exclusion of heirs of the testators also raised suspicion.

Hence, the Will was held to be not genuine and the petition was dismissed.

Part A : Company Law

3 In the Matter of M/s Octacle Integration Private Limited

Registrar of Companies, West Bengal

Adjudication Order No. ROC/ADJ/326/223465/2023/12320-12325

Date of Order: 22nd February, 2024

Individual appointed as a director on the Board of the Company without holding DIN at the time of his appointment- amounts to a violation of the provisions of Section 152(3) of the Companies Act, 2013

FACTS

On the basis of the inquiry carried out u/s 206(4) of the Companies Act, 2013, certain violations were pointed out in the inquiry report and it was observed that M/s OIPL had filed form DIR-12 for the appointment of a director Mr SK on 27th August, 2021. The said form was approved on 28th August, 2021. The DIN of the appointed director was 06762192

Further, on a careful examination of the DIN details of Mr SK available on the MCA portal and E-form DIR-12, it was observed that there were differences in the details/data with respect to address, PAN, email ID and Mobile no. of Mr SK and also DIN status was shown as de-activated due to non-filing of Form DIR-3 KYC.

Thereafter, the notice under section 206(1) of the Companies Act, 2013 was issued to M/s OIPL on 27th April 2023 and a reply was received on 12th May 2023. In the reply dated 12th May 2023, Mr SK, residing in the State of West Bengal had submitted the following facts by way of an Affidavit: –

a) At the time of appointment, he was not holding any DIN and inadvertently DIN 06762192 of Mr SK, IAS officer (New Delhi) was used by him for his appointment.

b) Mr SK had applied to obtain DIN in Form DIR-3 in his name and got the DIN 10159546 dated 11th May, 2023.

c) Accordingly, Adjudication Officer (“AO”) had issued Show Cause Notice (“SCN”) dated 12th December, 2023 to Mr SK for giving an opportunity to submit his reply with respect why the penalty under Section 159 of the Companies Act, 2013 should not be imposed for violation of the provisions of Section 152 of the Companies Act, 2013.

Thereafter, two times opportunity for appearing before the AO for a hearing was provided to Mr SK. However, Mr. SK remained absent himself or through his representative from hearing the matter.

CONTRAVENTION OF SECTION 152(3) OF THE COMPANIES ACT, 2013

Section 152(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154(7) (or any other number as may be prescribed under section 153).

Section 159 of the Companies Act, 2013 inter alia provides that “If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues.”

ORDER/HELD

The AO after taking into account the facts, passed an ex-parte order and imposed a penalty on Mr SK having (DIN 10159546) under Section 159 of the Companies Act, 2013 as per the table below for violation of section 152(3) of the Companies Act, 2013:

**The days of default are calculated from the date of appointment as the director i.e., 17th August 2021 till the date of allotment of new DIN i.e., 10th May, 2023.

Mr SK director of M/s OIPL had to pay the amount of penalty individually by way of e-payment within 90 (ninety) days from the date of the order.

Minor’s Dealings – Major Implications

INTRODUCTION

Readers may be aware that the minimum age to vote (under the Constitution of India); for driving (under the Motor Vehicle Act, 1988); for women to get married (under the Prohibition of Child Marriage Act, 2006) is 18 years, etc. Thus, the law places several restrictions on what a minor can and cannot do. However, can a minor enter into contracts, either directly or through his guardian? Can a minor own property / asset? Several such issues crop when dealing with minors. Let us examine some of these questions which could have major ramifications.

MEANING OF A MINOR

The Majority Act, 1875 states that every person domiciled in India shall attain the age of majority on his completing the age of 18 years. In computing the age of any person, the day on which he was born is to be included as a whole day and he shall be deemed to have attained majority at the beginning of the 18th anniversary of that day.Thus,any person below the age of 18 years is a minor.

In addition, the Hindu Minority and Guardianship Act, 1956 lays down the law relating to minority and guardianship of Hindus and the powers and duties of the guardians. It overrides any Hindu custom, tradition or usage in respect of the minority and guardianship of Hindus. According to this law also, a “minor” means a person who has not completed the age of 18 years. The Act applies to:

(i) Any person who is a Hindu, Jain, Sikh or Buddhist by religion.

(ii) Any person who is not a Muslim, Christian, Parsi or a Jew.

(iii) Any person who becomes a Hindu, Jain, Sikh or Buddhist by conversion or reconversion.

(iv) A legitimate / illegitimate child whose one or both parents are Hindu, Jain, Sikh or Buddhist by religion. However, in case only one parent is a Hindu, Jain, Sikh or Buddhist by religion, then the child must be brought up by such parent as a member of his community, family, etc.

GUARDIAN OF MINORS

In India the Guardians and Wards Act, 1890, lays down the law relating to guardians of a minor. A guardian means a person having the care of the minor or of his property, or of both the minor and his property and a ward is defined to mean a minor for whose benefit or property, or both, there is a guardian. A guardian stands in a fiduciary relation to his ward and he must not make any profit out of his office.

CONTRACTS BY MINORS

S.3 of the Indian Contract Act, 1872 states that only a person who has attained the age of majority is competent to contract. The Privy Council, in Mohori Bibee vs. Dharamdas Ghose, (1903) 30 Cal 539, held that contracts involving minors are void ab initio. The Court also held that even if a minor intentionally misrepresents his age, he can still plead minority as a defence to avoid liability. This protects minors from incurring liabilities, as the law deems them incompetent to contract.

In Krishnaveni vs. M.A. Shagul Hameed, Civil Appeal arising out of SLP P(C) No.23655/2019, the Supreme Court held that a minor is not competent to enter into an agreement. It is void as per Section 11 of the Indian Contract Act, 1872. Therefore, the suit founded on the strength of such a void agreement is liable to be dismissed. The Court below declined to accept the said stand on the ground that a minor can be a beneficiary under an agreement.

In Mathai Mathai vs. Joseph Mary Alias Marykutty Joseph (2015) 5 SCC 622, the Court opined that a minor could not have entered into a valid contract in her own name and she ought to be represented either by her natural guardian or a guardian appointed by the Court in order to lend legal validity to the contract in question. This decision has further held that the Indian Contract Act,1872 clearly states that for an agreement to become a contract, the parties must be competent to contract, wherein age of majority is a condition for competency. A deed of mortgage is a contract and it cannot be held that a mortgage in the name of a minor is valid, simply because it is in the interests of the minor unless she is represented by her guardian. The law cannot be read differently for a minor who is a mortgagor and a minor who is a mortgagee as there are rights and liabilities in respect of the immovable property would flow out of such a contract for both of them.

WILL BY A MINOR?

Since a minor is not competent to contract, he cannot even make a Will for his property. The Privy Council in K. Vijayaratnam v Mandapaka Sundarsana Rao, 1925 AIR(PC) 196 has taken a similar view. The Indian Succession Act, 1925 now expressly provides that a minor cannot make a Will. The Act does permit a father to appoint a guardian for his minor child. However,a guardian cannot make a Will for his minor child.Thus, if a minor owning assets dies then he would always die intestate. If such a minor is a Hindu then his property would devolve as per the Hindu Succession Act, 1956.

It may be noted that a minor can be the beneficiary of a private trust created under the Indian Trusts Act, 1882. Every person capable of holding property can be a beneficiary and a minor is capable of holding property. The Full Bench of the Madras High Court in A.T. Raghava Chariar vs O.A. Srinivasa Raghava Chariar, AIR 1917 Madras 630,has held that a minor can be a transferee of property, whether such transfer is by way of sale, mortgage, lease, exchange or gift.

PROPERTY FOR BENEFIT OF HINDU MINOR

The Hindu Minority and Guardianship Act places certain restrictions on the powers of a natural guardian of a Hindu minor. The restrictions on the powers of the natural guardian are as follows:

(a) The natural guardian of a Hindu minor has the power to do all acts which are necessary or reasonable and proper for the minor’s benefit or for the realisation, protection or the benefit of the minor’s estate. However, the natural guardian cannot bind the minor by a personal covenant. Thus, the natural guardian of a minor can acquire property, whether by lease or by purchase, for the minor’s benefit.

(b) The most important restriction placed by the Act on the natural guardian relates to his immovable property. A natural guardian cannot without the prior permission of the Court enter into the following transactions, for or on behalf of the minor:

(i) Mortgage or charge or transfer, by way of sale, gift, exchange or in any other mode, any part of the immovable property of the minor.

(ii) Lease any part of the immovable property of the minor for a period exceeding five years or for a term which would extend to a period more than one year beyond his majority.

Even if the above transactions are for the purported benefit of the minor, the natural guardian would require the prior permission of the Court. The permission must be obtained before entering into the transaction. Any transaction involving disposal of the minor’s immovable property without obtaining the Court’s prior permission for the purposes mentioned above is voidable at the instance of the minor or any person claiming under him. Thus, the transaction is not void ab initio but voidable at the minor’s option. The Court would only grant the permission to the natural guardian, if it is proved that the disposal is a necessity or it is for an advantage to the minor. If the Court is not satisfied on this count, then it would not grant a permission for the disposal.

However, it may be noted that the Supreme Court in Sri Narayan Bal and Others vs. Sridhar Sutar and Others (1996) 8 SCC 54 has held that the above provisions do not envisage a natural guardian of an undivided interest of a Hindu minor in a joint Hindu family property. The above provisions, with the object of saving the minor’s separate individual interest from being misappropriated require a natural guardian to seek permission from the Court before alienating any part of the minor’s estate, but do not affect the right of the Karta or the head of the branch to manage and from dealing with the joint Hindu family property. Hence, the Court held that the above provisions will have no application when a Karta of the HUF alienates joint Hindu property even if one or more coparceners are minor.

GIFTS RECEIVED BY MINORS

While a minor cannot make a gift, there is no bar on him receiving one. A minor suffers disability from entering into a contract but he is thereby not incapable of receiving property. Section 127 of the Transfer of Property Act, 1882 throws light on the question of validity of transfer of property by gift to a minor. It recognises the minors capacity to accept the gift without intervention of guardian, if it is possible, or through him. It states that a donee who is not competent to contract (e.g., a minor) and accepting property burdened by any obligation is not bound by his acceptance. But if, after becoming competent to contract and being aware of the obligation, he retains the property given, he becomes so bound.

The Supreme Court in K.Balakrishnan vs. K. Kamalam, 2004 (1) SCC 581 has held that this clearly indicates that a minor donee, who can be said to be in law incompetent to contract under Section 11 of the Contract Act is, however, competent to accept a non-onerous gift. Acceptance of an onerous gift, however, cannot bind the minor. If he accepts the gift during his minority of a property burdened with obligation and on attaining majority does not repudiate but retains it, he would be bound by the obligation attached to it. Thus, it clearly recognised the competence of a minor to accept the gift. It held that the position in law, thus, under the Transfer of Property Act read with the Indian Contract Act was that the acquisition of property being generally beneficial, a child can take property in any manner whatsoever either under intestacy or by Will or by purchase or gift or other assurance inter vivos, except where it is clearly to his prejudice to do so. A gift inter-vivos to a child cannot be revoked. There was a presumption in favour of the validity of a gift of a parent or a grandparent to a child, if it was complete. When a gift was made to a child, generally there was presumption of its acceptance because express acceptance in his case was not possible and only an implied acceptance could be excepted.

HUFs AND MINORS

Minors can be coparceners in their father’s / grandfather’s HUF. Coparcenery is acquired by birth and there is no bar that only major individuals can be coparceners. However, a minor coparcener cannot be a Karta of an HUF since he has no capacity to contract. In a case where the only coparcener surviving after the father’s death was a minor, the Supreme Court allowed his mother (who was not a coparcener of the HUF) to act as the guardian Karta / manager till such time as the son turned major — Shreya Vidyarthi vs. Ashok Vidyarthi AIR 2016 SC139.

SHARES IN THE NAMES OF MINORS

A minor can hold shares in a company through his guardian — Dewan Singh v Minerva Films Ltd (10958) 28 Comp Cases 191 (Punj). The Articles may impose restrictions on the voting rights of a minor but there cannot be any restrictions on the transfer of shares in favour of a minor — Master Gautam Padival vs. Karnataka Theatres (2000) 100 Comp. Cases 124 (CLB). The Department of Company Affairs (as it was then known) has issued a Circular in September 1963 under the Companies Act 1956, stating that a minor cannot be a subscriber to Memorandum of Association since he cannot enter into any contract. However, there is no objection to his owning shares since in the event of such purchase there will be no covenant subsequent on the part of the minor. The name of the guardian and not that of the minor should be shown on the Register of Members.

Just as a minor can have a bank account, a Demat account can also be opened in the name of a minor. The account will be operated by a guardian till the minor becomes major. The guardian has to be the father or in his absence mother. In absence of both, father or mother, the guardian can be appointed by court. A minor cannot be a joint holder in a demat account.

A minor can apply for securities in an IPO. A minor cannot enter into a contract with a stock broker to purchase or sell any security. However, a Trading account can be opened in the name of the minor only for the sole purpose of sale of securities which minor has possessed by way of investment in IPO, inheritance, corporate action, off-market transfers under the following reason:

  •  Gifts
  •  Transfer between family members
  •  Implementation of Government / Regulatory Directions or Orders

Such an account will be operated by the natural guardian till the minor becomes a major. The minor’s demat / trading account can be continued when the minor becomes major. However, on attaining majority, the erstwhile minor should confirm the account balance and complete the formalities as are required for opening a demat / trading account to continue in the same account.

CAN MINOR BECOME A PARTNER?

Under the Indian Partnership Act, 1930, a person who is a minor cannot be a partner in a partnership firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm. His share is liable for the acts of the firm, but the minor is not personally liable for any such act. The minor cannot sue the partners for accounts or payment of his share of the property or profits of the firm except when severing his connection with the firm, and in such casethe amount of his share shall be determined by avaluation.

At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm. However, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.

Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of 6 months of his attaining majority, shall lie on the persons asserting that fact. Where such person becomes a partner,–

(a) his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

Where he elects not to become a partner,–

(a) his rights and liabilities shall continue to be those of a minor up to the date on which he gives a public notice,

(b) his share shall not be liable for any acts of the firm done after the date of the notice, and

(c) he shall be entitled to sue the partners for his share of the property and profits.

It may be noted that the Limited Liability Partnership Act, 2008 does not have similar provisions for minors being admitted to the benefits of an LLP.

RENUNCIATION OF CITIZENSHIP BY PARENTS

The Citizenship Act, 1955 provides that if any Indian citizen renounces his citizenship, then every minor child of that person also automatically ceases to be an Indian citizen. However, after attaining majority such minor can resume Indian citizenship by making a declaration within one year of becoming a major.

CAN MINORS MAKE REMITTANCES UNDER THE LRS?

Yes. Minors are also eligible to make remittances abroad under the RBI’s Liberalised Remittance Scheme of US$250,000. The RBI has clarified that in case of a minor, Form A2 must be signed by the minor’s natural guardian. It should be noted that the minor’s remittances would not be deducted from his parent’s individual limits.

INCOME-TAX AND MINORS

The provisions relating to clubbing of income of minors with that of their parent under s.64 of the Income-tax Act are quite well known. However, one issue which has garnered attention in recent times is that should the parents also disclose foreign assets owned by the minors in their own Return of Income? Thus, should the Schedule FA of the parent’s Income-tax Return also club disclosures for the foreign assets owned by the minor?

When it comes to minor, the Tribunal has held that only gifts received from defined relatives of the minor himself would be exempt from the purview of s.56(2)(x) of the Income-tax Act. The Mumbai ITAT in the case of ACIT vs. Lucky Pamnani, [2011] 129 ITD 489 (Mum) has held that when minors receive gifts, relationship of the donor should be with reference to the minor who was to be treated as ‘the individual’. With reference to the minor, if the donor was not a defined relative of such minor, then merely because his income is clubbed in the hands of his father, under s.64, a relative of the father does not become a relative of the minor. Accordingly, gifts received from uncle of the father were taxed in the hands of the minor since such a donor was not a relative of the minor, though he was a relative of the father.

CONCLUSION

Due care should be taken in dealing with assets / properties related to minors. A minor slip-up could have major ramifications.

Allied Laws

6 Venkataraman Krishnamurthy and another vs. Lodha Crown Buildmart Private Limited.

2024 SCC OnLine SC 182

Date of order: 22nd February, 2024

Agreement to sale — Agreement clauses included terms for termination — Court bound by the terms of the agreement — Courts cannot unilaterally rewrite terms of agreements [S. 2(g), S. 2(h) Indian Contract Act, 1872].

FACTS

The Appellants intended to purchase an apartment located in Mumbai from the Respondent-developer company. The parties entered into an agreement to sell. As per the said agreement to sale, the Respondent was to construct the property, get necessary approvals / certifications from the Government and deliver the possession of the apartment to the Appellants on said date, failing which, the Appellants had the option to cancel the agreement with full compensation along with interest at 12 per cent per annum. The Respondent failed to deliver the possession of the said apartment owing to certain circumstances. The Appellants, therefore, terminated the contract and requested for a full refund along with interest as per the terms of the agreement. The Respondent, however, denied the termination of the agreement. Aggrieved, the Appellants approached the National Consumers Dispute Redressal Commission (NCDRC). The Ld. NCDRCnoted that though there was a minor delay by the Respondent in handing over the possession of the apartment, the same was not unreasonable. Further, the Ld. NCDRC held the Respondent was to hand over the possession of the apartment within a stipulated time period and if the Appellants wished to terminate the agreement, the Respondent was entitled to deduct the earnest money and interest was restricted to 6 per cent per annum.

Aggrieved by the said order, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the parties had entered into an agreement outlining remedies in case the Respondent failed to hand over possession. Thus, the Hon’ble Supreme Court held that the Ld. NCDRC couldn’t overstep its jurisdiction by rewriting the terms of the agreement of the parties. Further, the Hon’ble Court overturned the decision of the Ld. NCDRC and directed the Respondent to compensate the Appellants as per the terms of the agreement.

7 R. Hemalatha vs. Kashthuri

AIR 2023 Supreme Court 1895

Date of order: 10th April, 2023

Admissibility of Evidence — Suit for Specific Performance — Unregistered Agreement to Sale — Compulsorily registrable document after State Amendment — Effect of non-registration — Can be taken into evidence in a suit for Specific Performance [S. 17, 49, The Registration Act, 1908; S. 17, Tamil Nadu Amendment Act, 2012].

FACTS

The Respondent (Original Plaintiff) instituted a suit for the specific performance of an agreement to sell against the Appellant (Original Defendant). However, the agreement to sale entered between the parties was unregistered. Thus, the preliminary issue which was framed before the Ld. Trial Court pertained to the admissibility of the agreement to sell as evidence. The Ld. Trial Court opined that in view of the Tamil Nadu Amendment Act, 2012, (Amendment Act), an amendment was made to section 17 of the Indian Registration Act, 1908, (Act) whereby, an agreement to sale was made compulsorily registrable. Thus, the Ld. Trial court held that the said agreement to sale cannot be admitted as evidence. Aggrieved, the Original Plaintiff filed an appeal before the Hon’ble Madras High Court. The Hon’ble Court, after relying on section 49(1) of the Act, held that even though the said agreement to sale was unregistered, it can still be taken into evidence considering it was a suit instituted for specific performance.

Aggrieved, an appeal was filed by the Original Defendant before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that though section 17 of the Act was amended by the Amendment Act of Tamil Nadu to make registration compulsory of an agreement to sale, there was no such corresponding amendment made to section 49 of the Act. Further, the Hon’ble Court also noted that an unregistered document affecting any immovable property and which is required to be registered as per section 17 of the Act, may be taken into evidence in a suit instituted for specific performance (subject to section 17(IA) of the Act) under Chapter-II of Specific Relief Act, 1877. Thus, the order of the Hon’ble Madras High Court was upheld.

8 Leela Devi vs. Amar Chand

AIR 2023 Rajasthan 109

Date of order: 2nd May, 2023

Admissibility of Evidence — Suit for partition — Family arrangement between parties — Effect of unstamped and unregistered family arrangement — Admissible evidence — Not liable to be stamped or registered [S. 17, The Registration Act, 1908; S. 2(xx), Rajasthan Stamps Act, 1999].

FACTS

The Petitioner (Plaintiff) had instituted a suit for partition before the Ld. Trial Court. The Defendant had filed a written statement alleging that the parties, being family members, had entered into a family agreement and the properties were partitioned accordingly. The Plaintiff, however, disputed the admission of the said family agreement into evidence, citing that the alleged family agreement was actually a partition deed and the same was neither stamped nor registered. The Ld. Trial Court, however, refused to accept the contentions of the Plaintiff and admitted the family agreement into evidence.

Aggrieved, the Plaintiff filed a writ under Articles 226 and 227 of the Constitution before the Hon’ble Rajasthan High Court.

HELD

The Hon’ble Rajasthan High Court observed that the parties had entered into an oral family agreement which was later reduced to writing. Further, the family agreement was entered in order to resolve the ongoing dispute between the parties and it did not create any new right or title. Thus, the Hon’ble Court held that the alleged document was to be treated as a family arrangement and admitted as evidence. Furthermore, the Hon’ble Court also noted that the family arrangement was neither liable to be stamped according to section 2(xx) of the Rajasthan Stamps Act, 1999 nor liable to be registered under section 17 of the Registration Act, 1908. Thus, the decision of the Ld. Trial Court was upheld.

9 Purni Devi and Anr vs. Babu Ram and Anr

2024 LiveLaw (SC) 273

Date of order: 2nd April, 2024

Limitation — Suit for possession — Execution — Application of execution before a wrong court — Subsequent filing before a correct court — No mala fide intention — Genuine apprehension — Time spent in wrong court to be excluded from limitation period [S. 14, Limitation Act, 1963].

FACTS

The predecessor in interest of the Plaintiff / Appellant had instituted a suit for possession against the Respondent, resulting in a favourable order from the Hon’ble Jammu and Kashmir High Court. However, while filing the application for execution of a decree, the Plaintiff had mistakenly filed it before the wrong District Court [Tehsildar (Settlement), Hiranagar]. Upon realising the error, the Plaintiff immediately filed a fresh application for execution of the decree before the correct District court [Court of Munsiff, Hiranagar]. However, the Ld. District Court rejected the said application on the grounds that the application was filed beyond the period of limitation of three years. On appeal, the Hon’ble Jammu and Kashmir High Court confirmed the decision of the Ld. District Court.

Aggrieved, a Special Leave Petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that there was some delay beyond the limitation period of three years. However, the Hon’ble Court also noted that filing of execution application before the wrong forum was not under any mala fide intention. Further, the Plaintiff had acted in good faith and with genuine apprehension.

Therefore, relying on section 14 of the Limitation Act, 1963, the Hon’ble Court held that time spent contesting bona fide litigation at the wrong forum shall be excluded when calculating the limitation period. Thus, the decision of the Hon’ble Jammu and Kashmir High Court was overturned.

10 Annapurna B. Uppin and Ors. vs. Malsiddappa and Anr.

2024 LiveLaw (SC) 284

Date of order: 5th April, 2024

Partnership firm — Loan advanced to firm — Unable to repay the loan — Deceased Partner — Commercial transaction — Outside of the purview of consumer laws — Legal heirs of the partner not liable to repay the loan [S. 63, Partnership Act, 1932, Consumer Protection Act, 1986].

FACTS

The Respondent had advanced a loan to a partnership firm. The firm was, however, unable to repay the said loan. Aggrieved, the Respondent approached the National Consumer Disputes Redressal Commission (NCDRC) for deficiency in service. The Ld. NCDRC ordered the Appellant and the legal heirs of the second deceased partner to repay the said loan along with interest.
Aggrieved by the said order, a Special Leave Petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme observed that the loan was given for deriving interest on the principal loan amount. Therefore, the said transaction was in the nature of an investment for deriving profits / gains. Thus, the said transaction is of commercial nature and outside the purview of the Consumer Protection Act, 1986. Therefore, the Hon’ble Court held that Ld. NCDRC did not have the jurisdiction to adjudicate the matter in the first place. Further, the Hon’ble Court also observed that out of the two partners who were running the firm, the managing partner had expired one year after the loan was received. Therefore, the partnership firm ceased to exist from the date of the death of the managing partner. The Hon’ble Court held that after the death of a partner, the liability of the deceased partner does not pass on to its legal heirs. Thus, the decision of the Ld. NCDRC was set aside.

Part A : Company Law

20 In the Matter of M/s Blue Sapphire Healthcares Private Limited

Registrar of Companies, NCT of Delhi & Haryana

Adjudication Order No. ROC/D/Adj/Section 118/Blue Sapphire/3143-3149

Date of Order: 9th August, 2023

Adjudication Order for delay in circulation of draft Board Minutes to Directors of the Company and delay in entry of minutes in Minutes’ Book which amounts to violation of provisions of Clause 7.4 and 7.5 of the Secretarial Standard — I (SS-1) issued by the Institute of Company Secretaries of India (ICSI) read with Section 118(10) of the Companies Act, 2013.

FACTS

M/s BSPL initially made a suo moto application before the office of the Registrar of Companies, NCT of Delhi & Haryana (“ROC”) for adjudication of non-compliance with regards to delay in circulation of 2 (two) draft Board meeting minutes to its directors, which amounts to violation of provisions of Clause 7.4 of the Secretarial Standard–I (SS-1) issued by Institute of Company Secretaries of India read with Section 118(10) of the Companies Act, 2013.

M/s BSPL had conducted its Board meetings on24th September, 2021 and 21st January, 2022. Thereafter as per Clause 7.4 of SS-1, the draft minutes were required to be circulated on or before 9th October, 2021 and 5th February, 2022 respectively. However, M/s BSPL circulated the draft minutes for the Board Meetings on 22nd October, 2021 and 2nd March, 2022, respectively i.e. beyond the 15 days timeline from the date of holding of the meeting.

The ROC on the basis of said application observed that M/s BSPL not only had committed delay in circulating the draft minutes, but also committed default of delay in entering the minutes in the Minute Book timely. The following table depicts the default:

Particulars of events 3rd Board Meeting of FY 2021-22 4th Board Meeting of FY 2021-22
Date of Board Meeting 24th September, 2021 21st January, 2022
Due date for circulation of Draft Minutes as per Para 7.4 of SS-1 9th October, 2021 5th February, 2022
Draft Minutes circulated on (Default for Suo-moto application filed by M/s BSPL) 22nd October, 2021 2nd March, 2022
Due date for entry of Minutes in the Minute Book as per Para 7.5 of SS-1 24th October, 2021 20th March, 2022
Minutes entered in Minute Book (Default observed by ROC on the basis of application received in the case) 29th October, 2021 9th March, 2022

 

Thereafter, the ROC issued show cause notice (“SCN”) to M/s BSPL and its officer for default with regard to non-compliance of provisions of Clause 7.5 of SS-1 for delay or late entry of minutes in the Minutes books. Subsequently, M/s BSPL in its reply to SCN admitted the violation of Clause 7.5 of SS-1.

Relevant Provisions of SS-1 and Companies Act, 2013:

SS-1 Clause 7.4. Finalisation of Minutes: –

“Within fifteen days from the date of the conclusion of the Meeting of the board or the Committee, the draft Minutes thereof shall be circulated by hand or by speed post or by registered post or by courier or by e-mail or by any other recognised electronic means to all the members of the Board or the Committee for their comments.”

SS-1 Clause 7.5 Entry in the Minutes Book: –

7.5.1 Minutes shall be entered in the Minutes Book within thirty days from the date of conclusion of the Meeting.

Section 118 of the Companies Act, 2013

Minutes of Proceedings of General Meeting, Meeting of Board of Directors and Other Meeting and Resolutions Passed by Postal Ballot: –

(1) Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors, and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

(10) “Every company shall observe secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 (56 of 1980), and approved as such by the Central Government.”

(11) If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

HELD

Adjudication Officer (“AO”) after considering the facts of the case and submissions made, noted that provisions of Section 118 read with clause 7.4 and clause 7.5 of SS-1 for the aforesaid 2 (two) Board meetings ofM/s BSPL had not been complied for which ROC imposed the penalty on M/s BSPL and its officer in default except one of the directors Mr. MKM who ceased to be director w.e.f. 21st January, 2022. Hence, he was not considered as officer in default for the violations pertaining to only the Board meeting held on 21st January, 2022.

 

Sr. No. Name of Person on which penalty imposed Violation provisions of Section 118 of the Act and Clause 7.4 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Violation provisions of Section 118 of the Act and Clause 7.5 of SS-1 for meetings held on 24th September, 2021 and 21st January, 2022. Penalty imposed under Section 118 of the Companies Act, 2013
1. M/s BSPL Yes Yes ₹1,00,000/- (₹25,000/- for
two defaults in each of the two Board meetings)
2. Mr. MKM (Wholetime Director) Yes, except meeting dated
21st January, 2022		 Yes, except meeting dated
21st January, 2022		 ₹10,000/- (₹5,000/- for each event of default on officer in default)
3. Mr. AP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
4. Mr. PP (Wholetime Director) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)
5. Mr. NKP (Managing Director) Yes Yes ₹20,000/- (₹5,000/- for each event of defaulton officer in default)
5. Mr. SM (Company Secretary) Yes Yes ₹20,000/- (₹5,000/- for each event of default on officer in default)

The amount of penalty was ordered to be paid through the MCA website, within 90 days of the receipt of the order and intimate by filing Form INC-28.

21 IN THE MATTER OF M/S CONTLO TECHNOLOGIES PRIVATE LIMITED

Registrar of Companies, Karnataka

Adjudication Order No. ROCB/ADJ.ORDER/SECTION 90(4)/CONTLO/Co. No.152010/2022

Date of Order: 9th November, 2022

Adjudication Order imposing penalty for delay in filing of Form BEN-2 with regards to declaration of Significant Beneficial Ownership (SBO) which amounts to violation of provisions of section 90 of the Companies Act, 2013.

FACTS

M/s CTPL suo-moto filed an adjudication application on 22nd August, 2022 for violation of sub-section (4) of section 90 of the Companies Act, 2013 before Registrar of Companies, Karnataka (“ROC”), for which hearing was held on 19th October, 2022.

It was noticed from the application that the share capital of M/s CTPL was held by 3 (three) shareholders, of which majority of the shares were held by a body corporate. Hence M/s CTPL identified that the provisions of Significant Beneficial Ownership (“SBO”) were applicable to M/s CTPL.

Thereafter, M/s CTPL had received a declaration in Form BEN-1 on 20th January 2022 which was required to be reported to the ROC in Form BEN-2 within 30 days of obtaining the declaration in Form BEN-1. However, M/s CTPL missed out the filing of Form BEN-2 within the required time period, i.e. on or before 19th February, 2022 but M/s. CTPL filed the Form BEN-2 with ROC on 2nd August, 2022 with a delay of 163 days.

Thus, M/s CTPL had failed to comply with the provisions of sub-section (4) of Section 90 of Companies Act, 2013 and Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

During the hearing, the authorised representative of M/s. CTPL made written submissions, as directed by the ROC.

It was observed from the form BEN-2 that 99.98 per cent of M/s CTPL shares were held by M/s CI, USA. Hence M/s. CTPL was not a small company as defined under Section 2(85) of the Companies Act, 2013.

Provisions of section 90(4) of the Companies, 2013 require that every company shall file a return of Significant Beneficial Owners of the company and changes therein with the Registrar containing names, addresses and other details in Form No. BEN-2 within 30 days from the date of receipt of declaration from Significant Beneficial Owner, as prescribed in Rule 4 of Companies (Significant Beneficial Owners) Rules, 2018.

Sub-section(11) of Section 90 of the Companies Act, 2013, stipulates that a company, required to maintain register under sub-section (2) and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein, the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to maximum of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of twenty five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

HELD

Accordingly, an Adjudication officer (‘AO’) as per powers vested under Section 454(3) of the Companies Act, 2013, imposed a penalty on M/s CTPL and its directors under Section 90 (11) of the Companies Act, 2013 as per below table:

Sl. No. Particulars Period of Default
(19th February, 2022 to
1st August, 2022) 163 days		 Penalty Imposed (₹)
1. M/s CTPL R1,00,000 + (500*163 days) 1,81,500/-
2. Mr MNS, Director R25,000 + (200*163 days) 57,600/-
3. Mr IB, Director R25,000 + (200*163 days) 57,600/-
TOTAL 2,96,700/-

 

 

The penalty amount was to be remitted by M/s CTPL and its officers through the MCA portal within 60 days from the date of the order. M/s CTPL was required to file INC-28 as per the provisions of the Companies Act, 2013.

Reconciling Inconsistencies in a Document

INTRODUCTION

“To err is human” so the saying goes. Human error and mistakes could creep in even after due care and caution. Agreements / documents could be the subject matter of such mistakes. One often comes across inconsistencies in a document where the earlier part is at contradistinction to the later part. In such a scenario, how does one reconcile such discrepancies? The Supreme Court in a recent decision in the case of Bharat Sher Singh Kalsia vs. State of Bihar, Criminal Appeal No. 523 of 2024 (Special Leave Petition (CRL.) No. 6562 of 2021), Order dated 31st January, 2024, had an occasion to consider this issue. Let us analyse the position in this respect based on this as well as other decisions.

FACTS OF BHARAT SHER (SUPRA)

A Power of Attorney was granted in respect of an immovable property for its management and maintenance. It was provided therein that the Power of Attorney holder shall pursue litigation, file a plaint after obtaining signature of the land owners / principals of the Power of Attorney. Clause 3 of the Power of Attorney entitled the Power of Attorney holder to execute any type of Deed and to receive consideration on behalf of the landowners / executors of the Power of Attorney and get such Deed registered. Clauses 3 and 11 read with Clause 5 gave full authority to the Power of Attorney holder to sell the property, get the Sale Deed registered and receive consideration. Clause 15 empowered the holder to present for registration all the sale deeds or other documents signed by the owner.

The plea of the respondents was that a perusal of the Power indicated that as per Clause 3, the Power of Attorney holder was authorised to execute any type of deed, to receive consideration in this behalf and to get the registration done thereof. Clause 11 of the Power of Attorney further made it clear that the Power of Attorney holder had the authority to sell movable or immovable property including land, livestock, trees etc. and receive payment of such sales on behalf of the land-owners / principals. However, Clause 15 of the Power of Attorney stated that the Power of Attorney holder was authorised to present for registration the sale deed(s) or other documents signed by the landowners / principals and admit execution thereof before the District Registrar or the Sub Registrar or such other officer as may have authority to register the said deeds and documents, as the case may be, and take back the same after registration. The dispute resolved over whether the Power of Attorney holder had power to sell the property or only had a limited power to register the sale documents executed by the landowners. In short, which clauses prevailed, Clauses 3 and 11 or Clause 15?

COURT’S VERDICT IN BHARAT SHER (SUPRA)

The Supreme Court held that it was required to interpret harmoniously as also logically the effect of a combined reading of the impugned three clauses. Its endeavour would, in the first instance, necessarily require the Court to render all three clauses as effective and none as otiose. In order to do so, the Court would test as to whether all the three clauses could independently be given effect to and still not be in conflict with the other clauses. It dissected the three clauses as follows:

(a) Clause 3 pertained to execution of any type of deed and receiving consideration, if any, on behalf of the land-owners / principals and to get the registration thereof carried out. Basically, this took care of any type of deed by which the Power of Attorney holder was authorised to execute and also receive consideration and get registration done on behalf of the land-owners / principals.

(b) Clause 11 of the Power of Attorney dealt specifically with regard to sale of movable or immovable property including land and receiving payments of such sales on behalf of the landowners / principals. Thus, Clauses 3 and 11 of the Power of Attorney together authorised the Power of Attorney holder to execute deeds, including of / for sale, receive consideration in this regard and proceed to registration upon accepting consideration for and on behalf of the land-owners / principals.

(c) Clause 15 of the Power of Attorney stated that the holder was authorised to present for registration the sale deeds or other documents signed by the landowners/ principals and admit execution thereof. The Apex Court held that it was in addition to Clauses 3 and 11 of the Power of Attorney and not in derogation thereof. The Power of Attorney holder had been authorised to execute any type of deed and receive consideration and get registration done, which included sale of movable/ immovable property on behalf of the land-owners/ principals. In addition, the land-owners / principals had also retained the authority that if a Sale Deed was/ had been signed by them, the very same Power of Attorney holder was also authorised to present it for registration and admit to execution before the authority concerned.

The Court observed this was not a situation where the land-owners / principals had executed a Sale Deed in favour of any third party prior to the Sale Deed executed and registered by the Power of Attorney-holder. Further, it held that if the Power of Attorney-holder had gone ahead himself and registered a different or a subsequent Sale Deed, the matter would be entirely different. There was no contradiction between Clauses 3, 11 and 15 of the Power of Attorney. To restate, Clause 15 of the Power of Attorney was an additional provision retaining authority for sale with the land-owners / principals themselves and the process whereof would also entail presentation for registration and admission of its execution by the Power of Attorney-holder. The Court opined that all three clauses were capable of being construed in such a manner that they operated in their own respective fields and were not rendered nugatory.

RECONCILIATION PRINCIPLE

The Supreme Court also reiterated the principle that states that when different clauses in a document or a Deed or a Contract cannot be reconciled, the earlier clauses would prevail over the later clauses. The Privy Council of Canada in Forbes vs. Git [1922] 1 A.C. 256 has explained this as follows:

“The principle of law to be applied may be stated in few words. If in a deed an earlier clause is followed by a later clause which destroys altogether the obligation created by the earlier clause, the later clause is to be rejected as repugnant and the earlier clause prevails. In this case the two clauses cannot be reconciled and the earlier provision in the deed prevails over the later. Thus, if A covenants to pay 100 and the deed subsequently provides that he shall not be liable under his covenant, that later provision is to be rejected as repugnant and void, for it altogether destroys the covenant. But if the later clause does not destroy but only qualifies the earlier, then the two are to be read together and effect is to be given to the intention of the parties as disclosed by the deed as a whole. …”

The above Privy Council decision has been approved by a Three-Judge Bench of the Supreme Court in Radha Sundar Dutta vs. Mohd. Jahadur Rahim, AIR 1959 SC 24. In that case, the Court held that it is a settled rule of interpretation that if there be admissible two constructions of a document, one of which will give effect to all the clauses therein while the other will render one or more of them nugatory, it is the former that should be adopted on the principle expressed in the maxim “ut res magis valeat quam pereat”. This maxim means that it is better for a thing to have an effect than for it to become void. However, where the maxim cannot be implemented, then if there is a conflict between the earlier clause and the later clauses of a document by which it is not possible to give effect to all of them, then the rule of construction was well-established that it is the earlier clause that must override the later clauses and not vice versa.

The Delhi High Court in Sunil Kumar Chandra vs. M/s Spire Techpark Pvt Ltd, 2023/DHC/000492 has held that it has been held in a catena of judgments by the Hon’ble Supreme Court that where there exists any iota of inconsistency between two provisions of a same instrument, the former clause shall prevail over the latter one. It referred to the Supreme Court’s decision Ramkishorelal vs. Kamal Narayan; 1963 Supp (2) SCR 417 wherein the Court held as follows:

“12. The golden Rule of construction, it has been said, is to ascertain the intention of the parties to the instrument after considering all the words, in their ordinary, natural sense. ….. It is clear, however, that an attempt should always be made to read the two parts of the document harmoniously, if possible; it is only when this is not possible, e.g., where an absolute title is given is in clear and unambiguous terms and the later provisions trench on the same, that the later provisions have to be held to be void.”

INFIRMITY IN CLAUSES IN A WILL

What happens if a Will suffers from such an infirmity, i.e., the Clauses in a Will are at variance with each other? The Supreme Court had an occasion to consider such a situation in Mauleshwar Mani vs. Jagdish Prasad, 2002 (2) SCC 468. In this case, the testator bequeathed all his assets and properties to his wife with the power of alienation but in a later part of the Will, he bequeathed the same also in favour of his grandsons. The Court observed that the first part of the “Will” provided that after the death of the testator or author of the Will, his wife was entitled to the entire assets and properties with the right of transfer. The second part of the will is that after the death of his wife, the grandsons would inherit the property. Here, what the Court was concerned with was whether the wife acquired an absolute estate or a limited estate under the Will. Thus, the issue before the Court was whether the subsequent bequest in favour of the grandsons was valid considering the earlier absolute interest created by the testator in favour of his wife. The Court held that the general rule of construction of a Will was that a Will had to be read in its entirety and effort should be made that no part of it was excluded or made redundant. It was the duty of the court to reconcile if there was any apparent inconsistency in a Will.

The Apex Court held that it was obvious that the testator conferred an estate by providing that the wife would be entitled to get the property with right of alienation. Where the property was given by a testator with a right of alienation, such bequeath was a conferment of an absolute estate. The Will, therefore, gave an unlimited and an absolute estate to the wife. It held that where an absolute estate was created by a Will, the clauses in the Will which were repugnant to such absolute estate could not cut down the estate; but they must be held to be invalid. It laid down the following legal principle:

(a) Where under a Will, a testator had bequeathed his absolute interest in the property in favour of his wife, any subsequent bequest which was repugnant to the first bequeath would be invalid;

(b) Where a testator had given a restricted or limited right in his property to his widow, it was open to the testator to bequeath the property after the death of his wife in the same Will.

Once the testator has given an absolute right and interest in his entire property to a person, he could not again bequeath the same property in favour of the second set of persons in the same Will. The object behind is that once an absolute right is vested in the first person, the testator cannot change the line of succession of the first person. Where a testator confers an absolute right on anyone, the subsequent bequest for the same property in favour of other persons would be repugnant to the first bequest in the Will and would be held invalid. Accordingly, it concluded that under the Will, the wife had got an absolute estate and, therefore, subsequent bequest in the same Will in favour of the grandsons was repugnant to the first bequest and, therefore, invalid.

In Madhuri Ghosh vs. Debobroto Dutta, AIR 2016 SC 5242, the Supreme Court held that the position is clear that where an absolute bequest has been made in a Will in respect of certain property to certain persons, then a subsequent bequest made qua the same property later in the same Will to other persons will be of no effect.

Interestingly, the Indian Succession Act, 1925 deals with the construction of Wills. S. 88 provides that where two clauses of gifts in a Will are irreconcilable, so that they cannot possibly stand together, the last shall prevail. The section gives an Illustration that the testator by the first clause leaves his estate to A and by the last clause leaves it to B and not to A. In this case, B will have it. In Kailvelikkal Ambunh1 (Dead) vs. H. Ganesh Bhandary, 1995 (5) SCC 444, the Court explained that a Will may contain several clauses and the latter clause may be inconsistent with the earlier clause. In such a situation, the last intention of the testator is given effect to and it is on this basis that the latter clause is held to prevail over the earlier clause. This is regulated by the well-known maxim “cum duo inter se pugnantia reperiuntur in testamento itltinium ratum est” which means that if in a Will there are two inconsistent provisions, the latter shall prevail over the earlier. Thus, s.88 is at variance with the aforesaid Supreme Court decisions.

The commentary “The Indian Succession Act”, Paruck, 11th Edition, Lexis Nexis, seeks to reconcile the dichotomy between s. 88 and the decisions and states that this section does not apply where in fact there is a conflict between the earlier and later clauses and it is not possible to give effect to all of them. Then the rule of construction is well established that it is the earlier clause that must override the later clause and not vice versa.

CONCLUSION

The old adage “better safe than sorry” would clearly be useful in all cases when drafting documents. Pay attention to inconsistencies, especially when preparing a Will. A small slip could lead to years of wasteful litigation between the beneficiaries of the Will. Similarly, when drafting contracts, any error could prove very expensive to either party.

Allied Laws

55 In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899

AIR 2024 Supreme Court 1

Date of Order: 13th December, 2023

Arbitration Agreement — Unstamped agreement or insufficiently stamped agreement — Validity- Reference to a larger Bench — Curable defect — Enforceable- Principle of severability — Doctrine of competence — Agreement neither void nor voidable — [S. 7, 8, 11, Arbitration and Conciliation Act, 1996; S. 33, 35, Indian Stamps Act, 1899; S. 2(g), Indian Contract Act, 1872].

FACTS

An arbitral agreement between two or more parties is an underlying contract usually in the form of a clause in an original agreement / contract or a separate arbitral agreement based on the original agreement. This original agreement, thus, is an instrument which is mandated to be stamped under the Indian Stamps Act, 1899 (Stamp Act). Whenever an application is made before a court for the appointment of an arbitrator under section 8 of the Arbitration and Conciliation Act, 1996, an argument is normally made that the original agreement is not sufficiently stamped and thus, the arbitration agreement (or clauses) is inadmissible before the court. This issue was discussed at length before the Hon’ble Supreme Court before a five-member bench in the case of N.N. Global Mercantile Pvt Ltd vs. Indo Unique Flame Ltd & Ors [(2023) 7 SCC 1]. The Hon’ble Court in a 3:2 majority held that an unstamped arbitral agreement is void and thus lacked legal enforceability.

However, in a curative petition filed in one of the arbitration cases, the correctness of this decision was questioned. Subsequently, the question was referred to a larger bench. The primary issue which was referred to the seven-member bench of the Hon’ble Supreme Court was to ascertain the validity of an arbitration agreement if the underlying contract was unstamped or insufficiently stamped.

HELD

The Hon’ble Supreme Court observed that agreements which are inadequately stamped or are unstamped are deemed inadmissible in evidence as per Section 35 of the Stamp Act. However, such agreements are not automatically void, void ab initio, or unenforceable. The Hon’ble Court held that an instrument which is unstamped or insufficiently stamped would be inadmissible in evidence, however the same is a curable defect and that in itself does not make the agreement void or unenforceable. Further, relying on the principle of severability of an arbitration agreement and doctrine of competence-competence, the Court further held that objections regarding the stamping of the agreement fall under the jurisdiction of the Arbitral Tribunal and not judicial courts.

56 K. Loganathan vs. A. Elaango

AIR 2024 Madras 10

Date of Order: 2nd November, 2023

Evidence — Suit for recovery of money —Application for admission of electronic evidence — Non-production of 65B certificate — Mandatory provision- Curable defect- Production of Certificate- Any time before completion of Trial. [S. 65B, Indian Evidence Act, 1872; O.7 R. 14(3) Code for Civil Procedure, 1908].

FACTS

The Petitioner / Plaintiff instituted a suit against the Respondent in City Civil Court for recovery of money from Respondents. The Petitioner alleged that he had given a loan to Respondent which has not been repaid. The Petitioner, filed an application before the court to take on record, as additional evidence, certain electronic data such as a CD Compact, call history recordings and transcriptions wherein, the Respondent had confirmed the non-repayment of the loan. However, due to the non-production of the certificate mandated under s. 65B of the Indian Evidence Act, 1872 (Act), the Ld. Trial court rejected the said application of the Petitioner.

Aggrieved, the Plaintiff filed a civil revision petition under Article 227 of the Constitution before the Hon’ble Madras High Court.

HELD

The Hon’ble Madras High Court observed that the production of the certificate mandated under section 65B of the Act is a mandatory provision. However, the Court held that non-production of the certificate is a curable defect. This defect can be cured any time before the trial is over. Thus, the order of the Trial Court dismissing the application of the plaintiff was overturned.

57 Ashwani Sharad Pendese and Anr vs. Registrar of Hindu Marriage

AIR 2024 Rajasthan 23

Date of Order: 7th December, 2023

Registration of Marriage — Hindu — Husband, a resident of foreign residence — Denial of registration — Not mandatory that couple should be of Indian citizens [S. 5, 8, Hindu Marriage Act, 1955; S. 8, Rajasthan Compulsory Registration of Marriages, 2009, Article 14, Constitution of India.].

FACTS

The petitioners are a married couple. The wife (Petitioner No-1) is a Hindu and a resident of India, while the husband (Petitioner-2) is a Hindu residing in Belgium and frequently travels to India. The Petitioners are married as per Hindu rites and have a valid certificate of marriage from Arya Samaj, Ajmer. The Petitioners had submitted an application before the Hindu Marriage Registrar (Respondent) in order to get their marriage registered. However, the Respondent refused to register the marriage on the grounds that the husband was not a citizen of India.

Aggrieved, the Petitioner filed a Writ Petition under Article 226 of the Constitution before the Hon’ble Rajasthan High Court.

HELD

The Hon’ble Rajasthan High Court held that the Respondent cannot refuse to register the marriage of the Petitioner solely on the ground that the husband was a foreign national. Further, the Hon’ble Court held that the action of denying registration was violative of Article 14 of the Constitution. Thus, the Court ordered to accept the registration application of the Petitioners.

58 Sanyunkta Sangarsh Samiti and Anr vs. The State of Maharashtra and Ors

AIR 2024 Supreme Court 204

Date of Order: 15th December, 2023

Slum Rehabilitation Scheme- Allotment of flats- Settlement deed between residents and developers to allot flats — Private Agreement — Allotment as per the mandate of Slum Rehabilitation Authority — Public Policy- Lottery-based allotment. [S.3B, Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971; Development Control Regulation, Maharashtra Regional Town Planning Act, 1966; Circular No. 162 of Slum Rehabilitation Authority].

FACTS

The Slum Rehabilitation Authority of Maharashtra (SRA) proposed a scheme to rehabilitate nearly 1,800 slum dwellers under the Slum Rehabilitation Scheme (SRS), governed under the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971. As per this Scheme, more than 70 per cent of the slum dwellers were to form a cooperative housing society and show their willingness to join the SRS. Thus, the slum dwellers unitedly formed a cooperative housing society (Respondents). The SRA had chosen a developer of Respondent’s choice for the construction of low-cost houses. However, shortly after the construction began, the project was stalled due to interference caused by a small section of slum dwellers (Appellants). The Appellants formed their own minority housing society. The Appellants and the developer initiated a legal battle which ended in a settlement deed whereby, the developer was to allot flats/houses to the Appellants. Despite a settlement deed between Appellants and developer, the SRA denied allotment of houses as per the settlement deed and proceeded with its own policy of lottery-based allotment. Aggrieved, the Appellants filed a petition before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court dismissed the petition.

An appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the SRA was bound by its own established policies and rules in order to prevail over public policy. Further, as per the mandate of SRA, the allotment of houses has to be done as per a lottery system. Thus, private agreements between parties cannot be enforced in SRS since it is against the mandate of SRA. The appeal was thus dismissed.

59 S. Rajaseekaran vs. Union of India and Ors.

AIR 2024 Supreme Court 583

Date of Order: 12th January, 2024

Motor Vehicles — Hit-and-Run cases — Compensation under scheme — Effective Implementation — Direction issued [S. 145(d). 161(3), The Motor Vehicle Act, 1988].

FACTS

The Petitioner, a leading orthopaedic surgeon, filed a writ petition under Article 32 of the Constitution for effective implementation of s. 161 of The Motor Vehicle Act, 1988 (Act) which dealt with grant of compensation in cases of hit-and-run cases. According to s. 161 of the Act, an accident involving a motor vehicle can be considered a hit-and-run accident, provided the identity of the vehicle that caused the accident cannot be ascertained despite reasonable efforts. The victims or the legal representatives of such victims are entitled to compensation after making the necessary application before a Claims Enquiry Officer. However, it was discovered that a small percentage of victims or their legal representatives have actually sought compensation over the years. This was because the victims or their legal representatives were not made aware of compensation rights.

HELD

The Hon’ble Supreme Court after examining various reports including the annual report of the General Insurance Council for the financial year 2022-23 issued directions for the implementation of the scheme prescribed under s. 161 of the Act. The Hon’ble Court held that if the identity of the vehicle that caused the accident is not ascertainable after making reasonable efforts, the police officer in charge must inform the victims or their legal representatives about the scheme of compensation. Further, within one month of the accident, the officer-in-charge must forward the First Accident Report (FAR) to the Claims Enquiry Officer as per Clause 21(1) ofthe Scheme. Furthermore, the Hon’ble Court also held that a Monitoring Committee at the district level should be formed, comprising the Secretary of the District Legal Service Authority, the district’s Claims Enquiry Officer, and a police officer of Deputy Superintendent rank or above nominated by the District Superintendent of Police. The Committee shall meet at least once every two months to monitor the implementation of the Scheme in the district and the compliance with the aforesaid directions.

Allied Laws

50 Late Kalu Gapliya (Through Legal Heirs) vs. Seeta Nathu and others

AIR 2023 (NOC) 820 (MP)(HC)

Date of Order: 8th August, 2023

Evidence — Land Dispute — Ownership — Adoption Deed between Petitioner and father of Respondents — Thumb impression of Respondents suggesting consent — Denial — Application in Trial court for verification of thumb impression by expert – Rejection of application — Failure to show expert aware of thumb impression of Respondents as mandated — Thumb impression unique — Cannot be forged easily — Rejection of application erroneous. [S. 45, 47, Indian Evidence Act, 1872].

FACTS

The Petitioner and Respondent were involved in a legal dispute over land ownership. The Petitioner claimed that he had absolute ownership in the suit property and as such, the recordings of the Respondent’s name in the land revenue records were illegal. The Petitioner, in the Trial court, relied upon an adoption deed entered between him and the erstwhile owner of the suit property (father of Respondents) in order to prove absolute ownership of the suit property. The Petitioner further claimed that the adoption deed consisted of thumb impressions of the Respondents, indicating their consent to the adoption deed. The Respondents, however, in the trial court denied the existence of any such adoption deed and further maintained that they had not put any thumb impression on such alleged adoption deed. Thus, in order to prove the genuineness of the adoption deed, the Petitioner filed an application before the trial court under section 45 of the Indian Evidence Act, 1872 (Evidence Act) for examination of the thumb impression of the Respondents. However, the Ld. Trial court rejected the application, citing the Petitioner’s failure to confirm whether the handwriting expert was familiar with the Respondent’s thumb impressions, as required by section 47 of the Evidence Act.

A Writ petition was filed before the Hon’ble Madhya Pradesh High Court (Indore Bench) challenging the said rejection.

HELD

The Hon’ble Madhya Pradesh High Court observed that in order to verify the thumb impression of the Respondents and to prove the genuineness of the adoption deed thereof, it was necessary to appoint a handwriting expert. Relying on the decision of the Hon’ble Supreme Court in the case of Lachhmi Narain Singh (D) through Lrs and Ors vs. Sarjug Singh (Dead) through Lrs and Ors [AIR 2021 SC 3873], the Hon’ble High Court held that the reasoning given by the Ld. Trial court for rejection of the application of the Petitioner was misplaced. Further, since the thumb impression of every person is different, its forgery is nearly impossible. Thus, it was not necessary for a handwriting expert to be personally aware of the thumb impression of the Respondents. An examination of its correctness can be made regardless. Furthermore, the Hon’ble High court also noted that section 47 of the Evidence Act merely talks about relevancy and it does not control section 45 of the Evidence Act.

The application of the Petitioner before the Ld. Trial court was thus allowed.

51 Ghanshyam Gautam & Anr vs. Late Usha Rani (Through Legal Heirs)

SLP (Criminal) 3289 of 2018

Date of Order: 4th January, 2024

Negotiable Instrument — Conviction — Subsequent settlement between parties — Settlement Deed — Conviction order to be quashed. [S. 138, Negotiable Instruments Act, 1881].

FACTS

The Petitioner and Respondent were involved in a legal dispute which resulted in the conviction of the Petitioner and subsequent sentencing under section 138 of the Negotiable Instruments Act, 1881 (NI ACT) by the Hon’ble Himachal Pradesh High Court (Shimla Bench). The Petitioner filed an appeal before the Hon’ble Supreme Court. However, before the matter was called for hearing before the Hon’ble Court, the parties had already settled their dispute and filed their compromise deed. According to the compromise deed, the Respondent was to receive a stipulated amount as a full and final settlement and was to bear the fine which was imposed by the Ld. Trial court.

HELD

The Hon’ble Supreme Court held since the settlement had been reached between the parties and that the complainant (Respondent) had signed the deed accepting a particular amount in full and final settlement and the fine amount awarded by the Ld. Trial court, the proceedings under Section 138 of the NI Act needed to be quashed.

The appeal was allowed and the order of the Hon’ble Himachal Pradesh High Court was quashed.

52 Revanasiddappa & Anr vs. Mallikarjun & Ors. AIR 2023 Supreme Court 4707

Date of Order: 1st September, 2023

Succession — Children born out of void or voidable marriage — Illegitimacy — Rights in ancestral Property — Illegitimate children on par with legitimate children — Rights in self-acquired property as well as ancestral property — Illegitimate children not a coparcener in the Hindu Mitakshara Joint Family. [S. 11, 16, Hindu Marriage Act, 1955; S. 6, Hindu Succession Act, 1956].

FACTS

The Appellants are illegitimate children of one Shri Shivasharanappa. The Respondents are the first wife and children of Shri Shivasharanappa. The Respondents had filed a suit for partition alleging that the marriage between the first wife (i.e. the Respondent herself) and Shri Shivasharanappa was subsisting when Shri Shivasharanappa married the second wife (i.e. mother of Appellants). The Respondents thus, alleged that since the first marriage was subsisting at the time of the second marriage, the children born out of the second marriage are illegitimate and not entitled to share in the ancestral property. The Hon’ble Supreme Court opined that the matter be referred to a larger bench for consideration.

HELD

The Hon’ble Supreme Court held that an illegitimate child is entitled to both, self-acquired and ancestral property of parents, after ascertaining the rights of such parent as per the mandate prescribed under section 6 of the Hindu Succession Act, 1956. However, such a child does not ipso facto become a coparcener in the Hindu Mitakshara Joint Family which is governed by Mitakshara Law.

53 Late Dhani Ram (Through Legal Heirs) vs. Shiv Singh

AIR 2023 Supreme Court 4787

Date of Order: 6th October, 2023

Will — Mere registration — Cannot dispel all suspicion to genuineness — Witnesses — Unable to confirm whether signed in presence of testatrix — Invalid Will. [S. 63, Indian Succession Act, 1925; S. 68, 71, Indian Evidence Act, 1872].

FACTS

One Mrs. Leela Devi, passed away on 10th December, 1987, with her husband already predeceased. Dhani Ram (Appellant), was Leela Devi’s brother’s son. He claimed ownership of the properties of Leela Devi after her death by relying on a registered Will. Shiv Singh (Respondent), was the son of the brother of the predeceased husband. The Respondent contested the genuineness of the said Will. The Ld. Trial court invalidated the said Will and granted the Respondent possession of the properties. In appeal, however, the Ld. District judge reversed the decision of the Ld. Trial court and validated the Will.

In the second appeal, filed by the Respondent, the Hon’ble Himachal Pradesh High Court again invalidated the Will and thereby, restored the decision of the Ld. Trial Court.

The Appellant filed an appeal before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the attesting witnesses of the said Will did not fulfil the requirements stipulated under Section 63(c) of the Indian Succession Act, 1925 (ISA) to prove the genuineness and validity of the Will. Both witnesses failed to confirm that they signed the Will in the presence of the testatrix, a key requirement under Section 63(c) of the ISA. Moreover, one witness claimed that the testatrix had signed the Will in his presence, while the other denied the same. The Hon’ble Supreme Court held that the mere registration of a Will does prove its genuineness. Thus, the decision of the Hon’ble Himachal Pradesh High Court was upheld.

The appeal was thus dismissed.

54 Vikrant Kapila and Anr vs. Pankaja Panda and Ors

AIR 2023 Supreme Court 5579

Date of Order: 10th October, 2023

Succession — Testamentary or Intestate Succession — Alleged Will- Existence denied by contesting party — Genuineness of the Will not dealt with at Trial Stage- Straightway assumption of the Will to be genuine by Trial and High court, unacceptable — Remanded back to determine the genuineness of the alleged Will- Subsequently, Trial court to decide whether testamentary or intestate succession. [S. 63, Indian Succession Act, 1925; O. XII R. 6, O. XV R. 1,2 O. 8 R. 5, Code of Civil Procedure Code, 1908; S. 17, 58, 68, Indian Evidence Act, 1872].

FACTS

The Appellant and respondents were involved in a legal dispute over the partition of the suit property through inheritance. The suit property belonged to one Mrs. Sheila Kapila (Hindu woman), who died in the year 1999. The Appellant (grandson of the deceased) averred that the suit property must be divided as per the alleged Will. However, the Respondents (original plaintiff, grandson of the deceased) denied the existence of any such Will and averred that suit property must be divided as per intestate succession (i.e., the principle of devolution). The Ld. Trial court passed an order without conducting a proper trial. In appeal, the Hon’ble Delhi High Court confirmed the decision of the Ld. Trial court on the premise that the Will was genuine and was never contested.

On appeal to the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the order passed by the Ld. Trial court without conducting a proper trial to ascertain the genuineness of Will was unjustified. Further, the Hon’ble court observed that the Ld. Trial court could not have passed an order without conducting a proper trial by taking discretionary jurisdiction under Order XII, Rule 6, read with Order XV, Rule 1 of the Code for Civil Procedure, 1908. Thus, the Hon’ble Supreme Court stated that since there was no explicit admission by the parties contesting the matter regarding the existence of the will, the presumption of the will’s existence made in the order and confirmed by the Hon’ble Delhi High Court was deemed unlawful. The Hon’ble Supreme Court further noted that in order to constitute a valid admission, the same should be unconditional, unequivocal and unambiguous. The matter was thus, remanded back to the Ld. Trial court for fresh adjudication and the order of the Hon’ble High Court was set aside.

Direct Listing of Indian Companies On International Exchanges

INTRODUCTION

New-age Indian companies often had a grouse that they were unable to get a good valuation for certain sunrise sectors in the Indian capital markets. These companies were unable to list on foreign stock exchanges and the only option available for them was to use the ADR / GDR route where Depository Receipts were issued against the Indian shares and these Receipts were listed on stock exchanges in the USA, Singapore, Luxembourg, etc. However, this has not proved to be a very successful model.

Recognising this demand from several of India’s start-up companies, the Indian Government has now permitted Indian companies to directly list their equity shares on certain international stock exchanges. Thus, instead of issuing shares in Rupees, Indian companies can directly issue these in Dollars, Euros, etc. This has become possible due to the Gujarat International Financial Tec-City (“GIFT City”), International Financial Service Centre (IFSC). One of the most salient features of the GIFT City is that any entity set up here would be treated as a Person Resident outside India under the Foreign Exchange Management Act, 1999. Thus, while the GIFT City is physically located in India, it is for all regulatory purposes treated as a foreign territory. Let us understand how Indian companies can now directly list their securities on an international stock exchange.

ENABLING LEGISLATION

S.23(3) of the Companies Act, 2013 was amended to provide that a prescribed class of public companies may issue such class of securities and list them on permitted stock exchanges in permissible foreign jurisdictions as may be prescribed.

In 2021, the International Financial Services Centre Authority or IFSCA (the nodal regulatory authority for the GIFT City, IFSC) notified the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“the IFSCA Regulations”). These Regulations govern an initial public offer of securities by an unlisted Indian company as well as a follow-on public offer of securities by a listed Indian company and their subsequent listing on a stock exchange located within the GIFT City IFSC.

Subsequent to this amendment to the Act, the Ministry of Corporate Affairs has notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024.

The Ministry of Finance has consequently, notified an amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which contains the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme (“the Scheme”). These two Rules put together contain the enabling mechanism for the direct listing of securities in permissible international exchanges.

WHO CAN LIST?

Public limited companies, whether listed or unlisted, are allowed to issue and list their shares on an international exchange. The current Rules only allow unlisted public Indian companies to list their shares on an international exchange. SEBI is in the process of issuing the operational guidelines for listed public Indian companies. Private limited companies are expressly prohibited from listing abroad.

WHAT IS THE ELIGIBILITY CRITERIA?

The Scheme provides that a public Indian company shall be eligible to issue equity shares in permissible jurisdiction, if

(a) the public Indian company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;

(b) none of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;

(c) the public Indian company or any of its promoters or directors is not a wilful defaulter;

(d) the public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013;

(e) none of its promoters or directors is a fugitive economic offender.

WHO IS INELIGIBLE?

In addition, the Rules provide that the following companies would be ineligible:

(a) it is a section 8 company (i.e., a company operating as a charitable foundation) or it is a Nidhi company;

(b) it is a company limited by guarantee and also has share capital;

(c) it has outstanding public deposits;

(d) it has a negative net worth (paid-up share capital + free reserves + securities premium but excluding revaluation reserve, amalgamation reserve, depreciation write-back reserve);

(e) it has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor or it has made good such default and a period of two years has not yet elapsed;

(f) an application for winding-up / corporate insolvency resolution process is pending;

(g) it has defaulted in filing its Annual Return under the Companies Act or filing its Accounts with the RoC.

ELIGIBLE JURISDICTIONS AND EXCHANGES

As of now, direct listing is only possible in the GIFT City and on any of two international exchanges which are operating within the GIFT City ~ India International Exchange, NSE / International Exchange. It is possible that with the passage of time, more jurisdictions / exchanges would be added. Both the aforesaid exchanges are international exchanges, i.e., shares are listed in terms of foreign currencies and not in INR terms. These international exchanges operate for 20 hours a day!

MECHANISM OF OFFERING

Eligible Indian public companies can make an Initial Public Offering (IPO) or an Offer for Sale (OFS) by its shareholders and get their shares listed on the above exchanges. Similarly, listed companies can make a Follow-On Public Offering (FPO) or an OFS. Listed companies for this purpose mean a company which has listed its equity shares and / or debt instruments on Indian stock exchanges. Hence, even debt-listed companies would be treated as listed companies. It may be noted that the Scheme seems to permit even Private Companies which are debt-listed to opt for direct listing but the Companies Act permits only Public Companies.

The IFSCA Regulations provide that an issuer shall be eligible to make an initial public offer only if:

(a) the issuer has an operating revenue of at least US$ 20 million in the preceding financial year; or

(b) the issuer has an average pre-tax profit, based on consolidated audited accounts, of at least US$ 1 million during the preceding 3 financial years; or

(c) any other eligibility criteria that may be specified by IFSCA.

The issue size shall not be less than USD 15 million or any other amount as may be specified by IFSCA.

In case of an offer for sale, the securities must have been held by the sellers for a period of at least 1 year prior to the date of filing of the draft offer document. Listed Indian companies may avail of a fast-track listing of their shares on the IFSC Stock Exchanges.

The issuer unlisted company must file a Prospectus in e-Form LEAP-1 within 7 days after the same has been finalised and filed with the international stock exchange. The Form will be required to be filed in the MCA-21 Registry electronically for record purposes.

The issuer company would be obliged to follow the Ind AS accounting standards.

The Indian company which issues and lists its equity shares on international exchange must also ensure compliance with other laws relating to the issuance of equity shares, including, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, the Prevention of Money-laundering Act, 2002 and the Companies Act, 2013.

FEMA RESTRICTIONS

The direct listing by the Indian companies would be treated as raising of Foreign Direct Investment (FDI) in Non-Debt Instruments by the issuing Indian company. Hence, the following conditions apply:

  • It cannot be in companies operating in sectors where FDI is prohibited, e.g., tobacco / gambling;
  • It is only up to the sectoral caps, if any, prescribed for FDI, e.g., 49% for FM Radio companies;
  • If issued to a holder who is from a land border country (e.g., China) with India, then his investment would be subject to prior Government Approval;
  • Persons resident in India cannot invest in such securities listed on the international exchange since that would be a case of round-tripping. Thus, LRS would not be possible in direct listing cases;
  • Indian Mutual Funds are not eligible to invest in such direct listing;
  • Existing Indian shareholders can make an OFS of their existing shares under the direct listing scheme;
  • Eligible investors would be NRIs / OCIs / FPIs, etc.;
  • The issue would be counted towards the foreign holding in the issuer company since it is a form of FDI;
  • The Indian company may or may not opt for listing on the Indian exchanges. That is a choice which has been given to the issuer. It has the flexibility of raising both INR and foreign currency-denominated capital.

PRICING OF ISSUES

In the case of an FPO / OFS by an equity-listed company, the direct issue shall be at a price, not less than the price applicable in case of a preferential issue under the SEBI (Issue of Capital and Disclosure Requirement) Regulations. However, if it is an issue by an unlisted public company, the IPO / OFS shall be determined by a book-building process as permitted by the said International Exchange and shall not be less than the fair market value under the FEMA Rules / Regulations. The FEMA Regulations specify that an issue / transfer of shares shall be at a price not less than the fair market value arrived at on an arm’s length pricing on the basis of any internationally accepted valuation methodology. Hence, methods such as DCF, Earnings Multiple, P/E Multiple, Comparable Company, Net Asset Value, etc., may be considered.

TAXATION

Any transfer of prescribed securities by a non-resident on an international exchange located in the GIFT City is not regarded as a transfer u/s. 47 for the purposes of capital gains of the Income-tax Act. For this purpose, Notification No. S.O. 986(E) [NO. 16/2020/F.NO. 370142/22/2019-TPL], DATED 5-3-2020 as amended from time to time, has notified a foreign currency-denominated equity share of a company which is listed on a recognised stock exchange located in any IFSC. Thus, the transfer of such shares by a non-resident would not be subject to capital gains tax in India.

The Indian companies paying dividends on such shares would need to withhold tax at source at rates specified in Treaties or the Act.

CONCLUSION

Direct Listing without listing in India marks an exciting chapter in India’s capital markets. Only time will tell whether this Scheme is a success or does it turn out to be an also-ran like ADRs / GDRs. However, the Government has taken the right step by framing the enabling legislation and the ball is now in the court of the Indian entrepreneurs to seize this opportunity. Maybe as a second step, the floodgates to other exchanges could be opened up. This would be one more step towards full capital convertibility of the Indian Rupee.

Part A : Company Law

19 In the matter of M/S. BESTOW FINISHING SCHOOL PRIVATE LIMITED

REGISTRAR OF COMPANIES, PUNJAB AND CHANDIGARH

Adjudication Order No. ROC CHD/ADJ/682

Date of Order: 14th December, 2023

Adjudication Order for not consecutively numbering the pages of the minute book of the Company: Violation of provisions of Section 118 (1) of the Companies Act, 2013 (CA 2013) read with Secretarial Standard-1 (SS-1) issued by Institute of Company Secretaries (ICSI) on “Meetings of Board of Directors”.

FACTS

Registrar of Companies, Punjab and Chandigarh (‘ROC’) had made an inquiry under Section 206(4) of CA 2013 against M/s. BFSPL. During inquiry proceedings, it was found that the pages of the minutes’ book of the company produced/maintained by the company were not consecutively numbered.

Thereafter, ROC had issued Show Cause Notice (‘SCN’) for violation of section 118(1) of (CA 2013) read with Companies (Adjudication of Penalties) Rules, 2014 to M/s. BFSPL and its directors. No reply or communication was received from M/s. BFSPL and its directors regarding making and maintaining minutes’ book without consecutive numbering of pages.

Further, on the request of M/s. BFSPL for making an oral submission before an Adjudication officer (‘AO’), Mr. SG, Director of M/s. BFSPL was given an opportunity to make an oral submission/representation either personally or through an authorized representative.

Mr. SG appeared and made the following oral submissions:-

i. that M/s. BFSPL is a non-working company and there is no instance of any type of sales/purchase or other activities in the company, there is no inventory or other business activities in the company and the directors have not performed any business since its incorporation,

ii. that they have not received the SCN as he was admitted to the hospital. So, during that time, the SCN might have reached his office,

iii. had agreed orally to pay the penalty if imposed.

Provisions of the Section 118(1) of the CA 2013 read as;

Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

Whereas Section 118(11) of CA 2013 reads as;

If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

HELD

AO after the examination and hearing, held that submission made by Mr. SG was not satisfactory as he has not furnished the proof of hospitalization. Therefore, it was concluded that M/s. BFSPL and its officers in default are liable for penalty as prescribed under Section 118(11) of the CA 2013 read with the Secretarial Standard-1 on meetings of Board of directors for not consecutively numbering the pages of the minutes’ book of M/s. BFSPL.

Accordingly, a penalty was imposed as prescribed under sub-section (11) of Section 118 of the CA 2013. The details of the penalty imposed on M/s BFSPL and officers in default is as under:

Nature of default Violation under CA 2013 Name of person on whom the penalty imposed Penalty imposed
(in ₹)		 Final Penalty imposed i.e. 50 per cent as per Section 446B of CA 2013 being Small Company (in ₹)
Not consecutively numbering the pages of the minutes’ book of Board Meeting Section 118 (1) On company 25,000 12,500
Mr. SG, Director 5,000 2,500
Mr. RA, Director 5,000 2,500

It was further directed that penalty imposed shall be paid through the Ministry of Corporate Affairs portal only.

Decoding Residential Status Under FEMA

INTRODUCTION

This article is the third part of a series on Income Tax and the Foreign Exchange Management Act (FEMA) issues related to NRIs. The first article focused on the provisions of the Income Tax Act, whereas the second one was on the applicability of the treaty on the definition of Residential Status. This article will focus on the definition of Residential status under FEMA regulation.

BACKGROUND

Many professionals get flooded with questions on cross-border transactions day in and day out from their resident and non-resident clients regarding the remittance and capital account transactions to be done by individuals and companies.

FEMA governs the financial aspects of a cross-border transaction. As far as the individuals are concerned, the fundamental issue is determining their residential status under FEMA.

In India, the residential status of an individual is determined under the Income-tax Act as well as under FEMA. People at large get confused in deciding the status under both statutes as the criteria for determination and their impact are pretty different.

We shall try to decode the definition of a RESIDENT under FEMA.

An Individual can be a resident under the Income-tax Act, and a non-resident under FEMA and vice versa. An individual can simultaneously be a non-resident or a resident under both Acts.

Also, under FEMA, a split residency is permitted, meaning a person can be a resident for part of the year and a non-resident for another part and vice versa. However, under the Income-tax Act, a person is either a resident or a non-resident for the entire financial year.

Thus, many permutations and combinations are possible. This leads to further complications in practical application.

The definition of “Resident” for an individual under FEMA is similar to that of erstwhile FERA, as both emphasise on a person’s intention. However, FEMA has included the number of days stay in India (more than 182 days) in the preceding financial year as one of the criteria for determining the residential status.

DEFINITION

A person resident in India is defined u/s 2(v) of FEMA, as follow:

“person resident in India” means —

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—

(A) a person who has gone out of India or who stays outside India, in either case—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

Whereas,
(w) “person resident outside India” means a person who is not resident in India;

From the above definition, it is clear that section 2(v) defines an individual to be resident in India if he resides in India for more than one hundred and eighty-two days during the course of the preceding financial year, except where he has gone out of India or who stays outside India, (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period. Thus, a person falling under the above exceptions will not be considered a person resident in India even though his stay in India exceeded 182 days in the preceding financial year. This can give rise to a split residency. Consider an individual who leaves India for employment on 1st November, 2023. He can be considered a non-resident under FEMA from that date and would be a resident from 1st April, 2023 till 31st October, 2023. The exceptions will be operative as he is leaving for employment. Hence, although his stay in India during FY 2022-2023 exceeded 183 days, he would be regarded as non-resident w.e.f. 1st November, 2023.

Similarly, in case of a person resident outside India who is coming back to India to take up employment or for carrying on business or vocation in India or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period, such person would be regarded as a person resident in India from the day he comes to India even if his stay in the preceding financial year in India was less than 183 days.

There is another school of thought, and according to which a person can become non-resident from the date he leaves India for employment, business / vocation or an uncertain period; however, to determine the residential status of an individual returning to India, one has to look at the physical stay of that person in the preceding financial year along with the intentions, such as employment, business / vocation or stay for an uncertain period. This view is applicable in the case of the purchase of immovable property in India as per the Press Release by the Government of India dated 1st February, 2009. As per the said Press Release, to be considered as a person resident in India, a person has not only to satisfy the condition of the period of stay in India (being more than 182 days during the preceding financial year) but also his purpose of stay as well as the type of Indian visa granted to him should indicate the intention to stay in India for an uncertain period.

In this regard, to be eligible, the intention to stay has to be unambiguously established with supporting documentation, including a visa.

Section 7(1) of the Limited Liability Partnership Act, 2008 (LLP Act) stipulates that every LLP should have two designated partners who are individuals, and at least one of them shall be a resident in India. The Explanation further provides that the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding year. Thus, an individual must satisfy the 182-day stay criteria to become a designated partner in an LLP.

Determination of the Residential Status of an individual based on his stay in India in the preceding FY may pose serious challenges, as one has to wait for the entire year to become a resident of India that is too subject to stay in the preceding FY of 183 days or more. Therefore, except for buying properties or becoming a designated partner in an LLP, the earlier view seems more practical and workable, i.e., an individual becomes a resident of India from the date he arrives for employment, business/vocation, or stay for an uncertain period.

This view is strengthened by the provisions of Para 7 of Schedule 1 of FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, which provides that NRE accounts should be re-designated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts immediately upon the return of the account holder to India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period.

From the above, it is clear that significant focus is being put on the intention of the person going abroad or returning to India.

Thus, we find that determining the residential status of a returning Indian is challenging. One needs to interpret the same in the context in which it is to be determined.

It is interesting to note that section 2(w) of the FEMA defines “person resident outside India” as a person who is not resident in India. Thus, it does not define the term “non-resident”, but for all practical purposes, the term “person resident outside India” is equated to “non-resident of India.” Similarly, the term “Non-Resident of India” (NRI) is not defined in FEMA, but various notifications / Master Directions define the term. For example, Para 2(vi) of the FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, as well as defines ‘Non-Resident Indian (NRI)’ as a person resident outside India who is a citizen of India. Rule 2(aj) of the FEMA Non-Debt Instruments Rules, 20191 defines ‘Non-Resident Indian (NRI)’ as an individual resident outside India who is a citizen of India.

1      Also refer Para 2.18 of the Master Direction – Foreign Investment in India RBI/FED/2017-18/60 FED Master Direction No.11/2017-18 dated 4th January, 2018, updated up to 17th March, 2022

ILLUSTRATION

Let’s understand the concept of the Residential Status of an Individual under FEMA with the help of some examples:

1. Mr Raj leaves India for employment on 26th May, 2021. His stay during the preceding Financial Year, i.e., 2020–2021, was 365 days.

Will he be a non-resident as per FEMA?

Answer: Residence for an individual under FEMA has been defined u/s 2(v)(i).

An individual is considered an Indian resident if he has been in India in the preceding financial year for more than 182 days.

To determine the residential status of Mr. Raj as of26th May, 2021, we need to check if in the preceding year, i.e. 2020–21, his stay in India was more than 182 days.

As in preceding year Mr. Raj was in India for more than 182 days; he is a resident of India as on 26th May, 2021 as per FEMA.

However, on 26th May, 2021, Mr Raj went outside India for employment and therefore fell under one of the exclusions in the definition of “person resident in India” hence, he is a Non-resident of India from 26th May, 2021.

2. If Mr Raj returns to India on 31st July, 2023 for employment, what would be his residential status under FEMA for FY 2023–24? (You may assume his stay in India during the FY 2022–2023 period to be less than 182 days).

Answer: To determine the residential status as per FEMA law for the financial year 2023–24, we need to check if his stay in India in the preceding year i.e. 2022–23 was more than 182 days. As in the preceding year, Mr. Raj was in India for less than 183 days. He is a Non-resident as per FEMA till July 2023, after which he shall become a Resident if he intends to stay in India for employment.

However, if Mr Raj intends to buy a property in India, he must complete a stay in India of 183 days or more in the preceding FY. Assuming Mr. Raj’s stay in India during the FY 2023–2024 exceeds 182 days, he can buy a property in the FY 2024–2025.

From the above, it is clear that one needs to apply the test of stay in India as well as the intention of a person depending upon the context for which one determines the residential status.

RESIDENTIAL STATUS OF A STUDENT GOING ABROAD FOR STUDIES

RBI vide its Press Release 2003-2004/710. Circular No. 45 dated 8th December, 20032 has clarified that “taking into account the definition of resident under FEMA and the intention of the student to stay abroad for an uncertain period though not for permanent settlement, it has been decided to treat them henceforth as non-residents from the FEMA angle.” The Circular further clarifies that “as non-residents, students will, in any case, be eligible for receiving remittances from India, as follows: (i) up to USD 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies also, (ii) up to USD 1 million out of sale proceeds / balances in their account maintained with an AD in India, (iii) all other facilities available for NRIs under FEMA, (iv) educational and other loans which were availed (as residents in India) by students would be allowed to continue.”

2      https://www.rbi.org.in/commonman/Upload/English/PressRelease/PDFs/40570.pdf and https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2763

While taking up studies or further advanced courses, students may have to take up jobs or seek scholarships to supplement income to meet their financial requirements abroad. As they have to earn and learn, their stay for educational purposes gets prolonged than what is intended while leaving India. Thus, the above clarification and NRI status will help students take up jobs and undertake various financial transactions as non-residents without violating FEMA provisions.

A few more examples of residential status are as follows:

 

Sr. No. Purpose Status Reasons
1 A person Leaves India to take up employment for the first time. A person Resident Outside India Since he has left India for employment, he has become non-resident from the day he leaves India.
2 The student leaves for Australia to undertake a Master’s degree course for three years. A person Resident Outside India As per RBI Circular No. 45 dated
8th December, 2003,
3 A person visits India as a tourist. A person Resident Outside India Since he is on a visit for a fixed or specific period.
4 A person goes to Brisbane to participate and represent India. His stay was extended for eight months. A person Resident in India Since he has gone for a fixed period and his coming back is confirmed.
5 A person has gone to the UK. She will return to India after the maternity case of her daughter. A person Resident in India Since the period of stay is definite and not uncertain.
6 A person has taken up American citizenship even though his wife and children are in India. He travels to India to meet his family and is in India for more than 250 days. However, he is employed in the USA and intends to be outside India. A person Resident Outside India Since he has no intention to stay in India for the uncertain period and is employed outside India.
7 A person is serving on board a ship flying the Indian National Flag and has not set up any residence, business, or profession outside India. Person Resident in India A ship with the Indian National Flag is considered a territory of India. He cannot be considered a person who proceeded outside India to take up employment and set up a business or profession.
8 A person employed with an Indian company undertakes export promotion tours to Singapore. He was in Singapore for approximately 201 days. A person Resident in India Since he is employed in India and has not gone to Singapore to take up employment or carry on business for an uncertain period, a visit abroad while exercising employment in India or a business visit cannot make a person non-resident. Also, export promotion tours typically are for a fixed duration; therefore, on all counts, that person will be regarded as a Resident of India.
9 A person leaves India for the US as he received a Green Card but has no employment or business, but he intends to settle or stay there for an uncertain period. A person Resident Outside India The receipt of a Green Card signifies the intention to stay outside India. The said intention is fortified with the person moving to such a country. Therefore, he
will be regarded as
a non-resident from the day he leaves India.
10 A person who is a foreign citizen of non-Indian origin sets up a proprietary concern in India on 1st June, 2019, to carry on business with the intention of settling in India. A person Resident in India Since a person is coming to India to set up Business or Vocation, he will be considered a resident in India.

OVERSEAS CITIZEN OF INDIA (OCI)

Another essential aspect to understand is OCI.

The Constitution of India does not allow holding dual citizenship.

However, to overcome the difficulty for various Indians settled abroad who have taken foreign citizenship (foreign passports), on 2nd December, 2005, the government launched the “Overseas Citizens of India” scheme. Registration as an OCI provides the registrant with a few benefits. An illustrative list is stated below:

 

  • A multiple entry / multi-purpose life-long visa for visiting India.

 

  • OCI may be granted Indian citizenship after five years from the date of registration, provided they stay in India for one year before making the application and are subject to renouncing the citizenship of another country. Employment is allowed to an OCI in all areas except mountaineering, missionary and research work and other work requiring PAP / RAP (PAP – Protected Area Permit, RAP – Restricted Area Permit).

 

A foreign national is eligible for registration as an OCI holder if one falls under any of the below criteria:

  • Who was eligible to become a citizen of India on26th January, 1950** or

 

  • Was a citizen of India on or at any time after26th January, 1950 or

 

  • Belonged to a territory that became part of India after 15th August, 1947

 

  • Person of Indian Origin card holders are deemed to be OCI.

Children and grandchildren, including minor children of the above-referred persons, are also eligible for registration as an OCI, provided their country of citizenship allows the same in some form or other under local laws and are eligible for registration as an OCI.

However, if the applicant had ever been a citizen of Pakistan or Bangladesh, he would not be eligible for registration as an OCI.

  • A spouse of foreign origin of a citizen of India or spouse of foreign origin of an OCI card holder registered and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the application’s presentation would be eligible to obtain registration as an OCI.

For eligibility for registration as OCI, such spouse shall be subjected to prior security clearance from a competent authority in India.

**Any person who, or whose parents or grandparents were born in India as defined in the Government of India Act, 1935 (as originally enacted), and who was ordinarily residing in any country outside India was eligible to become a citizen of India on 26th January, 1950. AnOCI card holder is eligible to visit India without obtaining a VISA.

PERSON OF INDIAN ORIGIN (PIO)

A PIO means a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, and Nepal):

  • who at any time held an Indian passport; Or
  • who or either of their parents / grandparents/great grandparents were born and permanently resident in India as defined in the Government of India Act, 1935 and other territories that became part of India thereafter, provided neither was at any time a citizen of any of the countries above (as referred above); Or
  • who is a spouse of a citizen of India or a PIO.

A TRANSITION FROM PIO CARD TO OCI CARD

Earlier, the “PIO Card Scheme” was in place. The PIO card scheme has been withdrawn vide Gazette Notification No. 25024/9/2014 F. I dated 9th January, 2015. Further, vide Gazette Notification No 26011/01/2014IC. I dated 9th January, 2015; all existing PIO card holders are deemed OCI card holders. Therefore, no separate authentication of the existing PIO card as an OCI card is necessary. Henceforth, applicants may only apply for an OCI Card, as the PIO Card scheme no longer exists. Current PIO cardholders may apply for OCI cards instead of their PIO cards.

CONCLUSION

The residential status under FEMA is often misconstrued due to the insertion of a number of days’ conditions, similar to the definition under the Income-tax Act. However, it is essential to note that the impact of residential status under FEMA is from the regulatory perspective, not the revenue perspective. Some situations lead to different residential statuses as explained in the article above; however, from the perspective of FEMA, the person’s intention is of utmost importance. It is also noteworthy that intentions need to be justifiable / verifiable from the documentary evidence such as type of visa, employment letter, hiring of an apartment, etc., and it should not be merely a thought by a person that he intends to stay in or out of the country. If the intention, coupled with the number of days of stay, is examined correctly, the residential status can be obtained for a particular person for a given period. As stated earlier, applying the criteria of stay vs. intentions will be relevant in the context in which one seeks to apply the provisions.

Related Party Transactions and Minority Rights – Part 3

Related Party Transactions and Minority Rights – Part 2

Allied Laws

45 IFFCO Tokio General Insurance Co. Ltd vs. Geeta Devi and others

AIR 2023 Supreme Court 5545

Date of Order: 30th October, 2023

Compensation — Right of recovery — Death due to negligent driving of employee — Fake driver’s license — Failure on the part of the insurance company to plea — Failure on the part of the insurance company to prove wilful breach of insurance policy by the insured — Insurance policy did not mandate to confirm every license with RTO authorities — Liable to compensate for damages. [S. 149, 168, Motor Vehicle Act, 1988].

FACTS

In 2010, Mr. Dharambir died in a road accident, when his motorcycle was hit by a truck driver who was driving negligently. Dependents (Respondents) of the deceased sought compensation from the insurance company of the truck (Petitioner). The Tribunal held that the insurance company was liable but later discovered that the driving license of the truck driver was fake. Thus, the Tribunal directed the Petitioner to deposit the awarded amount with the liberty to recover the same from the present owners of the truck. Aggrieved, the Petitioner approached the Hon’ble Delhi High Court. The Hon’ble High Court ruled that the insurance company couldn’t recover compensation from the current truck owner as the Petitioner neither pleaded nor proved that the insured (vehicle owner) did not take adequate steps to verify the genuineness of the driving licence and in the absence of such a plea on its part, it cannot be said that there was a breach of contract.

The Petitioner filed a Special Leave Petition before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that employers relying on a driver’s license from a seemingly competent authority cannot be expected to independently verify every license with the RTO authority. Further, the court observed that such a condition was not mandated in an insurance policy. The Hon’ble Supreme Court also observed that Petitioner failed to prove that there was a wilful breach of insurance policy on the part of the insured. The Court concluded that the insurance company lacked the right to recover compensation, given the absence of pleading and proof for a willful breach.

Thus, the decision of the Hon’ble Delhi High Court was upheld.

 

46 Prataap Snacks Ltd vs. Royal Marketing

AIR 2023 Madhya Pradesh 173

Date of Order: 28th July, 2023

Arbitration and Conciliation — Super-Stockiest agreement with provision for arbitration — Application for appointment of arbitrator -Instrument neither registered nor stamped — Cannot be considered as a contract — Application dismissed. [S. 7, 11(6), Arbitration and Conciliation Act, 1996; S. 35, Indian Stamps Act, 1899].

FACTS

The Petitioner, a registered company entered into a super-stockist agreement with the Respondent, a Telangana-based proprietor firm, appointing the proprietor firm as a non-exclusive distributor. The Petitioner alleged that despite purchasing materials from the Petitioner, the Respondent failed to pay the outstanding amount. The agreement included a provision for dispute resolution through discussion and subsequently through formal arbitration proceedings. The Petitioner proposed a retired High Court Judge as the sole arbitrator. With no response from the Respondent, the Petitioner filed an application before the court to seek a resolution.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Petitioner had not submitted the original or certified copy of the agreement. Furthermore, the photocopy of the agreement which was provided was unregistered and unstamped. Relying on the decision of the Hon’ble Supreme Court in the case of N.N. Global Mercantile Private Limited vs. Indo Unique Flame Ltd [(2023) SCC Online SC 495], the Hon’ble Madhya Pradesh High Court held that the instrument which attracts the stamp duty may contain an arbitration clause and if it is not stamped or insufficiently stamped, the same cannot be said to be a contract which could be enforced. It is further held that the arbitration agreement which attracts the stamp duty, if not stamped or insufficiently stamped cannot be acted upon given Section 35 of the Indian Stamps Act.

Thus, the Arbitration application was dismissed.

 

47 Sri Basavegowda vs. The State of Karnataka

Writ Petition No. 10872 of 2023 (Karnataka High Court at Bengaluru)

Date of Order: 20th December, 2023

Gratuity — Appointed as daily wage employee — Services regularised subsequently — Retirement after 42 years — Denied gratuity for the time spent as a non-regularised employee — Daily wage employee same as Regular employee – Entitled to full gratuity for services of 42 years. [S. 2(e), 14, Payment of Gratuity Act, 1972].

FACTS

The Petitioner, a septuagenarian, joined the services of a Government High School on 18th November, 1971, as a Group-D employee. The Petitioner had joined as a daily wage employee until his services were regularised on 1st January, 1990. He retired on 31st May, 2013, after serving for 42 years in the Government school. However, the gratuity entitlement during the period when the petitioner served as a daily wage worker was denied, with gratuity being granted only from the date of service regularization. Thus, he filed a writ petition before the Hon’ble Karnataka High Court.

HELD

The Hon’ble Karnataka High Court after interpreting section 2(e) and 14 of the Payment of Gratuity Act, 1972 held that a daily wage employee is within the definition of an employee. Thus, there is no distinction between a regular employee and a daily wage employee. The Hon’ble Karnataka High Court relied on the decisions of the Hon’ble Supreme Court in the case of Nagar Ayukt Nagar Nigam, Kanpur vs. Mujib Ullah Khan [(2019) 6 SCC 103] and Netram Sahu vs. State of Chhattisgarh [(2018) 5 SCC 430) and directed the Respondent to pay gratuity to the Petitioner for his entire period of service i.e. for 42 years along with interest.

The Petition was allowed.

 

48 Nitin Shambhukumar Kasliwal vs. Debt Recovery Tribunal

Writ Petition No. 26333 of 2023 (Karnataka High Court at Bengaluru)

Date of Order: 6th December, 2023

Impounding of Passport — Power is available only to Passport Authority or Constitutional Courts – Impounding by Debt Recovery Tribunal — No authority — Passport impounded to be immediately released. [S. 10, The Passport Act, 1967].

FACTS

On 16th April, 2015, the Hon’ble Debt Recovery Tribunal ordered impounding of the passport of the Petitioner following the initiation of a case against him by lender banks. The petitioner was granted temporary access to his passport whenever he travelled abroad for business purposes, subject to the submission of a duly filed application and appropriate travel itineraries. On 2nd December, 2016, the Petitioner sought the release of his passport as he had to renew it before its validity expired. However, his application was rejected. The Petitioner, thus, filed an application under Articles 226 and 227 of the Constitution before the Hon’ble Karnataka High Court (Bengaluru Bench) seeking an order instructing the Hon’ble Debt Recovery Tribunal (Respondent) to release the petitioner’s passport for passport renewal.

HELD

The Hon’ble Karnataka High Court after referring to the decision of the Hon’ble Supreme Court in the case of Suresh Nanda vs. CBI [(2008) 3 SCC 674] held that as per section 10 of the Passport Act, 1967, only the Passport Authority of India has the powers to impound or seize a passport of a citizen. The Debt Recovery Tribunal had no power to order the impounding of the passport. The Hon’ble Karnataka High Court also observed that neither the police nor the courts (other than constitutional courts) have the power to seize or impound the passports of citizens. Thus, the Hon’ble Court ordered the release of the passport by the Respondent.

The Petition was allowed.

 

49 Amol Vaman Tilve vs. Goa State Information Commission and others

AIR 2023 Bombay 382

Date of Order: 21st September, 2023

Right to Information — Failure to provide information within statutory timeline — First Appeal – Directed to provide information — Failure to provide information — Second Appeal — Directed to provide information and awarded cost — Petition before High Court — Consistently failed to provide information — Penalty justified. [S. 4, 20, Right to Information Act, 2005].

FACTS

Respondent had filed an application seeking information under provisions of the Right to Information Act, 2005. However, the Petitioner failed to provide the relevant information within the prescribed timeline. The Respondent instituted the first appeal after her application was deemed to have been rejected. In the first appeal, the Petitioner was directed to give the information as per the said application. However, despite directions, the Petitioner did not bother to provide the information. The Respondent, thus, filed a second appeal to the Global State Information Commission (GSIC). The Ld. GSIC allowed the appeal in favour of Respondent and imposed a penalty on the Petitioner. The Petitioner challenged this order before the Hon’ble Bombay High Court (Goa Bench) by invoking provisions of articles 226 and 227 of the Constitution.

HELD

The Hon’ble Bombay High Court held that the Petitioner had consistently failed to perform its statutory duties. The Hon’ble court further held that various allegations put forth by the Petitioner such as Respondent acting under mala-fide intentions were vague and baseless. Furthermore, the Court observed that the Petitioner was seeking excuses of the corona virus and nationwide lockdown in March 2020, which were not acceptable. Thus, the Hon’ble Bombay High Court upheld the order of the GSIC and directed the Petitioner to pay the penalty ordered by the Ld. GSIC.

The Petition was dismissed.

Shares ~ Nominee Vs. Will: And The Winner Is……?

INTRODUCTION

Problems of inheritance and succession are inevitable especially in a country like India where many businesses are still family owned or controlled. Many times bitter succession battles have destroyed otherwise well established businesses.

A Will is the last wish of a deceased individual and it determines how his estate and assets are to be distributed. However, in several cases, the deceased has not only made a Will, but he has also made a nomination in respect of several of his assets.

Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository / demat accounts, mutual funds, Government bonds / securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death. SEBI has made it mandatory for all investors to compulsorily opt for nomination in demat accounts or expressly opt out of the same. The deadline for the same was 31st December, 2023, and those for holders who did not nominate or opt out of nomination by 31st December, 2023, their demat account were frozen.

A question which often arises is which is superior — the Will or the nomination made by the deceased owner. While the position was quite clear that a nominee was not superior to the legal heirs / a Will, a judgment rendered in the context of shares in a company had taken a contrary view. The Supreme Court in Shakti Yezdani vs. Jayanand Jayant Salgaonkar, Civil Appeal No. 7107 of 2017, Order Dated 14th December, 2023, has settled the matter once and for all!

EFFECT OF NOMINATION

The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face with whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc. and the nominee.

The nomination seeks to avoid any confusion in cases where the Will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.

WHICH IS SUPERIOR?

A nomination continues only up to and until such time as the Will is executed. No sooner the Will is executed, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is for all purposes a trustee of the property. He cannot claim precedence over the legatees mentioned in the Will and take the bequests which the legatees are entitled to under the Will.

The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), had an occasion to examine this issue in the context of a nomination under a life insurance policy. The Court held, in the context of the Insurance Act, 1938, that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them.

The Supreme Court, once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), examined the effect of a nomination in respect of a National Savings Certificates. The Court examined the National Savings Certificate Act and various other provisions and held that the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest.

Again, in Shipra Sengupta vs. Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.

The Supreme Court again reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299.

In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee.

The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646 of 2006(SC). The Court held that the possession of the flat must be handed over by the society immediately to the nominee till such time as the succession issue (under a Will or intestate) is legally settled.

Thus, the legal position in this respect is very clear. Nomination is only a legal relationship and not a permanent transfer of interest in favour of the nominee. If the nominee claims ownership of an asset, the beneficiary under the Will can bring a suit against him and reclaim his rightful ownership.

FOR SHARES AND DEMAT ACCOUNTS — IS NOMINEE SUPERIOR?

S.109A of the Companies Act, 1956, was added by the Amendment Act of 1999. S.109A provided that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder / debenture holder, prevail over any law or any testamentary disposition, i.e., a Will. Thus, in case of shares or debentures in a company, the nominee on the death of the shareholder / debenture holder, becomes entitled to all the rights to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. In case the nominee is a minor, then the shareholder/debenture holder can appoint some other person who would be entitled to receive the shares/debentures, if the nominee dies during his minority. This position continues under the Companies Act, 2013 in the form of s.72 of this Act read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014. A similar position is contained in Bye Law 9.11 made under the Depositories Act, 1996 which deals with nomination for securities held in a dematerialised format.

A Single Judge of the Bombay High Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014. Interpreting Section 109A of the Companies Act, 1956 and the Depositories Act, the Court ruled that the rights of a nominee to shares of a company would override the rights of heirs to whom property may be bequeathed. In other words, what one writes in one’s Will would have no meaning if one has made a nomination on the shares in favour of someone other than the heir mentioned in the Will. The High Court ruled that securities automatically get transferred in the name of the nominee upon the death of the holder of shares. The nominee is required to follow the prescribed procedure in the Business Rules. Upon the death of the holder of shares the nominee would be entitled to elect to be registered as a beneficiary owner by notifying the depository participant along with a certified copy of the death certificate. The bank would be required to scrutinize the election and nomination of the nominee registered with it. Such nomination carries effect notwithstanding anything contained in a Testamentary Disposition (i.e. Wills) or nominations made under any other law dealing with Securities. The last of the many nominations would be valid.

The Court referred to the use of the word “vest” in the provisions of Section 109A of the Companies Act, 1956, which the court interpreted as giving ownership rights and not just custody rights as is the case for an insurance policy or shares of a housing society. The Bombay High Court distinguished the Supreme Court’s judgment in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC) citing a difference in the language of the applicable law. Section 109A of the Companies Act, 1956 provided that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent under s.109A of the Companies Act, 1956 and Bye Law 9.11 made under the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone. A similar view was also endorsed by a Single Judge of the Delhi High Court in the case of Dayagen P Ltd vs. Rajendra Dorian Punj, 151 Comp. Cases 92 (Del).

A TWIST IN THE TALE?

Another Single Judge of the Bombay High Court, had an occasion to consider the above provisions of the Companies Act and the earlier decision of the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014 decided on 31st March, 2015. The Bombay High Court after an exhaustive study of all the Supreme Court and Bombay High Court decisions on the subject of superiority of Will / legal heirs over nomination, concluded as follows:

a) The earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay High Court decisions.

b) It wrongly distinguished the Supreme Court’s decision in the case of Sarbati Devi vs. Usha Devi whereas the reality was that the ratio of that decision was applicable even under the Companies Act, 1956.

c) Neither the Companies Act, 1956 nor the Depositories Act provide for the law of succession or transfer of property. They must be viewed as being sub-silentio (i.e., as being silent on) of the testamentary and other dispositive laws.

d) If a nomination is held as supreme then it cannot be displaced even by a Will made subsequent to the nomination. This obviously cannot be the case.

e) The nomination would even oust personal law, such as Mohammedan Law and become all-pervasive.

f) The nomination under the Companies Act is not subject to the rigour of the Indian Succession Act in as much as it does not require witnesses as mandated under this Act. It cannot be assailed on grounds of importunity, fraud, coercion or undue influence. There cannot be a codicil to a nomination. In short, a nomination, if held supreme, wholly defenestrates the Indian Succession Act. According to the judgment in Harsha Nitin Kokate, a nomination becomes a “Super-Will”, one that has none of the defining traits of a proper Will.

g) Thus, a nomination, even under the Companies Act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.

BOMBAY HIGH COURT DIVISION BENCH VERDICT

The Single Judge’s decision in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar was appealed before the Division Bench of the Bombay High Court in Appeal No. 313/2015. The Division Bench observed that the object and provisions of the Companies Act were neither to provide a mode of succession nor to deal with succession at all. The Division Bench felt that the consistent view in the various judgments of the Supreme Court and the Bombay High Court must be followed and those did not warrant any departure. Accordingly, it declared that the nominee of a holder of a share or securities was not entitled to the beneficial ownership of the shares or securities which were the subject matter of nomination to the exclusion of all other persons who are entitled to inherit the estates of the holders as per the law of succession. It concluded that a bequest made in a Will executed in accordance with the Indian Succession Act, 1925 in respect of shares or securities of the deceased, superseded the nomination made under the provision of S. 109A of Companies Act and Bye-law 9.11 framed under the Depositories Act, 1996.

SUPREME COURT’S VERDICT

The Apex Court in its recent decision in the case of Shakti Yezdani (supra) has upheld the verdict of the Division Bench of the Bombay High Court. It held that reading the provision of nomination within the Companies Act with the broadest possible contours, it was not possible to say that the same dealt with the matter of succession in any manner. It referred to various decisions (cited above) which had dealt with the precedence of a Will over nomination in the context of various assets such as, bank account, insurance policy, provident fund, etc. It concluded that in all cases, the usual mode of succession was not to be impacted by such a nomination. The legal heirs therefore had not been excluded by virtue of nomination.

Importantly, the Court concluded that the presence of the three elements i.e., the term ‘vest’, the provision excluding others as well as a non-obstante clause under S.109A of the Companies Act, 1956 did not persuade the Court to hold any different view. The concept of nomination, if interpreted differently than was understood, would cause major ramifications and create a significant impact on disposition of properties left behind by deceased nominators. It referred to the use of the term ‘vest’ and held (after referring to various decisions) that it had a variable meaning and the mere use of the word ‘vest’ in a statute did not confer absolute title over the subject matter. Byelaw 9.11.1 under the Depositories Act, 1996 provided for ‘vesting’ of the securities held in the demat account unto the nominee on the death of the beneficial owner. The Court concluded that the vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 was only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities.

It next dealt with the use of the non-obstante clause in s.109 of the Companies Act, 1956 (similar wordings are found in s.72 of the Companies Act, 2013) and held that use of the non-obstante clause, served a singular purpose of allowing the company to vest the shares upon the nominee to the exclusion of any other person, for the purpose of discharging of its liability against diverse claims by the legal heirs of the deceased shareholder. This arrangement was until the legal heirs had settled the affairs of the testator and were ready to register the transmission of shares, by due process of succession law.

It also held that the Companies Act does not lay down a line of succession. The ‘statutory testament’ by way of nomination was not subject to the same rigours as was applicable to the formation and validity of a Will under the succession laws. The Companies Act did not deal with succession nor did it override the laws of succession. It was beyond the scope of the company’s affairs to facilitate succession planning of the shareholder. In case of a Will, it was upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession. The Court observed that the object of introduction of nomination facilities for shares was only to provide an impetus to the investment climate and ease the cumbersome process of obtaining various letters of succession, from different authorities upon the shareholder’s death.

The Court’s final verdict read as follows:

“Consistent interpretation is given by courts on the question of nomination, i.e., upon the holder’s death, the nominee would not get an absolute title to the subject matter of nomination, and those would apply to the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 as well.”

In following earlier decisions on nomination, the Court invoked the doctrine of stare decisis et non quieta movere, which means “to stand by decisions and not to disturb what is settled”. Thus, the line of judicial thinking on nomination in the case of shares / demat account was the same as earlier Court judgements on other asset classes.

EPILOGUE

The Court has thankfully prevented a major upheaval in estate planning, as is understood. The Court made a very important and telling observation that an individual dealing with estate planning or succession laws understood nomination to take effect in a particular manner and expected the implication to be no different for devolution of securities per se. Therefore, an interpretation otherwise would inevitably lead to confusion and possibly complexities, in the succession process, something that ought to be eschewed.

Corporate Law Corner – Part A | Company Law

18 In the matter of Vridhi Finserve Home Finance Limited Registrar of Companies, Karnataka, Adjudication order

Date of order: 30th November, 2023

Order of Adjudication of Penalty for violation of provisions of the Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

FACTS

M/s VFHFL had filed a suo-moto application on 9th August, 2023 for adjudication before Registrar of Companies, Karnataka (‘ROC’) with regards to non-compliance of Rule 9A (1) (a) & 9A (3)(a) of the Companies (Prospectus and allotment of Securities) Rules, 2014, as M/s VFHFL had issued 10,000 equity shares in physical mode on 25th January, 2022 instead of dematerialised mode and the Board of M/s VFHFL had also approved the transfer of 4990 equity shares in physical mode on 20th June, 2022.

As per Rule 9A (1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, every unlisted public company was at material time required to issue securities only in dematerialised form and further facilitate dematerialisation of all its existing securities.

Therefore, on the basis of the above suo-moto application, notice of hearing was sent and hearing was held before the office of ROC which was attended by Ms. K, Company Secretary and Mr SM, Director & CFO of M/s VFHFL who made their submissions.

ROC further asked for clarification on the matter. It was clarified that M/s VFHFL had made good the default by issuing the shares to initial subscribers and the transferees in dematerialised mode as per NSDL letters submitted to ROC with regards to activation of ISIN and for crediting equity shares in dematerialised accounts.

Provisions of the of 9A (1) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Issue of securities in dematerialised form by unlisted public companies. –

(1) Every unlisted public company shall –

(a) Issue the securities only in dematerialised form; and

(b) Facilitate dematerialisation of all its existing securities

in accordance with provisions of the Depositories Act, 1996 and regulations made there under.

Provisions of the of 9A (3) (a) & (b) Companies (Prospectus and allotment of Securities) Rules, 2014 states that;

Every holder of securities of an unlisted public company,

(a) who intends to transfer such securities on or after 2nd October, 2018, shall get such securities dematerialised before the transfer; or

(b) who subscribes to any securities of an unlisted public company (whether by way of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure that all his existing securities are held in dematerialised form before such subscription.

Provisions of the section 450 of the Companies Act, 2013 states that;

Punishment Where No Specific Penalty or Punishment is Provided:

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

HELD

Adjudication Officer (AO), after considering the facts and circumstances of the case and submissions made by M/s VFHFL and its representatives, held that in view of violations of the provisions of Rule 9A(1)(a) & 9A(3)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 penalty be imposed under Section 450 of the Companies Act, 2013 as mentioned in below table:

Sr. no. Penalty imposed on Penalty imposed for violation of Rule 9A(1)(a)
(R)		 Penalty imposed for violation of Rule 9A(3)(a)
(R)		 Total Penalty Imposed (R)
1. M/s VFHFL 10,000/- 10,000/- 20,000/-
2. Mr. SR, Director 10,000/- 10,000/- 20,000/-
3. Mr SS, Director 10,000/- 10,000/- 20,000/-
4. Mr DS, Director 10,000/- 10,000/- 20,000/-

M/s VFHFL and its directors were directed to pay the penalty amount as above within 90 days from the date of receipt of the Order and to file INC-28 attaching a copy of the order and payment challans. In the case of directors of M/s VFHFL, such a penalty amount was required to be paid out of their own funds.

Loan From Promoters: An Insight

This is a less-covered area—the words directors and promoters are used synonymously but this may not be always true and the consequence of these two on loans and deposits under the Companies Act, 2013 (CA 2013) and the Companies (Acceptance of Deposits) Rules, 2014 (AODR) are discussed hereunder:

The term “deposit” is defined in clause (31) of section 2 of the CA 2013 that states that ‘a deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India’.

Rule 2(1)(c) of AODR prescribes categories of amounts which shall not be termed as ‘deposits’ subject to meeting the prescribed conditions. It should be noted that receipt of money in a different form is also covered under the term “Deposit”.

LOAN AND DEPOSIT

Quite often, these two terms are used synonymously and interchangeably but these terms are different. A loan is repayable when it is contracted / incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan, there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit. The loan is usually at the instance of the borrower whereas in the case of a deposit, it is at the instance of the person placing a deposit.

Thus, to simplify: I want a loan. I am a borrower. I approach the bank which is a lender for a loan. I am taking a premises on rent. I place a deposit with the landlord.

Section 143(1)(d) of CA 2013 [Section 227(1A)(d) of the Companies Act, 1956] provides that the auditor shall
inquire “whether loans and advances made by the company have been shown as deposits”. These provisions indicate that it may not be possible to interchange the terms loan and deposit under the Companies Act.

In a transaction of a deposit of money or a loan, a relationship of a debtor and a creditor must come into existence. The term deposit and loan may not be mutually exclusive, but in each case, one needs to consider the intention of the parties and the circumstances. What is required to be noted further is that under the limitation act, the period when limitation begins in the case of deposit and in the case of loan are different. The limitation period in case of a loan starts on a date on which the amount was repayable as per the agreement. As regards deposit, the limitation period starts from the date the depositor claimed repayment of money. In the case of a deposit, the accrual of interest ceases upon maturity, whereas in a loan, interest is payable up to the date of repayment of the loan itself. However, this does not mean that a loan or deposit necessarily will carry an interest. Thus, we come across interest-free loans and deposits. The onus of repayment of loan vests with the person taking the loan. In the case of a deposit, the depositor has to claim the deposit amount.

DEPOSIT

However, for the purpose of CA 2013, the definition of the term ‘Deposit’ clearly states that it includes ‘any receipt of money by way of deposit or loan or in any other form by a company’. Any loan has to fall within the exclusion from the definition of ‘deposit’ if it were to qualify as loan simpliciter.

Rule 2(1)(c) of the AODR prescribes receipts of money that shall not be treated as a deposit. For the purposes of this article, we shall be discussing only 2 such amounts namely:

AMOUNT RECEIVED FROM THE DIRECTOR

Clause (viii) of Rule 2(1)(c) reads as:

(viii) Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;

As per Notification dated 15th September, 2015, which amended the rule, any amount received from a director of a company or in the case of a private company, from the relative of the director, shall also be exempt, provided that such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others …. The reporting in the Board’s report is a condition imposed by the Amendment Rules which are effective from 15th September, 2015. Hence, all reports of the Board of Directors, signed after this date need to give this disclosure.

It is pertinent to note here that a Hindu Undivided Family shall not be regarded as a relative of the director. Rule 16A of ADOR mandates that every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.

Thus, the essential conditions for this exemption are as under:

  • Amount is received from a person who was a director of the company (whether Private or Public) at the time of the receipt of the amount (so subsequent cessation does not affect this exemption) or
  • In the case of a private company, from the relative of the director.

Such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others and the same is disclosed in the Board’s Report. (One needs to look into the exemption notification dated 5th June, 2015 and applicable conditions)

AMOUNTS FROM PROMOTERS

Let us now see Clause (xiii) of Rule 2(1)(c) that deals with the amount brought in by promoters.

Unsecured loans received from the promoters (as defined in clause (69) of section 2) or their relatives (as defined in clause (77) of section 2) or both as per the stipulation of any lending financial institution or a bank shall not be treated as deposits.

Hence, when the loan is brought in without any stipulation imposed by the lending institution or the loan brought in beyond the amount stipulated by lending institutions, the same will amount to a ‘Deposit’. This exemption is available only till the loan from the lending institution subsists and not after the same is repaid.

As the exemption is available only till the subsistence of the loan, the amount brought in by promoters needs to be repaid along with the loans from lending institutions.

The rule reads as:

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely: –

(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;

(b) The loan is provided by the promoters themselves or by their relatives or by both; and

(c) The exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

One thus notes that conditions are cumulative. Condition (b) in my view implies that a loan cannot be given by third parties as compliance of the stipulation.

This clause and definition of the word promoter needs little elaboration:

As per section 2 (69) of CA 2013, “promoter” means a person—

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act,

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Before we deal with this definition, we may note that this definition is newly introduced in CA 2013. The term promoter was defined in the Companies Act 1956 only for the limited purpose of fixing liability for a misstatement in the prospectus. So, the definition of promoters under CA 2013 can be analysed in three parts. All the parts are separated by ‘or’ and are thus independent of each other, or mutually exclusive, meaning thereby that for being a promoter, a person may fall within any part of S. 2(69). Suffice it to state as an introduction that the promoter in sub clause (a) covers a factual aspect whereas to identify a person as a promoter in sub clause (b) and sub clause (c), the same has to be established with adequate material.

The first part [contained in sub-clause (a) of sub-section 69 of Section 2] lacks legal certainty in as much as instead of explaining the concept, it appears that it upholds as correct, what is mentioned in the documents referred to in the said sub clause. Without elaborating the essentials of the concept, it merely states that a person is a promoter if the name of that person is mentioned as a ‘promoter’ in the Prospectus or in the Annual Return filed under S. 92 of the Act.

In the second independent clause of the definition of ‘promoter’, we find a little objectivity in the definition, as it talks about the presence of one’s control over the affairs of the company as a prerequisite for being classified as a promoter. Such control may arise out of the position of that person as a shareholder, or a director or otherwise. The control envisaged can be direct or indirect. Undoubtedly, the definition also contemplates a person who may neither be a shareholder nor a director, and yet be a promoter if he has control over the affairs of the company. Thus at the same time, every shareholder or director need not be treated as promoter of the company if he does not exercise any control over the affairs of the company.

In this context, it is notable to look into the definition of ‘control’ given under S. 2(27) of the Act. As per section 2 (27), “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

Thus we are told that if a person has a right to appoint the majority of directors or to control the management or policy decisions of a company, then he/she would be considered to be a promoter. But again, what may be classified as control over management and policy decisions is still ambiguous, uncertain, vague & definitely a matter of academic debate and interpretation and thus may lead to two views.

The last part of the definition states that a promoter is a person “(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act”.

This is again vague and from the perspective of a person who is an outsider to the management of the company and this fact may not be evident very easily. So, applying the rules of literal interpretation on S. 2(69) of the Act, and reading all the parts of the definition together, a person may be a promoter of the company even without being a director or a shareholder, if he / she has been named so in the Prospectus or Annual Return of the Company.

Similarly, a person who has been stated to be a promoter in the prospectus of the company or the Annual Return of the Company, would be treated as a promoter even if he / she does not exercise any control over the affairs of the company or even if doesn’t have any right of appointment of a majority of the directors.

Thus, it can be seen that in the formation of a company, people who initially take an active part to give it a concrete shape are known as promoters in the commercial world. The term “promoters” is more familiar with the business than with law. It “involves the idea of exertion for the purpose of forming and starting a company.”

The individuals who not only conduct the task of promotion but also are responsible for all the affairs of the business are the promoters of a company. A promoter of a company is a person or a group of persons who came together with the objective of setting up a business. The promoter can be an individual, a firm or an association of artificial legal persons. To be a promoter, it is not necessary to be a founder of a business; the person who arranges capital and assists in other important works can be equally regarded as a “promoter of a company”. In another sense, the promoters may be called as the Parents of a company on the ideation of whom a company is born.

A person cannot become a promoter merely because he signed the memorandum as a subscriber for one or more shares. The proviso further carves out an exception as to the professionals such as counsels, solicitors, accountants, engineers or other technicians who will not become promoters by reason of acting unless they exceed their professional function and do something more in promoting the company.

TREATMENT OF LOAN RECEIVED FROM MEMBERS / DIRECTORS / PROMOTERS WHEN THEY ARE THE SAME

Let us consider a small Private limited company that has 2 members / shareholders who are directors of the Company. Consider a situation in which these directors lend money to the company for its operations. Since the loan is from the directors, it shall be considered as exempt only if a declaration is obtained from the directors. It is the duty of the concerned director to give the declaration, but it is equally the duty of the company to obtain the declaration. The sub clause granting exemption nowhere says that the director giving loan should not be a shareholder of the company. It similarly does not say that such a director should not be a Managing Director / Whole Time Director / Independent Director / Non-Executive Director / Employee of the Company. Reading any of these things or anything else will amount to inserting words in a statutory provision which we are not allowed to do. So, when a loan is accepted from a director who is a shareholder too, one needs to look into the exemption from the perspective of a loan from the director and one should not travel to other provisions regarding loan from members. If the intention of the rule-making authorities was to debar a company from accepting deposits/loan from their directors who happen to be shareholders of the company, there would have been a clear and explicit provision to that effect in clause (viii). But in the absence of such a provision, we cannot read it in the clause (viii) on our own. Thus loans from directors subject to compliance of conditions shall be treated as exempt deposit under rule 2(1)(c) (viii) of AODR.

Consider further a situation that this company decides to borrow from the financial institution (FI) a term loan of ₹100 crores and FI imposes a condition that promoters of the Company (in this case same 2 directors) bring in ₹10 Crores and such loan from the promoters shall not be repaid till term loan or part thereof continues. It is interesting to see here that such directors / promoters when they bring in a loan pursuant to a condition stipulated, there is no declaration required, and promoters (directors) in such cases, can place the funds with the company out of borrowed funds.

Thus, it is quite logical that with regards to the loans from promoters (who can be even non-individuals) to the company, there cannot be a condition similar to loan from directors or their relatives that they need to be out of their own funds.

Based on the logic explained in the paragraph on loan from directors, not to be treated as loan from members etc, one can conclude that loan from promoters pursuant to a stipulation cannot be considered as a loan from directors even though such promoters are directors and one need not take a declaration from such promoters since this is not prescribed when loan is from promoters.

Rule 2(1)(c) of AODR provides for certain situations in which the receipt of money shall become a deposit:

Any unsecured loans received from the promoters or their relatives or both as per the stipulation of any lending financial institution or a bank which continues beyond the subsistence of such loan from lending financial institution or a bank, shall become deposit.

Other compliances that need to be looked into in the case of loans and / or deposits:

I. CARO 2020 Clause (v) in Para 3 requires reporting in respect of the following:

in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not;

Thus, if loan from promoters does not fall in the four corners of exception, it needs to be reported in CARO.

II. Pursuant to amendments in Schedule III to the Companies Act, companies are required to give certain ratios which includes a ratio related to debts and equity namely Debt Equity ratio. The notification further mentions that the company shall explain the items included in numerator and denominator for computing the above ratios. Guidance note from ICAI further clarifies that the Debt-to-equity ratio compares a Company’s total debt to shareholders’ equity. Both of these numbers can be found in a Company’s balance sheet. Debt-Equity Ratio is defined to mean Total Debt / Shareholder’s Equity.

Is it possible to hold a view that the loan from promoters can be included in Equity for the purposes of this ratio?

CRISIL in its recent publication titled “CRISIL Ratings approach to financial ratios” mentions as under:

RELEVANT EXTRACTS ARE REPRODUCED

Computation of debt and equity has its nuances, especially in the context of promoter / family-owned unlisted entities where a sizeable portion of promoter funds deployed in the business could be in the form of unsecured loans.

These loans are infused either by promoters or family members and are usually subordinated to external debt. Over the years, CRISIL Ratings has observed that this source of funds has demonstrated a high degree of permanence in times of distress, with promoters deferring interest payments on these loans in order to prioritize the servicing of external debt. Furthermore, unsecured loans from promoters in case of promoter owned, unlisted entities are largely viewed as promoter source of funding by lenders and considered subordinate to all other forms of external debt.

Hence, even though as per accounting conventions, unsecured loans are considered part of debt, the aforementioned factors render some equity-like characteristics to these instruments.

CRISIL Ratings, as part of its analytical treatment of unsecured loans, classifies them into one of the following:

  • Part of overall debt,
  • May exclude unsecured loans from computation of debt,
  • In some circumstances, CRISIL Ratings accords partial equity treatment to around 75% of the unsecured loans, while considering the remaining as debt.

In view of the above, it is possible for a company to calculate the ratio treating unsecured loans from promoters as part of Equity.

CONCLUSION

The loans from Directors and Promoters and conditions related to exemptions from AODR are tabulated below:

Particulars Loan from Directors Loan from Promoters
Whether loan from Individuals Only Yes Not necessarily
Whether loan can be out of borrowed funds No Can be permitted
Whether any declaration required that loan is not out of the borrowed funds Yes No
Any Limit on the loan No Yes, subject to limits from Financial Institutions / Banks
Can the loan continue after director ceases to be a director of the Company Yes Not Applicable
Whether loan from relatives is permitted Yes (Only in case of private Limited Company) Yes. Not necessarily in the case of Private Limited Company.
How long loan can continue No such requirement and can be at the instance of the Company Loan can continue till Parent loan from FI continues
Reporting in the Board’s report Yes No such mandatory requirement

Navigating the Landscape: The Integration of ESG Factors Into Business Valuation

In the dynamic world of finance and investment, the integration of Environmental, Social, and Governance (ESG) factors into business valuation has become a paramount consideration. As the global business community grapples with the requirements of sustainability and responsible corporate practices, investors are increasingly recognizing the need to go beyond traditional financial metrics. This article explores the multifaceted realm of ESG, delving into its significance, the process of integrating these factors into business valuation, challenges encountered in this endeavour, and the highlights of Business Responsibility and Sustainability Reporting (“BRSR”) Core which has been introduced recently.

UNDERSTANDING ESG & ITS IMPORTANCE

ESG encompasses a triad of critical factors that collectively shape a company’s approach to sustainability, ethical practices, and corporate governance. Environmental criteria evaluate a company’s impact on the planet, social criteria gauge its relationships with stakeholders, and governance criteria assess the internal structures guiding decision-making. The importance of ESG lies in its ability to provide a holistic view of a company, reflecting its commitment to long-term resilience, ethical conduct, and positive societal impact. Investors are increasingly recognizing that companies with robust ESG practices are not only better equipped to manage risks but are also likely to be more resilient in the face of evolving market dynamics.

INTEGRATION OF ESG INTO VALUATION

The integration of ESG factors into business valuation marks a paradigm shift in how companies are assessed and valued for investment. Traditional valuation methods are being augmented with ESG considerations, as investors seek a more comprehensive understanding of a company’s performance and its ability to create long-term value. ESG integration involves analyzing a company’s ESG practices and assigning a quantitative value to these tangible and intangible factors. These factors become important for the valuation of a business as their impact can be considerable when taken for long periods of time including on its competitive advantages. Below are ways to incorporate the ESG impact under the market and income approach:

  • The Market Approach:

To account for ESG considerations, valuation under the market approach should:

1) Identify and assess ESG practices for comparable companies and industries, then

2) Assess the performance of the subject company for such criteria, and

3) Calibrate the market inputs to the subject entity to take into account the relevant performance as compared to the comparable companies.

An example for adjusting the ESG factor under market approach is as follows:

Relevant ESG Factors GHG Emissions (Co2e) Workplace Accidents
Competitor 1 0.60  65
Competitor 2 0.70 55
Industry Average (a) 0.65 60
ESF factor for Target Company (b) 0.75 70
Premium/(Discount) for ESG factor in comparision to Industry(c) (15%) (17%)
Weights (d) 50% 50%
Industry Average EV/Revenue Multiple (e)*   2.0
Calibrated EV/ Revenue multiple for the Target Company

Considering the ESG Factor (e*d*(1+c))

   1.7

A significant limitation of this method is that ESG data, disclosures, and rating systems are currently in their early stages of development, particularly for entities that are often private companies. Consequently, the scoring process is subjective, as different practitioners may assign varying weightings or scores to distinct ESG factors and practices implemented by companies.

  • The Income Approach:

To account for ESG considerations, valuation under the income approach should consider its impact on the discount rate or cash flows itself.

While discount rate adjustments can be used to incorporate ESG into the Discounted Cashflow approach (DCF), adjusting the discount rate may lead to double counting if beta values have reflected the market’s perspectives on ESG risks. A better way of integrating ESG factors in the DCF can be to adjust future cash flows. This helps the investor to integrate the company’s ESG factors into future cash flows and thus to focus on the relevant material issues. Depending on different industries and company performances, the translation of ESG factors to cash flow adjustments varies. Hence industry to industry lens is very critical since there is no standardized benchmark in ESG integration and adopting industry and company-specific value drivers could help avoid the ambiguity of the cash flow adjustments. Some of the adjustments to be considered include:

– The “E” factor can be incorporated by adjusting the cash flows with additional costs and Capex investments in carbon reduction initiatives and cost savings from the adoption of energy/water saving technology.

– The “S” factor can be incorporated through adjusting costs related to employee training programs, hiring contractual employees on a permanent basis, workplace safety measures and research and development investments to ensure quality and safe products among others.

– The “G” factor can be incorporated through adjusting for fines or penalties imposed by regulatory authorities due to weak governance policies of companies.

An example of adjusting the ESG factor under the income approach is as follows:

Cash Flow Items Amount (INR Mn) ESG Factor Explination of Adjustment
Revenue 1,500    
Revenue Adjustment (300) Social Reduced sales due to consumer boycott pf its products for unethical labour practises such as child labour, poor working conditions or low wages
Adjusted Revenue 1200    
Operating costs and expenses (250)    
Tax Expense (100)    
Tax Adjustment (40) Governance Additional tax payments due to fines imposed by regulatory authorities
Adjusted Net Profits 810    
Depreciation and Amortization 80    
Changes in Net Working Capital 50    
Necessary Capex (200)    
Capex Adjustment (80) Environmental Purchase of machineries necessary to reduce water resource waste
Free cash flow considering ESG Factors 660    

ISSUES IN INTEGRATING ESG FACTORS IN VALUATION

While the integration of ESG factors into business valuation is gaining momentum, it is not without its challenges. One key issue is the lack of standardized metrics and reporting frameworks, making it difficult for investors to compare ESG performance across companies. Additionally, there are concerns about “greenwashing,” where companies may overstate their ESG credentials to appear more attractive to investors. Striking a balance between qualitative and quantitative assessment poses another challenge, as some ESG factors are inherently subjective and context-dependent. Overcoming these challenges requires the development of standardized reporting practices, increased transparency, and ongoing dialogue between investors and companies.

BRSR CORE FRAMEWORK

Recent developments in the ESG landscape include the introduction of the BRSR Core Framework by SEBI, an extension of the existing BRSR framework that delves deeper into ESG integration by providing specific requirements for reporting and assurance. This framework aims to enhance transparency and accountability for companies and further elevate the role of ESG in business valuation.

  • Key Features of BRSR Core:

– Specificity: The framework defines a specific set of ESG indicators that companies must report on, — covering environmental, social, and governance aspects. This specificity ensures consistency and comparability across companies, facilitating easier analysis and assessment for investors.

– Assurance: BRSR Core introduces mandatory assurance requirements for a subset of reported ESG information. This independent verification enhances the credibility and reliability of ESG data, reducing the risk of greenwashing and building investor confidence.

– Value Chain Focus: The framework extends beyond a company’s own operations to include its value chain, requiring reporting on the sustainability practices of its suppliers and partners. This broader scope provides a more comprehensive picture of a company’s overall impact and promotes responsible sourcing practices.

– Phased Implementation: BRSR Core’s implementation is phased, starting with the top 1000 listed entities by market capitalization. This gradual approach allows companies to adapt and implement the framework while minimizing disruption.

Impact on Business Valuation:

– Enhanced Data for Valuation Models: The BRSR Core’s specific and assured ESG data provides valuable input for valuation models, enabling a more comprehensive assessment of a company’s long-term value and risk profile.

– Better Risk Assessment: Deeper insights into a company’s ESG performance through the value chain help identify potential environmental, social, and governance risks that could impact financial performance.

– Improved Comparability: The standardized reporting and assurance requirements facilitate easier comparison of ESG performance across companies, enabling investors to make more informed investment decisions based on ESG considerations.

BRSR Core represents a significant step towards a more integrated and transparent ESG landscape. The BRSR Core framework is still evolving, and its impact on business valuation is likely to grow as companies adapt and investors refine their assessment methods. Ongoing collaboration between regulators, investors, companies, and valuation professionals is crucial to ensure the effectiveness and continued improvement of the framework. Addressing data availability and accessibility, particularly for smaller companies, remains a challenge that needs to be tackled to ensure fair and equitable application of the framework.

CONCLUSION

The integration of ESG factors into business valuation is a transformative trend that reflects the evolving priorities of investors and the broader business ecosystem. ESG considerations are no longer peripheral but integral to evaluating a company’s overall performance and potential for sustained success. While challenges persist, the ongoing evolution of reporting frameworks like BRSR signals a commitment to addressing these issues and advancing the integration of ESG into mainstream financial practices. As businesses navigate this new landscape, embracing ESG not only contributes to a more sustainable future but also positions companies as leaders in an era where responsible practices are synonymous with long-term value creation.

Part A – Company Law

16 Case Law No. 01 /Jan 2024

In the matter of Shri Thiyagarajan Parthasarathy

Registrar of Companies, Tamil Nadu

F.NO.ROC/CHN/THIYAGARAJAN/ADJ ORDER/S.155/2023

Adjudication Order

Date of Order: 10th July, 2023

Adjudication Order for the violation of the provisions of Section 155 of the Companies Act, 2013 which do not permit holding more than one “Director Identification Number” (DIN).

FACTS

Shri Thyagrajan Parthsarathy made an application in DIR 5 before the office of the Regional Director (Northern Region) hereinafter RD for the surrender of his DIN.

RD further observed upon processing of application received in e-form DIR-5 with respect to the surrender of the second DIN that, the applicant earlier had applied for and obtained two DINs on the MCA portal, namely DIN: 03191514 dated 23rd August, 2010 (First DIN) and DIN: 09018479 dated 4th January, 2021 (Second DIN).

Thus, the applicant himself had admitted to holding two DINs and the same had been verified by the e-records of MCA. Further, it was observed that the DIN being surrendered was still associated with a company namely “M/s SPS HPL” and a new DIN was applied, while forming the new company i.e. “M/s SPS MPL”.

Thereafter, on request from the office of RD vide letter dated 5th September, 2022, the Adjudication Office (AO) i.e. Registrar of Companies, Tamil Nadu issued a Show Cause Notice to the director Shri. TP on 19th October, 2022 for violation of provisions of Section 155 of the Companies Act, 2013 for holding 2nd DIN. The AO issued an Adjudication hearing notice to the director Shri. TP vide letter dated 15th June, 2023.

Thereafter, Mr F, Practising Company Secretary representative of the Shri TP had appeared before the AO on 30th June, 2023 and admitted to the violation on behalf of Shri. TP.

Provisions of the Section 155 of the Companies Act, 2013 states that:

“No individual, who has already been allotted a Director Identification Number under Section 154, shall apply for, obtain or process another Director Identification Number.”

Whereas Section 159 of the Companies Act, 2013 reads as under:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each days after the first during which such default continues.”

HELD

AO after examination and hearing, held that Shri. TP had violated the provisions of Section 155 of the Companies Act, 2013 for which a penalty was imposed as per Section 159 of the Companies Act, 20l3. Further, AO noted that the clarification provided with respect to duplication did not seem satisfactory and that the 2nd DIN was obtained in violation of Section 155 of the Companies Act, 2013.

Therefore, in the exercise of the powers vested with AO under Section 454 (l) & (3) of the Companies Act, 2013 penalty imposed was as follows:

Name of the Officer in default Amount of Penalty for 1st Default Additional Penalty for Continuing Offence Total amount of Penalty Imposed
Shri TP ₹50,000 ₹4,53,500
(500*907)
No. of days of default: 907 days		 ₹5,03,500

17 Case Law No. 02/Jan 2024

M/s Sarada Pleasure And Adventure Limited

No. ROC/PAT/Sec. 88/13364/691

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of Order: 27th July, 2023

Penalty order for non-maintenance of Statutory Registers under section 88 of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“RoC”) during the course of their inquiry, noticed that M/s SPAL had failed to maintain the statutory registers as required under sections 88 of the Companies Act, 2013. Thus, M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL had violated the provisions of section 88(1) of the Companies Act, 2013 w.r.t. non-maintenance of the register of members, etc.

As per Section 88(1) of the Companies Act, 2013: Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India;

(b) register of debenture-holders; and

(c) register of any other security holders.

Further, RoC had issued a show cause notice to M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL for default under section 88(1) of the Companies Act, 2013 vide office letter dated 12th June, 2023 on which no reply was received.

Hence, RoC observed that the provisions of Section 88 (1) of the Companies Act, 2013 were contravened by M/s SPAL and therefore were liable for penalty under section 88 (5) of the Companies Act, 2013.

Section 88(5) of Companies Act, 2013 states that:

“If a company does not maintain a register of members or debenture-holders or other security holders or fails to maintain them in accordance with the provisions of sub-section (1) or sub-section (2), the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees”.

It was further observed that, as per the MCA portal, the paid-up capital of M/s SPAL is ₹2,22,56,77,000. As regards to its turnover, M/s SPAL has not filed its balance sheet since the financial year 2014-2015, hence the turnover M/s SPAL could not be ascertained. Therefore, the benefits of a small company under Section 446B could not be extended to M/s SPAL while adjudicating penalty.

HELD

The Adjudicating Officer (“AO”) after considering the facts and circumstances of the case, imposed a penalty as stated below for violation of Section 88(1) of the Companies Act, 2013 and the matter was disposed of.

Penalty on M/s SPAL: ₹3,00,000

Penalty on officers in default:

Mr RS (Director of M/s SPAL): ₹50,000
Mr SD (Director of M/s SPAL): ₹50,000
Mr SR (Director of M/s SPAL): ₹50,000

Further, it was directed to pay the penalty within 90 days of the date of the order.

Effect of Unregistered Documents

INTRODUCTION

A transfer of a movable property can be affected by mere delivery and possession. However, any transfer of interest in an immovable property requires an instrument which is duly registered. What happens when such an instrument which needs to be registered is not registered? Can it transfer any interest or can it be used for any other purpose? Can it attract income-tax liability on the transferor? What would be the position under the Stamp Act on such unregistered instruments? These are some of the very interesting questions in this respect which have been answered by different decisions of the Supreme Court and High Courts. This article analyses some of the key principles and pronouncements on this very important facet of conveyancing law.

REGISTRATION ACT

The Registration Act, 1908 (“the Act”) provides for the registration of various documents. Under the Act, certain documents are subject to compulsory registration while for certain documents registration is optional. Under the Act, instruments which create, declare, assign, limit or extinguish any right, title or interest (vested or contingent) in any immovable property, exceeding ₹100 in value, need to be compulsorily registered. Similarly, leases of immovable properties which are made on a yearly basis exceeding a term of one year or reserving a yearly rent.

Documents containing contracts to transfer for consideration any immovable property in Part Performance of a Contract u/s. 53A of the Transfer of Property Act, 1882, which was executed on or after 24th September, 2001 must be compulsorily registered. It has been further provided that if such documents are not registered, then they shall not have any effect for the purposes of s. 53A of the Transfer of Property Act, 1882. A corresponding amendment has also been made to the Transfer of Property Act. In this respect, the decision in Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra, 2004 (8) SCC 614 is relevant wherein it held:

“Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party.”

In addition to the Registration Act which specifies registration of certain documents, some other Statutes also provide for registration of documents pertaining to immovable properties. For instance, s. 54 of the Transfer of Property Act, 1882 provides that sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Such a transfer, in the case of tangible immovable property of the value of ₹100 and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument. It further provides that a contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not, of itself, create any interest in or charge on such property. In Narandas Karsondas vs. S.A. Kamtam (1977) 3 SCC 247, the Supreme Court observed:

“A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967] 1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein.”

U/s. 107 of the Transfer of Property Act, 1882, a lease of immovable property from year to year for any term exceeding one year or reserving a yearly rent can be made only by way of a registered instrument. It further provides that all other leases of immovable property may be made by a registered instrument or by an oral agreement accompanied by delivery of possession.

EFFECT OF NON-REGISTRATION

U/s. 49 of the Act, any document which is required to be registered and is not registered shall not affect any immovable property, comprised in the document, or be received as evidence of any transaction affecting such property. S. 50 provides that registered documents shall in respect of the property they comprise, take effect against every unregistered document relating to the same property.

However, an unregistered document pertaining to immovable property and which is required to be compulsorily registered either under the Act or under the Transfer of Property Act shall still be admitted as evidence in a suit for specific performance or as evidence for any collateral transaction which does not require a registered instrument.

SC IN SURAJ LAMPS

The Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd. vs. State of Haryana, (2012) 1 SCC is of great significance in this respect. In that decision, the issue was the legality of the transfer of immovable property in the National Capital Region by executing an unregistered Agreement of Sale + an unregistered General Power of Attorney from the seller to the buyer and a Will executed by the Seller in favour of the buyer bequeathing the property to the buyer as a safeguard against the consequences of the death of the vendor before the transfer. This hybrid system was devised as an alternative to obtaining a registered and stamped conveyance for the property. The Court was faced with the validity of such an arrangement.

Ill-effects – The Court frowned on such hybrid arrangements and held that its consequences were disturbing and far-reaching, adversely affecting the economy, civil society and law and order. Firstly, it enabled large scale evasion of income tax, wealth tax, stamp duty and registration fees thereby denying the benefit of such revenue to the government and the public. Secondly, such transactions enabled persons with undisclosed wealth / income to invest their black money and also earn profit / income, thereby encouraging the circulation of black money and corruption. These transactions also had disastrous collateral effects. For example, when the market value increased, many vendors (who effected power of attorney sales without registration) were tempted to resell the property taking advantage of the fact that there was no registered instrument or record in any public office thereby cheating the purchaser. Such power of attorney sales indirectly led to the growth of the real estate mafia and the criminalisation of real estate transactions.

Agreement to Sale – The Supreme Court next considered the effect of an unregistered agreement to sell. It held that a transfer of immovable property by way of sale could only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property could be transferred. Any contract of sale (agreement to sell) which was not registered would fall short of the requirements of sections 54 and 55 of the Transfer of Property Act and would not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of that Act). According to that Act, an agreement of sale, whether with possession or without possession, was not a conveyance. Section 54 of the TP Act enacted that a sale of immovable property could only be made by a registered instrument and an agreement of sale did not create any interest or charge on its subject matter.

Power of Attorney – It then considered the scope of a Power of Attorney and held that a power of attorney was not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney was the creation of an agency whereby the grantor authorised the grantee to do the acts specified therein, on behalf of the grantor, which when executed were binding on the grantor as if done by him.

Will – Lastly, it is considered the essence of a Will. According to the Court, a Will was the testament of the testator. It was a posthumous disposition of the estate of the testator directing the distribution of his estate upon his death. It was not a transfer inter vivos, i.e., between living persons. The two essential characteristics of a Will were that it was intended to come into effect only after the death of the testator and was revocable at any time during the lifetime of the testator. So long as the testator was alive, a Will was not worth the paper on which it was written, as the testator could at any time revoke it. In the case under review, the seller was an individual and the buyer was a company. The seller had executed a Will in favour of the buyer. The Supreme Court observed:

“Execution of a Will by an individual bequeathing an immovable property to a company, is also incongruous and absurd.”

It is respectfully submitted that the above statement of the Court made in the context of the case needs reconsideration. There is no bar as to who can be a beneficiary under a Will. In this context the decision of the Supreme Court in Krishna Kumar Birla vs. Rajendra Singh Lodha, (2008) 4 SCC 300, is relevant. It was concerned with a Will being affected in favour of a `stranger’. It held that why an owner of the property executed a Will in favour of another was a matter of his / her choice. She had a right to do so. The court was only concerned with the genuineness of the Will. If it was found to be valid, no further question as to why she did so would be completely out of its domain. It concluded that a Will may be executed even for the benefit of anyone including animals.

SUBSEQUENT CASES

The above decision of Suraj Lamps has been endorsed by several subsequent Supreme Court decisions, including the latest one in Shakeel Ahmed vs. Syed Akhlaq Hussain, CA 1598/2023, Order dated 1st November, 2023, which it has again held that the law is well settled that no right, title or interest in an immovable property can be conferred without a registered document. It also held that the decision of Suraj Lamps is retrospective in nature since it emanates from various Statutes and earlier judgments on the same point. Hence, the principles laid down therein applied even to unregistered agreements to sale executed prior to the date of the decision, i.e., before 2009.

On facts similar to those found in Suraj Lamps, the Karnataka High Court in Smt. K. Shashikala vs. ACIT, [2023] 147 taxmann.com 315 (Kar)has held that in order to attract Section 2(47)(v) of the IT Act, it is absolutely essential that the sale agreement should be a registered agreement to sale. In the absence of the same, there was no transfer under the Income-tax Act by the land owner in favour of the buyer and hence, there was no liability to capital gains tax.

UNREGISTERED JDA

In the case of CIT vs. Balbir Singh Maini, [2017] 86 taxmann.com 94 (SC),the Supreme Court considered whether capital gains arose to the land owner by executing an unregistered joint development agreement (JDA). The Court negated this argument and analysed the provisions of s. 2(47) of the Income-tax Act along with s.53A of the Transfer of Property Act. It held that it was well-settled law that the protection provided under Section 53A was only a shield, and could only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. The Court held that this position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act were omitted. Simultaneously, Sections 17 and 49 of the 1908 Act were amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of the 1882 Act) was registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The Supreme Court held that the effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA, was not registered, then it had no effect in law for the purposes of Section 53A. In short, there was no agreement in the eyes of law which could be enforced under Section 53A of the Transfer of Property Act. Thus, in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act showed that in the eyes of the law, there was no contract which could be taken cognizance of, for the purpose specified in Section 53A. Hence, it concluded that there was no contract in the eyes of law in force under Section 53A after 2001 unless the said contract was registered. This being the case, and it being clear that the said JDA was never registered, since the JDA had no efficacy in the eyes of the law, no “transfer” under the Income-tax Act could be said to have taken place under the JDA.

POSITION UNDER MAHARASHTRA STAMP ACT

It may be noted that even though the legal position is as stated above, the Maharashtra Stamp Act, 1958 has amended the definition of conveyance in Article 25 of Schedule I to the Stamp Act. It provides that in the case of an agreement to sell immovable property, where the possession of any immovable property was transferred or agreed to be transferred to the purchaser before the execution, or at the time of execution, or after the execution of, such agreement, then such Agreement to Sell is deemed to be a conveyance, and stamp duty thereon shall be leviable accordingly. Hence, the net effect of this is that in the State of Maharashtra, an Agreement to Sell is stamped as if it were a conveyance.

Based on this feature in the Stamp Act, a question arose whether such an agreement changed the legal position in Maharashtra. The Bombay High Court in Naginbhai P. Desai vs. Taraben A. Sheth, 2003 AIR(Bom.) 192 answered the question in the negative. The Court held that Section 54 of the Transfer of Property Act specifically provided that an Agreement for Sale by itself did not create any interest in or charge on the property agreed to be sold. There was no transfer of any interest in the property. The fiction created by Explanation I to Article 25 of the Bombay Stamp Act by which the agreement for sale was to be treated conveyance was limited only for the purposes of the Stamp Act and for no other purpose.

USE FOR COLLATERAL PURPOSES

The Supreme Court in K.B. Saha and Sons P Ltd vs. Development Consultant Ltd, (2008) 8 SCC 564 has laid down how an unregistered document can be considered for collateral purposes. It could be used as evidence of collateral purpose as provided in s. 49 of the Registration Act. A collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration. A collateral transaction must be a transaction, not itself required to be effected by a registered document, that is, a transaction creating, etc. any right, title or interest in immovable property.

In M/s Paul Rubber Industries P Ltd vs. Amit Chand Mitra, CA No. 1598/2023,the Supreme Court held that the determination of the nature and character of a lease could not be treated as collateral under an unregistered lease deed since that constituted the primary dispute and hence the Court was excluded by law from examining the unregistered deed for that purpose.

It has been held in Ameer Minhaj vs. Dierdre Elizabeth (Wright) Issar,(2018) 7 SCC 639, that a contract to transfer the right, title or interest in an immovable property for consideration is required to be registered if the party wants to rely on the same for the purposes of Section 53A of the Transfer of Property Act to protect its possession over the stated property. However, when an unregistered sale deed is tendered in evidence, not as evidence of a completed sale, but as proof of an oral agreement of sale, then such a deed can be received as evidence. However, an endorsement needs to be made that it is received only as evidence of an oral agreement of sale. The Court held that the document is received as evidence of a contract in a suit for specific performance and nothing more.

In Balram Singh vs. Kelo Devi, CA 6733/2022, the Supreme Court was considering a question of the use of an unregistered Agreement to Sale for collateral purposes. It had to decide whether a decree for a permanent injunction could be passed on the basis of such an agreement which restrained the defendant from interfering with her possession. The Court held that such an unregistered document / agreement to sell was not admissible as evidence. The Supreme Court disallowed the permanent injunction. It held that being conscious of the fact that the plaintiff might not succeed in getting the relief of specific performance for such an unregistered Agreement to Sale, the plaintiff filed a simple suit for permanent injunction. While it was true that in a given case, an unregistered document could be used and/or considered for collateral purposes, but the plaintiff could not get the relief indirectly which otherwise he cannot get in a suit for substantive relief, namely, the relief for specific performance. Therefore, the Court held that the plaintiff could not get the relief even for a permanent injunction on the basis of such an unregistered document / agreement to sell.

It appears that this decision of Balram Singh is somewhat of a variance to the above-mentioned decision in the case of Ameer Minhaj. In Ameer Minhaj’s case, the Court allowed an unregistered contract as evidence in a suit for specific performance whereas in this case, the Court made an observation that the plaintiff would not succeed in getting the relief of specific performance for such an unregistered contract.

EPILOGUE

As would be evident from the above discussion, an unregistered document offers very little protection. Registering a document offers a “notice to the entire world” regarding the execution of the document. Registration also leads to revenue in the form of stamp duty and helps curb undervalued transactions in immovable properties.

Allied Laws

41 Cox and Kings Ltd vs. SAP India Pvt Ltd

[2023] 157 taxmann.com 142 (SC)

Date of Order: 6th December, 2023

Arbitration — The validity of the ‘group companies’ doctrine — non-signatory parties can be bound by an arbitration agreement [Arbitration and Conciliation Act, 1996, 1 S. 2, S. 7].

FACTS

Five judges of the Hon’ble Supreme Court were called upon to determine the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration. The challenge was to figure out whether there can be reconciliation between the group of companies’ doctrine and well-settled legal principles of corporate law and contract law.

HELD

The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act, 1996 (ACA) includes both the signatory as well as non-signatory parties. The conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. The requirement of a written arbitration agreement under Section 7 of the ACA does not exclude the possibility of binding non-signatory parties. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement.

The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the ACA. Further, to apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Oil and Natural Gas Corporation Ltd vs. Discovery Enterprises (2022) 8 SCC 42. Resultantly, the principle of a single economic unit cannot be the sole basis for invoking the group of companies doctrine.

The group of companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and in the course of this judgment, any authoritative determination given by this Court pertaining to the
group of companies doctrine should not be interpretedto exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

42 Vijay vs. UOI & Ors

CA No. 4910 of 2023 (SC)

Date of Order: 29th November, 2023

Secondary Evidence — Admissibility — Agreement for sale — Executed prior to the amendment — Allowed [Indian Stamp Act, 1899, S. 35].

FACTS

The Original Plaintiff and Defendant entered into an agreement to sell a property on 4th February, 1998, and pursuant to that, Plaintiff was allegedly put in possession of the property by the Defendant. When the Defendant denied the existence of such an agreement, Plaintiff filed a suit for specific performance of the contract. In the said suit, Plaintiff moved an application to file a copy of the agreement to sell, among other documents, as secondary evidence. Initially, the said application was allowed but when the Defendant sought a review of the order, the Court held that secondary evidence of an agreement to sell could not be allowed as it was not executed on a proper stamp, thus barred under section 35 of the Indian Stamp Act, 1899 (Stamp Act). Subsequently, the Plaintiff filed a Writ Petition challenging the review order and the Constitutional validity of Section 35 of the Stamp Act. The High Court upheld the validity of the said section and the order of the Review Court.

On Appeal.

HELD

The Explanation deeming certain ‘agreements to sell’ as conveyance (and thus making them liable to be stamped as conveyance) inserted in Article 23 of Schedule I-A contained in the Stamp Act (vide MP Amendment Act, 1990) creates a new obligation for the party and, therefore, cannot be given retrospective application. Thus, it will not affect the agreement(s) executed before such amendments. Hence, the documents in question were not required to be stamped at the relevant period to attract the bar of Section 35 of the Stamp Act. Thus, a copy of a document can be adduced as secondary evidence if other legal requirements are met.

The Appeal was allowed.

43 Manu Gupta vs. Sujata Sharma & Ors

RFA (OS) 13 of 2016 (Del)(HC)

Date of Order: 4th December, 2023

Hindu Undivided Family — Right of a female coparcener to be Karta — Held Yes. [Hindu Succession Act, 1956, S. 6].

FACTS

The Appeal was preferred by the appellant / Manu Gupta (defendant No.1 in the main Suit), against the Judgement whereby the Suit for Declaration for declaring the plaintiff (respondent No.1 herein) as the Karta of Late Shri D.R. Gupta and Sons, HUF, has been allowed.

On an appeal.

HELD

The explicit language of Section 6 of the 2005 Amendment Act makes it abundantly clear that though the reference in the Preamble may be to inheritance, but conferring “same” rights would include all other rights that a coparcener has, which includes a woman’s right to be a Karta. Thus, if a woman can be a coparcener but not a Karta of HUF, would be giving an interpretation that would not only be anomalous but also against the stated Object of the introduction of the Amendment.

The appeal was dismissed.

44 Anumolu Nageswara Rao vs. AVRL Narasimha Rao

AIR 2023 TELANGANA 178 (FB)

Date of Order: 27th June, 2023

Rights of adoptee — Right of a coparcener — In the family of birth — Ceases on adoption — unless partition before adoption. [Hindu Adoption and Maintenance Act, 1956, S. 12].

FACTS

A full bench was constituted to address the question of whether the rights of a coparcener in the joint possession and enjoyment of the property is a clear vesting of title in the coparcener even before partition, and can he be said to be short of rights of a full owner or whether his rights would get crystallized into definite share only on an actual partition, and whether by virtue of the proviso (b) to Section 12 of the Adoption Act, the undivided interest in the property of a coparcener will not, on his adoption, be divested, but will continue to vest in him even after his adoption.

HELD

On adoption by another family, the adoptee becomes a coparcener of the adoptive family and ceases to have any connection with the family of his birth. He / she ceases to perform funeral ceremonies and loses all rights of inheritance as completely as if he / she had never been born. Court held that the child ceases to be a coparcener of the family of his / her birth and forgoes interest in the ancestral property in the family of his birth. Only if a partition has taken place before the adoption and property is allotted to his share or self-acquired, obtained by will, inherited from his natural father or other ancestor or collateral which is not coparcenary property held along with other coparceners and property held by him as sole surviving coparcener, he carries that property with him to the adoptive family with corresponding obligations.

Navigating the “CA (E)Volution”: Balancing Responsibility and Compliance in the Fight Against Money Laundering

“The Expanded Role of Chartered Accountants: Implications, Obligations, and Considerations under the New PMLA Rule in India”

The regulatory landscape in India has undergone a significant change with the new rule incorporating Chartered Accountants (CAs), along with Company Secretaries (CSs) and CMAs, as reporting entities under the Prevention of Money Laundering Act (PMLA). CAs, considered the warriors of the national economy, are expected to take the role of reporting entities as a vital role-upgradation for safeguarding the financial system and countering financial crimes. This expansion of reporting requirements places the role of CAs in the spotlight in combating money laundering and terrorism financing. As trusted professionals and gatekeepers of financial information, CAs now have the responsibility of detecting and reporting suspicious transactions linked to illicit activities or money laundering.

This article examines the concerns and considerations faced by CAs, compares approaches in other countries and provides insights on effective ways for CAs to equip themselves in light of the new rule. While there are already sources available for professionals to understand the notification and rules under the PMLA, this article primarily focuses on examining the specific implications and effects on CAs as reporting entities, providing insights and guidance relevant to their role in combating money laundering and terrorist financing.

BACKGROUND

In the context of combating money laundering and terrorist financing, the Financial Action Task Force (FATF), established by the G-7 countries as a global money-laundering watchdog headquartered in Paris under the OECD Secretariat, assumes great significance. This organisation sets global standards to combat money laundering, terrorist financing and other threats to the international financial system. FATF has developed 40 recommendations on legal, financial regulatory, and international cooperation that serve as a framework for countries to collectively address the challenges of money laundering, terrorist financing, and the financing of proliferation. These recommendations are meant to guide countries in effectively implementing measures within their national systems. The accounting profession plays a vital role in supporting the FATF 40 Recommendations in two key methods. Firstly, the “General Framework” recommendations align with the profession’s mission of promoting transparency and facilitating multilateral cooperation. Secondly, the “Financial System” recommendations emphasise the importance of record-keeping, reporting and promoting transparency, which directly aligns with the core competencies of the accounting profession, such as implementing controls and systems and maintaining audit trails.

One such recommendation is Recommendation 29, which requires the establishment of a Financial Intelligence Unit (FIU) in each country. The FIU serves as a central authority responsible for receiving, analysing and disseminating information related to suspicious transactions and financial intelligence. Reporting entities (RE), such as banks, financial institutions and other relevant businesses, are obligated to submit reports to the FIU in accordance with national laws and regulations.

In India, the FIU is known as FIU-IND and operates under the provisions of the PMLA. FIU-IND serves as the national centre for receiving, analysing and disseminating reports on suspicious transactions, money laundering activities, associated predicate offences and terrorist financing. This includes Suspicious Transaction Reports (STRs), Cash Transaction Reports (CTRs) and reports on cross-border wire transfers. The FIU utilises advanced analytics and intelligence tools to analyse the data received from these reports and shares actionable intelligence with law enforcement agencies.

With the recent rule, CAs have also been included as RE under the PMLA, expanding the concept to include them as well. This brings an important understanding of the differentiation between ‘reporting entities (RE)’ and ‘relevant persons.’ Relevant persons, including practising CAs, CSs and Cost and Works Accountants, become RE when they engage in specified financial transactions, thereby requiring them to comply with the necessary regulatory obligations. As relevant persons, CAs are included in the category of professionals who carry out specified financial transactions on behalf of their clients. These financial transactions fall within the ambit of RE, which means that CAs have reporting obligations under the PMLA. Hence, CAs can be referred to as both relevant persons and RE in the context of the PMLA.

As mentioned earlier, the PMLA encompasses a broad range of entities and individuals involved in designated businesses or professions. To specify the scope of RE, the Ministry of Finance, empowered by the PMLA, has outlined certain financial transactions conducted by relevant persons. These transactions pertain to diverse areas such as property dealings, management of client assets and establishment or administration of companies. The Ministry has further clarified that relevant persons encompass practising individuals or firms who hold certificates of practice under the Chartered Accountants Act, 1949, Company Secretaries Act, 1980 or Cost and Works Accountants Act, 1959. This inclusion aligns with the definition of a “person carrying on designated business or profession” and encompasses these professionals undertaking financial transactions on behalf of their clients. Consequently, these professionals assume the role of RE and are obligated to fulfil the requisite compliance obligations stipulated by the PMLA.

Recommendation 22

The above inclusion by PMLA aligns with Recommendation 22 of the FATF on Designated Non-Financial Businesses and Professions (DNFBPs). Recommendation 22 outlines the customer due diligence and record-keeping requirements that apply to DNFBPs in specific situations. These situations include activities carried out by lawyers, notaries, other independent legal professionals and accountants on behalf of their clients.

Recommendation 22(d): “The CDD and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17 apply to designated non-financial businesses and professions (DNFBPs) in the following situations: Lawyers, notaries, other independent legal professionals, and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

  • buying and selling of real estate;
  • managing of client money, securities, or other assets;
  • management of bank, savings, or securities accounts;
  • organisation of contributions for the creation, operation, or management of companies;
  • creation, operation or management of legal persons or arrangements, and buying and selling of business entities.”

By including CAs as RE and imposing compliance obligations on them, the PMLA takes reference from and assumes importance with the customer due diligence and record-keeping requirements outlined by the FATF for DNFBPs. While legal professionals like lawyers are excluded from this rule, unlike in other countries, the inclusion of CAs highlights their crucial role as relevant persons engaged in financial transactions, actively contributing to the fight against money laundering and other illicit activities. Consequently, this ensures that valuable information is gathered as part of the reports collected by FIU-IND, enhancing overall efforts to combat financial crimes.

ACCOUNTANTS AS RE IN OTHER COUNTRIES

In several countries, accountants have been included as RE under their respective Anti-Money Laundering (AML) acts or regimes.

The International Federation of Accountants (IFAC) highlights that while national AML regulations may not explicitly assign accountants specific responsibilities, practitioners are still obligated to adhere to the standards and guidelines set by local accounting bodies. Money laundering is generally not as directly impactful on financial statements as other forms of fraud, like misappropriation. Therefore, detecting money laundering through a financial statement audit is unlikely. However, the indirect consequences of money laundering can still affect an entity’s financial statements, which make it an area of concern for external auditors.

This leads us to the important question of the specific obligations imposed on CAs under this new rule.

THE TRANSITION OF OBLIGATIONS

When interpreting the notification, it is crucial to consider the purpose of the PMLA, which is to combat money laundering and terrorist activities. Suppose a transaction involves the client’s use or sourcing of funds and raises suspicions regarding money laundering or terrorism financing. In that case, the professional cannot claim ignorance of the client’s credentials, as due diligence on the client is a requirement. Additionally, if the professional identifies transactions that require reporting to the FIU-IND, they are obligated to report such transactions.

Comprehensively, below are the factors to be considered or that are expected by the CA to be performed.

1. Enhanced Customer Due Diligence (CDD): There is a need to implement robust CDD measures when establishing a business relationship with a client or when conducting occasional transactions above a certain threshold. Further, the professionals need to gather and verify information about the client’s identity, beneficial ownership and the purpose of the transaction.

2. Transaction Monitoring: The professionals ought to enhance their transaction monitoring systems to detect and report any suspicious transactions. They need to develop an understanding of the typical transaction patterns for each client and be alert to any anomalies or red flags.

3. Suspicious Transaction Reporting: If the professional identifies any suspicious transactions during their audit or through their transaction monitoring systems, they have a legal obligation to report these to the FIU-IND in a timely manner. This involves preparing an STR and submitting it as per the prescribed format and timelines.

4. Record Keeping: The professional must maintain detailed records of their clients, transactions and the measures taken to comply with the reporting obligations. These records should be readily accessible for review by regulatory authorities.

5. Compliance Training and Policies: There is a need for practising professionals to provide appropriate training to their staff on AML / CFT compliance, including recognising and reporting suspicious transactions. They should also update their internal policies and procedures to reflect the new reporting requirements and ensure adherence across the organisation.

As a result, CAs, in addition to the traditional roles in financial auditing, now need to be proactive in identifying and reporting suspicious transactions as per the new PMLA rule. This transition requires them to enhance their knowledge, implement new procedures and stay vigilant in their efforts to combat money laundering.

In practical terms, it is beneficial for CAs to consider the following points, drawing inspiration from a money laundering guide for lawyers. These recommendations encompass similar activities and requirements that can be relevant for CA professionals.

FATF Recommendation Key Consideration Relevance Recommended Actions
10 Customer due diligence Identifying clients and their ownership – Identify the client and their beneficial owner.
– Use reliable, independent source documents or information.
– Request a structure map and details of beneficial ownership for corporate clients.
– Understand the business relationship and the purpose of the transaction.
– Conduct ongoing due diligence to align with your knowledge of the client’s profile and source of funds.
– Refrain from establishing or continuing the business relationship if satisfactory due diligence cannot be carried out.

– Consider reporting suspicious transactions.
11 Record-keeping requirements Maintaining records – Keep copies or originals of documents obtained during CDD measures.
– Maintain files and business correspondence for a specified period or as per the recommended period by the PMLA.
– Include electronic and physical communications and documentation.
– Ensure records are sufficient to reconstruct individual transactions as potential evidence in suits.
12 Enhanced CDD for politically exposed persons (PEPs) Dealing with high-risk clients – Obtain senior partner approval for establishing or continuing a business relationship with PEPs, their families or close associates.
– Take reasonable steps to determine the source of wealth and funds.
– Conduct enhanced ongoing monitoring of the business relationship.
15 New technologies Keeping pace with emerging risks – Identify, assess and manage risks associated with new products, business practices and technologies used by lawyers.
17 Reliance on third parties and group-wide compliance Partnering with reliable entities – Ensure third parties have a good reputation and are regulated, supervised and monitored.
– Confirm that third parties have measures in place to comply with CDD and record-keeping requirements.
– Obtain necessary CDD information from third parties and ensure availability of identification data and documentation upon request.
20 Suspicious transaction reporting Identifying and reporting suspicious activity – Familiarise yourself with the requirements for reporting suspicious transactions in the relevant jurisdiction.
– Report suspicions of criminal or terrorist activity to the FIU-IND as per requirements.

These guidelines, based on the specific recommendations, provide suggested actions for CA professionals to follow in order to comply with the new PMLA rules and effectively prevent money laundering activities. Each recommendation highlights the key consideration, its relevance and the suggested actions to be taken by CAs to fulfil their obligations under the new rule.

ETHICAL CONSIDERATIONS AND CONCERNS

As with any new rule, the implementation of the amended PMLA raises several ethical considerations and concerns that the CA professionals need to navigate. One such consideration is the delicate balance between client confidentiality and reporting obligations. Professionals often face the challenge of deciding when and how to disclose information while upholding the privacy and trust of their clients. One may come across a suspicious transaction involving a client but revealing that information could potentially breach the client’s confidentiality. Striking the right balance requires a deep understanding of the legal framework and clear guidelines. Not to mention the significant effort and investment in conducting thorough due diligence on clients, monitoring transactions and maintaining records.

The enhanced requirements and extensive documentation can be time-consuming and resource-intensive, which requires professionals to allocate sufficient resources to meet these obligations while also ensuring the smooth functioning of their practice.

Importantly, the potential for bias and subjective interpretation in identifying suspicious transactions is also a valid concern. Professionals must ensure they approach their work with objectivity and avoid unintended biases. This can be particularly challenging in cases where transactions may appear suspicious based on subjective criteria. For instance, two professionals may have different interpretations of a transaction’s suspicious nature, leading to inconsistent reporting. Clear guidelines, regular training and collaboration with industry peers can help address this concern.

In light of the new obligations, the CA professionals should equip themselves in the following ways and prepare for the coming days:

The inclusion of professionals like CAs under the PMLA is a significant and welcome development in the fight against money laundering. This expansion of their role emphasises the critical responsibility they hold as warriors safeguarding the financial integrity of the nation. Despite the criticisms surrounding the lower contribution of accountants in terms of STRs compared to other contributors in the global scenario, it remains crucial to strike a balance between compliance efforts and conviction rates in India as the regulatory landscape evolves to combat financial crimes. For instance, although all DNFBPs are required to report suspicious activity reports (SARs), there is underreporting from higher-risk sectors such as trust and company service providers, lawyers and accountants in the UK. It is key to achieving the objective of ensuring that heightened compliance measures effectively translate into successful convictions without imposing an excessive burden on professionals.

The upcoming FATF assessment in 2023 will shed light on the effectiveness of the new notification in addressing financial crimes in India. It is imperative for CA professionals to step up their game by staying updated on compliance regulations, embracing technology and fostering a strong ethical framework. This expanded role signifies a crucial step towards curbing money laundering in India, reinforcing the collective effort to preserve the integrity of our financial system and protecting the interests of our nation.

REFERENCES

1. A Lawyer’s Guide to Detecting and Preventing Money Laundering October 2014, A collaborative publication of the International Bar Association, the American Bar Association, and the Council of Bars and Law Societies of Europe.

2. https://www.nortonrosefulbright.com/en-au/knowledge/publications/bae065f5/tranche-2

3. Anti-money laundering, 2nd edition by IFAC.

4. Extending the Reach: CAs, CMAs and CSs brought under the ambit of PMLA reporting entities by Dr (CA) Durgesh Pandey.

5. https://legal.thomsonreuters.com/en/insights/articles/what-is-a-suspicious-activity-report

6. Requiring Lawyers to Submit Suspicious Transaction Reports: Implementation Issues and Current International Trends by George V. Carmona, Chief of Party, ROLE – USAID

7. Guideline: Accountants Complying with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, March 2018, published by New Zealand Government

8. https://fintrac-canafe.canada.ca/re-ed/accts-eng

9. https://ec.europa.eu/commission/presscorner/detail/en/MEMO_13_64

10. https://alessa.com/blog/compliance-with-bank-secrecy-act-aml-requirements/

11. https://cfatf-gafic.org/index.php/documents/fatf-40r/388-fatf-recommendation-22-dnfbps-customer-due-diligence

12. https://www.cfatf-gafic.org/index.php/documents/fatf-40r/395-fatf-recommendation-29-financial-intelligence-units

13. https://www.rupanjanade.com/post/the-role-of-professionals-under-the-redefined-pmla

Corporate Law Corner : Part A | Company Law

15 Case Law No. 01/December/2023

M/s Antique Exim Private Limited

ROC-Guj/Adj. Order/Sec 138/ 2023/1676 to 80

Office of Registrar of Companies, GUJARAT DADRA & NAGAR HAVELI

Adjudication Order

Date of Order: 4th July, 2023

Adjudication order under section 454 read with Section 450 of the Companies Act, 2013 on the company and its directors for violation of provisions of section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014 with respect to non-appointment of Internal Auditor in the Company.

FACTS

The Ministry of Corporate Affairs (‘MCA’) vide letter no. 3/82/2020/CL-II (DGA CoA), dated 17th March, 2020 had ordered an Inquiry of M/s. AEPL under section 206(4) of the Companies Act, 2013.

During the course of the inquiry and on examination of financial statements for the financial years 2018–19 and 2019–20 of M/s AEPL, the Registrar of Companies (‘RoC’) had found that the turnover of M/s AEPL being a Private Limited Company exceeded R200 Crores. Based on the same, it was required and mandatory for M/s. AEPL to appoint an Internal Auditor under provisions of Section 138 of the Companies Act, 2013. However, the company had failed to appoint an Internal Auditor since the financial years 2014-15. Therefore, M/s. AEPL and Mr. PKB, Mr. SP, its officers in default had violated the provisions of the Act.

The ROC had issued an adjudication notice to M/s. AEPL and Mr. PKB, Mr. SP, its officers in default on 6th December, 2022 under section 454 of the Companies Act, 2013 for violation of Section 138 with a request to remit the penalty as prescribedunder the provisions of the Companies Act, 2013. A hearing was fixed on 21st June, 2023 to give the appellants an opportunity of being heard.

Mr. BV, Practising Company Secretary (‘PCS’), Authorised Representative of M/s. AEPL and its directors, present in the hearing stated that M/s. AEPL had already submitted their reply on two occasions i.e., 7th March, 2022 and20th October, 2022, which were taken on record.

Mr. BV further stated that M/s. AEPL had already constituted an in-house Internal Audit Department commensurate with the size of the company and had not appointed any external professional as an internal auditor of M/s. AEPL. Further, the Director’s Reports of M/s. AEPL for the F.Ys. 2014–15, 2015–16, 2016–17, 2017–18, 2018–19 and 2019–20 had reported on the adequacy of the Internal control system with reference to its Financial Statement. Hence, there was no violation of Section 138 of the Companies Act, 2013 with respect to the appointment of the Internal Auditor by M/s. AEPL. In view of the above representation, M/s. AEPL and Mr. PKB, Mr. SP, and its directors had requested a lenient view on the matter.

HELD

The Adjudication Officer (‘AO’) submitted that the reply received from M/s. AEPL was unsatisfactory since M/s. AEPL was liable to appoint an Internal Auditor from the F.Y. 2014–15. Thereby, M/s. AEPL and its directors were in default and shall be liable for penalty as per the applicable provisions.

After considering the facts and circumstances of the case, the AO imposed a penalty under Section 450 of the Companies Act, 2013 as per the below-mentioned table:

Sr. No. Name of the Company /Director Maximum Penalty (₹) Penalty imposed (₹)
1. M/s. AEPL 2,00,000 2,00,000
2. Mr. PKB, Director of M/s. AEPL 50,000 50,000
Sr. No. Name of the Company /Director Maximum Penalty (₹) Penalty imposed (₹)
3. Mr. SP, Director of M/s. AEPL 50,000 50,000

M/s. AEPL, Mr. PKB and Mr. SP were directed to pay the penalty and comply with this Adjudication order individually within 90 days and failure to do so may result in penal action without further intimation.

IBC: Tax or Creditors – Who Wins?

INTRODUCTION

One of the issues which has gained prominence under the Under the Insolvency & Bankruptcy Code, 2016 (“the Code”) is that in case of a company undergoing a Corporate Insolvency Resolution Process (“CIRP”), do the tax dues have priority over the secured lenders / creditors? In other words, would the direct and indirect tax claims get paid off before the secured creditors?

The general legal principle (prior to the enactment of the Code) in this respect has been laid down by various Supreme Court decisions, such as, Union of India vs. SICOM Ltd, [2009] 233 ELT 433 (SC) which was in the context of priority of Central Excise dues over those of a financial creditor. It held that the rights of the Crown to recover its debt would prevail over the right of a subject. Crown debt meant the debts due to the State which entitled the Crown to claim priority before all other creditors. Such creditors, however, were held to mean only unsecured creditors.

This issue has gained more prominence because of a Supreme Court decision delivered in 2022. The Supreme Court recently had an occasion to revisit its earlier decision and it upheld the earlier decision.The answer to the above question would depend upon the manner in which the tax Statute in question is worded. Let us understand the position in this respect.

WATERFALL MECHANISM AND THE CODE

At the outset, it must be understood that section 53 of the Code provides for a waterfall mechanism for the mode and manner of distribution of the proceeds of the sale of the assets of a Corporate Debtor. It starts with a non-obstante clause which overrides anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force. The mechanism is as follows:

(a)    the insolvency resolution process costs and the liquidation costs paid in full;

(b)    the following debts which shall rank equally between and among the following-

(i)    workmen’s dues for the period of 24 months preceding the liquidation commencement date; and

(ii)    debts owed to a secured creditor in the event such secured creditor has relinquished security;

(c)    wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;

(d)    financial debts owed to unsecured creditors;

(e)    the following dues which shall rank equally between:

(i)    any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii)    debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f)    any remaining debts and dues;

(g)    preference shareholders, if any; and

(h)    equity shareholders or partners, as the case may be.

Thus, as is evident from the above section, secured creditors have a priority in being repaid as compared to unsecured creditors.

Secured creditor is defined to mean a creditor in favour of whom security interest is created. Security interest is defined in an exhaustive manner to mean right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In this respect it should be noted that section 238 of the Code contains a non-obstante clause which states that the provisions of the Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Supreme Court in PCIT vs. Monnet Ispat & Energy Ltd., [2019] 107 taxmann.com 481 (SC) has categorically held that:

“Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act.”

SC’S DECISION IN RAINBOW PAPERS

InState Tax Officer vs. Rainbow Papers Ltd, [2022] 142 taxmann.com 157 (SC),a two-Judge Bench of the Supreme Court was faced with the question whether VAT / CST dues under the Gujarat Value Added Tax Act, 2003 could be treated as dues of a secured creditor? Section 48 of this Act reads as follows:

“48. Tax to be first charge on property— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.”

Based on the above statutory charge in terms of section 48 of the Gujarat VAT Act, the Apex Court concluded that the claim of the Tax Department of the State, squarely fell within the definition of “Security Interest” under the Code and the State became a secured creditor under the Code. Such security interest could be created by the operation of law. The definition of a secured creditor in the IBC did not exclude any Government or Governmental Authority. It held that it was not the case that section 48 of the Act prevailed over section 53 of the Code. Rather, it was the case that the State fell within the purview of “Secured Creditor”. Section 48 of the Act was not contrary to or inconsistent with any provisions of the Code. Under s.53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, were to rank equally with other specified debts including debts on account of the workman’s dues for a period of 24 months preceding the liquidation commencement date.

SUBSEQUENT CONTRARY SC VERDICT IN PASCHIMANCHAL

A two-Judge Bench of the Supreme Court in Paschimanchal Vidyut Vitran Nigam Limited vs. Raman Ispat Private Limited, n C.A. No. 7976 of 2019, Order dated 17th July, 2023 observed that the decision in Rainbow Papers (supra) did not notice the ‘waterfall mechanism’ under section 53 of the Code and the provision had not been adverted to or extracted in the judgment. Furthermore, Rainbow Papers (supra) was in the context of a resolution process and not during liquidation. It observed that the dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment had not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to the Central or State Government.

SC’S REVIEW PETITION DECISION

The above decision of Rainbow Papers (supra)has created several hurdles for secured creditors of companies undergoing resolution. Many secured lenders are afraid that there would not be anything left for them if the Government also ranks as a secured creditor along with them. Accordingly, many petitioners, strengthened by the above-mentioned verdict inPaschmianchal (supra), filed a Review Petition before the Supreme Court. The judgment in the same was delivered by a two-Judge Bench of the Apex Court in the case of Sanjay Kumar Agarwal vs. State Tax Officer, RP(Civil) No. 1620 /2023 Order dated 31st October, 2023. The Court refused to review the Petitions since it was a co-ordinate bench and even otherwise a well-considered judgment could not fall within the ambit of a Review Petition.

PRINCIPLES OF REVIEW

To refresh, a review petition could be filed before the Supreme Court since the power to review its own judgment has been enshrined on the Court under Article 137 of the Constitution. The Supreme Court in Sanjay Kumar (supra) laid down the following important principles which would govern a review of an earlier decision:

(i)    A judgment is open to review inter alia if there is a mistake or an error apparent on the face of the record – Parsion Devi and Others vs. Sumitri Devi and Others, (1997) 8 SCC 715.

(ii)    A judgment pronounced by the Court is final, and departure from that principle is justified only when circumstances of a substantial and compelling character make it necessary to do so – Sajjan Singh and Ors. vs. State of Rajasthan and Ors., AIR 1965 SC 845.

(iii)    An error which is not self-evident and has to be detected by a process of reasoning, can hardly be said to be an error apparent on the face of record justifying the court to exercise its power of review – Shanti Conductors Private Limited vs. Assam State Electricity Board and Others, (2020) 2 SCC 677.

(iv)    In exercise of the jurisdiction under Order 47 Rule 1 CPC, it is not permissible for an erroneous decision to be “reheard and corrected” – Shri Ram Sahu (Dead) Through Legal Representatives and Others vs. Vinod Kumar Rawat and Others, (2021) 13 SCC 1.

(v)    A review petition has a limited purpose and cannot be allowed to be “an appeal in disguise” – Parison Devi (supra).

(vi)    Under the guise of review, the petitioner cannot be permitted to reagitate and reargue the questions which have already been addressed and decided – Shanti Conductors (supra).

(vii)    An error on the face of record must be such an error which, mere looking at the record should strike and it should not require any long-drawn process of reasoning on the points where there may conceivably be two opinions – Arun Dev Upadhyaya vs. Integrated Sales Service Limited & Another, 2023 (8) SCC 11.

(viii)    Even the change in law or subsequent decision/ judgment of a co-ordinate or larger Bench by itself cannot be regarded as a ground for review – Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, (2021) 3 SCC 1.

The above principles governing a review petition have been explained very succinctly and precisely by the Supreme Court. They would be useful in all cases for deciding whether or not a review could be filed.

PRINCIPLES OF JUDICIAL PROPRIETY

The Supreme Court inSanjay Kumar (supra)refused to entertain the review petition on grounds of judicial propriety which demands respect for the order passed by a Bench of coordinate strength. It referred to important cases on this point, such as, Jai Sri Sahu vs. Rajdewan Dubey and Others, AIR 1962 SC 83; Mamleshwar Prasad and Another vs. Kanhaiya Lal (Dead) Through L. Rs, (1975) 2 SCC 232; Sant Lal Gupta and Others vs. Modern Cooperative Group Housing Society Limited and Others, (2010) 13 SCC 336and held as follows:

a)    One co-ordinate Bench could not comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength.

b)    If a Bench did not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions.

c)    Certainty of the law, consistency of rulings and comity of courts all flowered from this principle.

d)    The rule of precedent was binding for the reason that there was a desire to secure uniformity and certainty in law. Thus, in judicial administration precedents which enunciated the rules of law formed the foundation of the administration of justice under our system. Therefore, it was always insisted that the decision of a coordinate Bench must be followed.

RAINBOW PAPERS CORRECT ON MERITS

The Supreme Court further held that even on merits, the decision inRainbow Papers (supra)was correct. The plea that the court in the impugned decision had failed to consider the waterfall mechanism as contained in section 53 and failed to consider other provisions of the Code, were factually incorrect. The Court in the impugned judgment had categorically reproduced and referred to section 53 and other provisions of the Code. After considering the Waterfall mechanism as contemplated in section 53 and other provisions of the Code for the purpose of deciding as to whether section 53 IBC would override section 48 of the GVAT Act, it decided in favour of the State Government. Thus, the Court in Sanjay Kumar (supra) dismissed the review petitions.

POSITION BASED ON THE ABOVE VERDICTS

To apply the ratio laid down in Rainbow Papers, one would have to ascertain the exact nature of the wordings in the impugned tax statute. If they are of the type found in section 48 of the GVAT Act, then the Government would be treated as a secured creditor, and would rank pari passu with other secured lenders / creditors. Wordings similar to wordings of section 48 of the GVAT Act are found in the Maharashtra Value Added Tax Act, 2002.

However, what happens when the wordings of the tax statute are not so explicit? In that event, it is submitted that the Government would not be considered as a secured creditor. The decision in Rainbow Papers was based upon specific wordings found in section 48 of the GVAT Act which provided that the tax dues “shall be a first charge on the property” of such dealer. It is not a blanket verdict which holds that for all tax dues, the government is a secured creditor. Prior to the introduction of the Code, this was also the position as laid down by the Supreme Court in Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694, wherein it held that the Crown’s preferential right to recovery of debts over other creditors was confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) did not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor.

A very old decision in M/s. Builders Supply Corporation vs. Union of India, AIR 1965 SC 1061, rendered under the Income-tax Act, 1922 is also relevant. Section 46(2) of that Act enabled the Income Tax Officer to forward to the Collector a certificate specifying the amount of arrears due from an assessee and requiring the Collector, on receipt of such certificate, to proceed to recover from the assessee in question the amount specified as if it were an arrear of land revenue. The Supreme Court held that merely on the basis of this provision it could not be construed that section 46 dealt with or provided for the principal of priority of tax dues. The provision could not be said to convert arrears of tax into arrears of land revenue either; all that it purported to do was to indicate that after receiving the certificate from the Income-tax Officer, the Collector had to proceed to recover the arrears in question as if the said arrears were arrears of land revenue.

Let us examine the position under some important tax statutes:

(a)    Income-tax dues– The Income-tax Act, does not contain any such wordings of the nature found under section 48 of the GVAT Act. Hence, it is submitted that the income-tax officer would not be a secured creditor of the corporate debtor. He would rank much lower as per the waterfall mechanism. The decisions in the case of TRO vs. Punjab and Sing Bank, 161 ITR 220 (Del) / Suraj Prasad Gupta vs. Chartered Bank, 83 ITR 494 (All)support the principle that in the absence of any specific statutory provision, income-tax dues cannot defeat the rights of any secured creditor. In fact, section 178(6) of the Income-tax Act, was specifically amended to provide that the provisions pertaining to the liability of a company in liquidation would override all laws other than the provisions of the Code.

The decision of the Delhi ITAT in ACIT vs. ABW Infrastructure Ltd, I.T.A. No. 2861/DEL/2018 (A.Y 2008-09)also states that it is well settled now that the Code has an overriding effect on all Acts including Income Tax Act which has been specifically provided under section 178(6). The Delhi High Court in Tata Steel Ltd vs. DCIT, WP(C) 13188/2018 Order dated 31st October, 2023, has also held that the Code overrides the provisions of the Income-tax Act to the extent that the latter is inconsistent with the provisions of the former. Section 238 of the Code, contains a non-obstante clause which makes this abundantly clear. It concluded that the Code was a special enactment, dealing with aspects concerning insolvency and, therefore, it would prevail over the provisions of the Income-tax Act 1961.

The NCLAT in Om Prakash Agrawal vs. CCIT, [2021] 124 taxmann.com 305 (NCL-AT) held that the priority was different for Government dues under s.53(1)(e) of the Code and under section 178 of the Income-tax Act. Both section 178(6) of the Act and section 53 of the Code start with non-obstante clause, and therefore, the legislature in its wisdom to give effect to the scheme of the Code, amended section 178(6). By virtue of the amendment the whole of section 178 had no application to the liquidation proceedings initiated under the Code. The matter pertained to the recovery of TDS (under section 194-IA) dues from a company in liquidation. The NCLAT held that as per section 194-IA of the Income-tax Act, 1% TDS was recovered on priority to other creditors of the transferor, whereas s.53(1)(e) in its waterfall mechanism provided that the Government dues came 5th in order of priority. Thus, with regard to recovery of the Government dues (including income tax) from a company-in-liquidation under IBC, there was an inconsistency between section 194-IA and section 53(1)(e). Therefore, by virtue of section 238, section 53(1)(e) had an overriding effect on the provisions of section 194-IA. Even otherwise section 53 started with a  non-obstante clause, whereas section 194-IA, did not start with a non-obstante clause, and it would necessarily be subject to the overriding effect of the Code.

(b)    GST dues – The Central Goods and Services Tax Act contains an express provision to the contrary of the type found in the VAT Acts referred to above. It contains a non-obstante clause which states that any amount payable by a taxable person on account of GST would be a first charge on the property of such person. This provision would apply notwithstanding anything to the contrary in any other law except as otherwise provided in the Insolvency & Bankruptcy Code, 2016. Thus, the GST dues would not override the IBC Code.

CONCLUSION

One feels that the provisions of the Code are explicitly clear in as much as it overrides all other Statutes. In the absence of specific wordings of the type found in the State VAT Acts, it would be very difficult to consider the Revenue Department as a secured creditor along with other secured lenders. In spite of that, there have been several cases where the Revenue Department, relying on the decision in Rainbow Papers, is petitioning to be treated as a secured creditor. This is only increasing the cases of litigation and causing more problemsin the corporate resolution process. Some recent press reports indicate that the Government is considering a Notification which would clarify that the Revenuedoes not ipso facto become a secured creditor in all insolvency cases before the NCLT under the Code. It would depend upon the wordings of the statute in each and every case!

Allied Laws

36 Paramjota vs. Deputy Director of Consolidation & Ors

AIR 2023 ALLAHABAD 222

Date of Order: 8th August, 2023

Adoption — Adoption Deed is sufficient — Rituals are not necessary — Adopted child entitled to property on parent renouncing the world.[Hindu Adoption and Maintenance Act, 1965, S. 11, 15 and 16]

FACTS

Amidst a land dispute, a consolidation officer entered the name of the adopted son (Mahadeo) of one Mr Bholla, who renounced the world for Sanyas, in the revenue records.

This was disputed by the Petitioner; the Consolidation officer rejected the objections filed by the Petitioner.

On filing the Writ Petition.

HELD

CA ceremony is not necessary to prove that Mr Mahadeo is the adopted son of Mr Bhalla, especially since the adoption deed is registered. Subsequentnotarized deed revoking the adoption has no legal consequences. Further, since the father has renounced the world by becoming a Sanyasi, the property would devolve on his adopted son.

The Writ Petition was dismissed.

37 Usha Kumari vs. Santha Kumari

AIR 2023 KERALA 161

Date of Order: 26th June, 2023

Evidence — Submissions in court — Public document — Cannot be treated as secondary evidence. [Indian Evidence Act, 1872, S. 74]

FACTS

There was a dispute among the members of the family. A suit for partition was filed by one of the members. The defendants filed their written statements wherein the disputed gift deeds were annexed. The suit was dismissed for want of prosecution.

On appeal, inter alia, a question arose i.e., whether a written statement in a suit, is a public document falling under section 74 of the Indian Evidence Act?

HELD

Pleadings of the parties to the litigation, once filed in a court, become a part of the public records maintained by the Court and hence fall within the ambit of “public documents”. The same cannot be considered as secondary evidence.

The Appeal is allowed.

38 Akza Rajan vs. Rajan M S

AIR 2023 KERALA 166

Date of Order: 12th April, 2023

Maintenance of Daughters — Father responsible for daughter’s marriage even if they are Christians. [Hindu Adoption and Maintenance Act, 1956, S. 20; Transfer of Property Act, 1882, S. 39]

FACTS

The Petitioner is the daughter of the Respondent. The Respondent-father neglected the Petitioner’s mother and sold her jewellery to buy certain assets. The Respondent was trying to alienate the immovable property and hence Petitioner filed for a temporary injunction. The said injunction was denied by the Family Court.

On a Writ Petition.

HELD

Drawing a reference to the codified Hindu law that the maintenance of an unmarried daughter is a duty of the father, it was held that such a duty is applicable to all fathers irrespective of their religion. The Court secured a reasonable sum for the wedding expense of the Petitioner by way of charge on the immovable property and also held that the injunction could be lifted if the respondent furnished the sum by way of a fixed deposit or other mode.

The Writ Petition is allowed.

39 Rajesh Kumar Sahu vs. Manish Kumar Sahu

AIR 2023 MADHYA PRADESH 862

Date of Order: 26th June, 2023

Succession — Unregistered document “Abhiswikrati Patra” — Cannot be construed as a Will — Any unregistered document transferring title of more than Rs.100 is required to be registered. [Registration Act, 1908, S. 17(2)(v)]

FACTS

The Petitioner/original defendant objected to the admissibility of an unregistered and unstamped document before the Trial Court. The Trial Court rejected the objection and held the document to be a Will.

On a Writ Petition.

HELD

The unregistered and unstamped document is a “Abhiswikrati Patra”. Although the document transfers certain rights to his son, it is mentioned that a Will would be executed separately. Therefore, the said document could not be considered as a Will.

Further, as the document was intended to transfer a right and title of property valued more than Rs.100, such a document is mandatorily required to be registered otherwise it would not be taken on record.

The Writ petition is allowed.

40 G Venkatesh vs. Bridge Federation of India

AIR 2023 MADRAS 296

Date of Order: 7th August, 2023

Overseas Citizen of India Cardholder — Bridge player — Eligible to play in National Championships but cannot represent India internationally — Policy decision by the Central Government- Writ petition is held to be not maintainable. [Citizenship Act, 1955, S. 7A, 7B, Constitution of India, Article, 226]

FACTS

The Writ Petitioner is an Overseas Citizen of India (OCI) who desired to represent the Respondent internationally. He received a letter of rejection stating he would only be eligible to play in national championships and cannot represent the nation.

On a Writ Petition.

HELD

The Respondent is affiliated with the Central Government and is governed by the National Sports Development Code of India, 2011. A policy decision taken by the Central Government to only allow Indians to represent India in international sports cannot be interfered with Courts. Further, the rejection of the Petitioner was on the basis of two Circulars. As the said Circulars were not challenged in the Petition, the Petition becomes non-maintainable.

The Writ Petition is dismissed.

Reporting Under PMLA by Professionals – Deciphering ‘On Behalf Of’

INTRODUCTION

Notifications dated 3rd May, 2023 and 9th May, 2023 issued by the Ministry of Finance have the effect of making relevant persons ‘reporting entities’ as more particularly defined by Section 2(1)(sa)(vi) read with Section 2(1)(wa) of the Prevention of Money Laundering Act, 2002 (PMLA).

The 3rd May, 2023 Notification purports to cover within the definition of ‘reporting entities’ those ‘relevant persons’ who carry out ‘financial transactions’ on behalf of his / her client, in the course of one’s profession in relation to certain activities. If the certain activities listed in the Notification are carried out by the ‘relevant person’, then the professional would find himself/herself as a reporting entity under the PMLA. Explanation 1 in the Notification states that a ‘relevant person’ would include:

•    an individual who obtained a certificate of practice under section 6 of the Chartered Accountants Act, 1949 (38 of 1949) and practicing individually or through a firm, in whatever manner it has been constituted;

•    an individual who obtained a certificate of practice under section 6 of the Company Secretaries Act, 1980 (56 of 1980) and practicing individually or through a firm, in whatever manner it has been constituted;

•    an individual who has obtained a certificate of practice under section 6 of the Cost and Works Accountants Act, 1959 (23 of 1959) and practicing individually or through a firm, in whatever manner it has been constituted.

On the other hand, the 9th May Notification purports to cover within the definition of ‘reporting entities’ those ‘persons’ who carry out certain activities in the course of business on behalf of or for another person as the case may be. This Notification does not seek to restrict the applicability of the Notification to a specific business or profession and therefore, can also act as a trigger for professionals to become reporting entities under the PMLA.

India is a member of the Financial Action Task Force (FATF). The FATF has a set of 40 recommendations that the member countries seek to implement in order to combat the menace of money laundering. Trying to comply with the FATF recommendations on money laundering is one of our country’s international commitments. In fact, the PMLA Act itself is a result of India’s international commitments. The preamble to the Act reads as follows:

“An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.

WHEREAS the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its seventeenth special session on the twenty-third day of February, 1990;

AND WHEREAS the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money-laundering legislation and programme;

AND WHEREAS it is considered necessary to implement the aforesaid resolution and the Declaration.”

While much has already been discussed regarding these two notifications, there is still uncertainty around the phrase ‘on behalf of’ as used in them. Though perhaps we may have to wait for an authoritative judicial pronouncement on the exact interpretation to be given to this commonly used phrase, today we seek to lay down broad contours of what ‘on behalf of’ could mean with regard to these two notifications.

THE FATF FACTOR

The FATF recommendations also use the phrase ‘on behalf of’ quite often. In fact, the phrase ‘on behalf of’ when used in the Recommendations, seems to signify a fiduciary relationship and is broader than what is given in Indian law. Recommendation 23 (a) reads as follows:

Lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities described in paragraph (d) of Recommendation 22. Countries are strongly encouraged to extend the reporting requirement to the rest of the professional activities of accountants, including auditing.

Recommendation 22 (d) in turn reads as follows:

Lawyers, notaries, other independent legal professionals and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

•    buying and selling of real estate;

•    managing of client money, securities or other assets;

•    management of bank, savings or securities accounts;

•    organisation of contributions for the creation, operation or management of companies;

•    creation, operation or management of legal persons or arrangements, and buying and selling of business entities.

The above two recommendations read together therefore are the genesis of the 3rd May, 2023 Circular. This is in line with the commitment that our country is showing to combat money laundering.

LAYING THE GROUNDWORK – USING ‘FOR ANOTHER PERSON’ TO HELP IN INTERPRETING ‘ON BEHALF OF’

In order to narrow down on the meaning of ‘on behalf of’, it would be perhaps instructive to hazard a guess as to what would constitute ‘for another person’. The 3rd May, 2023 notification does not include ‘for another person’. This language is used in the 9th May, 2023 Notification, the relevant portion of which reads –

“the following activities when carried out in the course of business on behalf of or for another person, as the case may be, as an activity for the purposes of said sub-clause”

Therefore, the Notification itself draws a distinction between ‘on behalf of another person’ and ‘for another person’ by making them alternative to each other through the use of the conjunction ‘or’. The list of activities covered in the 9th May notification is also instructive:

a)    “acting as a formation agent of companies and limited liability partnerships;

b)    acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and limited liability partnerships;

c)    providing a registered office, business address or accommodation, correspondence or administrative address for a company or a limited liability partnership or a trust;

d)    acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and

e)    acting as (or arranging for another person to act as) a nominee shareholder for another person”.

Though the Explanation to the Notification provides for a list of exclusions, the only relevant part for our discussion would perhaps be restricted to Explanation ‘b’ which reads as follows:

“any activity that is carried out by an employee on behalf of his employer in the course of or in relation to his employment;”

The list of activities enumerated from ‘(a) to (e)’ above is telling. These activities do not need to be necessarily carried out in a representative capacity. They may also be carried out in a personal capacity for the benefit of someone else. A hypothesis can thus be drawn that ‘on behalf of another person’ would denote a person acting in a ‘representative capacity’ for another person, but ‘for another person’ would denote a person acting in a personal capacity for another person. Therefore, based on this premise, the 9th May, 2023 notification would make a professional a ‘reporting entity’, whether he carried out those activities in his individual capacity or in a representative capacity.

However, the absence of ‘for another person’ in the 3rd May, 2023 notification is telling. Firstly, the notification restricts itself to ‘financial transactions’, to be carried out specifically ‘on behalf of a client’, ‘in the course of the profession’ and in ‘relation to the following activities’–

1.    “buying and selling of any immovable property;

2.    managing of client money, securities or other assets;

3.    management of bank, savings or securities accounts;

4.    organisation of contributions for the creation, operation or management of companies;

5.    creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling of business entities.”

It may be of particular interest to note that the transactions covered in ‘1 to 5’ as enumerated above can possibly be conducted both ‘on behalf of a client’ as well as ‘for a client’. As the notification omits using the phrase ‘for the client’, the interpretation of ‘on behalf of a client’ gains a greater relevance. Significantly, distinguishing ‘on behalf of a client’ and ‘for a client’ also gains greater relevance as, while the former would make the professional a ‘reporting entity’, the latter would not.

DECIPHERING THE ENIGMA OF ‘ON BEHALF OF’

While embarking upon a journey to find the meaning of a phrase in law, the Black’s Law Dictionary has often served as a good starting point. The Black’s law dictionary, while defining ‘behalf’, includes the definition of ‘on behalf of’. The definition in the dictionary supports our hypothesis that ‘on behalf of’ would denote representative capacity. The dictionary states as follows:

behalf.[fr. Anglo-Saxon half “unit, side”] (14c) Side, part, advantage, or interest. • The phrase in behalf of traditionally means “in the interest, support, or defense of”; on behalf of means “in the name of, on the part of, as the agent or representative of.”

In fact, the Income-tax Act, 1961, also leads credence to this hypothesis of ‘on behalf of’ being used in a representative capacity. The phrase ‘on behalf of’ is used in the very definition of ‘Authorised Representative in Section 288(2) of the Act. It is reproduced below as follows:

Section 288 (2) For the purposes of this section, “authorised representative” means a person authorised by the assessee in writing to appear on his behalf, being—

(i)    a person related to the assessee in any manner, or a person regularly employed by the  assessee; or

(ii)    any officer of a Scheduled Bank with which the assessee maintains a current account or has other regular dealings; or

(iii)    any legal practitioner who is entitled to practise in any civil court in India; or

(iv)    an accountant; or

(v)    any person who has passed any accountancy examination recognised in this behalf by the Board; or

(vi)    any person who has acquired such educational qualifications as the Board may prescribe for this purpose; or

(via)    any person who, before the coming into force of this Act in the Union territory of Dadra and Nagar Haveli, Goa†, Daman and Diu, or Pondicherry, attended before an income-tax authority in the said territory on behalf of any assessee otherwise than in the capacity of an employee or relative of that assessee; or

(vii)    any other person who, immediately before the commencement of this Act, was an income-tax practitioner within the meaning of clause (iv) of sub-section (2) of section 61 of the Indian Income-tax Act, 1922 (11 of 1922), and was actually practising as such;

[(viii)    any other person as may be prescribed.]

Thus, the phrase ‘on behalf of’ in the Income-tax Act, 1961, is clearly in a representative capacity. It may be noted that for a professional to appear before the tax authorities, a ‘vakalatnama’ or a ‘power of attorney’ is required. This allows the person so authorised to appear ‘on behalf of a person’ before various authorities and make pleadings and submissions on their behalf. These pleadings and submissions are binding upon the person so represented. A cursory glance at umpteen Judgements of various courts will show that the Courts observe that Advocates have appeared ‘on behalf of’ a client. This introduces an additional point of distinction between ‘on behalf of’ and ‘for’. We may add this to our original hypothesis – For a transaction or activity to be carried out ‘on behalf of’ another person, there should be authorisation to that effect and the intention to be bound by the action of the person so authorised acting on one’s behalf.

In fact, inspiration can be drawn from the Judgment of the Constitution Bench of the Supreme Court in M. Siddiq (Ram Janmabhumi Temple-5 J.) vs. Suresh Das, (2020) 1 SCC 1. The Judgment, more famously known as the ‘Ayodhya Judgment’ or the ‘Ram Janmabhoomi Temple Judgment’ discussed the right of a ‘Shebait’ and the ‘next friend’ of the idol to institute a suit. The following extracts of the Judgment may prove to be instructive:

“Courts recognise a Hindu idol as the material embodiment of a testator’s pious purpose. Juristic personality can also be conferred on a Swayambhu deity which is a self-manifestation in nature. An idol is a juristic person in which title to the endowed property vests. The idol does not enjoy possession of the property in the same manner as do natural persons. The property vests in the idol only in an ideal sense. The idol must act through some human agency which will manage its properties, arrange for the performance of ceremonies associated with worship and take steps to protect the endowment, inter alia by bringing proceedings on behalf of the idol. The shebait is the human person who discharges this role..

..The dedicated property legally vests in the idol in an ideal sense and not in the shebait. A shebait does not bring an action for the recovery of the property in a personal capacity but on behalf of the idol for the protection of the idol’s dedicated property. Ordinarily, a deed of dedication will not contain a provision for the duties of the shebait. However, an express stipulation or even its absence does not mean that the property of the idol vests in the shebait. Though the property does not legally vest in the shebait, the shebait may have some interest in the usufruct generated from it. Appurtenant to the duties of a shebait, this interest is reflected in the nature of the office of a shebait..

..Ordinarily, the right to sue on behalf of the idol vests in the shebait. This does not however mean that the idol is deprived of its inherent and independent right to sue in its own name in certain situations. The property vests in the idol. A right to sue for the recovery of property is an inherent component of the rights that flow from the ownership of property. The shebait is merely the human actor through which the right to sue is exercised. As the immediate protector of the idols and the exclusive manager of its properties, a suit on behalf of the idol must be brought by the shebait alone. Where there exists a lawfully appointed shebait who is able and willing to take all actions necessary to protect the deity’s interests and to ensure its continued protection and providence, the right of the deity to sue cannot be separated from the right of the shebait to sue on behalf ofthe deity. In such situations, the idol’s right to sue stands merged with the right of the shebait to sue on behalf of the idol..

..A suit by a shebait on behalf of an idol binds the idol.For this reason, the question of who can sue on behalf of an idol is a question of substantive law. Vesting any stranger with the right to institute proceedings on behalf of the idol and bind it would leave the idol and its properties at the mercy of numerous individuals claiming to be “next friend”. Therefore, the interests of the idol are protected by restricting and scrutinising actions brought on behalf of the idol. For this reason, ordinarily, only a lawful shebait can sue on behalf of the idol. When a lawful shebait sues on behalf of the deity, the question whether the deity is a party to the proceedings is merely a matter of procedure. As long as the suit is filed in the capacity of a shebait, it is implicit that such a suit is on behalf of and for the benefit of the idol..”

Therefore, the shebait acts in a representative capacity on behalf of the idol in instituting a suit and by the virtue of being the shebait, has the authorisation by the virtue of appointment and consequently the authority to bind the idol through a suit. In short, as the Supreme Court observed, the shebait can file a suit on behalf of the idol.

In fact, the expression ‘on behalf of’ also finds use in the relationship of ‘agency’. A recent Judgment of the Supreme Court inRajasthan Art Emporium vs. Kuwait Airways & Onr. 2023 SCC OnLine SC 1461,examining Section 237 of the Indian Contract Act considered if the agent had the authority to act ‘on behalf of’ the Principal.

Section 237 of the Contract Act provides that:

“237. Liability of principal inducing belief that agent’s unauthorised acts were authorised – When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.”

The Court observed that: “There is no gainsaying that onus to show that the act done by an agent was within the scope of his authority or ostensible authority held or exercised by him is on the person claiming against the principal. This, of course, can be shown by practice as well as by a written instrument. Thus, the question for consideration is whether on the evidence obtaining in the instant case, can it be said that Respondent 3 had an express or implied authority to act on behalf of Respondent 1 as their agent? If Respondent 3 had such an authority, then obviously Respondent 1 was bound by the commitment Respondent 3 had made to the appellant.”

This Judgment would also support our hypothesis that in order to act ‘on behalf of’ someone, the person must be authorised, and act in a representative capacity and such act must have the power to bind the person to the act committed.

In State of W.B. vs. O.P. Lodha (1997) 5 SCC 93 where an agent was selling goods both in his individual capacity and in his capacity as an agent, the Supreme Court observed: “In my judgement, the scheme of the Act leaves no room for doubt that an agent who sells goods on behalf of somebody else cannot escape the liability to pay sales tax on the sales made by him for and on behalf of others merely because, he was selling goods on behalf of others.”

The importance of the ‘on behalf of’ being in the course of business or profession to trigger the reporting obligations.

Therefore, a relationship akin to an agency would see an agent act ‘on behalf of the principal’. A perusal of the list of the activities and finance transactions covered by both the 3rd May as well as the 9th May, 2023 Notifications would seem to suggest that an agency relationship and the relationship of a constituted attorney / power of attorney holder for carrying out the listed activities / transactions would trigger the definition of reporting entity. After all, a constituted attorney also acts in a representative capacity, is specifically authorised and can bind the Donor (the person who grants the power of attorney) by his / her Acts.

For professionals, it is important to note that both Notifications carry an important safeguard. The activity / transactions must be carried out in the course of business / profession. If this safeguard did not exist, then personal transactions / activities of the nature listed in the notifications would also have been covered. After all, it is quite common for a parent / guardian / family member / spouse to act ‘on behalf of’ the minor child / ward / other members of the family or spouse. For example, for a minor to be admitted into a partnership, a parent / guardian needs to enter into the contract on the minor’s behalf.

In CIT vs. Shah Mohandas Sadhuram [1965] 57 ITR 415 (SC) the Supreme Court observed “Before we discuss these questions it is necessary to consider what are the incidents and true nature of “benefits of partnership” and what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits of partnership to a minor. First it is clear from sub-section (2) of section 30 of the Partnership Act that a minor cannot be made liable for losses. Secondly, section 30, sub-section (4), enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contained in section 48, which section visualises capital having been contributed by partners. There is no difficulty in holding that this severance may be effected on behalf of a minor by his guardian. Therefore, sub-section (4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm. If the guardian is entitled to sever the minor’s connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree to accept the benefits of partnership for a further period on terms which are in accordance with law. Subsection (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not to become a partner in the firm. Thus it contemplates that a guardian may have accepted the benefits of a partnershipon behalf ofa minor without his knowledge. If a guardian can accept benefits of partnership on behalf ofa minor, he must have the power to scrutinise the terms on which such benefits are received by the minor. He must also have the power to accept the conditions on which the benefits of partnership are being conferred. It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.”

In fact, ‘on behalf of’ is often used between a minor and a guardian. If we look at the Indian Trusts Act, 1882, it uses the phrase ‘on behalf of’, statutorily allows a trust to be created by or on behalf of a minor subject to the law contained in Section 7(b) of the Act. In the Definitions included in the FATF 40 recommendations, the phrase ‘on behalf of’ is also used in the definition of trustee to denote a family member which reads as follows:

Trustee: The terms trust and trustee should be understood as described in and consistent with Article 2 of the Hague Convention on the law applicable to trusts and their recognition. Trustees may be professional (e.g. depending on the jurisdiction, a lawyer or trust company) if they are paid to act as a trustee in the course of their business, or a non-professional who is not in the business of being a trustee (e.g. a person acting on behalf of the family).

Normally, this activity of the Guardian would have triggered the definition of ‘reporting entity’ qua the 9th May, 2023 Notification by acting as a partner of a firm on behalf of the minor or through the other activities / transactions listed in the notifications e.g. buying and selling of immovable property and management of bank, savings of securities account. The same activities can also be carried out for family members as well as major children through an express Power of Attorney etc. Therefore, the transaction / activity needing to be in the course of profession / business in addition to being carried out on behalf of another person or (in the case of the 9th May, 2023 Notification) for another person is an important safeguard to one’s privacy.

CONCLUSION

This discussion, rather than trying to be the last word on the interpretation of the phrase ‘on behalf of’, seeks to be a ‘starting point’.  The phrase ‘on behalf of’ is generic and is often used in a broad sense. Whether an activity or a transaction is conducted on behalf ofanother person or not would be greatly influenced by fact. The image would change as one peers through the kaleidoscope of facts. In law, the interpretation given to this phrase will undoubtedly affect both, the professionals as well as the general public with regard to the reporting and compliance requirements imposed by Chapter IV of the PMLA.

If one goes through the FATF recommendations which are available on the website, one would see  that the scheme is putting the onus on Lawyers, Notaries, Independent Legal Professionals and Accountants to carry out KYC and report suspicious transactions as a  part of the 40 recommendations. Therefore, putting the onus on professionals is not a decision that has been taken by the Government of India in an arbitrary manner or as a ‘vendetta’ but is a part of our international commitments to adhere to global practices. These obligations will be implemented in FATF member countries across the globe at some point in time, if not already implemented. The relationships that have been indicated for the purposes of reporting are mainly fiduciary in nature. Professionals can avoid being reporting entities by not rendering the services that have been listed in the Notifications. Most of these services are generally not a part of professional services rendered and are more ‘personal’ in nature and may be seen as being fiduciary relationships.

It is important to note that the penalty for not complying with Chapter IV of the PMLA is a monetary one under Section 13 and no prosecution is contemplated. The fine may be steep, as a separate fine may be levied (maximum of One lakh), but the fine shall be for each individual infraction and may add up quite quickly.  However, a word of caution: Some of these activities may also be in violation of the professional code of ethics and may give rise to disciplinary proceedings against the professional concerned. It would perhaps be better for most professionals to avoid carrying out the activities that are contemplated by the 3rd and 9th May, 2023 Notifications in the course of carrying on their professions.

FEMA FOCUS

(A) Standard Operating Procedure for processing FDI Proposals notified by Department of Industrial Policy and Promotion dated 9th November, 2020.

(I)  Application

The government has notified the Standard Operating Procedure (SOP) to be followed for obtaining approvals for foreign investment in sectors / activities requiring government approval. All applications for approval would need to be filed online through the Foreign Investment Facilitation Portal (FIFP) on www.fifp.gov.in in the specified format and containing documents mentioned in Annexure 1 to the SOP.

Further, once an application is received, the Department of Promotion of Industrial and Internal Trade (DPIIT) will identify the Administrative Ministry / Department (Competent Authority) concerned which will process the case. Detailed guidelines have been provided in respect of timelines to be followed for processing the applications with an outer limit of ten weeks or 12 weeks (for companies requiring security clearance from the Ministry of Home Affairs) from the date of filing of the application. Once the application is approved, an Approval letter as per Annexure 2 to the SOP will be issued to the applicant.

(II) Name of Competent Authority for approving the application

As per the SOP, the Competent Authority (CA) for approving / rejecting foreign investment for different sectors has been specified below:

S. No. Activity / sector Administrative Ministry / Department
(i) Mining Ministry of Mines
(ii) Defence
a) Items requiring Industrial Licence under the Industries (Development & Regulation) Act, 1951 and / or Arms Act, 1959 for which the powers have been delegated by the Ministry of Home Affairs to the DPIIT Department of Defence Production, Ministry of Defence
b) Manufacturing of small arms and ammunition covered under the Arms Act, 1959 Ministry of Home Affairs
(iii) Broadcasting Ministry of Information & Broadcasting
(iv) Print Media and Digital Media
(v) Civil Aviation Ministry of Civil Aviation
(vi) Satellites Department of Space
(vii) Telecommunication Department of Telecommunications
(viii) Private Security Agencies Ministry of Home Affairs
(ix) (a) Applications arising out of Press Note 3 of 2020 dated 17th April, 2020 read with Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated 22nd April, 2020 as under:

(A) investments from an entity of a country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country; and / or

(B) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction / purview of Para 3.1.1(a) of the FDI Policy (i.e., investment from country with which India shares land border)

 The Administrative Ministry / Department concerned as identified by the DPIIT
(ix)(b) Cases pertaining to Government approval route sectors / activities, requiring security clearance as per extant FEMA Regulations, FDI Policy and security guidelines, as amended from time to time Nodal Administrative Ministries / Departments
(x) Trading (single, multi-brand and food product retail trading) Department for Promotion of Industry and Internal Trade
(xi) FDI proposals by Non-Resident Indians (NRIs) / Export-Oriented Units (EOUs) requiring approval of the Government Administrative Ministry / Department concerned as identified by the DPIIT
(xii) Application relating to issue of equity shares under the FDI Policy under the Government route for import of capital goods / machinery / equipment (excluding second-hand machinery)
(xiii) Applications relating to issue of equity shares for pre-operative / pre-incorporation expenses (including payments of rent, etc.)
(xiv) Financial services which are not regulated by any Financial Sector Regulator or where only part of the financial services activity is or where there is doubt regarding the regulatory oversight Department of Economic Affairs
(xv) Applications for foreign investment into a core investment company or an Indian company engaged only in the activity of investing in the capital of other Indian company/ies
(xvi) Banking (public and private) Department of Financial services
(xvii) Pharmaceuticals Department of Pharmaceuticals

Further, it has been clarified that the administrative Ministry / Department concerned as identified above by the DPIIT would continue to be the Competent Authority for post facto approval for foreign investment.

(III) Detailed flowchart for processing the application

The detailed process laid down in the SOP for processing the application is explained by way of the flow chart as under:

  •  Following proposals will require security clearance from the MHA:
  1. i) Investments in Broadcasting, Telecommunication, Satellites – establishment and operation, Private Security Agencies, Defence, Civil Aviation and Mining & Mineral, separation of titanium-bearing minerals and ores, its value addition and integrated activities;

  1. ii) Applications arising out of Press Note 3 of 2020 dated 17thApril, 2020 read with Foreign Exchange Management (Non-Debt Instruments) Amendment Rules, 2020 dated 22ndApril, 2020 as under:
  1. a) investments from an entity of a country which shares land border with India or where the beneficial owner of an investment in India is situated in or is a citizen of any such country. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors / activities other than defence, space, atomic energy and sectors / activities prohibited for foreign investment; and / or
  2. b) transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction / purview of paragraph 3.1.1(a) of the FDI Policy.

** In case application is not digitally signed, then applicant to submit physical copy to CA within seven days of receipt of email from DPIIT. If not submitted, then additional timeline of seven days can be given, failing which application will be treated as closed.

^ If no clarifications are received from the applicant, additional time of seven days should be given. Thereafter, if no additional details are provided, final reminder for submitting application in seven days to be given to the applicant, failing which application should be treated as closed.

(IV) Specific clarifications

Further, the SOP has also clarified the following points:

(a) Where FDI applications are incomplete – CA is not required to obtain concurrence from DPIIT for closure of the application. However, where applicant has submitted all details and CA proposes to reject the application, concurrence from DPIIT is required. The CA for closure of FDI application due to incomplete information / document would be the Secretary of the respective Ministry / Department;

(b) Where the FDI application seeks an amendment to an earlier approval granted by Government / FIPB and concurrence of DPIIT is sought for rejecting such an amendment and ask to file a fresh application – The applicant should not be asked to file a fresh application;

(c) NCLT has not yet approved the scheme of merger / demerger and concurrence of DPIIT is sought for rejecting the application – Approval of NCLT / competent authority as applicable under the Companies Act, 2013 is required before grant of FDI approval. Hence, where such approval is not received, the applicant should be advised to resubmit it upon receipt of requisite approval; and

(d) CA seeks DPIIT’s concurrence for conditions requiring compounding under FEMA / compliance of other laws / orders of courts – No concurrence from DPIIT required in such cases.

(V) Approving authority in DPIIT – The Secretary, DPIIT, is the competent authority for a decision on cases referred by other Ministry / CA seeking concurrence of the DPIIT.

(VI) Database – DPIIT and each CA to maintain a database on proposals received with details like name of investor, investee, date of receipt, company details, amount of foreign investment, date of grant of approval / rejection letter.

(VII) Surrender of approval – CA may accept withdrawal of approval letter from the applicant after receiving declaration clearly explaining reasons for withdrawal / surrender.

(VIII) Compounding of contraventions – Any contravention of FEMA would be subject to compounding as per Foreign Exchange (Compounding Proceedings) Rules, 2000 as amended from time to time.

Thus, the laying down of the detailed SOP in relation to obtaining approval under the Government route along with timelines for respective Ministries / Departments would definitely help in streamlining the process of approvals.

(B) Amendments to FDI Regulations governed by Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 by issuance of Notification dated 8th December, 2020.

The Government had amended the above regulations in April, 2020 by placing restrictions on investments from countries with which India shares land border and taking such investments under the prior approval route. The Amendment has now clarified that investment made by a multilateral bank or fund of which India is a member shall not be treated as an entity of particular country and, hence, the beneficial ownership condition is not required to be examined in relation to investments from such multilateral bank or fund.

Further, FDI limit in the defence sector has been increased to 74% under the automatic route from the existing limit of 49%. Any FDI above 74% will be under the Government route. Additionally, certain additional conditions have also been specified for FDI in the defence sector both for existing as well as new companies.

(C) Amendments to Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 by issuance of Notification dated 15th June, 2020.

(I) Schedule II – Investment by Foreign Portfolio Investors (FPI) & Schedule VIII – Investment by person resident outside India in an Investment Vehicle

Schedule II of FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 provided for the mode of payment and remittance of sale proceeds in case of investments by FPIs. There was a specific prohibition in Schedule II under which balances held in Special Non-Resident Rupee (SNRR) Accounts could not be utilised for investment in units of Investment Vehicles other than units of domestic mutual funds. The said prohibition has now been deleted by issuance of Notification dated 15th June, 2020.

Accordingly, with effect from 15th June, 2020, investment in REITS, InVits apart from domestic mutual funds can be made by FPIs from balances held in SNRR Accounts.

Similarly, amendments have been made in Schedule VIII which provides for the mode of payment in case of investment by a non-resident in an Indian Investment Vehicle. The Amendment now permits FPIs and FVCIs to invest out of their balance held in their SNRR Accounts for trading in units of an Indian Investment Vehicle listed or to be listed (primary issuance) on Indian stock exchanges.

(D) Amendment in Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 – FEMA 6(R) / 2015.

The above Regulation has now been amended to provide that on a specific application, RBI may allow a person to export or import Indian currency notes subject to such terms and conditions as specified by RBI.

(E) Prohibition for opening any Branch office / Liaison office / Project office or any other business place by foreign law firms.

RBI had earlier issued AP DIR Circular No. 23 dated 29th October, 2015 wherein it was instructed that no fresh permissions / renewal of permissions shall be granted by RBI / AD Bank to any foreign bank for opening their liaison office in India as the matter was pending for disposal with the Supreme Court.

RBI has now issued AP DIR Circular No. 7 dated 23rd November, 2020 wherein it has directed that foreign lawyers / foreign law firms / companies or any other person resident outside India will not be permitted to establish any branch office / project office / liaison office / any other place of business in India for the purpose of practising legal profession.

(F) Delegation of compounding powers to Regional offices / sub-offices of RBI.

RBI has issued AP DIR Circular No. 06 dated 17th November, 2020 clarifying that post the Notification of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 in October, 2019 which superseded the earlier FDI Notification FEMA 20(R) / 2017-RB, compounding powers in relation to the following contraventions have been delegated to the Regional offices of the RBI.

FEM (Non–Debt Instruments) Rules, 2019 dated 17th October, 2019
Relevant paragraph Nature of contravention
Rule 2(k) read with Rule 5 Investment made by person resident outside India shall be subject to entry routes, sectoral caps or the investment limits
Rule 21 Price of equity instrument of an Indian company issued to person resident outside India or transferred from person resident in India to person resident outside India or vice versa shall be subject to pricing guidelines
Paragraph 3 (b) of Schedule I (Issue of shares without approval of RBI or Government, wherever required) The total foreign investment shall not exceed the sectoral or statutory cap
Rule 4 (Receiving investment in India from non-resident or taking on record transfer of shares by investee company) An Indian entity or an investment vehicle or a venture capital fund or a firm or an association of persons or a proprietary concern may receive investment in India from a person resident outside India or record such investment in its books subject to approval of RBI
Rule 9(4) and Rule 13(3) Person resident in India may, by way of gift, transfer equity instrument or units of an Indian company to person resident outside India with the prior approval of RBI and subject to certain conditions;

 

NRI or an OCI or an eligible investor under Schedule IV of these rules may, by way of gift, transfer equity instrument or units of an Indian company on a non-repatriation basis with the prior approval of RBI and subject to certain conditions
FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations dated 17th October, 2019
Relevant Paragraph Nature of contravention
Regulation 3.1(I)(A) Issuance of equity instrument to person resident outside India within 60 days from the date of receipt of the consideration
Regulation 4(1) Filling of Form FC-GPR within 30 days from the date of issue of equity instrument
Regulation 4(2) Filling of Form FLA on or before 15th July of each year
Regulation 4(3) Filling of Form FC-TRS within 60 days of transfer of equity instrument or receipt / remittance of funds, whichever is earlier
Regulation 4(6) Filling of Form LLP(I) within 30 days from the date of receipt of the amount of consideration
Regulation 4(7) Filling of Form LLP(II) within 60 days from the date of receipt of funds
Regulation 4(11) Filling of Form DI within 30 days from the date of allotment of equity instrument

Allied Laws

27. Dheeraj Singh vs. Greater Noida Industrial Development Authority & others AIR 2023 Supreme Court 3110

4th July, 2023

Cross Objection — Cross Objections have the same trapping as a Regular Appeal — Not considered by the High Court — Matter remanded to High Court for fresh adjudication. [O. 41, R. 22, Code of Civil Procedure, 1908; S. 14, 17, Land Acquisition Act, 1894].

FACTS

The State of Uttar Pradesh (Respondent) had acquired the land of the Appellants under the provisions of the Land Acquisition Act, 1894 and paid compensation for the same. The Ld. District Judge granted further compensation. Aggrieved by the same, the Respondent filed an appeal in the High Court of Allahabad (High Court). Subsequently, the appellants filed a cross objection in the High Court. The Hon’ble High Court confirmed the order of the Ld. District Judge. It was the contention of the Appellants before the Hon’ble Supreme Court that the Cross Objection filed by them (Appellants) was not considered by the Hon’ble High Court.

HELD  

The Hon’ble Supreme Court observed that the Hon’ble High Court failed to consider the Cross Objections filed by the Appellants. The Court further held, relying on Order 41, Rule 22 of the Code for Civil Procedure, 1908, that Cross Objections have all the trappings of a regular appeal. Thus, the matter was remanded to the High Court for fresh adjudication.

28. Manoj Kumar Jain and another vs. UOI AIR 2023 (NOC) 580 (CAL)

9th June, 2023

Look out Circular — Economic Offence — Issuance of Look Out Circular by the bank for non-re-payment of loans — Apprehension that Petitioner would flee the country — Petitioner was not declared a fraudster or economic offender — Constant efforts of settlement of dues — Lookout circular for every borrower incorrect — Lookout Circular quashed. [Art. 226, Constitution of India, O. VI, Rule 17, The Code of Civil Procedure, 1908].

FACTS

The Petitioners were de-boarded from the plane by the Immigration Authority. The Petitioners were informed about the lookout circular issued against them and, thus, the petitioners filed a writ petition challenging the lookout circular. The Petitioner had failed to repay the loan obtained for the expansion of the business. The lookout circular issued by the lender bank was on the apprehension that the petitioner might flee the country and thereby frustrate the whole process of settlement of dues.

HELD     

The Hon’ble Calcutta High Court held that lookout circulars have to be issued in only exceptional cases and cannot be issued at the slightest provocation. The Hon’ble High Court also observed that Petitioner made efforts in the process of settlement of loans by actually paying loans to the other banks in the consortium. Further, the lender bank also had securities of the Petitioner and further realised some of the outstanding by realising the property of the Petitioner. The Hon’ble Court also observed that Petitioner was allowed to travel by the CBI court and there was no complaint with respect to Petitioner not complying with conditions. The court held that Petitioner was not declared a fraud or economic offender and his travel to the UK was for his son’s education. Thus, the lookout circular was quashed.

29. V Narayanasamy vs. Vanchikodi AIR 2023 (NOC) 631 (MAD)
19th April, 2023

Condonation of Delay — Delay of 1,835 days — Negligence of earlier Counsel — Not a sufficient ground — Condonation denied. [S. 5, Limitation Act of 1963].

FACTS

The Petitioner / Plaintiff had filed a suit to declare the title of the property of the Petitioner and a relief of permanent injunction before the lower court. However, the complaint was returned by the Registry for rectifying certain defects and a time of one month was given to the petitioner. The Plaintiff, however, failed to comply with the time period of one month. The lower court dismissed the petition on the ground that no prima facie case was made by the plaintiff and there were no sufficient reasons to condone the delay of the plaintiff. The plaintiff, after a delay of 1,835 days, approached the Madras High Court for the same.

HELD

The Hon’ble Madras High Court held that merely stating that earlier counsel was negligent and did not inform the plaintiff regarding the proceedings of the suit, was not a sufficient reason to condone the delay of 1,835 days. Thus, the Hon’ble High Court upheld the order of the lower court. The Petition was dismissed with no costs.

30. Revanasiddappa & Anr vs. Mallikarjun & Ors Civil Appeal No. 2844 of 2022

1st September, 2023

Hindu Undivided Family — Children born of void or voidable marriage — Have a right in their parent’s share in the Hindu Undivided Family. (Hindu Marriage Act, 1955, S. 16, Hindu Succession Act, 1956, S. 2, S. 6).

FACTS

Section 16(1) of the Hindu Marriage Act, 1955 provides that even if a marriage is null and void, any child born out of such marriage who would have been legitimate if the marriage had been valid, shall be considered to be a legitimate child. However, Section 16(3) of the Hindu Marriage Act 1955 states such children are entitled to inherit only their parents’ property and will have no right over the other coparcenary shares. On this background, a question of law arose before the three-judge bench of the Hon’ble Supreme Court, whether children born out of void or voidable marriage will have a right in their parent’s share in the undivided family property, as Section 16 of the Hindu Marriage Act 1955 confers legitimacy to children who are born out of invalid marriages.

HELD

The provisions of the Hindu Succession Act, 1956 have to be harmonised with the mandate in Section 16(3) of the Hindu Marriage Act, 1955 which indicates that a child who is conferred with legitimacy will not be entitled to rights in or to the property of any person other than the parents. Therefore, the children born of such marriages will be entitled to a right to their parent’s share in the Hindu Undivided Family.

(Editor’s Note: Refer to Laws and Business where this decision and the subject have been discussed).

31. Bhagyanathan Nadar vs. Vishwanathan Nadar and others AIR 2023 (NOC) 568 (KER)

13th April, 2023

Settlement deed — Cancellation unilaterally — No legal effect — Not enforceable by law — A gift deed once executed cannot be revoked. (Specific Relief Act, 1963, S. 34; Transfer of Property Act, 1882, S. 5, S. 123).

FACTS

A settlement deed was executed by the owner of a property in favour of the Original plaintiffs. The deed of settlement did not provide for any power to revoke the settlement. A dispute arose between the parties and the settlement deed was cancelled. The donee / Original Plaintiffs, inter alia, challenged the cancellation deed before the lower court. The lower court, considering all the facts, held in favour of the Original plaintiffs.

On appeal, the first appellate court held in favour of the Original Plaintiffs and dismissed the appeal of the Original Defendants.

On the second appeal

HELD

The Hon’ble Kerala High Court held that the settlement deed was valid and binding. After the acceptance of the gift, if the donor wants to revoke the gift by resorting to Section 126 of the Transfer of Property Act, 1882, the donor will have to institute a suit for the same. A gift can be cancelled only if the gift is the one executed in contemplation of section 126 of the Transfer of Property Act, 1882 and not otherwise. There is no such agreement between the donor and donee to suspend or revoke the gift. It also provides that a gift which parties agree shall be revocable wholly or in part on the mere will of the donor, is void wholly or in part as the case may be. So a gift deed once executed cannot be revoked and even if such contingencies as contemplated under Section 126 of Transfer of Properties Act, 1882 are in existence in the deed, a suit has to be filed for cancellation.

Therefore the settlement deed is valid and the second appeal is dismissed.

Corporate Law Corner : Part A | Company Law

14 Case law 01/November 2023

M/s. DEXTER BIOCHEM PRIVATE LIMITED

No. ROC-GJ /ADJ. ORDER/ DEXTER BIOCHEM/ Sec.140/ 2023-24/2632/33

Office of the Registrar of Companies, Gujarat, Dadra & Nagar Haveli

Adjudication order

Date of Order: 15th September, 2023

Adjudication Order against the Auditor of the Company for violation of section 140(2) of the Companies Act, 2013, read with Rule 8 of the Companies (Audit and Auditors) Rules, 2014, for Non-filing of Form ADT-3 with respect to Resignation from the Company.

FACTS

On perusal of documents available on the MCA21 Portal, M/s DBPL (the Company) had appointed M/s. DKN&A as Statutory Auditors of the company for the period from 1st May, 2015 to 31st March, 2020. Further, it was noticed that the company had also appointed M/s. P.U.N & Co. Chartered Accountants as Statutory Auditors of the Company for the period from 1st April, 2017 to 31st March, 2022.

Based on this, the Registrar of Companies, Gujarat, Dadra & Nagar Haveli (“RoC”) had issued a show cause notice to M/s. DBPL and M/s. DKN&A, Chartered Accountant Firm for default under section 140(2) of the Companies Act, 2013 asking clarification whether the company had removed M/s. DKN&A under Section 140(1) of the Companies Act, 2013 or whether M/s. DKN&A had resigned pursuant to Section 140(2) of the Companies Act, 2013.

M/s DBPL, in their letter dated 24th May, 2023 had replied that “they have forwarded the above-referred notice to M/s DKN&A and have requested to file Form ADT-3 for their resignation at the earliest to make the default good”. It was revealed from the reply of M/s. DBPL that M/s. DKN&A, Statutory Auditors had violated the provisions Section 140(2) of the Companies Act, 2013 due to non-filing of the notice of resignation in the prescribed e-form ADT-3, and were thereby liable for penalty under Section 140(3) of Companies Act, 2013.

Adjudication Notice vide No. ROC-GJ/ADJ-Sec. 454 read with Sec.140/Dexter Biochem/2023-24/1447 dated 21st June, 2023 was issued to Mr. KAS, Partner of M/s. DKN&A, as per Section 454 of the Companies Act, 2013 read with Rule 3 for violation of Section 140(2) of the Companies Act, 2013 regarding non-filing of Form ADT-3 and no reply was received from M/s. DKN&A on such notice.

Thereafter, for providing an opportunity of being heard a “written notice” was issued to the mailing address of M/s DKN&A on 4th September, 2023 to hold a physical hearing and to give an opportunity to be heard.

In the hearing, Mr. MD, Practising Company Secretary (“PCS”) being the authorised representative of M/s. DKN&A submitted that due to ill-health conditions, the auditor was not able to file Form ADT-3 for his resignation in a time-bound manner as per the provisions of the Companies Act, 2013. However, the Auditors had filed ADT-3 on 8th June, 2023 under the MCA portal with an additional fee of ₹7,200 with a delay of 1711 days in the filing.

He also submitted that the Auditors were engaged in a small company and the provisions of Section 446B be considered at the time of levying penalties.

Thereafter, the Presenting 0fficer submitted that the additional fees paid for delayed filing as prescribed under the Companies (The Registered offices and Fees) Rules, 2014 is, only a fees paid for filing of form as the cost of facility of delayed filing and thereby can neither be considered as fine nor penalty specified under the Companies Act, 2013. Therefore, payment of additional fees by the auditor does not absolve the default committed and hence M/s. DKN&A is liable to pay a prescribed penalty under Section 140(3) of the Companies Act, 2013.

Relevant provisions of the Companies Act, 2013 as applicable, are as under:

“As per Section 140(2); The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

HELD

Accordingly, AO after considering the facts and circumstances of the case, imposed the following penalty on M/s. DKN&A:

Name of Auditor’s Firm Penalty as per Section 140(2) of the Companies Act, 2013 Penalty
for continuing default		 Final penalty imposed as per Section 140(2) of the Companies Act, 2013 read with Section 446B of the Companies Act, 2013 (R) #
M/s. DKN&A R50,000 or an amount equal to the Remuneration of Auditors, which is less.

 

As per the financial statement, no remuneration was given to the Auditor for F.Ys. 2016–17 and 2017–18.

 1711 days*250 = R4,27,750 ₹ 1,00,000

Further, it was directed to pay the penalty within 90 days of the order.

# Final Penalty was imposed pursuant to the provision of section 446B of the Companies Act, 2013 as M/s. DBPL satisfied the criteria of being a Small Company where M/s. DKN&A were Auditors.

Companies Act — Some Changes Upcoming Soon

The Securities and Exchange Board (SEBI) of India has always been, updating its regulations. It sets up Committees on specific areas to suggest changes, issues such reports, takes feedback, and then appropriately modifies the Regulations. Now, even the Ministry of Corporate Affairs (MCA) is initiating major changes to the Companies Act, 2013 (the Act). Major and frequent changes may be tough for practitioners and companies to keep up with, but at least some of their grievances are addressed and market evils are tackled. The MCA has often been seen to be sleepy in updating the laws, while SEBI has always taken a lead as far as listed companies are concerned. Part of the reason is that the SEBI Act contains just a few substantive provisions like powers to take action by SEBI including levy of penalties, procedure for appeals, etc. But largely it is a very brief enactment since most of the powers for laying down the details are delegated to SEBI. Hence, subject to the procedure for placing the amendments before Parliament, SEBI has been able to act swiftly in changing the law. On the other hand, the Companies Act, 2013, involves hundreds of provisions requiring hardwiring of many details including even the amounts. Many rules have been made to lay down details in several areas. However, there are several provisions in the Act which make substantive requirements. This requires amendments to be approved by Parliament which can be long and tortuous. But now, MCA seems to be becoming active. A good example is the fairly detailed report of the Company Law Committee released in March, 2022. It is also reported in the media to be implemented soon. Further, the term of the Committee is further extended and more aspects are to be covered. We can cover some of the amendments proposed as per the report released as also discuss some proposals said to be in the works as reported by the media with fair, though broad, details even if official confirmation is yet to be released on these. Undoubtedly, the proposals are at the initial stage and may be modified as the discussions progress. But that said, let us consider some important proposals with some angles I could think of.

ISSUE OF FRACTIONAL SHARES

Fractional shares often arise particularly out of corporate actions like mergers, bonus issues, etc. The law presently does not permit companies to make a fresh issue of fractional shares and, in any case, there is not a proper market for that. So companies typically opt for a workaround. All the fractional shares are accumulated and then a trustee sells them in the market and the proceeds are distributed proportionately to the respective shareholders.

However, there is a radical new proposal of permitting issue of fractional shares on an independent basis. The arguments given are primarily two. Some shares are so expensive that buying even one share may require spending more than ₹1,000 and, in one case, even more than ₹1 lakh. Thus, the Committee report says, the purchase of such shares is inaccessible to small investors. The proposal then is that the issue of fractional shares may be permitted, for listed and unlisted companies, with consultation with SEBI for the listed companies. The report cites that 1.42 crore new retail investors have entered into the market just in F.Y. 2021.

However, the Report lacks further details of the proposal on issuing fractional shares and hence several questions arise.

What will be the face value of such shares? Would multiple face-value shares be permitted? Say, if the original face value is ₹10, would fractional shares having face value of ₹1, ₹2, ₹5, etc. be permitted? Or even ₹0.50 or ₹0.10? Assuming there will be flexibility, will not there be a separate quoted price for each of such groups of shares? It would be perhaps naïve, considering history, to assume that the price quoted for a ₹1 share would be one-tenth of the price quoted in the market for the ₹10 face value shares, which may be the predominant category of the share capital.

We have seen (history now) the “odd lot” share market. Since there was a fixed minimum market lot, there was a problem with selling them. If the market lot size was, say, 50, one could not sell on the stock exchange their shareholding of, say, 27 shares. So a parallel market developed where agents would buy such shares at a discount, often heavy, and then accumulate them and sell almost all of them at the market lot. Of course, this issue has been largely resolved because the market now permits the sale/purchase of even 1 share. But the experience should teach us to be wary.

Another example is the issue of Differential Voting Right (DVRs) shares. The only difference between them and the ‘ordinary’ shares was that DVRs had fewer voting rights, depending on the terms of the issue. This concept has flopped miserably with some 3 odd companies only having issued them. The price of such DVRs is quoted at a discount, often as much as 50 per cent of the ‘ordinary’ shares.

So would this also happen to fractional shares? And would history repeat itself at the expense of small investors?

Curiously, the only example really given for this proposal is just one scrip, that is MRF, which is quoted at more than ₹1 lakh per share. But should the rule be made of such an exception?

Also, nothing prevents companies from issuing bonus shares, for example, to make shares available at a lower price.

Perhaps this proposal requires detailed reconsideration or at least clarity of the fine print of the proposals.

SOME OTHER IMPORTANT PROPOSALS

Space would not permit going into even major substantive proposals in detail of this lengthy report. So reference may be quickly made to some important of such proposals. One is for increasing communication through electronic mode.

Then there is a proposal to permit the issue of Restricted Stock Units and also Stock Appreciation Rights. These, though separate topics by themselves, require detailed consideration.

Then there is a move to eliminate the need to file affidavits. It is proposed to replace them with a simple self-declaration. The advantages are at least two. One is that it eliminates the need to buy stamp paper and get them notarised. The other is an approach of placing some element of trust in the concerned persons. Of course, the liability for violation/false declarations would remain the same.

A DIFFERENT REGIME FOR UNLISTED COMPANIES

While presently, we have a separate regime for listed companies regulated by SEBI, there are also some requirements in the Act for listed companies. Typically, the stricter of the two laws apply. But SEBI as an independent body has expertise and wide powers. A parallel regime seems to be the intention to be set up. This is what a detailed report in Business Standard of 25th September, 2023 states. The details of the proposal, which still can be stated to be general and also subject to official announcement, make for an interesting read. Notably, it is reported, that this would be a part of the Company Law Committee report in the upcoming second part.

Firstly, it would be applicable only to “large” companies. Nothing is stated specifically on what would constitute large companies. However, it is a fact that many unlisted companies are larger, at least in terms of valuation than some listed companies.

Here too, a few recent examples, one of which is specifically cited by name in the media report, is stated to be the motivation driving this proposal. The question again then is whether we are making a rule from an exception. Be as it may be, larger companies may require special focus. The other side is that smaller companies, which are in lakhs, may hopefully face a more relaxed regime.

It is stated that the new regime would not be a “light touch” one. Presumably, there will be detailed provisions. In particular, the punitive consequences of violations may be high. One will have to see how the proposal actually turns out to be. It would be of concern if the provisions are as harsh as, say, Section 447 of the Act which provides for very strict punishment under a very widely worded definition of “fraud”. This Section itself requires a close relook. But that does not seem to be the agenda. One hopes that since the intent of the Committee is to make India an easier place to conduct business. While consequences of serious violations ought to be harsh, a too widely drafted definition of what is such a serious violation may end up being intimidating or discouraging companies.

A welcome proposal is about auditors who resign. They would be asked to specifically state whether their resignation is due to fraud or similar serious wrongs observed in the company. The present Act already has certain provisions. But such a specific declaration would be helpful since later, if wrongs are soon found, they also can be confronted. On the other hand, the question would be whether an auditor would be required to ascertain whether there was fraud? The present requirement gives some leeway of judgment to the auditor. But generally, the powers of auditors as well as their legal expertise may not be wide enough for them to collect conclusive evidence and decide whether or not there was fraud. They may then face the Shakespearean dilemma of declaring there was fraud or there is not. Particularly, if they declare there is fraud, they could be subject to a lawsuit from the company/officials. They may end up taking a legal opinion that the information with them may be insufficient to declare that there is a confirmed fraud. And that would defeat the provisions. But in any event, this seems to be in the right direction. Indeed, such a requirement should also be made for independent directors and Key Managerial Personnel.

Finally, the question would be on who would administer this new regime. Presently, we have an independent body like SEBI that is not only well-empowered under the law, but has specialized knowledge of the field. If the new regime would still be under MCA, one wonders how effectively it would be implemented. Perhaps, an independent body for such unlisted companies, with wide powers, could be created.

Interestingly, we already have the Serious Frauds Investigation Office (SFIO) created under the Act itself which has wide powers to collect information, summon persons and investigate and give reports to various regulators under different laws. What more or better would the new regime and its administering body do, would have to be seen.

CONCLUSION

Several other amendments, largely technical or those relating to procedural aspects, are also proposed. For example, enabling more and more use of electronic technology, removing minor ambiguities, etc. These may be particularly important for those involved in day-to-day compliance like the Company Secretaries. Generally, they all seem to be in the right direction.

At the end, while the amendments proposed are several, they do not tackle the larger issue of keeping the principal provisions in the Act itself and do not move towards setting up a specialized independent body for unlisted companies to which extensive powers are delegated. Hopefully, as the media report says, the Committee report, the second part, would be released soon followed by a draft Bill which will give more details and the fine print.

Genuineness of A Will: Supreme Court Lays Down Guidelines

INTRODUCTION

A probate means a copy of the Will certified by the seal of a Court. A probate of a Will establishes the genuineness and finality of a Will and validates all the acts of the executors. It conclusively proves the validity of the Will, and after a probate has been granted no claim can be raised about the genuineness or otherwise of the Will.

The most important question in relation to any Will, irrespective of whether a probate is required, is whether the Will is genuine. If a Will is forged / fraudulent, then it does not transmit the estate of the deceased to the beneficiaries named in the Will. The issue of determining the authenticity of a Will has been one which has been a perennial source of litigation. Several judgments of the Supreme Court have shed light on this issue. The Supreme Court’s decision in the case of Meena Pradhan vs. Kamla Pradhan, CA No. 3351/2014 Order dated 21st September, 2023, has laid down the principles which the Courts should consider in this respect.

TESTS LAID DOWN BY THE SC

In the above-mentioned decision on Meena Pradhan vs. Kamla Pradhan, the Supreme Court laid down 9 important tests to determine the validity of a Will. It held that broadly it has to be proved that (a) the testator signed the Will out of his own free will, (b) at the time of execution he had a sound state of mind, (c) he was aware of the contents thereof and (d) the Will was not executed under any suspicious circumstances. The Navratna Tests of the Apex Court are explained below:

TEST-1: EXECUTED BY TESTATOR

The court has to consider two aspects: firstly, that the Will is executed by the testator, and secondly, that it was the last Will executed by him. The Court held that it is not required to be proved with mathematical accuracy, but the test of satisfaction of the prudent mind has to be applied. A Testator is the person who makes the Will. He is the person whose property is to be disposed of after his death in accordance with the directions specified under the Will. The Indian Succession Act, 1925, governs the making of Wills and lays down who can be an Executor of a Will. The following persons can make a Will:

(a) Any major person who is of sound mind;

(b) An ordinarily insane person can make a Will when he is sane / of sound mind;

(c) A person who is intoxicated or who does not understand what he is doing cannot make a Will in that state, e.g., a Will made by a person who is heavily drunk and not in his senses is not a valid Will;

(d) Deaf / dumb / blind people can make a Will provided they know what they are doing, e.g., a Will made by a blind person in Braille script. An illiterate person can also make a Will but he should be aware of the contents and should affix his / her thumb impression as a mark of acceptance;

(e) A married woman can bequeath any property which she could dispose of during her lifetime.

TEST-2: SIGNING OF THE WILL

The testator must sign / affix his mark to the Will or it shall be signed by some other person in his presence and by his direction and the said signature or affixation shall show that it was intended to give effect to the writing as a Will. The Indian Succession Act, 1925, requires that a testator shall so sign a Will that it appears that he intended to execute it. Thus, it need not necessarily be at the end of the Will, it can also be at the beginning of the Will. The key is that it should appear that he intended to give effect to the Will. There is no requirement that each and every page must be signed or initiated – Ammu Balachandran vs. Mrs O.T. Joseph (Died) AIR 1996 Mad 442 which was followed again in Janaki Devi vs. R Vasanthi (2005) 1 MLJ 357. Nevertheless, it goes without saying that for personal safety, the testator must sign each and every page so that there is no risk of pages being replaced.

TEST-3: ATTESTATION

One of the tests laid down was that it was mandatory to get the Will attested by two or more witnesses, though no particular form of attestation was necessary. Each of the attesting witnesses was required to have seen the testator sign or affix his mark to the Will or has seen some other person sign the Will, in the presence of and by the direction of the testator or has received from the testator a personal acknowledgement of such signatures. Each of the attesting witnesses shall sign the Will in the presence of the testator.

It is trite that the witnesses need not know the contents of the Will. All that they need to see is the testator and each other signing the Will — nothing more and nothing less!

The Indian Succession Act states that any bequest (gift) to a witness of the Will is void. However, the Will is not deemed to be insufficiently attested for this reason alone. Thus, he who certifies the signing of the Will should not be getting a bequest from the testator. However, there is a twist to this section. This section does not apply to a Will made by a Hindu, Sikh, Jain or Buddhist and hence, bequests made under such Wills to attesting witnesses would be valid! Wills by Muslims are governed by Sharia Law. Thus, the prohibition on gifts to witnesses applies only to Wills made by Christians, Parsis, Jews, etc. However, there is no bar for a person to be both an executor of a Will and a witness of the very same Will. In fact, the Indian Succession Act, 1925, expressly provides for the same.

TEST-4: EVIDENCE OF WITNESSES

The Court held that for the purpose of proving the execution of the Will, at least one of the attesting witnesses, who was alive and capable of giving evidence, should be examined. The attesting witness should speak not only about the testator’s signatures but also that each of the witnesses had signed the Will in the presence of the testator.

Section 68 of the Indian Evidence Act, 1872 (‘the Evidence Act’) explains how a document that is required to be attested must be proved to be executed. In the case of a Will, if the attesting witness is alive and capable of giving evidence, then, the Will can be proved only if one of the attesting witnesses is called for proving its execution. Thus, in case of a Will, the witness must be examined in the Court and he must confirm that he indeed attested the execution of that Will.

TEST-5: EVIDENCE OF ONE WITNESS IS SUFFICIENT

The Court declared that if one of the attesting witnesses can prove the execution of the Will, the examination of other attesting witnesses can be dispensed with. Where one attesting witness examined to prove the Will fails to prove its due execution, then the other available attesting witness has to be called to supplement his evidence.

Section 69 of the Evidence Act provides that if no attesting witness can be found, it must be proved that the attestation by at least one of the witnesses is in his own handwriting and that the signature of the person executing the document is in the handwriting of that person. Thus, evidence needs to be produced which can confirm the signature of at least one of the attesting witnesses to the Will as well as that of the Testator of the Will.

The Supreme Court in V. Kalyanaswamy(D) by LRs. vs. L Bakthavatsalam(D) by LRs., Civil Appeal Nos. 1021-1026 / 2013, Order dated 17th July, 2020, has explained that attesting witness not being found refers to a variety of situations – it would cover a case of incapacity on account of any physical illness; a case where the attesting witnesses are dead; the attesting witness could be mentally incapable / insane. Thus, the word “found” is capable of comprehending a situation as one where the attesting witness, though physically available, is incapable of performing the task of proving the attestation and therefore, it becomes a situation where he is not found.

TEST-6: SUSPICION SURROUNDING THE WILL

The Apex Court laid down that whenever there existed any suspicion as to the execution of the Will, it was the responsibility of the propounder to remove all legitimate suspicions before it could be accepted as the testator’s last Will. In such cases, the initial onus on the propounder became heavier.

On being satisfied that a Will is indeed genuine, the Court would grant a probate under its seal. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat vs. Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali vs. State (2009) 5 SCC 528, that while granting probate, the Court must not only consider the genuineness of the Will but also the explanation given by the parties to all suspicious circumstances surrounding thereto along with proof in support of the same. The onus of proving the Will is on the propounder (person claiming that the Will is genuine). The propounder has to prove the legality of the execution and genuineness of the said Will by proving the absence of suspicious circumstances and surrounding the said Will and also by proving the testamentary capacity and the signature of the testator. When there are suspicious circumstances, the onus is also on the propounder to explain them to the court’s satisfaction and only when such onus is discharged would the court accept the Will – K. Laxmanan vs. T Padmini (2009) 1 SCC 354. In that case, the testator and one of the attesting witnesses to the Will died before the date of examination of the witnesses. The second attesting witness was also not in good physical condition, in as much as neither was he able to speak nor was he able to move. Consequently, as the execution of the Will could not be proved by leading primary evidence, the Court held that the propounder was required to lead secondary evidence in order to discharge his onus of proving the Will. This view has also been held in Daulat Ram vs. Sodha, (2005) 1 SCC 40.

TEST-7: OVERALL FACTORS TO BE CONSIDERED

The Court held that the test of judicial conscience has evolved for dealing with those cases where the execution of the Will is surrounded by suspicious circumstances. It requires to consider factors such as awareness of the testator as to the content as well as the consequences, nature and effect of the dispositions in the Will; sound, certain and disposing state of mind and memory of the testator at the time of execution; testator executed the Will while acting on his own free will.

The mental capacity of the Testator is possibly the most relevant factor in determining the validity of a Will. For instance, in the case of a person suffering from Alzheimer’s disease / or if he is a schizophrenic, the mental capacity of such a person would be highly debatable.

In this respect, the verdict of the Court in Shivakumar vs. Sharanabasappa, (2021) 11 SCC 277 is very relevant. Here it held that unlike other documents, a Will speaks from the grave of the Testator, and so, when it was propounded, the Testator had already died and could not say whether or not it was his Will. It was this aspect which introduced an element of solemnity in the decision of the question as to whether the document propounded was indeed his last Will. Ordinarily when the evidence adduced in support of the Will was satisfactory and sufficient to prove the sound and disposing state of the Testator’s mind and his signature as required by law, Courts would be justified in making a finding in favor of the propounder. However, it also held that a Will is not approached with doubts but is examined cautiously and with circumspection.

TEST-8: ONUS ON THE PERSON WHO ALLEGES

One who alleges fraud, fabrication, undue influence et cetera has to prove the same. However, even in the absence of such allegations, if there are circumstances giving rise to doubt, then it becomes the duty of the propounder to dispel such suspicious circumstances by giving a cogent and convincing explanation. In the case of Shivakumar (supra), the Court observed that there were three unnatural and unusual features of the Will — different sheets of paper were used; placement of the signatures of the Testator was beyond normal distance from the last typed matter; and in making of three signatures, at least two different pens were used. These, the Court held, made it clear that a deeper probe into the genuineness of the Will was called for to find out whether the document could at all be accepted as the last Will of the Testator.

TEST-9: SUSPICIONS SHOULD BE REAL

The Court explained an important principle — “suspicious circumstances surrounding the Will must be ‘real, germane and valid’ and not merely the fantasy of the doubting mind”. Whether a particular feature qualified as ‘suspicious’ would depend on the facts and circumstances of each case. Any circumstance raising legitimate suspicions would qualify as a suspicious circumstance for example, a shaky signature, a feeble mind, an unfair and unjust disposition of property, the propounder himself taking a leading part in the making of the Will under which he receives a substantial benefit, etc.

For instance, in Pratap Singh vs. State, 157 (2009) DLT 731, the Delhi High Court held that the fact that a person was suffering from a very painful form of terminal cancer of the mouth which prevented him from speaking, and that he succumbed to it within 2 weeks of executing a Will, showed that he may not have prepared the Will. Hence, in cases of terminal illness, it becomes very important to prove how the testator could have prepared the Will. The role of the witnesses in such cases also becomes very important. In Maki Sorabji Commissariat vs. HomiSorabji Commissariat, TS No. 60/2011 Order dated 30th April, 2014, the Bombay High Court was faced withthe issue as to whether the Testator who was suffering from Parkinson’s disease could make a Will. It concluded that merely because he suffered from Parkinson’s disease, it would not indicate or prove that it had affected his sound and disposing mind or capacity to execute a Will. Unless the disease was of such a nature that it would affect the sound and disposing mind of the testator, such disease cannot be a ground to refuse a Probate.

Again, the Court’s verdict in Shivakumar (supra) is quite interesting in this respect. It concluded that while a fishing enquiry of digging out faults and lacuna was not to be resorted to while examining a Will but at the same time, the real and valid suspicions which arose (any abnormal happening or conduct) could not be ignored either. Ignoring or brushing aside all the features noticed in relation to the Will would require taking up an individual feature and ignoring it as being trivial or minor and then proceeding with the belief that it had only been a matter of chance that all the abnormalities somehow chose to conglomerate into the Will. The Apex Court held that such an approach could not be adopted. It emphasized that the examination of a Will had to be on the norms of reality as also normalcy, and the overall effect of all the features and circumstances was required to be examined.

CONCLUSION

Covering all situations and scenarios for examining the genuineness of a Will would require an exhaustive treatise. However, this decision of the Apex Court has done a very good job of collating all the important principles at one place and giving guidance to Courts as to what they should consider when a Will comes up before them! Persons executing Wills should be aware of these nitty-gritties so that their Wills have fail-safe features.

Allied Laws

32 A.S. Rawat vs. Dawa Tashi

AIR 2023 Delhi 252

Date of Order: 13th March, 2023

RTI — Filed by non-citizen — Public Information Officer denied on account of non-citizenship — RTI available to citizens as well as non-citizens. [Ss. 3, 6, 7(1), Right to Information Act, 2005; Article 21, Constitution of India].

FACTS

The Respondent / Right to Information (RTI) Applicant had requested information concerning various aspects such as his employment confirmation letter, children’s education allowance, and all India LTC benefits. In response, the Public Information Officer (PIO) / Petitioner stated that the RTI applicant did not have the right to use the provisions of the RTI Act, 2005, since he was a Tibetan and not a citizen of India. The appeal against this decision was denied. However, in a subsequent appeal to the Central Information Commission (CIC), the CIC ruled that the PIO ought to have provided the requested information to the Applicant. The CIC also found that the PIO’s actions were driven by ill intent and baseless suspicions about the applicant’s citizenship. As a result, the Commission imposed a penalty of ₹25,000 on the PIO.

The PIO filed a Writ Petition before the High Court against the order of the CIC.

HELD

The Hon’ble Delhi High Court held that the RTI is accessible to both Indian citizens as well as non-citizens, and refusing this right to non-citizens would be in conflict with both the Constitution of India and the RTI Act. Thus, the Hon’ble court directed the PIO to comply with the PIL filed by the Respondent. However, the Court quashed the penalty of R25,000 imposed on the PIO, stating that the actions of the PIO were not mala fide or ill-intended.

33 Sree Rengaraaj Steel and Alloys Limited vs. MSTC  Limited

AIR 2023 Madras 278

Date of Order: 25th January, 2023

Limitation — Self-serving and unilateral payment made by the creditor — Cannot be constituted as an acknowledgement of debt or cannot extend the time period of calculating limitation period. [S. 3, 19, The Limitation Act, 1963].

FACTS

The Respondent/ Plaintiff filed a suit for recovery of a sum of money from the Appellant. The Appellant and the Respondent had a contract whereby, the Appellant was liable to pay money in exchange for goods along with interest if the Appellant failed to pay within a grace period of 175 days. The Appellant failed to pay within the grace period of 175 days. The Appellant contested that the suit filed by the Plaintiff was after the expiry of the period of limitation, and thus, the suit was liable to be dismissed. The Trial Court, in its finding, held that the last transaction (which took place on 6th July, 1996) was made by the creditor as payment for adjustment of the demurrage deposit and thus, held that the suit was filed within the limitation period.

On Appeal.

HELD

The Hon’ble Madras High Court held that self-serving adjustment of account by the creditor, in the ledger maintained by the Plaintiff cannot be considered as an acknowledgement of debt (as contemplated by section 19 of the Limitation Act, 1963) when it is admitted that no payment as such was received towards the debt or liability as per the ledger account. Thus, the suit filed by the Plaintiff was barred by limitation. The order of the Trial Court was set aside and the original suit was dismissed.

34 Debkanta Chakrabarti vs. State of West Bengal and others

AIR 2023 Calcutta 287

Date of Order: 28th June, 2023

Succession — Membership of Co-operative society — Heritable — Not automatic in the absence of a nominee — Legal heir required to produce probate, letter of administration or succession certificate. [Ss. 70, 92, West Bengal Co-operative Societies Act, 2006].

FACTS

The father of the Appellant was inducted as a shareholder / member of a cooperative society on 16th June, 1975. A deed of lease was executed between them on 20th September, 1990, to grant the leasehold right of the piece of land to the said member. His name was mutated in the government record of rights. He had since been possessing the land, by constructing a residential house and staying therein. The said person died on 18th July, 1997. The Appellant’s claim is that he and his mother, being the son and wife of the deceased person, are the only legal heirs and successors of the deceased. Therefore, the mother of the Appellant made an application to the Society, on 5th November, 1997, for the transfer of the share of her deceased husband in the Society, in the names of herself and the Appellant, so that they may be inducted as members in the Society, in place of the deceased member. However, the Appellant’s mother died on 10th January, 2018. It is the further case of the Appellant that since the death of his father, he has duly remitted all the expenses and charges payable to the Society, in a manner similar to an existing member. Appellant by his letters requested the Society to record his name as a member of the Society, by virtue of his being the only legal heir of the erstwhile member, since deceased. His letters not being acted upon by Society, the Appellant resorted to lodging his grievance to the registrar and assistant registrar of the co-operative societies. In response, the Society replied that the interest of the deceased member, i.e., the father of the present Appellant, shall be disposed of in accordance with the provisions laid down in Section 70 of the West Bengal Co-operative Societies Act, 2006 (Act) and the rules framed thereunder.

Aggrieved by this, the Appellant filed a Writ Petition before the Single bench of the Calcutta High Court, which was dismissed. Appeal was filed before the division bench.

HELD

According to Section 92 of the Act, even a nominee has to follow the procedure mentioned in the Act to be inducted as a member of a housing cooperative society. Shares of a cooperative society are heritable and transferable immovable property, and the Appellant does have a right to inherit the same. However, the Appellant is not named as a nominee by his father, and hence, the automatic transfer of interest does not arise. The Appellant should have produced either probate or letters of administration or succession certificate from a competent court of law, as per Section 70 of the said Act.

The appeal was dismissed.

35 Guruprasad Tah vs. Ashoke Kumar Tah and others

AIR 2023 Calcutta 267

Date of Order: 26th April, 2023

Succession — Will — Genuineness of Will in doubt — First Will was revoked — Second Will in favour of executor — Testator was not well at the time of Second Will — Signatures not proper — Witnesses were persons of the executor — Will was not a product of a free and fair mind.

FACTS

Ashok Kumar Tah (Respondent) filed an application for a grant of probate of a Will dated 4th July, 1983, executed by his father Gourpada Tah in respect of his property. Ashok was named as the executor in the Will. Gourpada, during his lifetime, executed two Wills. The first Will was executed on 3rd June, 1964. The said Will was revoked by the later Will dated 4th July, 1983. Ashok is claiming property under the Will dated 4th July, 1983.

The Trial Court allowed the application for a grant of probate. The trial Court was satisfied with the due execution and attestation of the Will by two attesting witnesses.

On an appeal by Guruprasad Tah (Appellant), the eldest son of the deceased.

HELD

There are several reasons to doubt the genuineness of the Will as it is made in suspicious circumstances. The Will is a second Will which revokes the First Will. At the time of the execution of the Second Will, the testator was physically ill and mentally frail. It was incumbent upon the executor and the attesting witnesses to establish the mental ability and physical fitness of the executor to execute the Will. There is no evidence that, at the registration, the testator was in a position to travel to the office for registration. Further, there is no evidence that the Will was registered at the residence of the testator. One of the attesting witnesses stated that he had not seen the other attesting witness at the registry office. The signature of the testator appears to be shaky and at the right-hand corner of the Will instead of the bottom of each page. Also, there is no endorsement in the Will that the sub registrar had explained the contents of the Will to the testator. It appears that the executor had a prominent role in the execution of the Will, and all the witnesses also appear to be the persons of the executor. Hence, it cannot be said that the Will was a product of the free and fair mind of the testator.

The appeal is allowed, and the probate proceedings fail.

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after day-long practice as chartered accountant.
For Vikram, friendship with Vetal was real education. Vetal being a spirit of
intelligent human frustrated in his lifetime, was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game, Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulder and tread through the woods of
graveyard. Vetal would laugh weirdly in the silence of the graveyard and
thunder :

“So Vikrambhai, you succeeded to catch me once again, keep
walking, don’t look back, if you speak a word I will vanish. Well, I would tell
you a story of a spiritual guru like Bhagwan Rajneesh, Yogi Mahesh or Satya
Saibaba, well, you are clever enough to get the lead . . . . so our spiritual
guru Baba Ramjay was a very revered person. It was believed, after spending many
years in seclusion somewhere in the high altitudes of Himalaya, Baba established
connection with the almighty. He taught his confused disciples how to live life
in peace and tranquility, how to detach the mind from the mundane world and seek
solace beyond the present life. It was not surprising that he had disciples all
over the world, rich and wealthy. In search of peace of mind they were
squandering their wealth for Baba Ramjay. It seemed that Baba Ramjay’s
philosophy of life was “high living and high thinking”. Over a period he amassed
huge wealth in cash and kind through his charitable trusts or otherwise.
Obviously he was being spied on by the Income-tax Department. I mean he was on
the radar of the Department. A raid was conducted on Baba’s Ashram. On that day
his disciples were celebrating the most auspicious day, Baba’s birthday. It was
believed that he was incarnation of great Buddha. Baba chanted “Om Shanti Shanti
Shanti”. One of the disciples in the close circuit of the Baba announced :

“Ladies and gentlemen, for your kind attention those who wish
to express their gratitude towards our revered Baba Ramjay, we have kept
offertory box”

There was a sudden rush towards the offeratory box. What a
phenomenal impact Baba Ramjay had on the minds of his disciples. They were ready
to sacrifice, though not everything, but something which the government cannot
do through full-fledged tax laws. I think the Finance Minister should learn a
lesson from him how to mobilise funds. Jokes apart, Vikrambhai, Baba was about
to leave the “Dhyan Mandir” (meditation centre). A tall and middle-aged person
full of bureaucratic arrogance barged into the Dhyan Mandir along with his
assistants. Without losing much time he disclosed that he and his assistants
were from the Income-tax Department. He ordered all present not to leave the
place till his further order and asked to hand over cellphones to one of his
assistants. Baba Ramjay sank back in the sandal wood throne. When Baba was
trying to use his cellphone, the alert officer recovered the cell-phone from
Baba. Inwardly Baba was very furious at the audacity of the officer. But Baba
kept chanting “Om Shanti Shanti”. What else he could do ? nothing. The alert
officer was the chief of the raid team. He proceeded further. He showed the
search warrant to Baba Ramjay. Baba pretended to be still in trance of
meditation and said, “My child, I see great future for you, I can read from your
face, believe me, our tryst is pre-planned by the destiny . . . . . Om Shanti
Shanti.”

For a few moments the chief forgot his duty and bowed before
Baba to touch Baba’s feet. But after finishing the ritual the chief regained his
sense of duty as Income-tax Officer the moment he smelled sandalwood aroma of
Baba’s throne studded with precious stones and said mischievously, “Baba I will
meet you at some other time to check how great future I have. Right now I have
to record your statement about your great fortune, I mean your wealth, your
income in the present”

Baba realised that the chief was a hard nut. He was a bit
irritated.

Most of the questions Baba ducked by saying “My team of
Chartered Accountants would explain it, right now I am not aware of it”. It took
two hours to complete the recording of the statement. By that time Baba was a
fully grounded person. Baba realised “reality — not spirituality” would work in
this situation. Baba asked his assistant to arrange refreshments for the search
party. Baba and the chief moved from meditation centre to Baba’s closet.

“Look officer, I have a large number of disciples all over
the world. I have connections with political bigwigs, film stars,
industrialists, leading stockbrokers, etc. They adore me in their drawing rooms.
I don’t wish to waste my time in litigations. Let us now negotiate something
reasonable for you and other members of the search party”. Baba as an ordinary
human being exposed his mind to the officer.

The chief was very shrewd. He did not respond to Baba’s offer
instantly. He was thoughtful for a long time. His silence was killing Baba’s
patience. Eventually the chief broke his silence.

“Look Baba, I have strict instructions from the top, no let
up in the investigations. I am helpless.” said the chief. It was more a threat
than honest disclosure.

Thus the raid proceeded. At the end of the raid the chief and
Baba again went to Baba’s closet.

The chief put all the documents, notings and jottings
incriminating Baba and a couple of his close disciples, which the chief had
secreted from others during the course of search, on the table.

“Om shanti shanti” Baba chanted, staring nervously at the
chief.

“Gurudev, look at all these documents and papers, very damaging, they show your clandestine investments abroad, money laundering, violation of FEMA.”

” know, I know but you would agree that I have not earned any money from doing any “illegal business”, I mean black-marketing, smuggling, gambling or the like, all this money comes from my disciples teaching spirituality, guiding them how to live in peace and tranquility, giving them lessons of Yoga. Most of the donations are being accepted in the name of different trusts. All that money is being spent on philanthropic objects.” Baba made a futile attempt to earn sympathy.

“Gurudev, I am not concerned with your philan-thropic deeds, I know your trusts are doing great service to the society at large. But I can’t ignore all these papers and documents which implicate you individually. You are caught with your pants down.” For a while there was pin-drop silence in the room. Baba was flipping through the documents and papers.

“Why don’t you hand over those papers and documents having my reference as if you did not detect them at all ?” asked Baba staring at the chief.

“Ok, but not without price! What about other papers having names of your confidents, I mean second in command of the your Ashram ?” responded the chief.

“It’s for you to decide. Who am I to direct you?” the chief got pampered by Baba’s unexpected respect.

“Well, all right, I understand, so the deal is struck” said the chief.

Baba scribbled a figure on the paper and said, “Is this enough for you ?”

“It’s all right, but what about others?” queried the chief.

“Oh I just forgot them, how many are they?” asked Baba.

“Seven” said the chief making headcount on his fingers.

Again Baba scribbled a figure per member of the raid team on the paper and stared at the chief for his approval.

The chief hesitated, he asked  for more.

“Okay, I increase the amount as you desire. Can you give me guarantee you will not pocket the amount meant for them ?” asked Baba.

“I would call them right now if you suspect my honesty towards my colleagues” retorted the chief.

“Om Shanti Shanti Shanti, I am sorry, I am sorry” said Baba with a smile on his face.

Baba got a “clean” chit. His team of chartered accountants managed to convince the assessing officer that in Baba’s case everything was on “board”, nothing hidden or concealed. However Baba’s three disciples were implicated to the hilt for concealment of income and violations of different provisions of the Income-tax Act, FEMA, Customs, etc.

So Vikrambhai, my questions to you:

First how do you differentiate between Baba Ramjay and the chief ?

Second, what  works  in any given  situation ?

Third, both Baba Ramjay and the chief are dishonest persons. Who would you prefer as a friend ?

If you remain silent knowing the answers to my questions, I will chop your head with your sword.” Vetal roared.

Vikarm began  to answer,

“Both Baba Ramjay and the chief are social evils. But Baba is more dangerous than the chief. Forget his philanthropic deeds. The chief is an ordinary corrupt bureaucrat. Whereas Baba is an extraordinary corrupt member of the society, he pretends to be ‘spiritual’ for the society at large on the one hand and amasses huge wealth in the name of spirituality on the other hand. I think an avid spiritual person tends to abandon the mundane world in his pursuit to practise the principles of spirituality. Well, the chief has greed for money, whereas Baba has greed for money and ‘image’ both. Greed for image is more powerful than the greed for money.

Answer to your second question, in any given situation it’s not spirituality, ethics traditions or culture, but ‘survival instinct’ of an individual works. This survival instinct varies from individual to individual.

And lastly, I would prefer the chief as my friend instead of Baba Ramjay, Baba Ramjay is more selfish than the chief. He betrays his close confidents. On the contrary, the chief looks after the interest of his colleagues.”

“Vikrambhai, you broke the silence, I am vanishing” again VetaI’s laugh was echoing in the graveyard.

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after daylong practice as chartered accountant.
For Vikram friendship with Vetal was real education. Vetal being the spirit of
an intelligent human being frustrated in its lifetime was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulder and tread through woods of the
graveyard. Vetal would laugh weirdly in the silence of the graveyard and
thunder :

“So Vikrambhai you succeeded to catch me once again, keep
walking don’t look back, if you speak a word I will vanish. Well I would tell
you a story involving your professional colleague which happened in a metro. To
keep the flow of the story I would name my characters one by one as the story
moves on. Your professional colleague, let’s say Gopal, was a fresh chartered
accountant. He started his practice as soon as he passed his final exam. He had
no ‘Godfather’ in the profession and was on his own. He was very enthusiastic
and honest. He was well-versed with the code of conduct of the ICAI. He was
approached by an old man called Purshottam aged about 60 years.

Purshottam retired as chief engineer from a manufacturing
company. Purshottam had four daughters. Only one daughter got married during his
service tenure. Other three were still pursuing their studies. Obviously
Purshottam was financially not that strong to spend on his daughters’ higher
education and their marriages after retirement down the line. During the fag end
of his service he came into contact with Duryodhan, a high-profile government
officer in charge of ‘safety audits’ prescribed under the Factories Act.
Duryodhan was aware that Purshottam was ‘a chartered engineer’ by qualification.
Vikrambhai you know in our country under Factories Act you are required to
observe number of safety measures. For this purpose the factory owner has to get
the report from a ‘chartered engineer’ as to the implementation of safety
measures by the factory satisfactorily.

You may be aware of Bhopal Gas tragedy of Union Carbide. For
the factory owner it is a big threat to its very existence, a small
non-compliance would lead to suspension of manufacturing activity,
investigations and litigation besides huge business loss, so on and so forth.

So this Duryodhan, a hard core corrupt government officer,
made an offer to Purshottam in connivance with the factory owners, to undertake
‘safety audits’. Purshottom was aware that audit fee for a single ‘safety audit’
runs in lacs. However the offer was not without price. Purhottam would pay out
60% of audit fees to Duryodhan that too in cash. Against the 40% share of
Purshottam there was hardly any expenditure, just windfall profit for Purshottam.
So Purshottam having thought over his future financial requirement, accepted the
lucrative offer made by Duryodhan.

Against this backdrop, Purshottam being an honest and law
abiding person, approached Gopal. Purshottam narrated him the modus operandi of
sharing of audit fees with Duryodhan and asked him whether he would be required
to pay any income tax. The moment Purshottam told him that his professional
receipts were likely to cross Rs. ten lacs, Gopal explained him about
maintenance of books of accounts, record and getting them audited by a chartered
accountant u/s.44AB apart from tax liability.

For a week or so Purshottam was musing over the ‘wake up’
call given by Gopal. He checked his audit fees received as per his bank account;
the amount was staggering well above Rs.10 lacs, near about 27 lacs.

So he met Gopal again. He told him his actual professional
receipts would be around Rs.27 lacs whereas his actual expenses would be just
one lac. It was a challenge to Gopal’s conscience and the ethical values he
cherished. Gopal was in dilemma over whether to advise or not to advise
Purshottam about ‘manufacturing’ fake record of expenses like staff salary in
the absence of staff, office rent in the absence of rented office, driver’s
salary in the absence of driver, travelling expenses, etc. to arrive at some
reasonable taxable income. If he did not advise, probably Purshottam would
approach other chartered accountant. He would lose his first ever ‘Tax Audit’ of
his career. On the other hand if he advises Purshottam to ‘manufacture’ fake
record of expenses which would be audited by him, it was a blatant violation of
law and code of conduct of the ICAI of which he was a proud member. Gopal’s
professional career was at stake. Eventually, evil-mind prevailed over his
conscience. He advised Purshottam to create fake record of expenses for the
purpose of ‘tax audit’. Gopal convinced Purshottam that there was no option but
to create fake record of expenses of a huge amount. Purshottam was repenting on
his decision to accept the offer of Duryodhan just for greed of money. Gopal
also confessed to Purshottam that whatever he was asking him to do was not
ethically correct.

Purshottam arranged record for all those expenses as
suggested by Gopal. Gopal conducted tax audit and submitted tax audit report
with the return of income of Purshottam. Nothing went wrong from income tax
point of view, I mean Purshottam’s case was not selected for scrutiny, since
nothing was illegal prima-facie.

Now Vikrambhai my questions to you : who is being protected
by the act of Gopal and Purshottam ? How do you define the conduct of Gopal and
Purshottam ? And how do you differentiate between Gopal, Purshottam and
Duryodhan character-wise ?

“Vetalbhai, first, Gopal and Purshottam were protecting Duryodhan, the corrupt government officer. Secondly, on the part of Gopal and Purshottam, it was breach of conscience but within the framework of law. That is what happens the world over. Thirdly, I would differentiate Gopal, Purshottam and Duryodhan as “the bad, the worse and the ugly” respectively. Gopal and Purshottam were in need of money whereas Duryodhan was in greed of money”

“Vikrambhai you broke the silence, I am vanishing”. Again Vetal’s laugh was echoing in the grave-yard.

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after day-long practice as chartered accountant.
For Vikram friendship with Vetal was real education. Vetal being a spirit of
intelligent human being frustrated in its lifetime was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulders and tread through woods of the
graveyard. Vetal would laugh weirdly in the silence of graveyard and thunder :

“So Vikrambhai, you succeeded to catch me once again, keep
walking, don’t look back, if you speak a word I will vanish. Well, I would tell
you an episode you may find utopian. Gopal was an Assessing Officer in the
Income-tax Department. Occasionally he would take bribes from taxpayers, most of
the times under pressure from the higher ups. Otherwise he was Mr. Clean in the
Income-tax Department. At times he would revere social values. His helping
nature was known to all. But his demeanour was utter nuisance for those
indulging in rampant corruption particularly for Duryodhan, an assessing officer
having his cabin next to Gopal’s. He was always on the lookout to trap Gopal and
demolish him. So he would spy in Gopal’s activities in and off the office.

On that fateful day it was post-lunch session. Gopal was
desperate to ‘settle’ the assessment of Dhanraj. Dhanraj along with his
consultant was sitting in front of Gopal and whispering something as Gopal was
busy on the phone. In the previous hearings Gopal had detected a number of
irregularities in Dhanraj’s assessment. Finally those irregularities resulted in
additional income. Anticipating those additions, Dhanraj being a ‘seasonsed’
tax-dodger had already been hinting Gopal about his willingness to ‘comply’ with
his demand to hush up the case with reasonable additions. It was two days
before that fateful day that Gopal had agreed to settle the case for fifty
thousand, most reasonable amount of bribe for a hardcore tax-dodger like Dhanraj.

As I told you earlier, Gopal was not a hardcore corrupt
bureaucrat. Gopal finished his call and said,

“So Dhanraj, did you bring the amount ?”

“Yes Sir” replied Dhanraj.

Again the phone rang. Gopal was listening intently to the
caller on the other end. He responded,

“I will try my level best to arrange something. Don’t keep on
postponing the surgery of your son, come down to my office”.

As soon as he finished the call his assistant peeped in and
informed.

“Sir there is a call from bada sab“

While getting out of the chair Gopal said,

“Dhanaraj, I will be back in 10 minutes”

Gopal left the cabin. En route he met Duryodhan who was just
returning back to his cabin. They just greeted each other. As usual Duryodhan
addressed him sarcastically “How are you Dharmaraj ?” Gopal did not respond
verbally, he just chuckled nervously. Driven by suspicion and hatred Duryodhan
intruded in Gopal’s cabin. He saw Dhanraj along with his consultant and
overheard their whispering about how reasonable the ‘amount’ was. Dhanraj being
‘old customer’, Duryodhan greeted him with smile.

“What’s up Dhanraj ?” asked Duryodhan.

“My case is selected for scrutiny Sir” responded Dhanraj.

“Any trouble” queried Duryodhan.

“No trouble Sir, the case will be over today only”said
Dhanraj.

” How much ?” Duryodhan.

“Very reasonable” Dhanraj.

Duryodhan got the required ‘ammunition’ to demolish
‘Dharmaraj’ Gopal, he left the cabin hurriedly. Gopal was still with Bada Sab
nearabout half an hour after Duryodhan’s exit. Dhanraj and his consultant were
anxiously waiting for Gopal’s arrival. There was a knock on the door and an aged
person in his sixties entered the cabin.

“Where is Mr. Gopal ?” he asked with bewildered look at
Dhanraj and his consultant.

“Sir has gone to Bada Sab” Dhanraj replied.

The aged person was about to ask the next question, when
Gopal entered in the cabin and hurriedly sank in the chair. He asked the aged
person to take a seat.

“So Dhanraj, you’ve brought the money ?” asked Gopal.

“Yes Sir” Dhanraj replied.

“Hand over that money to Mr. Sudam (the aged person). Let me
tell you in brief. After two hours from now his son aged about 14 will be
operated for heart ailment, the only hope of Sudam and being retired person he
is not in a position to pay for the operation on his own” explained Gopal. The
moment the envelope containing the money was being handed over by Dhanraj to
Sudam, two persons barged into the cabin.

“Don’t move, stay where you are” ordered one of the two.

“We are from Anti-Corruption Bureau” said one. Gopal realised
that he was caught red handed, but he did not lose his cool. Quickly he
recovered from the shock and requested,

“Sir I am guilty of accepting bribe from Dhanraj, but Sir
please let Mr. Sudam go with the money. I am here to face your interrogation.”

Duryodhan, the protagonist of the raid of ACB, could not
control his excitement and joy. He deliberately came out of his cabin to watch
the ‘demolition drama’. Meanwhile the news of the raid spread like wild fire.

So Vikarmbhai, my question, how do you reckon the acts of
Gopal and Duryodhan ?”

“Vetalbhai, legally speaking Gopal is guilty of accepting bribe, he cannot plead social cause behind the bribe since the Goddess of justice is blind. However socially I still hold Duryodhan guilty of manipulating the law to demolish Gopal who by his conduct invoked Duryodhan’s conscience. He manipulated the law for his own convenience.

Apparently one may appreciate Duryodhan for his alertness to unearth corruption. Vetalbhai, you will agree with me that persons like Gopal are always in minority. Further, a manipulator of law is more dangerous than an occasional offender of law in the society.”

“Vikrambhai, you have broken the silence. I am vanishing” again Vetal’s laugh was echoing in the graveyard.

Right to Information

Part A : Decisions of the Court and CIC

Whether co-operative Societies are public authorities ?

    In the judgment delivered on 3-4-2009, the Kerala High Court examined under the writ petitions the applicability of the RTI Act to co-operative Societies registered under the Kerala Co-operative Societies Act (KCS Act).

    The Registrar of Co-operative Societies issued Circular No. 23/06, taking the view that all co-operative Societies registered under the KCS Act, hereinafter, for short, the ‘Societies’, are under the administrative control of the Registrar and therefore, public authorities for the purpose of the RTI Act. Directions were hence issued, requiring all Societies to discharge the obligations as public authorities under the RTI Act and to follow the procedure stated therein. The information officers in the co-operative department of the State Government commenced acting on complaints for non-consideration of requests for information made by different persons to Societies. These writ petitions are hence filed, seeking to quash the aforesaid Circular and for the declaration that the RTI Act does not apply to Societies registered under the KCS Act. Certain actions taken by the officers under the KCS Act and orders issued by the State Information Commission touching the issue, in individual cases, are also under challenge.

    Societies are not government organisations. S. 2(h)(ii) of the RTI Act uses the term ‘Non-Government Organisations’, one not defined in the Act. S. 2(h)(ii), therefore, refers to something that is not part of the Government; which is very true of a Society, as pointed out even by the petitioners. If a Society is substantially financed, directly or indirectly by funds provided by appropriate Government, it falls within the inclusive definition of ‘public authority’; within the expanse of that definition clause. Therefore, any co-operative Society registered under the KCS Act is a non-government organisation and if it is substantially financed, directly or indirectly by funds provided by appropriate Government, it is a public authority for the purpose of S. 2(h) of the RTI Act.

    The Court then notes that the word ‘substantial’ has no fixed meaning. It ought to be understood definitely by connecting the context. The Court then quoted a few judgments of providing its meaning in the context of the code of civil procedure, the Income-tax Act, the Customs Act, etc. and as defined in the dictionary. It then said : “Such a spectrum of substantial wisdom essentially advises that the provision under consideration has to be looked into from the angle of the purpose of the legislation in hand and the object sought to be achieved thereby, that is, with a purposeful approach. What is intended is the protection of the larger public interests as also private interests. The fundamental purpose is to provide transparency, to contain corruption and to prompt accountability. Taken in this context, funds which the Government deal with are public funds, they essentially belong to the sovereign, “We, the People”. The collective national interest of the citizenry is always against pilferage of national wealth. This includes the need to ensure complete protection of public funds. In this view of the matter, wherever funds, including all types of public funding, are provided, the word ‘substantial’ has to be understood in contradistinction to the word ‘trivial’ and where the funding is not trivial to be ignored as pittance, the same would be ‘substantial’ funding because it comes from the public funds. Hence, whatever benefit flows to the Societies in the form of share capital contribution or subsidy, or any other aid including provisions for writing off bad debts, as also exemptions granted to it from different fiscal provisions for fee, duty, tax, etc. amount to substantial finance by funds provided by the appropriate Government, for the purpose of S. 2(h) of the RTI Act”.

    Based on the above view and after examining as to whether the provisions of the KCS Act and Rules are relevant to decide whether the definition in clause in S. 2(h) of the RTI Act applies to co-operative Societies, the Court came to the conclusion that it is beyond doubt that the Societies are substantially financed by funds provided by Government.

    The Court then rules : “It is held that co-operative Societies registered under the KCS Act are public authorities for the purpose of the RTI Act and are bound to act in conformity with the obligations in Chapter II of that Act.”

    As the applicability of RTI Act to the co-operative Societies has arisen in many States and being discussed at many platforms, I reproduce three concluding paras of this judgment which are of common application in all cases :

    The question for decision in every other individual case of a Society, in the event of any dispute, would be as to whether it is substantially financed by the State Government, in the light of what is stated above. That may have to be determined with reference to the financing of each Society. That question would arise for decision only when any co-operative Society refuses to act as a public authority. In such event, any citizen whose right to information is legislatively conferred as per S. 3 of the RTI Act would be entitled to trigger the duty of the State Information Commission in terms of clauses (b), (e) and (f) of S. 18(1) of the RTI Act. In that context, the State Information Commission has every jurisdiction to adjudicate and decide on the question as to whether a particular co-operative Society, against which a complaint is made u/s.18(1), is a public authority for the purpose of S. 2(h). The mere fact that the RTI Act does not expressly prescribe any limits as to finance, to determine the scope of the word ‘substantially’ in S. 2(h) does not give rise to any presumption of possible abuse of power. This is because the State Information Commission, as already found, is the authority which can determine that issue on a case-to-case basis. That power is with that high office, the quality of which is statutorily regulated. Declaration of law as made in this judgment would stand to aid as precedent, by law. Advertence to Sections 12, 15, 16, etc. would show that the Legislature has reposed the powers in such a manner that there could be really no room for any presumptive argument as to possible arbitrariness and apprehension of incompetence. Even with reference to the KCS Act, lots of yardsticks would be available. There is no ground for any such apprehension being recognised with any element of legitimacy.

Insofar as the contention that information is sought for by different individuals for no rhyme or reason is concerned, the answer is short but clear, and is found in S. 6(2), which provides that an applicant making request for information shall not be required to give any reason for requesting the information or any other personal details except those that may be necessary for contacting him.

Having found that co-operative Societies are public authorities for the purpose of the RTI Act, another issue surfaces for consideration. In some of the cases in hand, applications for the information were submitted to the statutory authorities under the KCS Act and KCS Rule requiring them to summon information from the Societies. Instead of summoning information by exercising the authority under the KCS Act and KCS Rules, those officers have forwarded those requests to the Societies, requiring them to answer the queries. The definition of information in the RTI Act includes information as is accessible through such statutory authorities. All such information as is accessible through the mechanism of the KCS Act and KCS Rules thus becomes information for the purpose of the RTI Act. Therefore, the provisions under the RTI Act themselves would be sufficient for reaching at such information. Hence, the question whether the authorities under the KCS Act and KCS Rules should have summoned the documents without requiring the Societies to communicate the information, is too technical and should necessarily give way to the primary object of the RTI Act, viz., to provide access to information. Therefore,  there is no illegality in any officer vested  with  powers under the KCS Act and KCA Rules forwarding the request obtained by them to the concerned. Societies with  a request or direction  to that Society to provide information directly to the person who  has sought the information.

[Thalapalam Service Co-operative Bank v. Union of India, WP (C). No. 18175 of 2006 and connected cases decided on 3-4-2009 in the High Court of Kerala at Ernakulam].

Denial of information by the Registrar of Companies:

Mr. Dharmendra Kumar Garg sought certain information from the PlO of ROC of NCT Delhi and Haryana regarding Bloom Financial Services Ltd. The same were denied. Before the Commission, the PlO submitted the following:

1. Once the information is available  in the public domain accessible to the citizens, the information is automatically excluded from purview of the RTI Act as held by Hon’ble Information Commissioner Shri A. N. Tiwari in the case of ClC/ AT / A/2007 /00112.

2. S. 610 of the Companies Act, 1956 provides that any person may inspect any document kept by ROC and obtain copy of any document from the ROC concerned on payment of prescribed fee. Therefore, the complainant need not seek information under the RTI Act. This was held by the Hon’ble Information Commissioner Shri M. M. Ansari in the case of ClC/MA/ A/2006/0016.

Following is the order of ClC, Mr. .Shailesh Gandhi:

For the first argument the Respondent relied on the order number ClC/ AT / A/2007 /00112 where it was held by the Hon’ble Commission while interpreting S. 20) of the RTI Act that” …. Unless information is exclusively held and controlled by a public authority, that information cannot be said to be information accessible under the RTI Act. Inferentially it would mean that once a certain information is placed in the public domain accessible to the citizens either freely or on payment of a pre-determined price, that information cannot be said to be ‘held’ or ‘under the control of the public authority’ and thus would cease to be information accessible under the RTI Act …. ” I would respectfully beg to differ from this decision. Even if the information is in public domain, an applicant can still ask a public authority to grant him the information if it is held by it. Even if some information is available at various places, it is the citizen’s choice from where he wishes to access it. The only exemptions from disclosure of information available in the RTI Act are provided u/s.8 and u/s.9. The Commission would like to clarify that S. 2 of the RTI Act is the definitional provision and therefore S. 2(j) is not an exemption clause under the RTI Act. It merely defines the ‘right to information’. So the exemption from disclosing the information cannot be sought u/s.2(j). It is also the basic tenet of the law of statutory interpretation that no Section should be interpreted in such a manner which would violate the basic objective of the statute. The basic objective of the Right to Information Act, 2005 is to provide the information sought by the applicant from a public authority and therefore the Sections of the Act should be interpreted to further the objective of this Act. Also the information sought by the complainant here has not been provided on the internet. The information asked for is very basic information and records related to this particular information are missing. This information is very important for the complainant as he is facing a threat of arrest and needs the information to prove his innocence. Not granting such information clearly leads to violation of the fundamental right of the complainant as provided under Article 21 of the Constitution.

With regards to the second argument of the respondent about information to be sought only u/s.610 of the Companies Act, the respondent has relied on order number ClC/MA/ A/2006/0016 of the Commission where the Hon’ble Commissioner Shri M. M. Ansari upholding FAA’s order stated that “There is already a provision for seeking information u/s.610 of the Companies Act, 1956. The complainant may accordingly approach the ROC as advised by the Appellate Authority to obtain the relevant information.” If the complainant has more than one way of seeking remedy he has the freedom to opt for the way which is more convenient for him. No claim has been made by the PlO of any exemption under the RTI Act to deny the information. If a public authority has a procedure of disclosing certain information which can also be accessed by a citizen using the Right to Information Act, it is the citizen’s prerogative to decide which route he wishes to take. The existence of another method of accessing information cannot be a justification to deny the citizen this freedom to exercise his fundamental right codified under the Right to Information Act. If the Parliament wanted to restrict this right, it would have been stated expressly in the Act. Nobody else has the right to constrain or limit the rights of the Sovereign Citizen.

With the views taken as above, the ClC directed that complete information will be given to the complainant before 25th July 2009. If records are not available for any of the queries, this will be stated categorically.

[Mr. Dharmendra Kumar Garg v. Registrar of Companies & CAPIO, decision No. ClC/SG/C/2009/ 000753/4129 of 14-7-2009].


Part B : The RTI Act

Work practices at an Information Commission:

Yutika Vora and Shibani Ghosh have made out a report on the above subject in July 2009. It is a report written  with primary objectives that taken by Mr. Shailesh Gandhi, Central Information Commissioner, New Delhi may be adopted, after making necessary changes, in other Commissions across the country. Mr. Gandhi’s office is continuously striving to improve its work processes. Increasing efficiency entails that more time is available to focus on S. 4 compliance and S. 25 monitoring. The Right to Information is a fundamental right enshrined in the Constitution of India and as statutory bodies entrusted with the responsibility to uphold this right, Commissions must deliver to give this right its full meaning.

I reproduce  some extracts from the said report. (Full report is posted on BCAS website www.bcasonline.org)

This report describes the working processes that have been adopted in Mr. Shailesh Gandhi’s office, which have resulted in a high rate of disposal of cases; reduced the time in which communication received by the office are responded to; and monitoring of S. 4 compliance have been initiated. The report also provides examples of documents that have been referred to in the report in the form of Annexure – such as types of responses sent by Mr. Gandhi’s office, his orders, and other documents used by the office during its working.

Mr. Shailesh Gandhi took charge as Central Information Commissioner on 18th September 2008. He brought with him the conviction that for the rule of law to be upheld, the legal system has to function in a timely manner and justice has to be delivered in time. If justice is delayed, then the rule of law becomes a fiction and the citizen is denied his rights in a democracy.

The fundamental premise  on the basis of which his office works  is that law is time-bound. For the information    to be useful it has  to ensure that  it is made available within  a reasonable period  of time. One of the biggest  strengths of the Right to Information  Act, 2005 is that it requires information to be provided  within  a reasonable  timeframe.  If cases are not disposed within this timeframe, the spirit of this Act is-severely undermined. The importance of the time element in this Act is apparent  when one looks at the penalty provision S. 20 of the Act. In fact, to ensure  timely  response by the Information commission,  the first RTI Bill of 22nd December, 2004 had a provision  that the Information Commission would dispose a case  within thirty days.

However, this provision was dropped at the last moment without any explanation. Mr. Gandhi’s office believes that a timely response is essential and therefore makes strenuous efforts to ensure that cases are disposed within ninety days.

An Information Commissioner costs the nation about 25 lakh Rupees annually. The average yearly disposal of Information Commissioners across the country is around 600, thus the nation is spending an astounding amount of over Rs.4,100 per case only on the Commissioners. This is of course only a part of the expenditure on each case as it does not include costs to maintain an office, infrastructure, etc. If however a Commissioner could achieve an average disposal rate of 4000 cases per year, the nation would spend Rs.625 per case on the Commissioner.

Mr. Gandhi’s office has achieved an average monthly rate of disposal of 535 during 2009, with disposal of 3212 cases in the first six months of 2009. Mr. Gandhi is not the only Commissioner to have achieved such figure. Ms. Annapurna Dixit, Central Information Commissioner, has achieved an average monthly disposal rate of 345 cases by clearing 2070 cases in the same period. Setting a target of 4000 cases a year, and achieving an average monthly disposal of 330-340 case’, is not an impossible task and Mr. Gandhi and Ms. Dixit have proved it consistently.

Mr. Gandhi’s office receives on an average nearly 1600 ‘daks’ every month and a system is developed that between 4 to 6 assistants, the same are distributed, each person is given 10 to 20 daks. Most of the staff members are trained and encouraged to take up various functions in the work flow. Daks are attended within 24-48 hours. Numbers of templates have been prepared to reply to daks. Once an appeal or complaint is found in order, it is registered on the online registration system at www.rtiadmin.nic.in.

After the Second Appeal is registered, a summary is prepared. The summary is used as a preface to the order given by the Commission. The summary is available to Mr. Gandhi from at least a week before the date of hearing. The summary is also open on his desktop during the hearing and he can at any time refer to the documents which are also in front of him. Reading the summary helps Mr. Gandhi to get a gist of the case before the hearing.

It also serves as a ready reference for someone reading the order subsequently, who does not have access to the file.

Once the summary is prepared for a case, it is scheduled for hearing. Mr. Gandhi fixes 20 cases a day for hearing and notice for hearing is sent generally 25 to 45 days before the date of hearing.

In most of the cases, after hearing both the parties which takes approx 15 minutes, the decision is dictated and directly typed on the computer; the decision gets signed by Mr. Gandhi immediately and delivered on the spot. In less than 5%, the Orders are reserved and delivered on a later date after due consideration to the matter.

A very effective process for deciding a complaint is also worked out. Similar effective process is also worked out to deal with non-compliance of orders delivered by the Commission. The Commission also receives dak which are not Appeals or complaints, etc. The same are dealt with as under:

Queries  with  regard  to RTI Act:

A few dak each week ask queries with regard to implementation of the RTI Act as well as the rights and obligations under the RTI Act. All efforts are made to send an adequate response to such queries as Mr. Gandhi believes that the Commissioner’s responsibilities are not restricted to cases brought before him, but also extend to disseminating awareness and better understanding of the RTI Act.

Communication  in relation  to S. 4 compliance:

The office sometimes  receives communication from citizens that certain information which should have been disclosed suo moto by a public authority by 12th October 2005 and till date has not been disclosed. In such cases, after due consideration to the facts and research, a letter is sent to the head of public authority directing it to ensure that it fulfils its obligations u/s.4.

Communication in relation to monitoring u/s.25 :

 U / s.25 of the RTI Act, public authorities have to submit information on the implementation of the RTI Act to the Commission. Mr. Gandhi has asked certain public authorities to submit information to him by the 10th of every month. This information can be sent to the office by email or by post in a form which is standardised.
 
Mr. Gandhi believes that to ensure a holistic success of the Act, emphasis needs to be laid on the fulfilment of the obligations u/s.4 of RTI Act. For this reason constant efforts are being made to bring to the attention of public authorities their obliga-tions u/ s.4 of the RTI Act.

Disposals in his office in the first six months of 2009 are more than the number received. In six months from January to June 2009, appeals and complaints registered are 1575 and 758, respectively, totalling 2333. Against the above, appeals disposed are 1975 and complaints disposed are 1219, totalling 3194.

The pendency of cases at the end of June 2009 is 618 cases, out of which 56 cases have been pending over 60 days. Mr. Shailesh Gandhi is reaching soon to his goal of all disposals of appeals and complaints within 60 days.


Part C: Other News

•  Wajahat    Habibullah

Sayed Nazakat in the magazine WEEK of August 16, writes:

There aren’t many bureaucrats like Wajahat Habibullah. As India’s first Chief Information Commissioner (CIC), he defends the right of common people to open information. “When someone learns to use RTI, he almost becomes addicted to it,” says Wajahat, sitting in his office in South Delhi. He explains why it is important to create more awareness about the Right to Information (RTI) : “It will bring democracy to its rightful owners – the people of India.”

The Right to Information Act was passed nearly four years ago, and Wajahat was asked to implement it. Today, it allows citizens to inspect Government records, take copies and question the authorities for a fee of Rs.10. “RTI is a magic wand. For the first time, the common man has an effective tool to fight bribery and bureaucratic apathy,” he says. “it has worked particularly well for routine tasks, such as getting passports and pensions, which previously took months or years.”

RTI has not been popular with bureaucrats who often ignore requests for information. The CIC is pondering granting of appeals which would allow people the right to access the sources of funds of anyone seeking public office.

•  How effective  is India’s RTI Act:

The news item in the Hindustan Times quoted a prominent Central Information Commissioner Shailesh Gandhi, warning the country that the Government and the judiciary together pose a serious threat to the RTI. Gandhi argued that the Government’s infrastructure — training, resources for implementation of the RTI is woefully inadequate. He also highlighted the role of the Courts in weakening the Act. The judiciary has been granting stays on orders of the Information Commission – which  he noted  is a very  dangerous  trend.

•  Mockery  of the RTI Law by some  Courts:

The gap between the judiciary’s traditionally insular self-image and the public’s rising expectations of accountability from all institutions is evident from the rather surprising interpretation made by the Supreme Court and some of the High Courts on the nature of information that would fall under the ambit of the RTI.

Making a mockery of this much-vaunted legislation, these Courts have made out on their administrative side that the only kind of information that can be accessed by citizens under RTI is what is already “in the public domain”.

When it challenged the Central Information Com-mission’s direction on the declaration of assets by Judges, the Se, in its petition before the Delhi HC earlier this year, had claimed that RTI’s definition “shows that the information which is required to be given must be information in the public domain.” Accordingly, it argued the application regarding declarations of assets by Judges was not maintainable inasmuch as the information sought for was neither in the public domain, nor was it required to be given or maintained under any statue or law.”

If the SC’s interpretation of the definition of information were to be valid, none of the public authorities should have been, for instance, disclosing file notings because given the confidential manner in which they are written by bureaucrats and ministers during decision-making, they are clearly not in the public domain. It is the operation of RTI that has brought into the public domain all manner of information that would have otherwise remained behind the official veil of secrecy. The wide-ranging definition of information contained in S. 2(f) of RTI does not bear out the SC’s claim that it is limited to material lying in the public domain. In fact, the SC seems to have imported the expression “in the public domain” into its petition on the basis of the rules framed by the Delhi HC

For, under the rules framed by it in 2006, the Delhi HC assumed the power to withhold “such information that is not in the public domain or does not relate to judicial functions and duties of the Court.”

•  Pay-Se-Park in Mumbai :

An advocate, whose two-wheeler was towed away because he did not give in to the demand of a man who was running an illegal pay-Se-park racket, used the RTI Act to learn how BMC contractors exploit the lack of parking space to line their pockets.

Advocate Sushil Dalvi, who works with the I-T Department, says, “Parking in South Mumbai is a horrible experience. Rules provide charge for two-wheelers at Re.l per hour, but I have been charged anything between Rs.S to 40.”

Most people cough up the money as they don’t want their vehicle towed away. But Dalvi’s tolerance ended six months ago. He had parked his scooter near Cafe Noorani at Haji Ali, a spot where several two-wheelers were parked. But, when he returned after lunch, only his two-wheeler had been towed away though there were several parked in the same spot. After probing around a bit, he learnt why.

He had refused to pay a person who claimed to be running a pay-&-park business there. And, he was right in doing so because the business was illegal. The space had not been earmarked for pay-&-park and was, in fact, a no-parking zone. Dalvi got his vehicle after paying a fine.

Immediately after the incident, Dalvi filed an RTI query with the BMC demanding details of pay-Se-park contracts allotted in wards A, B, C, D, E, F (south and north) and G (south).

“When I compared the plans with the actual parking plots, I found out that most accommodate more vehicles than they are authorised to. Also they expand their area of operations by encouraging double parking, parking on both sides of the road and on footpaths. But when I pointed out these illegalities to civic officials, they simply threw up their hands.” said Dalvi.

(Source: Mumbai Mirror of August, 2009)

• Mumbai SSC Board and RTI :

Pune Information Commissioner Vijay Kuvalekar has ruled in the case pertaining to Pune SSC Board that answer sheets were not confidential since they were not covered ul s.8 of ‘he RTI Act.

However, Mumbai SSC Board’s PlO in case of Samir Kanparia, rejected the application to inspect the answer sheets and held that they are confidential as per the provisions of law, and secondly, that no public interest will be served if the student is allowed inspection of answer sheets, hence will not allow him to inspect them. Kanparia also submitted before the Board the order passed by the Central Information Commission, in which it had directed the Institute of Chartered Accountants of India to show answer sheets to a student.

Matter is now pending in appeal before CSIC, Dr. Suresh Joshi.

• Proposed Amendments to RTI Act:

In a bid to strengthen the Right to Information Act, the Government has initiated action on a proposal to review the exemption of security and intelligence organisations from its purview. It is being examined whether some of the organisations could be deleted from the second schedule of the Act. Another proposal under examination of the department is to add some more categories of information to the list given in S. 4(1) of the Act which all public authorities are required to publish suo motu. This will enable greater proactive disclosures by public authorities.

• Performance at the Central Information Commission of 7 Commissioners:

The following is the chart of disposals by CICs in the first seven months of 2009.

ORDERS OF CIC

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Right to Information


S. 4(1)(c) :

S. 4(1)(c) reads as under :

Obligation of public authority — “4(1) every public authority
shall —

(C) publish all relevant facts while formulating important
policies or announcing the decisions which affect the public;”

Shri Venkatesh Nayak had filed 2 RTI applications with PIO of
two departments of Government of National Capital Territory of Delhi (GNCTD)
asking for proactive disclosure of contents of the Delhi Police (Amendment)
Bill, 2010 (DP Bill) as required u/s.4(1)(c) of the RTI Act. He received no
reply. Mr. Nayak then filed a complaint u/s.18 of the RTI Act with the
Commission.

Subsequently Mr. Nayak was informed that the DP Bill had been
placed on the website of the Delhi Police, GNCTD and the Ministry of Home
Affairs, Govt. of India and comments from the citizens, media persons, etc. were
invited.

CIC, Shailesh Gandhi in the decision wrote as :

“A plain reading of S. 4(1)(c) of the RTI Act suggests that
every public authority is required to publish or disclose all facts and
circumstances, which are relevant and taken into account while formulating
policies and taking decisions that would affect the public. S. 4(1)(c) of the
RTI Act requires proactive disclosure of proposed laws/policies and amendments
thereto or to existing laws/policies to enable citizens to debate in an
informed manner and provide useful feedback to the government, which may be
taken into account before finalising such laws/policies.

Given that the DP is a significant legislative change, the
relevant public authorities involved in drafting of the said bill had a duty
to proactively disclose its contents u/s.4(1)(c) of the RTI Act. The concerned
public authority, however, acted only after the complainant approached the
Commission and filed a complaint u/s.18(1) of the RTI Act. The public
authority should have disclosed the contents of the DP Bill suo motu and by
omitting to do so, the very purpose of S. 4(1) of the RTI Act stands defeated.
The Commission has further observed that at present, the GNCTD is not fully
complying with S. 4 of the RTI Act and therefore, is of the view that citizens
must be provided with means to debate legislative and policy changes, which
are likely to affect public lives as contemplated by the GNCTD. The citizens
individually are the sovereigns of the democracy and they delegate their
powers in the legislature. The RTI Act has recognised this and S. 4(1)(c) is
meant to ensure that the citizens would be kept informed
about proposals for significant legislative and policy changes.

In view of the aforesaid, the Commission, under the powers
vested in it vide S. 25(3)(g) and S. 25(5) of the RTI Act hereby directs the
Chief Secretary, GNCTD to develop a credible mechanism in all departments for
proactive and timely disclosure of draft legislations/policies and amendments
thereto or to existing laws/policies in the public domain, as required
u/s.4(1)(c) of the RTI Act, during the process of their formulation and before
finalisation.”

[Mr. Venkatesh Nayak v. Chief Secretary, Government of
National Capital Territory of Delhi, Decision No. CIC/SG/C/2010/000345+000400/8440,
decided on
7th July, 2010.]

?
Secret Accounts of Indian citizens in Swiss banks :


Very significant decision of the Full Bench (4 members) of
Information Commission on the subject in National debate since long viz. money
of Indian citizens lying in Swiss banks.

Shri V. R. Chandran had sought the following information from
the PIO of Directorate of Enforcement :

(1) Whether the Ministry of Finance/GOI is aware of the
existence of secret accounts of Indian citizens in Swiss banks amounting to
1456 billion US dollars?

(2) If yes, has any action been taken to find the identity
of the account holders ?

(3) If the list of depositors is available, please provide
a copy of the same, with complete information about the depositors,

(4) Are the transactions legitimate ?

(5) If the deposits are illegal, what action has been
contemplated on them ?

(6) Has the GOI/MOF addressed the Swiss authorities for
repatriating the illegal money ? If
not, why ?

(7) Are there such accounts in any other
countries ?

(8) If all or any of the actions mentioned above have not
been done, please furnish the reason therefor,

(9) If MOF/GOI holds the view that the said media reports
are not to be trusted, what action has been taken or proposed to be taken on
them for false propaganda ?

The CPIO and the first Appellate Authority held that the
Directorate has been exempted u/s.24 read with the Second Schedule of the RTI
Act.

Before the Commission, some of the submissions of the
applicant were :

The Enforcement Directorate cannot dispute that exporting
Indian currency to foreign countries was illegal. It was possible only because
of failure of officers of the Government of India under the Enforcement
Directorate or I.T. Department. Because of non-exercising of the powers and
duties by the above-said officials, Indian citizens who deposited money in
secret accounts got pecuniary advantage to the extent of tax liability of the
said amount. Therefore, non-exercising of the powers by the officers would be
nothing but the abuse of power to cause pecuniary advantage to those persons who
deposited in secret accounts, which is nothing but a criminal misconduct as
defined by u/s.13(1)(d) of the P.C. Act. Further, the corruptive attitude is
glaringly evident that in spite of exposure by the news media the authorities
failed to initiate meaningful action to retrieve the money and even did not
enlighten the taxpaying citizens to know what was happening by furnishing
information under the RTI Act. Therefore, the whole episode involves corruption
and violation of human rights of all citizens, specifically the 30 crore
citizens living in undignified condition in India. As such, the applicant
satisfies the stipulations under the first proviso to S. 24 of the RTI Act, 2005
and hence the applicant is entitled to get information sought for and the
Enforcement Directorate is duty bound to furnish the same along with costs.

The Full Bench took assistance of the Ministry of Finance, Department of Revenue, Department of Banking and Ministry of Law and Justice in the matter. Their comments were invited. The Ministry of Law & Justice and Department of Banking did not give any comments on technical grounds. However, the Department of Revenue in brief stated as under :

    The general impression that all accounts of Indian citizens in foreign banks are illegal is not correct.

    Indian citizens, who are NRIs, can maintain and operate foreign accounts and there is no requirement to get permission or even inform the tax authorities or RBI in India.

    The restriction is only for Indian residents. However, FEMA permits opening of accounts abroad with the knowledge or permission of competent authority. Thus, all foreign accounts of resident Indians are also not illegal.

    Movement of funds from India to outside and vice versa are now permitted liberally under the FEMA regime.

    The details of bank accounts of individuals are protected from disclosure even under the RTI Act, etc. As far as foreign accounts are concerned, the foreign banks do not come under the jurisdiction of Indian authorities.

    In order to get the information from the foreign governments on bank accounts suspected to contain proceeds of crime/tax evasion, the Indian authorities have to indicate the name, a/c. No., crime/tax evasion and the jurisdiction for seeking the information.

    Therefore, none of the agencies hold the full details of such accounts. There will be only the details of specific cases, which are under investigation, adjudication, prosecution, etc.

    ‘The Income Tax Authorities’ and ‘the Directorate of Enforcement’ are 2 agencies under the Department of Revenue, which deal with the illegal money of Indian residents lying abroad.

    In order to bring back illegal Indian money lying abroad, the following actions have been initiated/taken :

    a) The Income-tax Act, 1961 has been amended through the Finance (No. 2) Act, 2009, and it would enable the Central Govt. to enter into Agreement for the Exchange of Information and Assistance in Collection of Taxes (AEI&ACT) with non-sovereign jurisdictions.

    b) In this regard, they have written to the Ministry of External Affairs with respect of 19 prioritised countries/jurisdictions, for taking up the matter with them for entering into such agreements.

    c) Since the existing tax treaty with Switzerland does not provide for exchange of bank-related information, etc., the renegotiation of the tax treaty with Switzerland is being undertaken. The first round of negotiations was held on 10-12 Nov., 2009. Once the protocol amending the tax treaty is notified, India would be able to obtain bank-related information in specific cases from Switzerland.

    d) MEA has also been approached to renegotiate the remaining tax treaties, which are in force, but do not specifically provide for exchange of bank-related information.

    e) India has been actively taking part in building global consensus for taking action against those jurisdictions/countries, who are not transparent or cooperative in exchanging information with other countries.

    ‘The Directorate of Enforcement’ is listed in the Second Schedule of the RTI Act and therefore, in terms of S. 24 it is an exempted organisation. Assuming but not admitting that information about Indian money lying in foreign bank accounts is available with the Directorate, no disclosure need be made by the Directorate.

[My reaction to above 10 point reply : It appears that the Department of Revenue has diverted its reply to generality of the subject. It has not provided but avoided to give the information sought.]

Besides the above, the Directorate made submissions discussing DTAA with Switzerland, OECD standards on exchange of information as contained in Article 26 of the OECD model tax convention. He further stated that the Government of India has taken steps to collect authentic and accurate information about the black money stashed away. The Directorate of Enforcement also brought to the notice of the Commission writ petition (Civil) No. 176/2009 pending in the Supreme Court on the similar subject matter.

After considering the above submissions of both the parties, the Full Bench gave the following decision in 4 para, 14 to 17 of the order :

    14. The issues, which have been raised in this RTI application, are serious and have understand-ably raised public concern. The Enforcement Directorate — the principal agency of the Government to check and undo illegal stashing away of money from the country — has taken a rather technical position about disclosure of the information relating to it. Their position, briefly stated, is that they cannot either confirm or deny the media reports about the likely volume of black money stashed away in foreign banks illegally by Indian nationals. While this position is, doubtless, defensible, it leaves unanswered the perennial question as to what resources the country has lost to the evil of money laundering. We would like this matter to be taken beyond technicalities and to address the larger issue related to transparency in this vital field, about which the citizens of our country are keen for answers.

    15. While the Enforcement Directorate may take the position that they have no way of assessing the total volume of illegally held money by Indians in foreign banks, they can surely provide an estimate of the total volume of such money involved in the investigations they are presently conducting. In other words, the Enforcement Directorate can let the country know as to how much is the total sum of such money they are dealing with in their current investigations. This figure can be arrived at through the simple contrivance of aggregating the sums of money in all such investigations currently underway. The Enforcement Directorate need not disclose the nature of such investigations or the parties’ names. Surely, it is within its power to disclose the total amount of monies covered by these investigations.

    16. The Enforcement Directorate had strenuously argued before us that they stand exempted from disclosure obligation under the RTI Act by virtue of their inclusion in the Second Schedule, u/s.24 of the RTI Act. We would like to dwell upon this aspect of argument in the context of a proviso built into the S. 24 itself, i.e., that these exemptions are subject to their not being matters of ‘human rights violations’ or ‘allegations of corruption’. In our view, all matters now investigated by the Enforcement Directorate in the matter of stashing away of Indian money in foreign banks, come within the definition of allegations of corruption in S. 24. There is eminent and compelling reason why this exception must be applied in the present case.

    17. We direct the Enforcement Directorate to provide the information on Point Nos. (1) and (8) as per the direction in the preceding paragraphs. Point Nos. (2), (3) and (5) have been answered extensively in the foregoing discussions. Point Nos. (4) and (9) are questions which are in the form of seeking views and opinions and cannot be the subject-matter of RTI applications. Point No. (7) has been answered before us by the Department of Revenue.

[Shri V. R. Chandran v. Directorate of Enforcement, Appeal no. CIC/AT/A/2009/000353 decided on 28-9-2010]

                                                    PART B : THE RTI ACT 2005

In the last issue of BCAJ, the keynote remarks of Shri Gopalkrishna Gandhi at the CIC’s 5th annual convention held on 13th and 14th September 2010 was covered under this part. Now hereunder is covered the extracts from the speech of Shri Nandan Nilekani at the said convention :

A defining period for the country:

As a developing nation, the RTI Act was a decisive step for India. In most developing countries, citizen interaction with government is a Rubik’s cube of confusing procedure and requirements, and the asymmetry of power citizens face in interacting with governments encourage corruption and reduce the effectiveness of public services. The passing of the Right to Information Act in India was a big step away from this culture. The Act mandated that all citizens shall have the right to information, thus making it both a legal and justifiable right. It is a law that acknowledged that information can be a potent empowering force and critical to improving governance, and the public must have access to it.

A twin vision : bringing greater accountability in governance:

The Aadhaar Project, I believe, intensifies this movement. The RTI Act and the Aadhaar Project have a similar vision at their heart : that the government must be accountable to the people it governs.

While the RTI brings more accountability to governance by enabling better access to information, the UIDAI hopes to do this through the Unique Identification Number — the Aadhaar, it will issue to individuals across India. The number will allow individuals to clearly establish their identity to any agency in the country. This will be critical in combating the anonymity that impedes access for many of the poor to public benefits and services.

By authenticating their identity — either through biometrics or demographics — with the Aadhaar number in real time, individuals will also be able to verify whether they have received a particular service or benefit. This will bring last mile transparency to delivery of public services, and would also enable individuals to hold governments accountable when their wages and benefits are denied to them.

Such confirmation of benefit delivery is a particularly urgent requirement across social welfare schemes, since diversion and non-delivery of benefits has been a challenge across India.

The demand at the grassroots:

The Right to Information movement was driven by the passion of grassroot activists, and concerned citizens. From that local movement for ‘poora kaam, poora daam’ it became the national, visionary legislation we see now. The constitution of the UIDAI has a less romantic back-story, but has nevertheless, evolved into a project with similar transformational potential. There has long been a grassroot need for identity among India’s underprivileged, especially among the poorest and the most marginalised. Whether it is the anonymous migrants working and living in urban slums from Pune to Kanchipuram to Delhi; poor families unable to get BPL cards; or ordinary villagers who cannot open a bank account since they lack documentation, the demand for identity is palpable across the country, and the lack of it is deeply felt among the millions who work in the shadows of our institutions.

Building a bigger window:
accessing more information:

Since the Right to Information Act and the Aadhaar number have similar objectives for India’s residents, it is reasonable to consider that one can strengthen the other.

The vision of the RTI Act is a monumental one. In practice however, the Act has not been employed to the full extent that is possible. The RTI is most used today when a citizen applies for information from a particular public agency. We have been relatively less successful, however, in seeing the provisions of S. 4 enforced. S. 4 of the Act surrounds proactive disclosures — it states that public agencies and departments must release detailed information on operations and service delivery regularly to the public, and computerise records where possible for easier access. It requires public authorities to publish the matter of execution of subsidy programmes, including amounts allocated and the details of beneficiaries. In addition, it states that public authorities must maintain records as far as possible, in a computerised format, and connected by network all over the country to enable easy access for the public. For most public agencies and departments in India, however, computerising and releasing vast amounts of data, which now largely remain on paper, has proven to be a difficult task. Most departments, therefore, simply don’t do it.

The spirit behind S. 4 and proactive disclosure is that individuals should have to resort, as little as possible, to the Act in order to access information on public schemes. The Aadhaar-enabled applications the UIDAI envisions can turbo-charge the enforcement of these S. 4 provisions across our subsidy and welfare schemes, particularly within programmes such as the Public Distribution System and the NREGS. The availability of electronic records within such programmes would be a natural outcome of the applications that the UIDAI would implement in the coming years.

In the PDS, for example, public access to records through the RTI have been largely limited to the stock and sale registers of PDS outlets. The Aadhaar application in PDS would help enable broad-based computerisation of the PDS supply chain, making much of the available information across the various stakeholders electronically available. The Aadhaar application would enable every PDS beneficiary to confirm that they’ve received the grain by verifying their identity through Aadhaar. Such verification would be linked to an online MIS system. This would bring end to end accountability for every bag of grain — information on the movement of food grain that could be tracked online and in real-time, and published.

Petitioning the state:
enabling the underprivileged:

An important vision of the Right to Information Act was that it would bring the power of information to people most deprived of it in the country. However, the RTI application requires paperwork as well as follow-up in case it is rejected at the first level of appeal, which many of the poorest find difficult to do, due to the travel and additional filings that are required. BPL applicants face additional encumbrances — in order to waive the RTI application fees, they must provide documentation to prove that they are below the poverty line, which many of the poor don’t have.

Aadhaar could enable a mobile-based application, through which individuals could file an Aadhaar-linked RTI application through a mobile phone. Money could be debited either through the mobile phone or through an Aadhaar-linked bank account. The Aadhaar number could also be used to verify whether an individual falls into the BPL category. Follow-up of RTI requests and appeals could also be done remotely through mobile, reducing the travel and other practical constraints that the individual has to face. In addition, the status of the Aadhaar-linked RTI application could be tracked on a centralised, online database. Such a database would also enable the public and independent organisations to view the number of RTI applications that are pending, information that has been released, and so on.

Easing up the RTI process through Aadhaar applications would make the Act more accessible to millions across the country, particularly the poor.

The access to information is in itself a message : by enabling this, governments acknowledge that they are answerable to the people that elect them. By easing such information access to include the poor we would strengthen the objectives of the Act, help further reduce the inequalities that now exist between the ‘information rich’ and the ‘information poor’, and give the poor the tools to ensure that they receive better, fairer services.

Transforming India’s state-resident relationship:

What is perhaps the most defining feature of poverty is not just the absence of good housing and sufficient food, but the lack of access the poor have to the resources they need to change their circumstances — resources such as education, health, information and employment.

The RTI and Aadhaar are most fundamentally, about empowering the individual, and enabling such access for the poor. They do this by building a stronger, clearly acknowledged and accountable relationship between the state and the citizen. They give people the opportunity to form a direct relationship with their governments : through which they can request information necessary for them, demand individual recognition, get access to the services they need, and confirm to governments when they received an entitlement, and when they did not.

In the last few years, we have received a clear message in the recent policy efforts and reforms : that the path to development must be an inclusive, pro-poor one. The RTI and Aadhaar are potent, indispensable parts of this effort. Together, they can have a powerful impact on our broader reform movement : one that aims for a developmental agenda that is fairer, more equitable, and acknowledges and enables access for even its weakest citizens.

                                             

                                                Part C?: Information On & Around

    Political influence rules over merit :

Political interference at the highest level has been a common feature of the selection of staff at the Tamil Nadu Dr. MGR Medical University for three years between November 2006 and 2009, an RTI plea has found out. Documents obtained by TOI indicate the role of the Raj Bhavan and office of the State Health Minister in influencing the selection process in favour of certain applicants, thereby denying meritorious candidates a chance.

    Errant taxi drivers of Mumbai :

There has been a rise in the number of errant taxi drivers being punished for rigged meters or inflated readings in Mumbai’s suburbs in the past three years. This was revealed in the official statistics provided by the RTO to civic activist Anil Galgali under the Right to Information Act. The RTO said in its RTI reply that the action was taken by the flying squads based on complaints lodged by commuters. “But why should RTO officials wait for us (commuters) to complain ? Why can’t these flying squads have surprise checks? I am sure they can catch several autos overnight if they go on a surprise round across the suburbs,” Galgali pointed out.

    Maximum RTI applications in Maharashtra:

Statistics show that most queries raised under the Right to Information Act pertained to the State Urban Development Department. Of the nearly 4.5 lakh applications, clarity on issues related to the Department, which is considered crucial to the space-starved city. The data was provided by Chief Information Commissioner Suresh Joshi who addressed a press conference on his last day in office on 11-10-2010. According to Joshi, 12,5418 applicants sought information on matters involving the UD Department, followed by 72,393 info seekers who wanted the Revenue Department to answer their questions.

    CIC rescued:

Recently, the Supreme Court has rescued CIC the nodal body for smooth implementation of RTI from slipping into administrative chaos. On May 21, the Delhi HC had quashed the CIC (management) Regulations, 2007, framed by the Chief Information Commissioner for smooth functioning of CIC. The HC had also held that the Chief Information Commissioner had no power to constitute benches of CIC. The Bench, after brief arguments, stayed only that part of the HC order which restrained CIC from constituting benches for distribution of work. This means, the Chief Information Commissioner can now allot work to other Information Commissioners, for speedy disposal of RTI appeals.

Right to Information

Part A: Decisions of the Court and CIC

S. 8(1)(e), (i), (j) and S. 10(1) of the RTI Act :

    Ms. J. D. Sahay, CCIT-1, Ahmedabad had applied for empanelment/appointment to the post of member, CBDT in 2006 but was not selected. Aggrieved by non-selection, in 2007 she sought certain information, which could throw light on the reason for her non-selection.

    Vide two RTI applications, the appellant had sought copies of various documents including her ACRs of 10 years, minutes of the meeting of Committee of Secretaries (COS) and certain other information concerning the process of empanelment.

    Both, her applications and appeals were rejected on the ground that the information sought for is personal and confidential in nature and, therefore, exempted from disclosure u/s.8(1)(j) of the RTI Act and also on the basis that information sought is of secret/ confidential in nature, therefore, exempted from disclosure u/s.8(1)(i) of the RTI Act.

    Interestingly, the First Appellate Authority (FAA) further invoked S. 8(1)(e) stating that the information is available with the Department of Revenue in their fiduciary relationship with officers who were under consideration during the selection.

    In her appeal before CIC, she made following submissions :

    (i) Both CPIO and Appellate Authority erred in denying her the information and the decision was announced without hearing her. Hence grave injustice has been done to her;

    (ii) Information has been used against her without disclosing the comments/gradation to her at any time. This is gross injustice done to her;

    (iii) The plea regarding secret and confidential nature of information does not hold force because the information relates to the appellant and that she is not seeking information in respect of any other person;

    (iv) The procedure and technique followed to determine any cut-off point should be disclosed to the aspirants. The action relating to the determination and application of cut-off points being a critical factor for an aspirant should be put in public domain.

    At the hearing before the full Bench of CIC, Ministry of Finance, Department of Revenue in the written submission argued that file dealing with selection of Members, CBDT contains various secret and personal information about the officials considered for selection. This information is exempted from disclosure in view of the provisions contained in S. 8(1)(e), (g), (h), and (j) of the RTI Act. At the time of hearing, the respondents also stated that what are being asked for are not DPC proceedings but proceedings of a Selection Committee consisting of senior Secretaries. All these proceedings are confidential and marked as such. They also submitted that these minutes are not with them but the Cabinet Secretariat.

    CIC in its order stated :

  •      The object of RTI Act is also to bring in transparency and accountability in the working of Public Authorities. RTI Act confers a right on the citizen to access information held by a public Authority and every public Authority is obliged to facilitate this right. ACRs do contain an objective assessment of an officer and non-communication of the same has been held to be arbitrary by the Court and as such violative of Article 14 of the Constitution of India.

  •      In regard to the disclosure of Annual Confidential Report, it has been our view that what is contained therein is undoubtedly ‘personal information’ about that employee. Accordingly, in Shri Gopal Kumar v. Maj. Gen. Gautam Dutt, DGW, Army HQ, (Appeal No. CIC/AT/A/2006/00069 dated 13-7-2006), a Division Bench of Commission held that ACRs are protected from disclosure because arguably such disclosure seriously harms interpersonal relationship in a given organisation. Further, the ACR notings represent an interaction based on trust and confidence between the officers involved in initiating, reviewing or accepting the ACRs. These officers could be seriously embarrassed and even compromised if their notings are made public.

  •      As regards the documents concerning DPC, the concerned Public Authority is directed to make available information in terms of request of the appellant but there shall be no obligation to disclose details concerning 3rd parties. The respondent Public Authority may suitably use the severability clause in S. 10(1) of the Right to Information Act.

    Note :

    Paras 1 and 2 in above order are contradictory to each other. In para 1, as stated, the Supreme Court has held that fairness and transparency in public administration requires that all entries whether poor, fair, average, good or very good in the ACR whether in civil, judicial, police or any other State service except military must be communicated to him within a reasonable period so that he can make a representation for its upgradation. The Apex Court held that in their opinion this is the correct legal position even though there may be no Rule/G.O. requiring communication of the entry, or even if there is a Rule/G.O. prohibiting it, because the principle of non-arbitrariness in State action as envisaged by Article 14 of the Constitution in our opinion requires such communication. Article 14 will override all rules or government orders.

    In para 2, inspite of above position, Commission has denied disclosure. It has taken the following view :

    There are, thus, reasonable grounds to protect all such information through a proper classification under the Official Secrets Act. This decision of the Commission has been followed in several other decisions also and the Commission has held that the disclosure of ACR is exempt u/s.8(1)(e) of the Right to Information Act, 2005 unless the Competent Authority is satisfied that a larger public interest warrants disclosure of such information.

    It is further noted that the Commission may change the hitherto held view if a full Bench of the Commission considering the matter in a couple of appeal/complaint cases decides otherwise. Presently, the matter is still considered as sub-judice by the commission.

    [Chief CIT-I, Ahmedabad v. Ministry of Finance, Department of Revenue, New Delhi, Appeal No. CIC/AT/A/2008/00027 & 33; Decided on : 6-2-2009]

    (Full Bench Coram : Mr. Wajahat Habibullah, CIC, Prof. M. M. Ansari, IC and Mr. A. N. Tiwari, IC)

Whether co-operative societies are public authorities?

In September 2009 issue of BCAJ, in this column is reported the judgment of the Kerala High Court holding that co-operative societies are public authorities.

Similar issue has come before the H.C. of Bombay (Nagpur Bench) decided on 31-1-2009 in which the Court has held :

  • It is well settled that general regulations under an Act, like the Companies Act or the Cooperative Societies Act, would not render the activities of a company or a society as subjects to control of the State. Such control in terms of the provisions of the Act are meant to ensure proper functioning of the society and the State or statutory authorities would have nothing to do with its day to day functions.

  •     As pointed out earlier in the present matter we have to find out whether the petitioner-bank is controlled by the government, if ‘yes’ it will be ‘public authority’ and if ‘no’ it will not be ‘public authority’, because none of the other requirement to make an institution a ‘public authority’ are available in the present case. ‘Control’ does not mean regulatory or statutory control. In the case of Ajay Hasia v. Khalid Sehracvardi, reported in AIR 1981 SC 487 three judges’ Bench of the Supreme Court had laid down the law and it was reiterated by the Constitution Bench of the Supreme Court in the case of Pradeep Kumar Biswas v. Indian Institute of Chemical Biology, (2002) 5 SCC 111 and the observations of the Supreme Court in Pradeep Kumar v. Indian Institute were reiterated in the case of S. S. Rana v. Registrar Co-op. Societies. Thus, it is clear that the control must be particular to the body in question and it must be deep and pervasive. If it is – so found then such body is ‘State’ within the meaning of Article 12 of the Constitution of India or a ‘public authority’ within the meaning of S. 2(h) of the Right to Information Act. When the control is merely regulatory; whether under statute or otherwise, it would not serve to make the body a ‘State’ or ‘public authority.’ In view of the full Bench authority of this Court in the case of S.V. Co. op. Bank v. Padubidri, (AIR 1993 Bom. 91) and in view of law laid down by the Supreme Court in several authorities, it is clear that, in absence of existence of deep and pervasive control with reference to the institution, it cannot be called a ‘State’ or ‘public authority’ within the meaning of the Right to Information Act.

  •     In view of the fact and legal position discussed earlier, it must be held that the petitioner Bank is not a ‘public authority’ within the meaning of S. 2(h) of the Right to Information Act.

  •     I find that the State Information Commissioner committed error in allowing the appeals filed by respondent No. 3. Therefore, it is necessary to intervence and set aside the impugned order”.

[Dr. Panjabrao Deshmukh Urban Co-operative Bank Ltd. v. The State Information Commissioner, W.P. No. 5666 of 2007; decided on 31-1-2009]

Author’s comments:

Similar to the decision as above of Bombay High Court, in more than one case, Karnataka High Court has. also decided on similar ground, that co-op. SOCIetiesare not public authority.

What distinguishes decisions of Bombay & Karnataka High Court v. that of Kerala HC is that the former is based on ‘control’ provision while the latter is based on ‘substantially financed’ part of the provision [So2(h)(d)(i) reads: body owned, controlled or substantially financed]. Kerala High Court has taken within its sweep all funds provided by appropriate Government from its own funds or funds which reach societies thru Government or with its concurrence i.e. financed directly or indirectly by appropriate Government.

I am of the opinion that the decision of Kerala High Court is eorrect and needs to be accepted by all. Other day justice D. Chandrachud said: “There must be wider norms for disclosure. Suppression of information must be the exception. He also said that time has come when RTI should not only cover just public bodies but also private bodies. In number of cases, Information Commission has stated: “Under this Act, providing information is the rule and denial is an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against rule of law”.

Part B : The RTI Act

Continuing from October BCAl, the summary of two reports:

One study by Price water house Coopers (PWC) as appointed by the Department of Personnel and Training (DOPT), titled as ‘Understanding the key issues and constraints in implementing the RTI Act.’ Its final report as Executive Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment Analysis Group (RaaG) in collaboration with number of other social bodies including TISS, Mumbai under the title ‘Safeguarding the Right to Information’ .

DOPT-PWC  Report:

Improving convenience in filing requests:

As determined by the survey, most of the applications (more than 70% of the people surveyed) for information are filed at the Government offices, a conducive and facilitative environment at Government offices is a necessary condition to ensure that citizens are able to apply and receive information in a convenient manner.

Key issues:

  • As per S. 4(1)(b)xv-xvi, S. 6(1) and S. ‘5(3), the Public Authority is expected to proactively provide certain information/facilitate the citizens in accessing the information as per the RTI Act. However, during the study, it was noticed that there was a wide gap in ensuring convenience to the citizens in filing requests for information. There were also anecdotal instances where the citizen was discouraged to file for information requests (e.g., the form for requesting information is only a guideline, but at many places, the information requests were rejected if the applications were not in the prescribed format).

  • Submission at the PlO office is the most prevalent channel. However, over 26% of the citizens had to pay more than three visits to submit applications and 17% said no sign boards were present to help them with the process.

  • Lack of an updated list of PIOs, which leads to citizen inconvenience [providing updated list of PIOs as per S. 4(1)(b)(xvi)].

  • Payment of cash is the most prevalent channel. However, it has the inherent limitation of requiring the applicant to be present physically, whereas as per the Act, there is no such restriction. Most of the payment modes accepted by the Public Authorities have this inherent limitation.

  • Inadequate help was provided to applicants or the attitude of PIOs was non-friendly [assistance is expected from PIOs as per S. 5(3) and S. 6(1)].

  • Approximately 89% of the PIOs were not using the provision of inspection of records by citizens, which led to delay in providing information. (As per S. 2(j)(i), ‘inspection of work, documents, records’ is a means to provide information under Right to Information Act).

  • Over 75% of the information seekers were dissatisfied with the quality of information provided.

Encouraging accessibility to information is one of the major change management issues among Government employees. For a Government servant, there has been a significant shift from the ‘Official Secrets Act’ mindset to the ‘Right to Information Act’ mindset.

Recommendations:

In order to facilitate filing RTI requests / appeals, the following alternative channels should be considered :

Common Service Centers (CSCs) is a scheme of the Government of India under which 1,00,000 CSCs are being created. This means that there would be approximately 1 CSC for every 6 villages. These CSCs are expected to act as front-end/single window outlets for many Government services. These are being operated by private agencies under the Public-Private-Partnership model. It is recommended that these CSCs should be used to collect applications [to act as APIO, as per S. 5(2)] and facilitate Citizens in filing RTI applications.

Department of Posts (GoI) is already a designated APIO under the S. 5(2) for Central Government. It is suggested that the State Governments also accord the status of APIO to post offices and designate staff to assist citizens in drafting and forwarding the applications/appeals.

RTI Call Centers : these have already been implemented in some states or are in the process of being implemented (e.g. in Bihar, Haryana). This is a convenient channel wherein the RTI application is taken by the call centre and payment of fee is included in the telephone bill.

RTI Portal: In this case the information request can be made through the RTI portal. Various State Governments have already started planning the implementation of this recommendation. The RTI portal should contain links to all Ministry /Department websites of the appropriate Government.

  • The Ministry/Departments should provide a comprehensive list of agencies/offices under its control and a link (or a webpage) which contains all the suo-moto information desired in S. 4(1)(b).

  • These agencies / offices should be categorised as recommended in ARC report, viz. (i) constitutional body (ii) line agency (iii) statutory body (iv) public sector undertaking (v) body created under executive orders (vi) body owned, controlled or substantially financed and (vii) NGO substantially financed by the Government.

The RTI application is made online by choosing the relevant Public Authority on the website owned by IC/appropriate Government. The information seeker has the option of making the payment of fee through a payment gateway.

  •     Also there are various e-Governance initiatives (such as e-District, e-Municipalities) which are proposed to have an RTI module in the software application being developed for this project. The role of e-District kiosks would be to act as APIOs for the other State Govt. departments.

  •     Further, it is suggested that the appropriate Government amend relevant rules so as to facilitate ease in paying the requisite fees from any part of the country, as per S. 6(1). Some of the recommendations are as follows:

Define certain minimum channels for payment, some of which are convenient to people residing in other parts of the country. At the least, it should have the following channels:

    i) Indian  Postal  Order

    ii) Demand  Draft

    iii) Cash

    iv) Court  fee stamps

    v) Non-judicial  stamps

Introduce RTI envelopes, which would have an inbuilt cost of application fee.

Facilitate payment through Electronic Pay-ment Gateway while submitting RTI application on the web.

At this stage, it would be pertinent to mention that some of the above channels may lead to revenue loss for the State Government (for example payment made through Indian Postal Order /RTI envelopes would result in revenue accruing to the Central Government, whereas the revenue should accrue to the State Government in case the RTI application is for a Public Authority under the State Government.

However, it may be noted that this loss would be insignificant and the revenue accruing to the Central Government would be utilised for strengthening the Act through awareness generation, Knowledge Resource Centre, etc.

Raag & NCPRI Report:

Current  status  and  preliminary findings:

(2) Urban survey:

RTI applications have been filed in Public Authorities (PAs) of the Central Government, 10 State Governments and Delhi. However, the current analysis is based on applications received by 305 PIOs in 6 States, the Central Government and Delhi. These applications are addressed to the sample of public authorities as listed and also included district level public authorities. The objective was to assess the ease of accessing information through the use of the RTI Act. The applications filed asked for lists of RTI applicants and appellants that have filed applications in the respective PAs, along with data on the total number of applications and appeals the PA received since 2005. The application also requested details of the nature of responses, and copies of all the applications, the appeals, and orders of the first appellate authority.

To assess the ease of applications, the RAAG team tracked these applications for four months to asses speed of responses, nature of response, process of accessing information based on the response and finally, the first appeal process.

Some interesting findings emerging from the Urban Survey’s RTI filing process are :

Response rates – Nearly three fourths of the applications filed received responses.
 
However, the responses were somewhat slow in coming. In only a third of the cases where the responses were received, were received within the stipulated time period of 30 days.

Access to information – Of the total responses received, three-fourths furnished information directly or upon receiving payments for photocopying.

About half of the total applications filed received positive responses. However, many difficulties were encountered in payments for photocopying and other fee demanded.

Variations    across Centre,  State and District PAs:

Overall, the central government responded much more quickly and shared much more information than state governments. The Ministry of Environment and Forests and the Railways stand out for speediest responses on a large number of applications. Nearly %th of the RTIs filed were responded to within 30 days and in over half the cases, information was furnished .

At the state level, Meghalaya stands out as the quickest, the most compliant, and also the politest amongst all the states surveyed, in responding to RTI applications – the largest percentage of responses with all the information requested were received from Meghalaya.

Overall, districts appear to be much slower, and much less efficient in responding to RTI applications than states. Meghalaya and Karnataka stand out for quickest responses at the district level.

PA level analysis suggests that the police department is overall the slowest to respond to RTI applications. The largest number of rejections also came from the police.

Interestingly most of these come from Delhi police. Revenue department and the women and child department come a close second to the police.

The RAAG Team’s practical observations on the RTI filing process:

In filing and appealing this vast diversity of applications, the RAAG team confronted four major challenges, which would certainly act to stymie RTI applications by those with less resources than we had.

Plethora of state rules and payment modes – As we discovered through hard experience, every State has its own set of RTI fee and mode of payment rules. In some States, the application fee is Rs.10 and can be paid by IPO; in others it is Rs.20 and can only be paid by Demand Draft or a court fee stamp issued in that particular state. Many of our applications were thus returned, and we had to pore over the plethora of differing State rules to ensure that we got it right the second time. Similarly, some States require that only treasury challans be used to pay for requested information, which required many trips to Government offices and officials, but without much success.

Poor information on First Appellate Authority – In many states, it proved very difficult, if not impossible, to find the name and address of the First Appellate Authority for the departments in which we filed RTIs. Almost none were listed on the departmental website, and many are not listed on the State RTI or SIC portal either. This was especially true at the district level.

Appealing deemed refusals – While the RTI Act binds the PlO to inform the applicant who the First Appellate Authority is in case of a rejection, the absence of publicly available FAA information becomes especially problematic in deemed refusals. Since, in such cases, the applicant receives no response at all from the PlO, he or she is constrained to appeal to the FAA. Thus, if FAA information is not easily available, it becomes a particular handicap in taking forward an application.

Unfamiliarity with the concept of a PlO – Confirming the rural survey finding that many PIOs do not know they are PIOs, many of our West Bengal district applications came back unopened. The post master’s remark was that the application had been rejected by the District Collectorate, because no such official existed.

Gender bias – Given the dominance of male applicants, PIOs appear to be convinced that anyone who files an RTI application MUST necessarily be male. Although RAAG RTI applications were all filed by women, unfailingly all the responses addressed us as ‘Mr.’ Equally amusing, but a poor reflection on attention to detail in public authorities, is that most responses completely miss-spelt and distorted our names, even though our RTI applications had all been typed to eliminate any such possibility. Bincy thus variously became Binoy, Vinay, Biceny, Binno, Bissy, etc. !

Part C : Other News

 RTI query shows how undertrials suffer in jails:

All those who have been locked up while being completely innocent or have served more than half the prison terms as an under trial of the prescribed maximum sentence for their alleged crime are very ordinary people, without influence to raise a stink or money to hire pushy lawyers. To begin with they were all bewildered by the charge being brought against them, and then terrorised by the relentless grind of the wheels of justice, and finally left rotting behind bars with their spirit crushed. There are as many as 14 under trials and five convicts in judicial custody in just one jail of Tihar for the past five years because their appeal is yet to be heard by the Delhi High Court. These facts have come to light thanks to flurry of pointed questions under the Right to Information Act by a public-spirited lawyer, Manish Khanna.

Hawkers in Mumbai  :

BMC wards give different answers to a query raised under RTI application like blind men trying to figure out the shape of an elephant. Jagdeep Desai wanted to know from the civic body as to what is the definition of ‘legal hawker’. But the confusing replies he got from different departments illustrate how clueless they are, and how lightly the BMC is treating the menace.

The Superintendent of Licence chose not to answer the query, stating that “the matter is sub-judice”. D/ ward and K/West Ward authorities replied that a hawker s a “person who sells goods kept on his head m ving around the street or road, and a legal hawke is one who has licence u/s.313 of the Mumbai Municipal Corporation Act”. S/Ward requested Desai to collect required information/ documents on payment of necessary charges from respective senior inspector (encroachment) of the ward while B/Ward and E/Ward replied that “the necessary information has already been furnished to you by the Superintendent of Licence”.

Desai is perplexed that while one BMC official did not answer the RTI query citing legal obligations, other replied readily. This is a complete contradiction. It seems that the information is being held back on purpose, because they have an issue with the definition of a legal hawker. Otherwise, all the replies to questions raised in the application should have been the same.

Chief  Justice of India under RTI :

In many issues in past under this column, I have covered the huge controversy and litigation which was going on re. applicability of RTI Act to the office of CJI. After two years of stiff resistance, the Supreme Court finally replied to a Right to Information query, saying that its judges were declaring their assets to the Chief Justice of India (CJI).

President of India on RTI :

The 4th Annual RTI Convention hosted by Central Information Commission was inaugurated on 12th October by Smt. Pratibha Oevisingh Patil, the President of India. In her speech she stated:

“There is a fine balance which needs to be maintained between application under the Right to Information to public authorities and also ensuring that public authorities are not flooded with applications, some of them frivolous nature, which could over-whelm their ability to respond in time. She said that institutions were increasingly coming under” greater scrutiny and information was no longer the preserve of a few and there is greater emphasis on transparency of work and accountability”.
 
Elaborating on the initiatives taken by the government, minister of state for personnel, public grievance and pensions, Prithviraj Chavan said a policy on data sharing and accessibility was under’ active consideration’. He added, “A large amount of Scientific, technical and economic data is generated with public funds. The policy will encourage the data to be prepared in standardised, digital form so that all non-sensitive data can be shared for legitimate use”.

Statistics:

  • Number  of RTI queries  filed in Maharashtra

2006   1.4 lakh2007   3.16 lakh
2008   4.16 lakh   2009   2.5 lakh (6 months)

  • Projection  by the end of 2009 around  5 lakh
  • 17-18 lakh queries  all across India

RTI’s  4th anniversary function on Monday, 12-10-2009 in Mumbai:

Private bodies should also be brought under the ambit of the Right to Information (RTI) Act, Bombay High Court judge justice Ohananjay Chandrachud said on Monday. “We cannot disempower our-selves, thinking that private bodies do not come under the purview of the Act.”

Celebrating four year of the sunshine act, RTI activists appealed that its scope be widened by including the private sector in the public service under it. “When the act is for fighting corruption, why not have it for the private sector too?” Ashok Rawat, an activist, asked.

“Disinvestment and deregulation have seen the government handing over public services to private hands. Now, private players are just as important as government. The RTI Act is not code to give information, but a constitutional right of a person to know about something. Right to Information is now beyond the scope of disclosure” said Chandrachud.

Introduced in 1766 in Sweden, the RTI Act has been adopted in 85 countries with varied levels of implementation. Activists also complained about the roadblocks public information officer (PIOs) created in their attempt to scuttle information. “The most common argument is that the information asked for does not come under the definition of the Act,” said Narayan Varma, a trustee of PCGT, an NGO working to spread the RTI awareness.

“Unfortunately, bureaucrats themselves train PlO how not to disclose information” said Rawat.

“One needs to understand that access to information is means to an end. This means should be eliminated as disclosure should be voluntary,” said Chandrachud.

“We are sensitising our officers. There is a need to institutionalise experience at the state level, jut as it had been at the Centre by making Shailesh Gandhi the Central Information Commissioner, so that there is a uniform pattern that will speed up the process of deliverance.”

Some NGOs, like Mahiti Adhikar Manch and PCGT, plan to set up a panel to ensure voluntary disclosure of information, which is part of the Act.

ORDERS OF CIC

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Right to Information

                                         PART A: ORDERS OF CIC

  • Section 18 of the RTI Act




A very sad and no doubt unusual and unprecedented case has
come up before CIC Shailesh Gandhi.

The appellant, Mr. Surinder Puri of Delhi, sought certain
information from the Municipal Corporation of Delhi (MCD) regarding one
property, all around which there had been encroachment.

The PIO did not provide the information. First, the AA
directed the PIO to provide the requisite information as available on record.

In the second appeal, Mr. Surinder Puri had stated:

Correct and complete Information not provided within the
stipulated time. The PIO tried to shift the onus for providing the information
on some other public authorities and if the onus for providing this
information lay on them, why this application was not transferred to them.

In the decision dated 29.12.2009, the CIC directed the PIO
to give the appellant the length and breadth of the said plot after obtaining
it from the building department before 12 January 2010.The Commission also
directed the PIO to arrange a joint inspection of the area with MCD House Tax,
Building Department and Engineering Department with a copy of the sanctioned
building plan on 12 January 2010.

On 12.01.2010, the inspection became unruly. The Commission
received a letter dated 28.01.2010 from the Appellant Mr. Puri wherein he
alleged physical assault and brutal manhandling of two office bearers of the
Public Grievance and Welfare Society (PGWS), who were among the other members
who accompanied the Appellant for the joint inspection. In the letter, it has
been stated that the inspection was initiated in the presence of MCD
officials. According to the letter, there were seven police constables of
Sarai Rohilla Police Station who were also present at the inspection site. The
MCD officer is said to have only allowed two of the society members to inspect
the property site. Therefore, only two office bearers of PGWS went in for the
inspection on the Appellant’s behalf. It has been alleged that while the
inspection was on, Municipal Councilor Mr. Satbir Singh, along with his
accomplices (reportedly son and nephew), came with a mob of 30 people and
inflicted a brutal physical assault with an iron rod on one office bearer,
which is said to have caused him a fracture on the nose bone and that the
second office bearer was slapped and bullied. Furthermore, it has been alleged
that when an attempt was made to file a FIR (First Information Report) against
the said attack, the case was only registered after the society lodged a
complaint with the CMM (North).

On the basis of the above letter, the Commission registered
a complaint in accordance with Section 18(1)(f) of the RTI Act.

The Commission writes:

If the allegations made by the Complainant were true, it
meant that persons lawfully exercising their rights under the Right to
Information Act were being unduly harassed and physically assaulted. The
allegations that the assault was carried out in the presence of police and MCD
officials led to suspicion of a probable collusion. The Commission has been
given the powers to initiate an enquiry in a complaint under Section 18(2) of
the RTI Act, when enquiring into a complaint under Section 18(1). Section
18(3) of the RTI Act also confers the powers of a Civil Court on the
Commission when it is inquiring into any matter under Section 18.

Considering the gravity of the matter, the Commission wrote
letters dated 18.02.2010 to the Commissioner of Police (CP) and Commissioner
of the Municipal Corporation of Delhi (MCD), informing them about the matter
and requesting them to inquire into the matter and submit a report to the
Commission before 24.02.2010.

The CP instead of inquiring into the matter and submitting
a report, filed a writ petition in the High Court against the direction of the
Commission. In the writ petition, the CP has challenged the power of the
Commission, stating that the Commission has ‘over reached the powers’
conferred on it under the RTI Act and the letter sent by the Commission to the
CP is bad-in-law. The Commissioner of MCD did not care to reply even despite
telephonic reminders to his office.

The Commission decided to call some of the people present
to understand whether a RTI Applicant was deliberately obstructed from
undertaking inspection, which had been ordered by the Central Information
Commission and whether the assault on the two persons was with the intention
of preventing them from undertaking inspection. It summoned 7 different
officers who were present on 12.01.2010 and the appellant and his
representatives.

During the inquiry, each person deposing before the
Commission was asked to come in one at a time and once they had finished their
account, they were allowed to sit and listen to the deposition of the others.
Each person was asked to narrate the sequence of events on the day of
inspection, starting from the time that they all met at the MCD Office and
then proceed to the inspection site and subsequent events. At the end, the
persons who had deposed were allowed to give their clarifications or
contradict the statements of the others.

The statements of 6 persons who were present were recorded
and two more were called in later, so 8 in all. The CIC made the following
observations on points common to the deposition of all:

  • as some tension was
    anticipated, both parties had requested the Police to be present during the
    inspection.


  • crowd had gathered
    before the Inspection could be completed and persons were asking questions
    to the representatives of the Appellant.


  • some level of
    altercation took place either at the inspection site or just away from it on
    the Main Road. Even the MCD officials have admitted that there was some
    pushing around and arguments.


  • the inspection could
    not be completed due to the presence of the crowd. It was completed at a
    later point in the absence of the Appellant or his representatives but in
    the presence of a larger Police force.

    •     Mr. Ajay Kumar (one representative of PWGS) had sustained injuries and had been taken to Hospital by the Police.

    The Commission made the following Decision:

    The Commission finds from the statements that Po-lice personnel were present during the whole epi-sode and were either unable to or unwilling to take any action to intervene and disperse the crowd. This points to a very sorry state of affairs in terms of law and order. Trouble had been anticipated at the site and when it did start, the Police was unable or un-willing to take any action. The incident took place on 12 January, 2010. The Commission requested for a report on the incident before 24.02.2010, which the Police has not submitted. Now it is over ten weeks since the incident occurred, but the police did not give a report but instead deemed it a fit case to op-pose in a writ petition.

    Complaint is allowed.

    The appellant was prevented from carrying out the inspection to arrive at the facts. MCD officers and police officers were present but could not ensure that the inspection could be carried out.

    With regard to the allegations of physical assault, the Commission finds that offences under the Indian Penal Code may have been committed in the pres-ent case against the representatives of the Appel-lant. However, the Commission as a statutory body does not have the powers to investigate allegations against offences under the Indian Penal Code or take action under the Code of Criminal Procedure. When such incidents are brought to the notice of the Com-mission, the Commission can initiate an inquiry at its level under Section 18(2) of the RTI Act and it has to rely on external agencies such as the Police and the MCD to undertake part of the inquiry and assist the Commission. As a statutory body, the Commission can work effectively only if it gets cooperation from other Departments of the Government, especially those which are trained in investigative methods. If statutory bodies such as the Delhi Police and the Municipal Corporation of Delhi decide not to assist the Commission in the performance of its statutory functions, the Commission will find it difficult to dis-charge its duties under the RTI Act.

    Neither the Commissioner, MCD, nor the Commis-sioner, Delhi Police, have extended cooperation in the conduct of this inquiry. The Commission expresses the hope that the Police and the MCD will do their duty and help statutory authorities in performing their functions, failing which it would not be possible for citizens to exercise their fundamental right to information to ‘contain corruption and to hold Governments and their instrumentalities accountable to the governed’, which is the objective and promise of the Right to Information Act 2005.

    Citizens rightly expect that the Information Commission must ensure their protection when they are using Right to Information to unearth and challenge illegal activities. It is with deep concern that I admit that I am unable to take any further action as my powers under the Act have now been rendered completely ineffective by the non-cooperation of the Police and the MCD. I hope that all statutory agencies will cooperate to ensure that the rule of law prevails.

    (Mr. Surinder Puri, Delhi vs. PIO, MCD, Delhi: Decision No. CIC/SG/C/2010/000163/7237 dated 25.03.2010)

        Section 4 of the RTI Act

    As stated often in my articles, Section 4 of the RTI Act is the mother of all Sections in the Act. If the obligations on public authorities cast therein are complied with, the need to furnish RTI applications can get considerably reduced. In this case, even the State Bank of India, the largest bank of the country, has not complied with its obligation under this Section.

    The Order states:

    During the hearing, it was brought to our notice that the State Bank of India as a public authority has not yet published details about the monthly remuneration received by each of its officers and employees, including the system of compensation as provided in its regulations in terms of the mandatory obligations cast on it under Section 4(1)(b)(x) of the RTI Act. If it is true, it is unfortunate; a major public authority like the SBI is expected to be a trendsetter in implementing RTI Act. We direct the CPIO to bring it to the notice of the authorities in the SBI immedi-ately to ensure that such details about each of its officers and employees are immediately put up in the public domain through its website at all lev-els and certainly not later than a month from the receipt of this Order.

    The Order also directs the PIO to furnish information on the following points to the applicant, Shri Chetan Kothari, which was denied by the PIO and the AA:

        Monthly salary and wages paid to each employee, by name, in the State Bank of India, Mumbai Zone as at the end of 31st March 2009; [This information should be given in electronic form in a CD as the number of employees might be too large]

        Total number of safe deposit lockers in the Mumbai Zone as on the above date; and

        A categorical statement to the effect that the names of the CPIO and the Appellate Authority have been duly displayed in every branch of the Mumbai Zone.

    It may be of interest to the readers that CIC conducts many appeals by video conferences. This one was heard through video conferencing. The Appel-lant was present in the Mumbai studio of the NIC whereas the Respondents were present in the Bandra (Mumbai) studio.

    (Shri Chetan Kothari, Mumbai vs. CPIO, State Bank of India, Bandra Kurla Complex, Mumbai: CIC/SM/ A/2009/001479 decided on 01.04.2010)

        Postal Order

    In spite of such a mode prescribed in the Rules, the CPIO of UCO Bank refused to accept the application since it was accompanied with a postal order by way of application fee and declined to provide the information. The AA endorsed the decision of the CPIO. CIC Satyananda Mishra in his Order writes:

    “We strongly object to the decision of the CPIO sup-ported by the order of the Appellate Authority that the Indian postal order is not an accepted mode of payment of application fee under the RTI Act. The rules framed by the Government of India in this regard are quite clear and it is unfortunate that nearly 3* years after the Indian postal order was introduced as a method of payment, these authorities should be rejecting an application from a citizen by disal-lowing his postal order. During the hearing, the Respondents expressed regrets on behalf of the CPIO and the Appellate Authority but that hardly helps. The rejection of his application and, later; his appeal on the sole ground that he had decided to pay his application fee by postal order has caused avoidable harassment and financial loss to the Appellant. We, therefore, direct the CPIO to explain in writing if he has reasonable cause for his decision to disallow the application of the Appellant. If we do not receive his explanation within 15 working days from the receipt of this order, we will proceed to consider impos-ing the maximum penalty of Rs. 25,000 on him for having denied the information on thoroughly wrong grounds.

    The appellant in this appeal had also submitted that the UCO Bank had only one Appellate Authority lo-cated in their corporate office in Kolkata and very few CPIOs in the field making it extremely difficult for information (* Actually it is nearly 4 years) seek-ers to approach these authorities for information. Besides, it appears that the Appellate Authority does not give any opportunity of hearing to the Appellants before deciding the appeals. The Respon-dents admitted that indeed there was only one Appellate Authority for the entire Bank having thou-sands of branches all over India and that the Appellate Authority decided appeals without providing any opportunity of hearing to the Appellants. This is both unfortunate and unacceptable; nearly 5 years into the implementation of the Right to Informa-tion (RTI) Act, a responsible public authority like the UCO Bank must not treat this law with such casual abandon. Section 5 (1) of the Right to Information (RTI) Act clearly mandates every public authority to appoint as many CPIOs in all administrative units or offices under it as may be necessary to provide information to persons requesting for the information under this Act. Similarly, Section 19(1) requires that such officers senior in rank to the CPIOs should be identified as Appellate Authority for receiving and deciding appeals. We expect that the UCO Bank shall, within a month from the receipt of this Order, designate larger number of CPIOs to cater to the information need of the citizens and designate more appellate authorities, preferably, in the Zonal offices, so that Appellants do not have to go all the way to its corporate office for filing appeals. We also direct the Appellate Authority to provide an opportunity of hearing to the Appellants before passing any order on their appeals.

                                     Part B: The RTI ACT

    On January 20, 2010, the Ministry of Personnel, Public Grievances and Pensions [Department of Personnel & Training (DoPT)] issued one Office Memorandum (OM) on the subject of maintenance of records in consonance with Section 4 of the RTI Act.

    In part A, I have summarised one Order on Section 4 and commented on its importance. In Part 3, the letter of SCIC talks of Section 4. I request all readers to bring this OM of DoPT to the notice of public authorities they are connected with such as PSUs, Nationalised Banks, Government-owned insurance companies and so on. Said OM reads as under:

    The Central Information Commission in a case has highlighted that the systematic failure in maintenance of records is resulting in the supply of incomplete and misleading information and that such failure is due to the fact that the public authorities do not adhere to the mandate of Section 4(1)(a)of the RTI Act, which requires every public authority to maintain all its re-cords duly catalogued and indexed in a manner and form which would facilitate the Right to Information. The Commission also pointed out that such a default could qualify for payment of compensation to the complainant. Section 19(8)(b) of the Act gives power to the Commission to require the concerned public authority to compensate the complainant for any loss or other detriment suffered.

        Proper maintenance of records is vital for the success of the Right to Information Act but many public authorities have not paid due attention to the issue despite instructions issued by this Department. The undersigned is directed to request all the Ministries/Departments, etc,. to ensure that requirements of Section 4 of the Act in general and clause (a) of sub-section (1) thereof in particular are met by all the public authorities under them without any further delay.

    At this stage, I may also refer to THE PUBLIC RE-CORDS ACT, 1993 (PRA), which regulates the man-agement, administration and preservation of public records of the Central Government, Union Territory Administrations, public sector undertakings, statutory bodies and corporations, commissions and committees constituted by the Central Govern-ment or a Union Territory Administration and mat-ters connected therewith or incidental thereto. The rules (THE PUBLIC RECORDS RULES, 1997) are also enacted under this PR Act.

    Under the said Act and Rules also duty is cast on all entities as referred to above (and which are also entities covered under the RTI Act) to regulate etc. of the public records (extensively and in inclusive manner defined) and to furnish an Annual Report to the Director General or head of the Archives in the pre-scribed form.

    It may be noted that this Act also provides the regulations for destruction of Public Records. Very often, in response to the request to the PIO to provide some records, the reply is received that the same are destroyed. The applicant then should ask whether compliance is made to the PR Act and the PR Rules. It may be noted that penalty for contraventions is very heavy provided in Section 9 of PR Act as under:

    Whoever contravenes any of the provisions of Section 4 or Section 8 shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to ten thousand rupees or with both.

                                  
                                 Part C: OTHER NEWS

        Important Pronouncements by the Commission:

    (Continuing from January 2010)

    When Shailesh Gandhi, CIC, was in the BCAS of-fice some months ago addressing RTI activists and journalists, he distributed a compilation of 8 important and profound pronouncements by the Central Information Commission. Herewith 7 & 8 (the last two) thereof:

     7.   Third Party

    It is clearly stated in Section 11 (1) that ‘submission of third party shall be kept in view while taking a decision about disclosure of information’. Section 11 gives a third party an opportunity to voice its objections to disclosing information. The PIO will keep these in mind and denial of information can only be on the basis of exemption under Section 8 (1) of the RTI Act.

    The test of public interest is to be applied to give information, only if any of the exemptions of Section 8 apply. Even if any exemption applies, the Act enjoins that if there is a larger public inter-est, the information would still have to be given. There is no requirement in the Act of establishing any public interest for information to be obtained by the sovereign Citizen; nor is there any require-ment to establish larger Public Interest, unless an exemption is held to be valid. Insofar as looking at the credentials of the applicant are concerned, the lawmaker has categorically stated in Section 6 (2), ‘An applicant making a request for information shall not be required to give any reason for requesting the information or any other personal details except those that may be necessary for contacting him.’ Since the law categorically states as above, it is clear that the credentials of the applicant are of no relevance, and are not to be taken into account at all when giving the information. The truth remains the truth and it is not important who accesses it. If there is a larger Public Interest in disclosing a truth, it is not relevant who gets it revealed.

    If the third party objects to giving the information, the Public Information Officer must take his objec-tions and see if any of the exemption clauses of Sec-tion 8 (1) apply. If any of the exemption clauses ap-ply, the PIO is then obliged to see if there is a larger Public interest in disclosure. If none of the exemp-tion clauses applies, information has to be given.

      8.  Assets of Public Servant

    The Commission can allow denial of information only based on the exemption listed under Section 8 (1) of the Act.

    Under Section 8 (1) (j), information which has been exempted is defined as:
     “Information which relates to personal information, the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the cause may be, is satisfied that the larger public interest justifies the disclosure of such information:”

    To qualify for this exemption, the information must satisfy the following criteria:

       1. It must be personal information

    Words in a law should normally be given the meanings given in common language. In common lan-guage we would ascribe the adjective ‘personal’ to an attribute which applies to an individual and not to an Institution or a Corporate. From this it flows that ‘personal’ cannot be related to Institutions, organisations or corporates. (Hence we could state that section 8(1)(j) cannot be applied when the in-formation concerns institutions, organisations or corporates).

        2. The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have some relationship to a public activity.

    Various Public Authorities in performing their func-tions routinely ask for ‘personal’ information from Citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a Public Authority as an employee, or asks for a permission, license or authorisation, all these are public activities. The information sought in this case by the appellant has certainly been obtained in the pursuit of a public activity.

    We can also look at this from another aspect. The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a Citizen. In those circumstances, special provisos of the law apply, always with certain safe-guards. Therefore it can be argued that where the State routinely obtains information from Citizens, this information is in relationship to a public activity and will not be an intrusion of privacy.

    Therefore we can state that disclosure of information such as assets of a Public Servant, which is routinely collected by the Public Authority and routinely provided by the Public Servants, – cannot be construed as an invasion of the privacy of an individual. There will only be a few exceptions to this rule, which might relate to information which is obtained by a Public Authority while using ex-traordinary powers such as in the case of a raid or phone-tapping. Any other exceptions would have to be specifically justified. Besides, the Supreme Court has clearly ruled that even people who aspire to be public servants by getting elected have to declare their property details. If people who aspire to be public servants must declare their property details, it is only logical that the details of assets of those who are public servants must be considered to be disclosable. Hence the exemption under Section 8(1)(j) cannot be applied in such a case.


        RTI Act amendments:

    Very interesting and significant exchange of corre-spondence has taken place between PM and Mrs. Sonia Gandhi: Times of India on April 10, 2010 has made following report:

    Against PM wish, Sonia stood ground on ‘no RTI changes’

    Congress Chief Sonia Gandhi firmly resisted changes to the RTI Act despite the government wanting to tinker with the transparency legislation, an RTI query reveals.

    Amendments to the RTI Act have been in the news for some time with activists protesting against the government’s move to exempt disclosure of Cabinet papers, internal discussions and judiciary. Sonia, in a letter dated November 10 had voiced this concern and said the government should “refrain from accepting or introducing changes in the legis-lation… in my opinion there is no need for changes or amendments”.

    The letter, accessed under RTI by activist S C Agar-wal, said, “It will of course take time before the momentum generated by the Act makes for greater transparency and accountability in the structures of the government. But the process has begun and it must be strengthened… It is important, therefore, that we adhere strictly to this original aims and re-frain from accepting or introducing changes in legislation on the way it is implemented that would dilute its purpose. In my opinion, there is no need for changes or amendments. The only exceptions permitted, such as national security, are already well taken care of in the legislation.”

    In response, the PM on December 24 stood his ground that certain issues could not be dealt with without changes in the Act. Among the issues cited by the PM were that the CJI had pointed out that the “independence of the higher judiciary needs to be safeguarded in the implementation of the Act. There are some issues relating to disclosure of Cabinet papers and internal discussions”.

    The PM assured that while the government was tak-ing steps to improve dissemination of information and training of personnel, “there are some issues that cannot be dealt with, except by amending the Act”. “The Act does not provide for the constitution of benches of the CIC though this is how the busi-ness of commission is being conducted,” the PM had said.

        Editorial in Times of India of India of April 14, 2010

    The RTI Spectre

    The act is working. Don’t tamper with it

    Few of our public institutions foster a culture of transparency and accountability. The Right to In-formation (RTI) Act was enacted in 2005 to change tradition of opacity and make governance a trans-parent process. The Act’s been working reasonably well and has become useful tool for a large cross-section of civil society to examine the workings of government. Since in the process institutional failings get exposed as well, there is resistance to the RTI culture from various quarters including the government.

    Many public institutions that come under the ambit of the Act now want its radical edge blunted. Many state information commissions are starved of funds and personnel, which may lead to a collapse of the institution itself. Pleas to amend the Act must be seen in this context and handled with caution. As Congress president Sonia Gandhi wrote in her letter to the prime minister, “It is important that we adhere strictly to its (RTI Act) original aims and re-frain from accepting or introducing changes in the legislation on the way it is implemented that would dilute its purpose.” Sonia’s intervention has come in the wake of a letter written by the Chief Justice of India (CJI) to the Prime Minister. The letter states that information concerning the functioning of the judiciary should be exempted from the scope of the Act to safeguard its independence.

    The CJI’s apprehensions about possible misuse of in-formation of “a highly confidential and sensitive nature” are valid. But should, for example, information on in-house inquiry proceedings regarding allegations against sitting judges or appointment of judges in high court be considered sensitive and barred from the public eye? Should not the apex court be in the forefront of an initiative to make the working of public institutions transparent? The push to amend the RTI Act came first from the government itself. Last year, the government proposed amendments to the Act so that “frivolous and vexatious” applications could be discarded and disclosure of file notings exempted. The amendments failed to pass muster with state information commissioners, but they could be revived at any time.

    To give teeth to the RTI legislation, the government must beef up infrastructure at the information commissions. More personnel and infrastructure must be created fast at the commissions to avoid a break-down. There are already more than 11,000 cases pending with the Central Information Commission. The situation is worse in many states. The focus must be on a climate of openness, rather than trying to restrict the scope of RTI Act.

        Right to Information – A route to good Governan    ce

    The book under above title was published by BCAS Foundation in 2007. Its updated, enlarged and re-vised edition authored and compiled by Narayan Varma was launched by BCAS on 25th March by Shri TN Manoharan, former president of ICAI and the director of Satyam Computer Services Ltd and now Padma Shri.

    Same was re-released by Public Concern for Governance Trust (joint publishers of this edition) on 7th April through the hands of Dr. Suresh Joshi, the Chief Information Commissioner, Maharashtra. The function was extensively covered by the Press. Hereunder is what DNA reported on 08.04.2010:

    •     RTI replies may soon be at your doorstep in 7 days State information commissioner will write to CM for faster disposal of cases


    If State information commissioner Suresh Joshi has his way, information sought under the Right to Infor-mation (RTI) Act will be made available to citizens in seven days, and not the stipulated 30 days.

    Speaking at the launch of RTI activist Narayan Varma’s book Right to Information – A Route to Good Governance on Wednesday, Joshi said he will be writing to the chief minister and the chief secre-tary asking for a change in the Act to ensure faster dissemination of information.

    Joshi said that in only 15% of the total applications, information officers may need more than a week to respond. “There is no reason for all applicants to wait for a month to get a reply,” Joshi said, adding, “I will also ask the chief minister and chief secretary to compliment officers who give information within seven days.”

    Talking about the success of the RTI Act, Joshi said corruption has gone down by 20%, “The RTI Act has increased accountability and transparency. Bureau-crats cannot shirk their responsibilities anymore.”

    He said the government needs to appoint senior officers as first appellant authorities (FAA). “If there is better work at that level, 50% of our work will re-duce,” he sad.

    Talking about Varma’s book, Joshi said it was a one-stop guide for all RTI related queries. The book contains information on prominent cases and judgments given by various commissioners. “The idea is not only to create awareness, but also to help peo-ple understand the Act,” Varma said.

        Information under RTI now in just 15 days

    True to his words as reported in above, Dr. Joshi wrote to CM on April 8. Hereunder news item in In-dian Express of 22.04.2010:

    CITIZENS now may not have to wait for 30 days to get details under the Right to Information Act. In a bid to make Maharashtra progressive by setting a good trend in RTI, State Information Commissioner Suresh Joshi has requested Chief Minister Ashok Chavan to issue a resolution to make information available in 15 days.

    With the State receiving 4.4 lakh applications from citizens – considered higher than in the US and Mexico – and disposal rate of more than 95 percent Joshi said it was about time that Maharashtra moves to giving information earlier than the 30-days limit.

    In 2002, before the Central Government accepted the Act, Maharashtra had its own RTI Act, which required providing information within 15 days.

    Therefore, there shouldn’t be a problem in going back to the original process. “It is not difficult to give details or documents in 15 days as everything is available in the department itself. Officials can send letters to applicants in seven days time to take the information after paying necessary amount and by the 15th day they can hand over the detail,” Joshi said.

    The letter – a copy of which is available with The Indian Express written to Chavan on April 8 – states that a Government Resolution should be issued urging officials to try hard and give information in 15 days. Chavan is expected to reply to the letter in the next few weeks.

    Although officials doing so cannot be given monetary incentive, head of departments could be suggested to take this note while considering promotions, the letter states.

    “There are Confidential Reports prepared for officers by their seniors and they can mention that due to exemplary services in disposing RTI queries he could be considered for accelerated promotion,” Joshi said. While amendment to this extent in the act will require Center’s approval, Joshi said that Maharashtra can experiment and see if the effort is successful.

    “If information could be given in 15 days and all departments follow the rule instead of waiting for 30 days, then the state can set an example and then central government could take the lead and make a similar suggestion for other states,” Joshi said.

    While Joshi is happy with the massive use of the RTI by citizens he has expressed dissatisfaction in section 4 of the act which requires voluntary disclosure of information on part of government.

    NSE is a Public Authority

    High Court of Delhi in a decision dated 15th April, 2010 have held that NATIONAL STOCK EXCHANGE OF INDIA LIMITED is a “public authority” as it is an “authority or institution of self government’ constituted or established by notification or order issued by the appropriate Government. It is also held that the petitioner is controlled by the appropriate Government.

    Detailed reporting of this landmark decision will be made in the next month’s article. In Mumbai, we are moving Bombay High Court, where Writ petition is pending, to decide similarly in the matter of BSE.

ORDERS OF CIC

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Right to Information

  •  
    Section 2(f) of the RTI ACT: INFORMATION     Section 2(f) which defines the word
    ‘information’ provides as follows.

In this Act, unless the context otherwise requires.


(f) ‘Information’ means any material in any form,
including records, documents, memos, e-mails, opinions, advices, press
releases, circulars, orders, logbooks, contracts, reports, papers, samples,
models, data material held in any electronic form and information relating
to any private body which can be accessed by a public authority under any
other law for the time being in force;


“According to the Commission, ‘information’ which is
requested u/s.6(1) of the RTI Act refers to only that information which is
available on record. Such information cannot be created. The terms ‘opinions’
and ‘advices’ which are brought within the purview of ‘information’ u/s.2(f) of
the RTI Act are opinions or advices that are already present on record. It does
not mean that if the opinion or advice of the public authority is sought
u/s.6(1) of the RTI Act, the said opinion or advice shall have to be created. It
must be an opinion or advice which is already on record. The creation of
information by the public authority every time such information is sought
u/s.6(1) of the RTI Act shall render governance impossible. However, the
Commission has observed that there are certain practices within a department
that are peculiar to that department. Such practices or understanding within the
department may not be present in a recorded form. Where information sought
u/s.6(1) of the RTI Act pertains to such general practices or understanding,
then the same must be provided to the applicant, even if such practices or
understanding are not specifically on record.”

The Appellant in the case before the Commission had cited one
order of the Supreme Court of India in the matter of Khanapuram Gandaiah v
Administration Officer & Ors. 2010(1) ID 287 (SC). The Supreme Court of India,
while dismissing the petition, interpreted section 2(f) of the RTI Act and
observed that an applicant u/s.6 of the RTI Act can get any information which is
already in existence and accessible to the public authority under law. The
applicant is entitled to get a copy of the opinions, advices, circulars, orders,
etc but he cannot ask for any information as to why such opinions, advices,
circulars, orders, etc have been passed, especially in matters pertaining to
judicial decisions.



Note: I have not covered in this reporting, the facts of the
case as same are not required to bring out the analysis and interpretation
made of the provisions of Section 2(f).


[Dr. Jitendra Nath Gupta vs. PIO & SDM (Civil Lines):
Decision No. CIC/SG/A/ 2010 / 00 2398/ 9878 of 22.10.2010] [2010(2) ID 593 (CIC,
DELHI)]

? Mr. Virajoo Kumar had asked Telecom Regulatory Authority of
India (TRAI) to provide him certain information in respect of Mobile no.
09304549785..

PIO of TRAI replied to inform the applicant that no such
information was being maintained by TRAI.

During the hearing before the Commission, the representative
of TRAI submitted that TRAI can call for such information from the service
provider as it needs for its own purposes by passing an order in writing but the
information requested for by appellant is not wanted by TRAI and therefore, it
is not bound to call for this information from the service provider.

As per the clause 2(f), information also includes
‘information relating to any private body which can be accessed by a public
authority under any other law for the time being in force.’ In other words, if
TRAI has authority under any law to access information from Reliance Company, it
can access that information for onward transmission to the information seeker.
According to Shri. Abraham, u/s.12of the TRAI Act,1997, TRAI has the authority
to call for information from the service provider by passing an order in writing
but this information should be such as is needed by TRAI for its own purpose. In
other words, according to him, TRAI cannot seek information from a private
entity for servicing the RTI Act.

Hereunder I reproduce paras 6 to 9 of the
decision –

6. Clause (a) of section 12(1) is reproduced
below –

‘(a) call upon any service provider at any time to furnish in
writing such information or explanation relating to its affairs as the Authority
may require’

Shri Abraham lays emphasis on the last 05 words of the above
clause viz. ‘as the Authority may require.’ It is his interpretation that this
expression means that TRAI can call for information only when it needs it for
its own purposes and not for the purposes of supplying it to the information
seeker under the provisions of the RTI Act.

7. We are afraid, the construction put on clause (a) by Shri
Abraham is not correct. According to us, the true meaning of the expression ‘as
the Authority may require’ is ‘as the Authority may direct’. In other words,
TRAI can call for such information from a private entity as it needs for its own
purposes as also for the purpose of servicing the RTI Act.

8. The above interpretation also finds support in the
Judgement dated 25.9.2009 of the Delhi High Court in WP (civil) No 765 of 2007 (Poorna
Prajna Public School Vs CIC) wherein High Court favoured wider interpretation of
the word ‘information’. The relevant part of para 16 of the judgement is
extracted below: –

“Further, information which a public authority can access
under any other law from private body is also ‘information’ u/s.2(f). The public
authority should be entitled to ask for the said information under law from the
private body. Details available with a public authority about a private body are
‘information’ and details which can be accessed by the public authority from
private body are also ‘information’ but the law should permit and entitle the
public authority to ask for the said details from a private body”.

DECISION

9. In view of the above, we are of the opinion that the
appellant is legally entitled to seek the information from TRAI u/s 2(f) of the
RTI Act and TRAI is mandated to call for such information from the service
provider (Reliance Company in this case) as mentioned hereinabove and furnish
the same to the appellant. We respectfully disagree with the view taken by other
Single Benches of the Commission.

[Virajoo Kumar vs. TRAI: Decision No. CIC/DS/ C/
2010/00 332 decided on 25.10.2010] [2010(2) ID 661(CIC DELHI)]

                          

                                                        PART B: The RTI Act, 2005

In the last issue (Feb 2011) I had reported on the directions issued by the Central Information Commission (CIC) on 09.12.2010 to all the Central Government’s Public Authorities through the Min-istries & Departments of Government of India. It appears that landmark initiative taken by the CIC is not bearing good fruit.

    Of the 1,600 public authorities (government departments, apex bodies, autonomous organisations and ministries) listed by the Commission, only 125 have obeyed its direc-tive and appointed transparency officers. The macro picture at the central level is no better with only 34 of 70 odd ministries and apex bodies appointing transparency officers. The ministries of finance, home and culture and the Prime Minister’s Office have done nothing except expressing their intention to appoint a transparency officer.

    The Department of Personnel and Training (DoPT), the parent department of the Commission, has taken exception to the directions and said that by giving such directions to departments, CIC has overstepped its brief. In its letter to the authority, DoPT has said that by appointing transparency officers CIC was trying to ‘create another bureaucracy’.

    CIC, however, feels that it is only trying to assign another responsibility to the same set of bureaucrats present in the government departments. Speaking to ET, Chief Central Information Commissioner Satyanand Mishra said, ‘We are examining the matter. The Com-mission does not have the powers to withdraw any of its orders. At the same time we don’t need to justify our orders. If any department has an objection it can only take legal recourse. Over the past few years in our deliberations as Information Commissioners, we had found that had the Ministries voluntarily disclosed information many applications would not have been filed. This is why the directive was given.’

Information on & Arround

  •     Gandhigiri for getting information:

Four members of Deshbhakti Andolan distributed roses to employees at the Charity Commissioner’s office in Worli one day in early February.
Deshbhakti Andolan resorted to Gandhigiri after the Charity Commissioner’s Office, in response to a query filed under the Right to Information Act by one of the andolan members, said it had lost pertinent files and papers.
Charity Commissioner on complaint made has assured that the file would be traced and information shall be provided.

  •     Working at the Commissions:

The Public Cause Research Foundation has analysed 79,813 decisions passed by the CICs and SICs across the country. The researchers found that in 59,631 cases, the information was delayed, but only 1,896 officials were punished. The report said had these penalties been imposed, the exchequer would have got nearly Rs. 86 crore during 2009-10. ‘Twenty-six Commissioners across the country did not impose a single penalty in the whole year’

  •     Working at crematoria in Mumbai:

Activist Anil Galgali, who sought information under the Right to Information Act, said those who register the number of deaths in the crematoria were over-worked.
There is a paucity of staff at the crematoria run by the municipal administration. With 36 posts lying vacant in the 46 crematoria run by the BMC, the delay in getting the last rites done has been inconveniencing citizens as well as the staffers.
The civic administration runs 46 crematoria, 7 cemeteries for Christians and 10 for Muslims. Apart from these, there are 125 privately-run ones and 11 powered by electricity.
Galgali said that after the RTI application was filed; the civic body issued a circular directing the authorities to fill the vacant posts.

                                             PART D: RTI & SUCCESS STORIES

Normally, my article contains 3 parts as would be observed above. Since long, I have been wanting to add PART D: containing success stories of RTI. BCAS Foundation & Public Concern for Governance Trust (PCGT) (where at I am a trustee) run 4 RTI Clinics and on an average 50 individuals visit these clinics in a month and are provided RTI guidance and they submit RTI applications and appeals etc. We now intend to arrange feedback on their applications etc. As such very few come back to report the success they get or solutions that they achieve though many have satisfactory results.

Similarly, I believe many CAs make RTI applications etc and have success stories.

It is with the above belief that I intend to add PART D as above to my article. I request all read-ers to send their RTI success stories in brief. We would like to report them here. Please join in this crusade.

Hereunder one success story:

Extracts from Akila Maheshwari’s email of 23 Feb 2011:

Dear Narayan Varmaji:

First of all let me profusely thank you and other members of PCGT and BCAS for guiding my hus-band Dr. Shiban Charagi to fight his case through RTI. He was not only successful to get justice for himself but for others too, when a large Goverment Organisation like B.A.R.C. (Bhabha Atomic Research Centre) under Department of Atomic Energy had to strictly adhere to Supreme Court Judgements of 12th May 2008 by Justice Markandeye Katju.

BARC has started informing officers at all levels about their CR Grading by their Superiors. Also an officer can challenge his CR grading by refusing to put his signature on the intimation of the CR Grading.

My husband (who has the rare privilege of being listed in MARQUIS who is who in the world) was denied PRIS (Performance related incentives scheme) on the basis of poor assessment by his immediate supervisor. My husband has been a UNESCO Scholar. He was a one of the few employees (out of 15300) denied PRIS on poor CR grading. His CR was assessed in a hurry by a biased supervisor. He was also denied facilities for research work and manpower assigned to him removed and he was thereby harrased and humiliated.

My husband filed a letter of grievances to the PMO. This was forwarded to the Secretary DAE. Other reminders followed. But no action took place at ground level.

Later my husband took guidance from BCAS and was successful in getting a sum of over a lakh rupees (pre tax deduction). He was informed of his previous grade in CR. Later his grading was revised. After re-assessment PRIS sanctioned. This is the first such case in the history of the Department of Atomic Energy.

A battle that would have cost lakhs of rupees if taken up legally with CAT etc and would have been time consuming also and few years delay ended within two to three months of filing the RTI petition.

Hail RTI! Hail BCAS & PCGT and all the activists who made RTI a reality! RTI is a new pillar of Indian democracy.


Orders of The Court

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Right to Information

Part A: Orders of The Court


Public Authority : S. 2(h)


Only Public Authorities are obliged to provide information to
the citizens under the RTI Act. In January 2010 under the same title, I had
written :

“Many bodies operate primarily as service to the citizens of
India, though some of them may even be commercial or business bodies. When RTI
application is received by them, they take a view that RTI Act does not apply to
them. They contend that they are not ‘Public Authority’ (PA) as defined u/s.2(h)
the Act. Basically, such bodies need to be transparent and accountable not only
to those they deal with, but to the citizens at large.”

Matter came before the High Court of Delhi in writ petition
(civil) No. 4748 as to whether National Stock Exchange of India Ltd. is Public
Authority or not. The Full Bench decision of CIC as reported earlier in this
feature, had decided that NSE, BSE and all other stock exchanges are PA.

The definition of ‘public authority’ u/s.2(h) reads as under
:

‘public authority’ means any authority or body or institution
of self-government established or constituted :

(a) by or under the Constitution;
(b) by any other law made by Parliament;
(c) by any other law made by State Legislature; (d) by notification issued or
order made by the appropriate Government, and includes any :

(i) body owned, controlled or substantially financed;

(ii) non-Government organisation substantially financed,
directly or indirectly by funds provided by the appropriate Government.

S. 2(h) of the Act consists of two parts. The first part
states that public authority means any authority or body or institution of
self-government established or constituted by or under the Constitution, by any
enactment made by the Parliament or the State Legislature or by a Notification
issued or order made by the appropriate Government. The second part starts from
the word ‘includes’ and states that the term ‘public authority’ includes bodies
which are owned, controlled or substantially financed directly or indirectly by
funds provided by the appropriate Government and non-Government organisations
substantially financed directly or indirectly by funds provided by the
ap-propriate Government.

It is obvious that the term ‘public authority’ has been given
a broad and wide meaning not only to include bodies which are owned, controlled
or substantially financed directly or indirectly by the Government, but even
non-Government organisations, which are substantially financed directly or
indirectly by the Government. The idea, purpose and objective behind the
beneficial legislation is to make information available to citizens in respect
of organisations, which take benefit and advantage by utilising substantial
public funds. This ensures that the citizens can ask for and get information and
know on how public funds are being used and there is accountability,
transparency and openness. Even private organisations, which are enjoying
benefit of substantial funding directly or indirectly from the Governments, fall
within the definition of ‘public authorities’ under the Act.

The Court then has extensively discussed the meaning of words
such as ‘authority’, ‘substantially financed’, ‘body’, ‘institution’, etc. While
interpreting ‘establish’ the Court noted : “Thus, it cannot be said that the
only meaning of the word ‘establish’ to be found in the sense in which an
eleemosynary or another institution is founded. The word ‘established’ need not
mean the initial foundation and it includes creation, confirmation or
recognition.

Then interpreting the word ‘constituted’, the Court stated
that the word ‘constituted’ is wider than the ‘established’. The word
‘constituted’ in S. 2(h) of the Act not only refers to the first act/acts by
which a body or organisation is set up, but a subsequent act or acts which will
have the effect of conferring on an organisation or a body, a special status and
constitute a ‘body’ with status of an ‘authority’ or institution of
‘self-government’ for the purpose of S. 2(h) of the Act. A private institution
or a body may be incorporated or formed by acts of private persons, but
subsequent statutory enactment or an order or Notification issued by the
appropriate Government can result in constitution and conferring upon the said
body, status of an ‘authority’ or an institution of ‘self-government’.

National Stock Exchange (NSE) is a company incorporated on
27-11-1992. Reading from the objects as per its Memorandum, it is noted that NSE
was incorporated for the purpose of establishing a stock exchange for which it
was necessary and required that they should be registered and/or recognised
under the Securities Act. It is only after the registration or recognition under
the Securities Act that NSE could carry out any of the functions or objects for
which it was incorporated.

Once a body or an institution has got its
recognition/registration under the Securities Act, it can operate and function
as a stock exchange and perform the said public functions. Registration or
recognition u/s.4(3) of the Securities Act by the Central Government has the
effect of constituting or establishing an ‘authority’ or an institution of
‘self-government’ as defined u/s.2(h).

NSE also satisfies requirements of the second part of the S.
2(h) of the Act. It is a ‘body’ which is controlled by Central Government. It is
not possible to accept that the control exercised is merely regulatory and is
not a pervasive and deep control.

The Court then writes :

“The Apex Court in Unni Krishnan J.P. v. State of Andhra
Pradesh held that when a private body carries on public duty, as in the case of
an institution whereby recognitions and affiliations are to be granted with
conditions, Stock Exchanges are also recognised subject to various conditions.
Unlike the companies registered under the Indian Companies Act, the bye-laws of
a Stock Exchange can be amended. Even for amendment in bye-laws, the Stock
Exchange requires approval of the Central Government. The Central Government,
having regard to the provisions of the 1956 Act, as noticed hereinbefore, can
interfere in the functions of the Stock Exchanges at every stage.”

The Court finally ruled :

In view of the aforesaid findings, it is held that the
petitioner is a public authority as it is an authority or institution of
self-government constituted or established by Notification or order issued by
the appropriate Government. It is also held that the petitioner is controlled by
the appropriate Government. The writ petition accordingly has no merit and is
dismissed. However, in the facts and circumstances of the case, there will be no
order as to costs.

The above is a single-Member judgment. The same is now
challenged.

    Senior advocate Abhishek Manu Singhvi, appearing for NSE, contended that the single-Judge Bench had erred in bringing it within the ambit of the RTI Act, as it is neither a Government body nor financed by the Government.

    A Division Bench headed by acting Chief Justice Madan B. Lokur stayed the operation of a single-Bench order which had on 15th April held that stock exchanges are ‘quasi’ governmental bodies which are bound to disclose information to the public under the transparency law.

    Learned counsel accepts notice on behalf of the respondents 2 to 4. Notice may now be issued to the respondent No. 1. returnable on 3rd August, 2010.

[Writ Petition (Civil) No. 4748 of 2007 : National Stock Exchange of India Ltd. v. Central Information Commission & Others, decision dated 15-4-2010]

                                                  Part B: The RTI ACT

    Fourth Annual Report of 2009 of Maharashtra State Information Commission

Some salient features of the Report :

    The number of applications received in the State in the year 2006 were 1,23,000, in the year 2007, 3,16,000, in the year 2008, 4,16,090 and in the year 2009, 4,40,728. The number of applications in other big States is less than one lakh. At the international level the number of applications received in Britain are 90,000 and in Mexico 1,25,000, whereas the number of applications received by the Central Government are three and a half lakh. This indicates an overwhelming response to the RTI Act amongst the people of Maharashtra.

    The Right to Information Act has brought about transparency, accountability and a sense of participation with the administration. It is necessary that administration, civil services, media, non-government organisations and all other sections of society accept these newer concepts. With these objectives we can attain good governance. The RTI Act is not only limited to administrative reforms, but it is seen as an instrument for upholding constitutional fundamental rights and human rights on a larger scale. Transparency and openness have now become acceptable principles. Supplying information is the rule, whereas denying information is the exception. Similarly the desire to eradicate corruption and fight against injustice is increasing amongst citizens. The Act has been successful in curbing corruption to some extent. This is not a small achieve-ment. The feeling of helplessness of the citizen has been reduced to some extent on account of this Act. The feeling that people’s representatives and Government officers are accountable is now a well-recognised fact amongst the general public. This Act has made available a level playing field to youth, old and retired persons. Many enlightened citizens, non-government organisations are prevailing on the Government to follow policies of public interest with the help of this Act. It can be said that this Act has given birth to a new era of proactive disclosure.

    Supportive to S. 4 of the RTI Act where a public authority is required to suo moto declare certain specified information, there is a provision in the Chapter-III of the Maharashtra Government Employees Transfer Regulations and ‘Prevention of Delay in Discharging the Duties by Government Employees Act-2005’ to perform their duties as laid down in the Citizens Charter, laying down the levels of supervision and completing the Government work within the prescribed time schedule. There is also a penal provision for delay. If all these laws are read together it can be seen that legal framework has come in place in the State for good governance.

It was the first step to evolve the institutional mechanism for implementing the RTI Act. As a measure to reach more people as a part of this institutional frame work, the Government has set up Benches of the Commission at the regional level. Maharashtra is the only State in the country to take up such initiative. The Information Commissioners are deciding the cases at the district level, with a view to reach more and more citizens. As a part of this exercise Dr. Joshi, State’s Chief Information Commission-er, has personally heard 1200 appeals at Dhule, Jalgaon & Nashik.

The Commission has undertaken hearing of appeals through video conferencing. In 2009, S.I.C. Greater Mumbai has heard 913 appeals through video conferencing. The regionwise distribution is as follows :

Pune Region

…

…

…

274

Aurangabad Region

 

…

…

390

Nagpur Region

…

…

…

173

Amravati Region

…

…

…

76

Total

…

…

…

913

    State Information Commission is of the view that RTI should be a part of syllabus also.

Some statistics :

 

In respect of 36
departments in Maharashtra Mantralaya :

 

   
There are 76747 PIOs and 19016 AAs

 

   
Number of RTI applications

received
by PIOs in 2009

440728

pending
as on 1-1-2009

57107

disposed
in 2009 and

 

information provided

439061

rejected

10893

Amount collected for

 

providing
information

 

in
2009

Rs.1,23,04,361

Number of first appeals
in 2009

 

Received
in 2009

43848

Pending
as on 1-1-2009

8694

Disposed
of in 2009

45953

Disposed
positively

40908

Rejected

5045

Pending
as on 31-12-2009

6589

                                                Part C: OTHER NEWS

    Marathi film on RTI : ‘Ek Cup Chya’

One can’t believe that two hours’ film in Marathi language with English subtitle on RTI can be so interesting and absorbing that one enjoys every minute thereof while watching it.

It is Ek Cup Chya, a movie about the Right to Information Act (RTI) as an effective tool against injus-tice (the cup of tea, a symbol of hospitality being the metaphor for corruption here).

The storyline is simple : a humble state bus conductor is slapped with a heavy electricity bill. Humiliated by the bureaucracy, the family embarks on their quest for justice using RTI. “The film operates at two levels,” informs the producer. “As a family drama and as pure information. A lot of research has gone into it with inputs from activists like Aruna Roy, Arvind Kejriwal etc.”

I was the chief guest at its screening at SP Jain Insti-tute of Management on April 28. Hopefully, I shall arrange its screening in due course for all interested in watching it.

    Assets disclosure by MPs :

At least 70 Lok Sabha MPs, including former Prime Minister HD Deve Gowda, Rashtriya Janata Dal (RJD) chief Lalu Prasad and cricketer-turned-politician Navjot Singh Sidhu, have not yet disclosed details of their assets, a Right to Information (RTI) application has revealed.

The information was obtained in reply to an application filed by RTI activist Subhash Chandra Agarwal with the Lok Sabha Secretariat, seeking names of the members who have not disclosed details of their assets and wealth to the speaker.

“No action has so far been taken against defaulting members . . . . the reason for not taking any action against those Lok Sabha members who have not submitted details of assets and liabilities to the Lok Sabha speaker is the non-receipt of any complaint from any other member or any citizen of India in this regard as required under Rule 5(1) of the members of the Lok Sabha (Declaration of Assets and Liabilities) Rules, 2004.”

    Legalising alterations to the buildings :

All is not fine with the fines collected by various civic authorities in Mumbai as an RTI application filed by activist Aaftab Siddique reveals.

The building proposal department in ward H West has collected over Rs.32.25 crore between 2007 and 2009 as fine to legalise alterations, after submitting the floor plans and drawings for approval. The health department has collected fines of Rs. 33.72 lakhs only between 2000 and 2009 while the licence department has collected barely Rs.3 lakhs in the same period.

    Dues to retirees at BMC :

Data procured under RTI from various departments of the Brihanmumbai Municipal Corporation (BMC) show that dues to the tune of Rs.30.41 crore is yet to be paid to those who retired over the past four years.

RTI activist, Mr. Milind Mulay, had filed a query under RTI. When he checked with many officers at the ward level, they were not even aware of the number of people who have retired from their office in the last four years. He writes : “My mother, Vijaya Mulay retired as a nurse from the Marol Maternity Home, but the BMC made her run around for almost one year and a half and even after that, she did not get her dues. She then used the RTI Act to get her file moving.”

    Red tape at BMC :

One Mr. Sharad Jadhav has been complaining about the irregularities in awarding a licence to a café located in one of the by-lanes of Dongri in south Mum-bai. Not getting a response, Jadhav finally wrote to the state Anti-Corruption Bureau (ACB). The bureau forwarded the complaint to the Municipal Commissioner for verifying the ‘allegation’ that the civic officials had turned a Nelson’s Eye to Sadguru Café’s illegal construction.

When no action was forthcoming from BMC, Jadhav filed an RTI application to find out about the status of his complaint. Reply received stated : “The BMC cannot give information on the subject as it never received any such letter from the ACB office.” After much criticism in the media, the police officials finally claimed that they had ‘found it’.

Right to Information

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Right to Information

Part A : Decisions of CIC

Mr. Mahavir Chopda of Mumbai addressed a few queries under
the RTI Act to NMIMS University of Vile Parle (W), Mumbai. The queries raised
included :



  •  In how many instances did students cancel admission after
    paying fees for admission to your FT-MBA Course ?


  •  What amount of fees was retained by NMIMS (i.e.
    collected but NOT refunded to students) due to the above cancellations ?


PIO refused to give the information and the First AA did not
reply to the appeal.

In the appeal before CIC, the representative of NMIMS
submitted that NMIMS is not a public authority. To decide on this issue, CIC
stated that two matters need to be determined :

a) Whether NMIMS is public authority by virtue of being a
deemed University.

b) Whether NMIMS is ‘substantially financed’ by Government.

In the hearing before CIC, Mr. Shekhar Gupta appeared on
behalf of NMIMS. He was asked to inform the Commission whether they have
received land at concession rates, or any other subsidies. He was also asked
whether donations received by the Institution are exempt from payment of Income
tax. If any of the concessions described have been availed of, he was to give a
Chartered Accountant’s certificate certifying the value of these concessions.

The respondent has stated that they are unaided Institution.
It was also argued that information sought is exempt u/s.8 (1)(d) of the RTI
Act. An affidavit was filed by Mr. Madhav N. Welling, Pro-Vice Chancellor of
NMIMS University dated 3 February, 2009 stating that the deemed University has
not obtained any land at concessional rates nor are the donations received
exempt from payment of Income tax.

‘Public Authority’ is defined u/s.2 (h) of the RTI Act. It
includes any authority or body or institution of self government established or
constituted . . . .  by notification issued or order made by the
appropriate government.

Section 3 of the University Grants Commission Act, 1956,
which provides for the constitution of Deemed Universities reads as follows :

“The Central Government may, on the advice of the Commission,
declare by notification in the official Gazette, that any institution for higher
education, other than a University, shall be deemed to be a University for the
purpose of this Act, and on such a declaration being made, all the provisions of
this Act shall apply to such institution as if it were a University within the
meaning of clause (f) of Section 2.”

CIC noted : Thus, it is clear that a deemed University
gets this status by virtue of a notification issued by the Central Government.
NMIMS has been conferred the status of a deemed University by virtue of
notification No.F9-37/2001-U-3 dated 13 January, 2003 of the Government of
India. It clearly meets the criterion of sub-clause (d) of clause (h) of section
2 of the RTI Act. Hence, all deemed Universities are Public Authorities as
defined under the RTI Act. Since NMIMS University is also a deemed University by
virtue of a notification by the Central Government it is a Public Authority and
must furnish information as mandated by the RTI Act.

The Commission also held that provisions of section 8(1)(d)
do not exempt the information sought, as the said information is not of
commercial confidence, trade secrets or intellectual property the access to
which would harm the competitive position.

In view of the above view taken by the Commission, it held
that NMIMS University is a Public Authority as defined in the RTI Act and must
give the information sought by the appellant. “The information shall be supplied
by Mr. Madhav N. Welling, Pro-Vice-Chancellor of NMIMS University to the
appellant free of cost before 20 April 2009”.

[Mr. Mahavir Chopda vs. NMIMS University, Decision No.CIC/OK/A/2008/01098/SG/2550
dtd. 31.03.2009].

Part B : The RTI Act

Standing committee of the Parliament on RTI Act, 2005 :

National Campaign for People’s Right to Information (NCPRI)
has made a presentation before the above committee. Some of the items of the
said presentation are worth noting to understand present deficiencies of the RTI
Act.

In previous 4 issues of BCAJ, 10 items have been reported :


1. Level of awareness

2. Use and Misuse of the RTI Act

3. Reduction of 20-year period for keeping documents

4. Voluntary Disclosures

5. Changes in Section 8

6. Penalties

7. Use of the RTI Act and refusal of information

8. Grievance redressal

9. Application fee

10. Strengthening the RTI Act


Now 11th and final item is being reported :

Central Information Commission


The Central Information Commission has a huge backlog of cases, which seems to grow larger everyday. This is mainly due to the very poor support system and infrastructure provided by the government to the Information Commission. For the Commission to function effectively, they need to have access to a large number of qualified advisors who can do a preliminary analysis of each appeal and complaint, thereby making the task of the Commissioner easier.

Given the role the Commission has to play, especially in adjudicating on matters relating to the government, it is important that the Commission retains its intellectual and functional independence. This is difficult to do when departments and ministries of the government control their budgets. It is, therefore, important that the budgetary allocations for the Commission are voted directly by Parliament or, at the very least, are a separate plan head without being subsumed under any ministry.

It has been observed that various public authorities are not following many of the Commission’s orders and directions. Considering the role the Parliament envisaged for the Information Commission, this is essentially subverting the wishes of the Parliament.

Therefore, it is important that the Prime Minister’s office send out a strong letter directing all public authorities to strictly follow the orders and directions of the Information Commission, unless they have been able to obtain a stay from a competent court. The PMO should also set up a mechanism to review compliance on a monthly basis and the report of compliance should be discussed at the three monthly meeting of the earlier suggested RTI Council.

The manner in which Information Commissioners are selected is shrouded in secrecy and reeks of arbitrariness and patronage. Though the Act very clearly specifies that Information Commissioners must be ‘persons of eminence in public life’, for the government this has mostly meant retired civil servants. No effort has been made to open up the process of selection to public scrutiny, or even to share with the public the rationale for choosing the people who are chosen and not others. This is so even when there have been demands from the public to do so, as in the case of the recent appointment of four new information commissioners. It is ironic that while appointing the Central Information Commissioners under the RTI Act, the Government of India repeatedly violates both the spirit and the letter of the RTI Act, specifically Section 4(1)(c & d).

These sections specify that the government must, suo moto: “publish all relevant facts while formulating important policies or announcing the decisions which affect public; …. provide reasons for its administrative or quasi-judicial decisions to affected persons”. Surely the appointment of Information Commissioners is an administrative decision that affects all the people of India, and also an ‘important decision that affects the public’ !


Part C : Other News

Haj House in Mumbai

Replying to an RTI application filed by Mumbai-based social activist A. M. Attar in November 2008, the Haj Committee of India (HCI) has said that Haj House – the committee’s headquarters – does not belong to the Muslim community.

The popular notion that the massive Haj House near CST, built with donations from the community without any government funding, belongs to the Muslim community is wrong. The HCI, which falls under the ministry of external affairs (MEA), has clarified that Haj House is not a Muslim property and that it belongs to the MEA. Interestingly, The Haj Committee Act, 2002 does not clarify who owns Haj House.

“Muslims had contributed to the construction of the building. Apart from a couple of months when the Haj season is on, the building remains unused. This is gross under-utilisation of a prime property”, said city-based hotelier A. M. Khalid who, along with Attar, is fighting to get Haj House out of the MEA’s control.

CA Examination

Students who fail in chartered accountant exams can find out their mistakes by going through their answer sheets as the Delhi HC directed the Institute of Chartered Accountants of India (ICAI) to provide a certified copy of the paper of students under the Right to information Act. Dismissing an ICAl’s plea against a CIC order, the HC said the answersheet cannot be excluded from the purview of the RTI.

New  Rules  for RTI applications by NRI

In order to simplify the RTI application process from abroad, the CIC has framed new rules enabling NRIs to pay application fees and information costs at the Indian embassies and missions abroad. “The commission will meet officials from the external affairs ministry and DoPT to smoothen issues related to the mode of payment and acceptance of appeals. Embassies may accept only the fee and information cost and provide e-receipt to applicants”, CIC chief Wajahat Habibullah said.
 
Padma awards

In response to a Right to Information query filed by Subhash Chandra Agarwal, the Home Ministry has admitted that “no specific record of the deliberations of the meeting of the Padma awards committee is maintained.

Only the final recommendations of the awards committee are submitted for the approval of the Prime Minister and the President”.

In what appears to be an attempt to shrug off disclosure, the government said there were no ‘specific records’ created in terms of receipt of nominations when asked about the number of recommendations that were received by the Home ministry by the cut-off date of September 30.

Incidentally, the decision on the awards was taken over a period of three days in meetings held on December 19, 20 and 22, 2008. The non-official members of the committee nominated by PM Manmohan Singh included Prof. [yotindra Jain, Kapila Vatsyayan, R Chidambaram, Tarun Das and Sayeeda Hameed.

Assets  of the  Ministers from  Rajya  Sabha

Earlier PMO had ruled that information on MP’s assets as being furnished to the speakers of the Lok Sabha (LS) and Rajya Sabha (RS) are exempt.

On appeal to CIC, he referred the matter to the speakers of LS and RS. In response, the Rajya Sabha has agreed to provide asset details of the Union Ministers who are members of RS. In reply to RTI query, it provided the information details of assets and liabilities of 16 ministers out of 18 as available.

PM Manmohan Singh owns only Maruti 800, Mr. Praful Patel is the richest cabinet minister with combined wealth of Rs.46.8 crores, Mr. A. K. Antony has the least financial muscle with combined worth of Rs.17.9 lakhs.

Report of Maharashtra State Information Commission

Maharashtra SIC submitted the annual report of 2008 to Vidhan Sabha on 16.03.09. It is a document in Marathi. English translation is under preparation and hopefully will be available in early June. Meantime, some interesting statistics:

  • 5 Commissioners together have imposed penalty in 256 cases, total amount of penalty levied Rs.34,01,432.

  • Total pendency of appeals as on 31.12.08 is 14,273 (In Mumbai 1574, in Konkan 1,339, Pune 3,863, Nashik 10, Aurangabad 3,584, Amravati 912, Nagpur 970).

  • Total pendency of complaints u/s.18 is 1207, (highest  in Mumbai 560).

It is understood that Maharashtra is the first state in India to present annual report of 2008 as required under section 25 of the RTI Act.

Right to Information

Part A : Decisions of CIC

 S. 5(4) of the RTI Act :

    Ss.4 of S. 5 of The RTI Act provides that the Public Information Officer may seek the assistance of any officer as he or she considers it necessary for the proper discharge of his or her duties.

    Rakesh Agarwal of New Delhi applied for inspection of certain records of Tis Hazari Court, New Delhi.

    In reply, the PIO stated that the appellant can inspect the records or take copies of the documents with the permission of Ld. Presiding Officer.

    The appellant objected to the condition put for inspection in an appeal to CIC.

    CIC, Shailesh Gandhi, in the Order noted as under :

    “The onus lies on the PIO to approach any officer of the court as he considers necessary to procure the information that the appellant is seeking. If the appellant is exercising his right to information under the RTI Act, then he is within his statutory rights to only approach persons designated as PIO or APIO. He is not expected to seek permission from persons who are not designated under the RTI Act. The purpose of putting in place S. 5(4) is to ensure that applicants for information do not have to run from pillar to post to access information to which they are rightfully entitled to under the RTI Act. In present case, to ask the appellant to apply for permission from the Presiding Officer of the Court is in clear contradiction to the spirit and word of the law. The Commission considers the PIO’s reply as an instance of shirking responsibility and takes strong exception to such actions.”

S. 28 of the RTI Act :

    S. 28 provides that the competent authority (the Chief Justice of all High Courts and Supreme Court are competent authorities u/s.2(e) of the RTI Act) may make rules to carry out the provisions of the RTI Act.

    The Delhi High Court (Right to Information) Rules, 2006 as amended include :

    The information specified in S. 8 of the Act shall not be disclosed and made available and in particular the following information shall not be disclosed :

    (a) Such information which relates to judicial functions and duties of the Court and matters incidental and ancillary thereto.

    CIC in his order noted as under for above rule :

    The Delhi High Court RTI Rules have been framed u/s.28 of the RTI Act. This provision clearly states that the competent authority may make rules to carry out the provisions of the Act. Therefore, rules framed by the High Court u/s.28 cannot run contrary to the fundamental basis of the RTI Act which is to ensure that citizens can enjoy their fundamental as well as statutory right to information. Rule as above, in effect, appears to add another ground based on which disclosure of information can be exempted. No public body is permitted under the Act to take upon itself the role of the Legislature and import new exemptions hitherto not provided. The Act leaves no such liberty with the public authorities to read law beyond what it is stated explicitly. There is absolutely no ambiguity in the Act and creating new exemptions will go against the spirit of the Act.

    Under this Act, providing information is the rule and denial an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against rule of law.

    Right to information as part of the fundamental right of freedom of speech and expression is well established in our constitutional jurisprudence. Any restriction on the fundamental rights of the citizens in a democratic polity is always looked upon with suspicion. Even the Parliament, while constricting any fundamental rights of the citizens, is very wary. Therefore, the Commission is of the view that no competent authority has the sanction to import new exemptions and in the process curtail the fundamental right of information of citizens”.

    Above two issues are part of the decision in Mr. Rakesh Agarwal v. Tis Hazari Court, New Delhi : CIC/SG/A/2009/000677/3392 of 22-5-2009.

 PM’s surgery :

    Mr. Jagdish Jetli made an RTI application to AIIMS, New Delhi seeking information on 7 points connected to the second heart by-pass surgery on the Prime Minister Dr. Manmohan Singh by a team drawn from Asian Heart Institute (AHI), Mumbai led by Dr. Rama Kant Panda. Information sought included :

  •      Details of expertise of all members of the AHI team

  •      Rules of the AIIMS under which a team from a private institute was asked to conduct this surgery.

    The CPIO gave certain information which according to Mr. Jetli was vague and evasive.

The Bench of Mrs. Annapurna Dixit, CIC decided as under:

“The respondent submitted that the AIIMS has nothing on record regarding the qualifications of Dr. Panda who conducted the by-pass heart surgery, nor have reasons for his selection been recorded. He stated that the decision to invite Dr. Panda was taken jointly by the PMO and family members of the Prime Minister. The appellant’s contention was that the public has a right to know why a premier institute such as the AIIMS which is staffed by the best doctors in the country and with the best of medical facilities had to invite a “doctor from outside to conduct the operation in its premises. He added that this is a matter of great concern to the public and that inviting a doctor from another institute has eroded the reputation of AIIMS. Keeping the peculiar facts of the case in mind and in the light of the fact that Dr. Panda had used the facilities belonging to AIIMS, which is a public authority, the Commission directs the CPIO to obtain the relevant information from the Asian Heart Institute regarding particulars of Dr. Panda and to provide the same to the appellant. The appellant also to be informed about how the decision to invite Dr. Panda to conduct the surgery was arrived at and for what reasons and also be provided with minutes of any meetings in this connection, available with the AIIMS. All information to be provided by 20th June, 2009.”

[Mr. Jagdish Chander Jetli v. AIIMS, CIC/ AD/ A/ 09/00609 dated May 21, 2009]


Part B : The RTI Act

S. 25 of the RTI Act provides that the Central Information Commission and the Sta te Informa tion Commissions as soon as practicable after the end of each year, prepare a report on the implementation of the provisions of the RTI Act during the year and forward a copy thereof to the appropriate Government.

Annual Report 2006-07 of Central Information Commission is now submitted in April 2009. It is surprising that it has taken two years to prepare and publish the annual report. One does not know when Annual Reports of 2007-08 and 2008-09 would be prepared and published. Words ‘as soon as practicable’ are nebulous. One wishes that time limit was set in the Act as it stands in other Acts like the Companies Act. As reported in this feature in June, Maharashtra SIC submitted the annual report of 2008 to Vidhan Sabha on 16-3-2009, i.e., within less than 3 months, praiseworthy achievement. Hereunder, I reproduce salient features of the Annual Report of the Central Information Commission as appears in the executive summary printed in the said Report:

i) The number of requests made to each Public Authority [Vide S. 25(3)(a) of RTI Act] : the period under report witnessed exponential increase in the number of requests (1,71,404) received by Public Authorities. If all ministries are taken together the number of requests received in year 2006-07 are seven times over previous year. This increase will rise to more than 8 times if comparison is made for top ten ministries. The number of requests received by Public Authorities of top ten Ministries in year 2006-07 were 1,38,501 in comparison to 16,680 during 2005-06.

ii) Rejection of the requests [Vide S. 25(3)(b) of RTI Act] : out of 1,14,724 requests received by top 5 ministries only 8.9% requests are rejected during 2006-07 in comparison to rejection of 26.5% requests by top five ministries under different sections in the previous year. When all ministries are considered together, only 8.98% requests received are rejected in the year 2006-07 in comparison to 13.9% in the previous year. The major rejections were u/s.8 of RTI Act 2005 followed by u/s.11, u/s.24 and u/s.9. On an average, authorities under different ministries disposed 66% of the requests received in year 2006-07.

iii) Number of appeals/complaints decided by the Central Information Commission (Vide S. 25(3)(c) of RTI Act) : Total number of appeals or complaints received by CIC were 6839 during 2006-07 (1156 in Quarter-I, 1483 in Quarter-If, 1583 in Quarter-Ill, and 2617 in Quarter-Tv). The total number of appeals received by Public Authorities during 2006-07 was 15298. Out of these 8466 (74.93%) appeals were accepted by Public Authorities and 4888 (31.95%) were rejected.

iv) Disciplinary  action taken  [Vide S. 25(3)(d) of RTI Act] : The total number of show cause notices issued against various public information officers by Central Information Commission for not being able to comply with the provisions of the RTI Act during 2006-07 were 259. Out of these 259 cases, penalties are imposed in 24 cases u/s.20(1) of the RTI Act and also recovered in 12 cases. In addition, S. 20(2) was invoked in 8 cases. Further, compensation was awarded to 12 appellants by the Central Information Commission u/s.19(8) of RTI Act.


Part C : Other News

Amendments to the  RTI Act :

In the address by the President of India, Shrimati Pratibha Devisingh Patil to the Parliament on 4th June 2009, in Para 32, she has covered number of measures on which her Government will initiate steps within the next hundred days. One of the items therein is :

Strengthening Right to Information by suitably amending the law to provide for disclosure by Government in all non-strategic areas.

However, it appears that amendments proposed are completely of different nature: The Times of India on June 19 reports:

In a body blow to claims of transparency, the UPA Government has proposed amendments to the RTI Act exempting all file notings except those dealing with social and development issues besides restricting access to pending policy decisions, cabinet documents and examrelated documents. The amendments also envisage increasing RTI fees substantially. The draft amendments proposed by the DoPT signal that the Government is keen to bring in changes in the law that it had been forced to drop in 2006 under pressure from Left parties and RTI activists. In a move aimed at discouraging ‘motivated information-seekers’ the DoPT Ministry has suggested that payment (at present Rs.10)should be hiked. There is a view in the Government that citizens should be made to pay for the pay of the officers working on RTI besides the amount for photocopying or accessing the information sought.

Objecting to the above proposal, Mr. Shailesh Gandhi, earlier RTI activist and presently erc has addressed a letter to the Prime Minis ter.

He states: It would be appropriate if the Government transparently accepts certain boundaries in the exercise of improving transparency.

The minimum requirements for this would  be :

1) No reduction  in the scope of S. 2(0, (h), (i) and (j).

2) No increase or addition in the exemptions u/s.8(1) of the RTI act.

The law has been spread by citizens across the coun-try and they value it very dearly. There are some worries in their minds about losing anything in the exercise of their fundamental right. It would be in the fitness of things if the Government declared the amendments they are proposing to the Act, and gave the reasons for the amendments publicly. I request you to clarify these matters soon so that citizens feel reassured.

•  File notings  :

Probably, as noted above, the proposed amendment for non-disclosure of file notings is caused by the serious battle going on between CIC and DoPT since years. CIC has often ruled (including under the Full Bench decision) that file notings are information as defined u/s.2(f). On the other hand, DoPT continues to hold the view that it is not an information. In FAQs as appearing on www.persmin.nic.in the Ministry, on interpretation of ‘what does information mean ?’ answers:

Information means any material in any form including records, documents, memos, emails, opinions, advices, press releases, circulars, orders, log books, contracts, reports, papers, samples, models, data material held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force but does not include file notings’.

In an unprecedented move, CIC chief Wajahat Habibullah in early June issued summons to Joint Secretary S. K. Sarkar and Deputy Secretary Anuradha Chagti to appear on June 17 to explain why they should not be prosecuted under the IPC and penalised under the RTI for their failure to correct the misleading claim made on the DoPT website about file notings.

The provocation was the DoPT’s refusal, despite repeated directions to correct the misleading claim made on its website, that file notings were not part of the information that could be disclosed under the RTI. While other public authorities, including the Law Ministry and the Sc, have long accepted the CIC’s ruling that file notings are not exempt from disclosure, the DOPT has maintained otherwise on its website, much to the CIC’s chagrin. Habibullah found it. ‘appalling’ that the nodal department of RTI had ‘sought to emasculate the mandate’ of S. 19(7) which stipulates that the CIC’s decisions are ‘binding’.

RTI rescues Chembur residents from illegal garages:

For over five years, around 20,000 families in Chembur, Mumbai faced cronic problems of noise and air pollution coming from nearby illegal commercial garages and workshops. Their repeated complaints to the civic authorities failed to bring any relief. Irked by the indifference from the authorities, the residents filed a Right to Information plea and have now got their way. The RTI application clearly stated that these establishments were operating without licences. Not only that, they had encroached upon the footpaths violating more rules.

The civic officials have admitted that the RTI information will help them to come strongly against the illegal garages. The residents have more than one reason to cheer now, as not only their action will ensure less pollution, but it will also stop water-logging during the monsoons.

•  RTI and  e-governance :

Citizens across the country can now exercise their Right to Information on the phone and Internet. Inspired by the success of [aankari, a Bihar State Government initiative to accept RTI applications through phone calls, the Centre is all set to replicate the model across the nation.

Listing his priorities after taking over as the Min-ister of State for Personnel and Public Grievances, Mr. Prithviraj Chavan said that the Government of India would soon facilitate RTI queries through the phone and Internet by adopting the Jaankari model, albeit with more refinements in technology.

The Bihar Government’s citizen-centric Jaankari project had earned it the national e-governance award last year. Using the effective tools of voice communication, thus enabling even the poor and uneducated to file RTI queries. The Jaankari initiative only involves making a phone call by dialing 155311 and communicating details of the desired information to a call-centre person. The call-centre executive then drafts an RTI application and sends it to the public authority concerned.

•  Electricity  Consumption bills (ECb) in Mumbai:

You may be shocked with these figures but they are as obtained under RTI application:

We pay taxes to meet above bills!

Right To Information

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Right to Information

Privacy &/v. Disclosure

One American writer has said:


“One man’s freedom of information is another man’s invasion
of privacy.”

The personal information of an individual need not be made
public in every case, as he has a right to be left alone, which now has been
recognised as a fundamental right the world over.


Article 21 of the Constitution of India:




21. Protection of life and personal liberty:

No person shall be deprived of his life or personal
liberty except according to procedure established by law.


The Supreme Court has ruled, modelled on the decisions of the
US Supreme Court, with regard to privacy. The Court observed in R. Rajagopal
alias R. R. Gopal v. State of Tamil Nadu (1994) 6 SCC 632:

The right to privacy is implicit in the right of life and
liberty guaranteed to the citizens of this country by Article 21. It is a
‘right to be left alone’. A citizen has a right to safeguard the privacy of
his own, his family, marriage, procreation, motherhood and education among
other matters. None can publish anything concerning the above matters without
his consent. If he does so, he would be violating the right to privacy of the
person concerned and would be liable in action for damages.

Article 19 of the Constitution of India reads:

“All citizens shall have the right to freedom of speech and
expression.”

That right, as per the Supreme Court of India, includes the
right to information. S. 8(1)(j) of the RTI Act:


8(1) Notwithstanding anything contained in this Act,
there shall be no obligation to give any citizen

(j) information which relates to:


§ personal information



§ the disclosure of which has no relationship to any public activity or
interest, or



§ which would cause unwarranted invasion of the privacy of the individual



§ unless the Central Public Information Officer or the State Public
Information Officer or the Appellate Authority, as the case may be, is
satisfied that the larger public interest justifies the disclosure of such
information:



Provided that the information which cannot be denied to the
Parliament or a State Legislature shall not be denied to any person.

Landmark judgment of Delhi High Court (F.B.) pronounced on
12-1-2010:

In Secretary General, Supreme Court of India v. Subhash
Chandra Agarwal: The Full Bench of the Delhi High Court concurred with the
view of the learned single Judge that the contents of asset declarations,
pursuant to the 1997 Resolution, are entitled to be treated as personal
information, and may be accessed in accordance with the procedure prescribed
u/s.8(1)(j); and that they are not otherwise subject to disclosure. Therefore,
as regards the contents of the declarations, whenever applicants approach the
authorities under the Act, they would have to satisfy themselves u/s.8(1)(j)
that such disclosure is warranted in ‘larger public interest’.

Privacy issues & RTI:




  •  
    S. 8(1)(j) talks of personal information:



Dictionary defines:


§
‘person’ as human being, an individual


§
‘personal’ as relating to or affecting an individual



Hence, S. 8(1)(j) only covers natural persons, i.e.,
individuals, it covers privacy of the individuals only.

Hence, other entities like companies, HUF, trusts, etc. are
not covered under this clause and any information on them cannot be affected by
the exemption u/s.8(1)(j).

Similarly, no such entities can take protection under the
Right of Privacy, a fundamental right guaranteed under the Article 21 of the
Constitution.

Re. Individual’s personal information gets exemption under
this clause on the following three criteria:



1. ‘It must be
personal information’:


Personal information here has reference to the third party’s
information and not one’s own.

Extract from a Full Bench decision (five members of the
Central Information Commission) dated 23-4-2007, explaining the scope and ambit
of this clause: (Para 32)

In this case there were six applicants/complainants and 5
public authorities. Out of 5 Information Commissioners, three are presently in
chair, two have retired.

This Section has to be read as a whole. If that were done, it would be apparent that personal information does not mean information relating to the information seeker, but about third party. That is why, in the Section, it is stated “unwarranted invasion of the privacy of the individual”. If one were to seek information about oneself or one’s own case, the question of invasion of privacy of one’s own self does not arise. If one were to ask information about a third party and if it were to invade the privacy of the individual, the information seeker can be denied the information on the ground that disclosure would invade the privacy of a third party. Therefore, when a citizen seeks information about his own case and as long as the information sought is not exempt in terms of other provisions of S. 8 of RTI Act, this clause cannot be applied to deny the information. Thus, denial for inspection/verification of his own answer sheets by a citizen applying the provisions of S. 8(1)(j) is not sustainable.

2.    It must not have been disclosed to the public authority as a part of public activity:

When a citizen provides information in discharge of a statutory obligation, it is a disclosure as a part of public activity. The same cannot be exempted under this clause. For example:

Income-tax return — Not exempt.

The Assessment Order — Exempt.

Names of persons who applied for arms licenses — Not exempt.

See:

Mr. Jagvesh Kumar Sharma, New Delhi v. PIO, Govt. of NCT of Delhi Decision No. CIC/WB/A/2008/00993 dated 16-3-2009

One para thereof:

Various public authorities in performing their functions routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Applying for an arms licence certainly falls in this category. As a matter of fact S. 4(1)(b)(xii) requires a suo moto publishing of ‘particulars of recipients of concessions, permits or authorisations granted by it’.

3.    The disclosure of the information would cause unwarranted invasion of the privacy of the individual
What is unwarranted invasion of privacy of a person cannot be enlisted exhaustively. However cases have arisen before numerous adjudicative bodies on the issue of invasion of privacy arising out of the requests to furnish information under the RTI Act. To cite an example is the case before the Central Information Commission in Mr. Harish Lamba v. Indian Council of Medical Research, CIC/AD/A/20009/0010371 dated 2nd September, 2009. The Commission denied to provide information about expenses on educa-tion of the children of members of the Committee u/s.8(1)(j) as it was held to be personal information disclosure of which will cause unwarranted invasion of privacy of individuals constituting the Project Review Committee.

The right of privacy is an evolving right and the extent of its strength and reach is different in different countries.

Privacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively. The boundaries and content of what is considered private differ among cultures and individuals, but share basic common themes. Privacy is sometimes related to anonymity, the wish to remain unnoticed or unidentified in the public realm. When something is private to a person , it usually means there is something within them that is considered inherently special or personally sensitive. The degree to which private information is exposed therefore depends on how the public will receive this information, which differs between places and over time.

Assuming that this clause is applicable after undergoing above three criteria, still it is overridden if larger public interest justifies the disclosure of such information.

Such matters could be of many types — e.g.,:

  •     criminal activity of any individual

  •     tax evasion matter

  •     medical related information on the Prime Minister and the President of India.

Para from the decision in
Mr. Mahesh Kumar Sharma
v. PIO, Govt. of NCT of Delhi
Decision No. CIC/AT/A/2008/01262/SG/2109 dated 27-2-2009

The test of public interest is to be applied to give information only if any of the exemptions of S. 8 apply. Even if the exemptions apply, the Act enjoins that if there is a larger public interest, the information would still have to be given. There is no requirement in the Act of establishing any pub-lic interest for information to be obtained by the sovereign citizen; nor is there any requirement to establish larger public interest, unless an exemption is held to be valid.

Para from the Decision No. CIC/OK/A/2008/00860/ SG/0809, dated 31-12-2008.

The concept of public interest cannot be invoked for denial of information. The Section empowers the Public Information Officer to provide the exempted information if it is in the larger public interest; meaning thereby that access to the exempted information can be allowed if public interest is served in providing the information.

The term ‘privacy’ means things in different contexts. Different people, cultures, and nations have a wide variety of expectations about how much privacy a person is entitled to or what constitutes an invasion of privacy.

Almost all countries have laws which in some way limit privacy; an example of this would be law concerning taxation, which normally require the sharing of information about personal income or earnings.

Similarly, if one is in job with the Government or is politician contesting for seat in Parliament, etc. he is obliged to disclose certain information publicly. Transparency is inseparable from good governance and privacy has then to be sacrificed for such occupation/situation and disclosure of many personal information has to be accepted as essential for democracy to be meaningful.

There are many types of privacy e.g.,

  •     Physical: In the USA, the right of the people to be secured in their houses, against unreasonable security and seizures is guaranteed. In India, our Income-tax Act provides for power to search and survey and over-rides privacy right, but reasonable restrictions also are built into the provisions like S. 133A(2) which provide that an income-tax authority may enter any place of business or profession referred to in Ss.(1) only during the hours at which such place is open for the conduct of business or profession and, in the case of any other place, only after sunrise and before sunset.

  •     Informational: Various types of personal information come in public domain, specially financial e.g., many transactions reported through Annual Information Returns (AIR) being furnished by many bodies like MFs, property registration authorities (see ITR-2, instruction 9) are to be disclosed. However, one is allowed to keep :in privacy outlets of one’s wealth/income other than required to be disclosed under AIR.

  •     Medical privacy allows a person to keep their medical records from being revealed to others. This may be because people have concern that it might affect their employment. Or it may be because they would not wish others to know about medical or psychological conditions or treatment which would be embarrassing. Revealing medical data could also reveal other details about one’s personal life (such as about one’s sexual activity for example).

  •     The secret ballot is the simplest and most widespread measure to ensure that political views are not known to any one other than the original voter. It is nearly universal in modern democracy, and considered a basic right of citizenship. In fact even where other rights of privacy do not exist, this type of privacy very often does.

  •     There is also concept of privacy in relation to spiritual and intellectual attributes of an individual, also many other types of privacy concepts prevail.

The concept of privacy is most often associated with western culture. Universal Declaration of Human Rights, Article 12 states:
No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.

In India, this right is not very deep. It would de-pend on each case to determine whether privacy is invaded in an unwarranted manner or not.

In fact, as regards the UID project, privacy right is extensively invaded and many civil society individuals are disturbed about it. Various representations have been made to the Authority through civil society meetings and discussions. In response, the Government has set up a group of officers under the Secretary, DOPT to develop frameworks for data protection, security and privacy.

It is difficult to balance between privacy and disclosure. An individual would say that he has the ‘right to be let alone’ yet he wants to live in the society and not alone, he wants to be part of the society. He has then to be open for disclosure. Hence, there is a right to privacy and the need for disclosure.

  •     Dr. Alan Westin (He is a professor of Public Law & Government Emeritus, Columbia University, Department of Political Science and has conducted 30 privacy surveys and created privacy indexes) once wrote:

Each individual is continually engaged in a personal adjustment process in which he balances the de-sire for privacy with the desire for disclosure and communication of himself to others, in light of the environmental conditions and social norms set by the society in which he lives.

In India the subject of ‘privacy’ has hardly been in public debates. However as noted above, the UID project has opened up this subject, more now with ‘2G Scam tapes’. The Income-tax authorities have tapped the phones of Niira Radia, a powerful lobbyist. The same have been leaked and partly now are in public domain. Issue is raised by Mr. Ratan Tata whether his right to privacy is violated. Let me quote some opinions on the same?: one pro-disclosure, one against and the third balanced.

Advocate Prashant Bhushan:

I think it (tapes made public) is absolutely in public interest. The Income-tax Department taped all these conversations legally. If whoever leaked it did it in public interest, it could be argued that he or she is a whistle-blower. But there is no precise definition of public interest. If somebody asked for the tapes through the Right To Information Act, they could be denied only on the premise that it would compromise the investigation, or that it contains personal information that has no relevance to public interest at all. Whatever has come out in public domain is not personal information. It’s all purely official communication, which is of interest to the public. Tata was talking to Radia, only because she happened to be employed by the Tata group as its lobbyist.

Mr. Deepak Parekh on NDTV’S ‘Walk the talk program’ said: “the tapes and the leaked conversations were an invasion of privacy.”

Mr. Arun Jaitley writes on this issue of privacy related to these tapes:
“The intercepted materials are ordinarily not likely to be secrets of the State. Their disclosures are neither prohibited, nor can at present be penalised. It is expected that the same would be available with the relevant departments of the Government and a legitimate disclosure of the same could be made either through the RTI Act or through an investigative process if the same are utilised for that purpose. If the material intercepted deals with matters concerning the affairs of the State, unauthorised intervention in the functioning of a government or commission of an offence, it could be handed over to the competent authority dealing with the matter. However, if the conversations so taped are private in nature and have no bearing whatsoever on the functioning of the State, it would ordinarily be expected from the competent authority to direct that such conversations or intercepts be maintained in absolute secrecy and its disclosure and use is prohibited.

However, those who seek to interfere in the matters of the State and influence decisions concerning the State of play in the political arena are hardly expected to contend that a cloak of secrecy be maintained around their roles. They may have a right to privacy in relation to their private lives, but not in relation to activities which are wholly political or related to the public affairs of the State.”

On macro level on this issue of privacy &/v. information, let me quote Barack Obama:
Open government is, within limits, an ideal that we all share. US president Barack Obama endorsed it when he took office in January 2009. ‘Starting today,’ he told his cabinet secretaries and staff “every agency and department should know that this administration stands on the side not of those who seek to withhold information, but those who seek to make it known.” He then noted that there would have to be exceptions to this policy to protect privacy and national security.

An iconic industrialist, Mr. Ratan Tata feels violated, is outraged over the public disclosure of his private conversation with lobbyist, Niira Radia. Mr. Tata has filed a petition in the Supreme Court invoking Article 21 of the Constitution, arguing that what has happened is an invasion of his privacy.

I have always wondered whether the right of privacy is opposite to the right to information or these two fundamental rights make balance for human dignity and human values. I believe that there cannot be any general conclusion as to which right universally overrides the other; each case has to be decided on the issue involved.

Let us hope that the Supreme Court decision enlightens the citizens on this vital issue of human rights and restrictions therein. It shall be a land-mark decision. Citizens await the same, hopefully in February 2011.

(I was invited by the Institute of Secretarial Training and Management, Department of Personnel & Training, Ministry of Personnel, Public Governances & Pensions, GOI to make a presentation on the subject ‘Privacy Issues & RTI.’ This article is based on the said presentation and further developed by other information available on this subject on Wikipedia and other websites and the recent news items related to tapes of telephone conversion between Niira Radia and others in newspapers and magazines).

Right to Information

Part A : Decisions of CIC

 S. 2(h) of the RTI Act :

    Many bodies operate primarily as service to the citizens of India, though some of them may be even commercial or business bodies. When RTI application is received by them, they take a view that RTI Act does not apply to them. They contend that they are not ‘Public Authority’ (PA) as defined u/s.2(h) the Act.

    Basically, such bodies need to be transparent and accountable not only to those they deal with, but to the citizens at large. Such bodies include co-operative societies, NGOs, various educational and medical institutions and so on.

    One may appreciate if the RTI application is mischievous in nature or is for harassment, and the body takes the view that it is not a PA, but not when citizen requests for information which leads the body to become more transparent and accountable.

    Matter came before Central Information Commission in respect of (1) LIC Housing Finance Ltd. (LICHF) (2) LIC Mutual Fund Asset Management Co. Ltd. (LICMF) and (3) G.I. Housing Finance Ltd. (GIHF). Applications and complaints are filed by 10 individuals and the decision is given by 3-member bench of Chief IC and two other ICS.

    All above 3 bodies took the view that they are not PA and refused to provide the information sought.

    Facts of the above three bodies are as under :

    LICHF : It is a Public Ltd. Company. 45.918% of shares are owned by LIC (40.497 %) and three other PSUs.

    LICMF : It is a Public Ltd. Company. LICMF made detailed submissions and based on 16 submissions made, stated that it is not PA. The same included : It is purely a business/commercial entity, it is not a Government Company as defined u/s.617 of the Cos. Act and the shares held by LIC in it are not even 50%.

    GIHF : Government-owned companies hold 47.7% of total shares, directorship on its Board is linked to the tenure of the respective Director with a Government-owned or controlled organisation.

    Decision :

    CIC held that the above facts are sufficient enough to bring these three bodies within the definition of the term ‘substantially financed’ as in S. 2(h)(d)(ii).

    CIC also noted that ‘Substantially financed’ does not mean more than fifty percent financed or majority shareholding by the Appropriate Government.

    It also held that :

  •      It can be inferred that the control of LIC over LICHFL is explicit and effective.

  •      LICMF is administratively controlled by the LIC of India.

  •      GICMF is controlled by six Public Authorities.

    Hence, it held : “In view of the above observations and findings, we decide that all the three respondents, LIC Housing Finance Limited, LIC Mutual Fund Asset Management Co. Limited & GIC Housing Finance Limited are ‘Public Authorities’ under the RTI Act. All of them are, therefore, obliged to take all necessary steps to carry out their duties and responsibilities assigned by the Act. Insofar as these appeals/complaints are concerned, the Commission directs the respondents to provide the requested information to the concerned applicants within a period of three weeks from the date of receipt of this decision.

    [10 Appellants & Complainants v. LIC Housing Finance Ltd., LIC Mutual Fund Asset Management Co. Ltd. and G.I. Housing Finance Ltd. decided on 28-10-2009]

Travel and medical expenses of the President of India : S. 7(9) of the RTI Act :

    The appellant, Shri Chetan Kothari of Mumbai, in four different appeals sought information regarding travel and medical expenses of (a) the President of India (b) Vice-President of India, and (c) The Prime Minister of India.

    Hereunder are covered two appeals re. (a) above. He had sought the above information not just for the incumbent but also for the earlier Presidents with break-up of each covering 11 Presidents starting with Dr. Rajendra Prasad and ending with Smt. Pratibha Patil. Also break-up for the period when they were not serving as President of India.

    CPIO responded as under :

    “The information asked for would have to be compiled and would disproportionately divert the resources of public authority and will be detrimental to the normal functioning of the office.”

    CIC while deciding the matter read out the contents of S. 7(9) to CPIO of the President’s Secretariat and asked him to identify under what clause of the Act he was authorised to actually refuse information sought, since this clause deals only with the option of providing information in a form other than that asked for. CPIO Shri F. A. Kidwai submitted that according to his understanding this clause entitled the CPIO to refuse the information if it would disproportionately divert the resources of the public authority or would be detrimental to the safety or preservation of the record in question.

    Decision Notice :

    Ss.(9) of S. 7 does not authorise a CPIO to refuse information under the RTI Act, but only allows him to provide the information sought in a form other than that sought. The best way of doing this is to interact with the appellant and provide him the information in alternative form. The decision of the CPIO in both applications to the President’s Secretariat is, therefore, invalid and inasmuch as it is supported in the order of the Appellate Authority, both orders of the Appellate Authority Ms. Chaube are set aside.

    In the normal course, the orders of the President’s Secretariat would have been set aside and it would have been directed to consider the appellant’s two RTI applications of 9-2-2008 and 29-5-2008 afresh. However, since the Ministries holding information sought are different to the President’s Secretariat as elaborated by Ms. Rasika Chaube in her order of 14-7-2008, the applications are now transferred to the CPIOs of Ministry of Health, Ministry of External Affairs and Ministry of Defence who will process these applications in response to the RTI applications made to them directly by Shri Chetan Kothari. Appeals concerning the President’s Secretariat are, therefore, allowed, but without cost.

    (Note : The above reporting covers decision on two out of four appeals. Other two for the expenses on the VP of India and on the PM of India are not covered in this issue.)

Part B : The RTI Act

Continuing from October to December BCAJ, the summary of two reports :

One study by PricewaterhouseCoopers (PWC) as appointed by the Department of Personnel and Training (DOPT), titled ‘Understanding the key issues and constraints in implementing the RTI Act’. Its final report as Executive Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment & Analysis Group (RaaG) in collaboration with number of other social bodies including TISS, Mumbai under the title ‘Safeguarding the Right to Information’. Its interim findings are published in October 2008.

DOPT-PWC Report :

Improving efficiencies at Information Commission :

The appeal process is a key component of the RTI Act. It is one of the controls established to ensure that the information is provided to common citizens.

Key issues observed :

Any person who does not receive a decision within the time specified in Ss.(1) or clause (a) of Ss.(3) of S. 7, or is aggrieved by a decision of the Public Information Officer may, within thirty days from the receipt of decision, appeal to an officer who is senior in rank in each Public Authority — commonly referred as the First Appellate Authority [S. 19(1)]. A second appeal against the decision shall lie within ninety days from the date on which the decision should have been made or was actually received, by the Central/State Information Commission [S. 19(3)]. However, there are significant challenges observed at the Information Commission. The findings of the study were as follows :

  •  Large pendency of cases with a wait time of 4-12 months existed in most of the States. This discouraged people from filing appeals.

  • Information seeker survey pointed out that 47% of the citizens did not receive replies to their RTI application with 30 days.

  • Appellants had to incur expenses to attend the hearing of second appeals at Information Commission. As per S. 19(8)(b), the Information Commission may require the Public Authority to compensate the complainant for any loss or other detriment suffered. However whether this clause can be invoked for compensating the travel expenses of the appellants is an area of contention and was not observed during the study.

The adjudicatory role of the Appellate Authority is critical in making this Act a success. As per the estimates, projected numbers of the secondary appeals would grow to 2.5-3.0 lakhs by the year 2011. This would require developing innovative ways to dispose of cases, without diluting the rights of either party.

Recommendations :

Improving the disposal rate of complaints/appeals by the Information Commission through the following recommendations :

  • Hearings through video conferencing : Since the Information Commissions are situated in State capitals (with exceptions like Maharashtra), it is inconvenient for applicants to be present during the scheduled hearing. This problem assumes significance in cases of matters pertaining to the Central Government, where the appellant has to travel to New Delhi. It is proposed that the Information Commissions use video conferencing (VC) as a mode of communication for such hearings. VC facility is available at each district headquarter which may be used for this purpose.

  •  The CIC, as per S. 12(7) and SIC, as per S. 15(7), with the approval of the appropriate Government should open offices at other locations, so as to reach out to the masses.

  •  Passing order on merit of the case without hearing. This would address issues of rescheduling the hearing, in case of absence of the appellant or the PIO.

  •  Usage of software application for managing the processes at the Information Commission. This application  should  assist  in  improving productivity/efficiency in disposal of cases, drafting of orders, day-to-day office administration etc.

Further the recommendations on other important issues are as follows :

  •  Composition of Information Commissions : As per the S. 12(5) and S. 15(5), the composition should be such that it should have people with wide knowledge and experience in law, science and technology, social service, management, journalism, mass media or administration and governance. To implement these sections in spirit, it is recommended that the people who have worked in Government should be restricted to 50% (if not less) as recommended in the ARC report.

  •  To facilitate the induction of the new Commissioner, where he/she does not have a back-ground of law/quasi-judicial role, he/she should go through an induction period before assuming full charge.

  •  Usage of RTI-compliant standard templates should ensure quick and reasoned orders to the appellant. It may be noted that the templates have a strong linkage to the Act and leave little room for errors.

Raag & NCPRI Report :

Current status and preliminary findings :

4) RTI case studies :

RAAG has now collected some 5,000 case studies from across the country in a further effort to understand who is using the Act, to what end, and what the outcomes have been. While thus far, case studies have been culled primarily from the national Hindi and English press, and by looking at relevant websites, mailing lists and blogs, attention is now turning to collecting more stories from the vernacular press as well.

These case studies show myriads of citizens using the Act in previously unknown ways, disproving the misperception that only RTI activists use the Act. Since the Act was born from people’s needs, it has been branching out continually as more and more people use it. For example, while it may strengthen some people’s Right to Life by helping them answer ration-related questions; it also helps others close down a polluting factory. In some cases, applicants faced threats, not all of which were ‘paper tigers’. In others, a larger group came forward to support an individual’s application. There are even interesting cases of Internet users forming their own online RTI support groups to help each other fill applications.

Similarly, there are extremely encouraging stories of RTI success by individuals or groups that are generally stonewalled by the Government, such as women, SCs and STs, people coping with physical challenges. Examples include economically-weaker sections using it to get school admissions for their children, a visually-challenged person using it to question his village panchayat, a ninety-year-old woman to get her passport, and supposed beneficiaries of the Indira Awas Yojna to avail of this scheme.

Other stories are emanating directly from field groups throughout the country. Many people’s movements, citizens’ groups, and non-governmental organisations now rest their work heavily on the Right to Information Act, using it for broader societal purposes.

In other words, RTI activism does not stand in isolation, but is being used as a potent instrument to improve governance and transparency across a variety of issues, including the Public Distribution System, municipalities, elections, trade unions, genetically-modified foods, dams, and the National Rural Employment Guarantee Act.

Cases of particular interest are being culled out and sent for rewriting, to make them more readable from the human interest angle. These will then be compiled into a compendium to be released in January. The RAAG team is also hoping to commission an author to write a novel featuring the Right to Information Act. These case studies will also become the basis for a play on the Right to Information Act, to be performed in January.

5) Website survey of S. 4 compliance :

As mentioned earlier, the departmental websites of the 240 state and district-level Public Authorities covered in the urban survey are also being evaluated for S. 4 compliance. This is to ascertain whether Public Authorities have begun to ‘pro-actively’ report the detailed operational, financial, and service-related information the Act requires of them.

The website survey of all 240 state and district-level sample Public Authorities is now half-way done.
 
One of the major findings of this ‘work in progress’ is that most S. 4-related information is not found on the website of the Public Authority itself as would be most logical, but on the State or Central RTI portal. Many websites also have frequent connectivity problems, making it difficult for citizens to use them to find the information they are seeking. There are also significant differences in the quality and depth of websites across States, with some providing extremely detailed and insightful information to citizens, while others provide almost nothing. However, a general pattern is that State Government websites tend to contain more information than District Government websites.

6) Survey of RTI coverage by the media :

As mentioned earlier, the People’s RTI Assessment is analysing the role that the print media has played as a disseminator and user of the Act. Leading newspapers and magazines in over ten states (Bihar, Goa, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Uttarakhand, Tamil Nadu), as also leading national English and Hindi publications are being analysed. Each state analysis is being undertaken by a partner organisation or individual.

This national analysis of the media is intended to answer the following questions :

  •  How much coverage have different publications given to RTI-related issues and cases ?

  • What role have different publications played in raising public awareness about the RTI Act and its use ?

  •  What tone and approach have different publications assumed vis-à-vis the RTI Act ?

  • Have newspapers, magazines and other publications used the RTI as a tool for investigative journalism, and have they found it useful ?

  •  What does the Indian media establishment (i.e., owners, editors and journalists) think of the RTI Act ?

  •  Has the Indian media establishment begun to internalise the RTI in letter and/or spirit by enhancing the transparency of their own functioning ?

Additionally, State partners are collecting clippings of all RTI coverage in their States, and RAAG intends to upload this entire collection onto a national People’s RTI Assessment portal.

Status — This analysis is now half-way done, and State partners are beginning to send in the first draft for their analysis reports. From a cursory review of these, it appears that RTI coverage of the media is not as intense as might be assumed, and that many journalists are still learning how to use the RTI for investigative purposes.

State media survey consultants will now begin the process of interviewing editors, journalists, and media house owners to determine their perceptions about the RTI and its potential impact in India. The final analysis report should be complete by late December 2008.


Part C : Other News

Important pronouncements by the Commission :

When Shailesh Gandhi, CIC was in BCAS office addressing RTI activists and journalists, he distributed compilation of 8 important profound pro-nouncements by the Central Information Commission.

In this part, the first is being covered, others to be followed in subsequent issues :

1. No imagined exemptions :

This Commission is conscious of the fact that it has been established under the Act and being an adjudication body under the Act, it cannot take upon itself the role of the Legislature and import new exemptions hitherto not provided. The Commission cannot of its own impose exemptions and substitute their own views for those of the Parliament. The Act leaves no such liberty with the adjudicating authorities to read law beyond what is stated explicitly. There is absolutely no ambiguity in the Act and tinkering with it in the name of larger public interest is beyond the scope of the adjudicating authorities. Creating new exemptions by the adjudicating authorities will go against the spirit of the Act.

Under this Act, providing information is the rule and denial an exception. Any attempt to constrict or deny information to the Sovereign Citizen of India without the explicit sanction of the law will be going against rule of law.

Right to Information as part of the fundamental right of freedom of speech and expression is well established in our constitutional jurisprudence. Any restriction on the Fundamental Rights of the Citizens in a democratic polity is always looked upon with suspicion and is invariably preceded by a great deal of thought and reasoning. Even the Parliament, while constricting any fundamental rights of the citizens, is very wary. Therefore, the Commission is of the view that the Commission — an adjudicating body which is a creation of the Act — has no authority to import new exemptions and in the process curtail the Fundamental Right of Information of citizens.

Undiplomatic disclosures :

Soli Sorabjee under ‘Soli LOQUIES’ writes in Sun-day Express of 25-10-2009 (extracts) :

Thanks to the freedom of Information Act in the UK, there have been startling revelations in the release of letters written by British ambassadors about foreign governments and the people of the country where they had been stationed.

The most devastating assessment was in a 1967 memo by Roger Pinsent, Britain’s ambassador to Nicaragua, stating that “the average Nicaraguan is one of the most dishonest, unreliable, violent and alcoholic of Latin Americans”. The letters are brutally frank but certainly not diplomatic. A successful application under our RTI Act for disclosure of assessments made by our diplomats about countries where they were posted would be very illuminating. The problem is that any disparaging criticism, even if true, would be withheld by timorous babus because of likely potential damage to foreign relations with other countries. Unfortunately, satyameva jayate has no place in these matters.

Unauthorised alterations in the flat :

One, Ms. Kanika Golder, was put in the dock by her housing society after she made unauthorised alterations in her flat purchased on the 20th floor of the storeyed Shivalaya Residency Co-operative Housing Society in Thakur Complex, Kandivli (E). She took the RTI route to find out that almost every neighbour of hers had also made such unauthorised constructions. But after follow-ups with the BMC failed to yield any result, she approached the Bombay High Court.

A report submitted by the BMC to the Court admit-ted that almost every flat holder had illegally encroached upon the corridor up to the lift door. There was an amalgamation of flats and major alteration inside the flats. The refuge area has also been encroached upon. Even though the BMC tried to argue that the illegalities cropped up at the time of construction, a Division Bench of Justices Ranjana Desai and Mridula Bhatkar ruled, “We are not concerned with the question as to whose instance the encroachment is done. If there is any encroachment, it should be removed immediately, because if the area outside the lift is encroached upon, in case of fire or other such calamity, it may prove hazardous. If the refuge area is occupied, it is also dangerous to the housing society,” the order said.

When the Court came down heavily on the civic body, the BMC begun action by demolishing certain portions in the tower.

RTI helps retired Government employees to get their dues :

RTI activist, Milind Mulay, was prompted to file the RTI query as his mother, Vijaya S. Mulay, who re-tired as a nurse from Marol Maternity Home, did not get her dues for over one and a half years. “I was made to run from pillar to post, but they found a new excuse every day,” Mulay said.

RTI replies had revealed that the leave encashment dues of many employees had remained unpaid.

In a Circular dated November 10, the State Finance Department ordered that full payment should be made to the retired government employees. The Circular also said that excuses like not having full details (like the revised pay) should not be used to delay payments.

The payment should be made in full and at one stroke. If there is any difference in the amount because of revised dues, even that should be given in the lump sum instead of in part payments, the Circular said.

In the Fire Brigade alone, 41 firemen had not been paid leave encashment dues for three years.

The RTI replies revealed that around Rs.6.81 crore have been pending in dues to the 787 employees. Fourteen municipal wards alone are sitting on the files of 308 employees.

A senior fire officer who won the President’s Gallantry Award for meritorious service said that “for around one and a half year he was curtly asked to call up later. Many Fire Officers and firemen like me did not take leave for months together, working seven days a week. But this is the way the department has rewarded us”.

RTI and emails at BMC :

BMC is trying to make it easier for citizens to file online complaints to officers. RTI reply showed that only 40% of BMC personnel used their official email IDs.

The Chief Minister has now in the Circular dated November 9, instructed personnel in all government departments, including the civic corporation, to use their official email IDs for departmental communication, especially in instances where files get stuck for months together.

The BMC now plans to make all official IDs according to the officer’s post (or office) and not his or her name. These way complaints from the public will reach the new officer even if the old one is transferred. BMC officials admitted that the civic corporation has done little to promote the use of online facilities among employees or citizens. There are now plans to bring out pamphlets with the details of all official email IDs. “We will also provide the email IDs in the civic guide,” an official said.

RTI replies on BMC employees Internet usage pat-terns had revealed that in a 20-day period only around 40% of personnel actually used their official e-mail IDs. Data provided by the BMC’s IT cell showed that while 2,897 official IDs were created by the department, an average of only 1,172 emails were sent daily. Further,

  • An average of 312 e-mails bounced back and 47 were rejected from official IDs every day;

  • A senior BMC official has said that only 1% of civic Public Information Officers have official e-mail IDs.


Rs.5, 000 demanded for reply in about 45 pages to RTI application :

The Delhi University (DU) seems to be taking sides when it comes to answering queries through the Right to Information Act. Months after Amitabh Amit, a civil servant and ex-DU student, alleged that two DU professors — including PM Manmohan Singh’s daughter Upinder — victimised him for objecting to an ‘anti-culture’ essay in the course, the varsity has sent him a bill of Rs.5, 000 to cover costs incurred to answer the question.

In reply to a fresh RTI application filed by Amit, District Information and Public Information Officer, DU said they spent the sum on typing and photo-copying information to answer his earlier query about Professor Singh, and only after receiving the amount due for the previous query, will it be pos-sible to entertain further questions.

DU’s late realisation has surprised Amit. “I am being victimised because I dared to question the PM’s daughter. Even if you consider all the answers sent to me, they will not be more than eight to nine replies of four to five pages each. I don’t know how they charged me Rs.5,000,” he said.

According to RTI activist, the usual charge for an RTI reply is Rs.2 per page. Therefore, Amit should not have been charged more than Rs.90.

Details on Judges’ appointment :

The Supreme Court on December 4 stayed an order of the Central Information Commission (CIC) to the Apex Court to make public details of discussions in the collegium relating to appointment of Judges and the correspondence between the Chief Justice of India and another Judge relating to alleged interference of a Union Minister in a pending case.

Accepting Attorney General G. E. Vahanvati’s suggestion that the matter was of grave importance and required threadbare scrutiny, a Bench issued notice to RTI applicant S. C. Agrawal and posted the matter for hearing after five weeks.

This marks the beginning of the SC’s maiden judicial journey to examine the impact of the RTI on the happenings in the inner sanctum of the highest echelon of judiciary relating to administration of justice, which had been traditionally kept away from public knowledge.

An important clarification came from the Bench before it embarked on the journey — “there is no backtracking on right to information”. Probably, it was hinting at the recent decision of Judges of the Apex Court to put their assets and liabilities on the official SC website.

Appearing for the RTI applicant, Counsel Prashant Bhushan said it was the SC which had got the ac-colades for pushing the right of a citizen to access information. But, a perception is gaining ground that when it came to enforcing the right to information on judiciary, the SC was backtracking.

A firm assurance came from the Bench that the judiciary was not against the citizen’s right to information. It said : “You can take it from us that there is no backtracking on the right to information. We will examine the issue threadbare”.

Assailing the direction to make public information which was available only with the CJI, the SC, in its two petitions, said the CJI held the information pertaining to the appointment of Judges in a fiduciary capacity. So it should be exempted from the public under the RTI Act.

Endorsement of food products of Pepsi :

A RTI battle by a doctor against his colleagues for endorsing two Pepsi products had made the Central Information Commission (CIC) sit up and direct the Medical Council of India (MCI), a statutory body to regulate standards of medical practice in the country, to take up the issue with their Ethics Committee.

The Indian Medical Association (IMA) had, under a cloud of controversy, gone ahead and given its seal of approval to Pepsi’s Tropicana fruit juices and Quaker cereals. Dr. K. V. Babu, a native of Kannur district in Kerala and a life member with the IMA, chose to stand back from his fellowmen to question how ethical is it for doctors to support Pepsi’s commercial products. He took his queries right up to the CIC after the MCI and later the Ministry of Health and Family Welfare passed the buck from one to the other. “IMA is endorsing food products of Pepsi and that such endorsement is unethical,” Information Commissioner Annapruna Dixit voiced Babu’s questions in a recent hearing, later recorded in her order.

“He requests clarification since he is an IMA member. He wants to know whether endorsement of a commercial product by a medical organisation is unethical or not,” the Commissioner explained.

She directed the Medical Council “to place the issue before the Ethics Committee at its next meeting and to inform Dr. Babu the decision taken by the committee” by December end 2009. The Commission ordered the Public Information Officer, IMA, to furnish necessary information to the doctor by December 15.

Right to Information

Part A: Decision of CIC

Section 8(1)(b), (d), (e), (h) and (j)
    Mr. Rakesh Kumar Gupta of Delhi has sought information regarding matters relating to the income tax of eight parties: (a) Three limited companies including Escorts Ltd (b) Three centers of Escorts Heart Institutes & Research, and (c) Mr. Rajan Nanda and Dr. Naresh Trehan.

    Both the PIO and FAA refused to grant information, holding that the information related to third parties, and the third parties, in reply to the notice issued to them, had strongly objected the disclosure of information relating to their income tax records.

    According to the PIO, the applicant was not able to substantiate as to what the overriding public interest in disclosing the information relating to third parties is, and that unless the case of public interest is established, the disclosure would lead to an invasion of privacy of the assessees.

    It was easy for the Commission to take the decision that clauses (b)(d), (e) and (h) do not apply to this case. The said clauses cover (b) Information forbidden to be published by any court of law, etc. (d) Information which is in the nature of trade secrets, intellectual property, etc. (e) Information held in a fiduciary relationship, etc. (h) Information which would impede the process of investigation, etc.

    However, as to applicability of clause (j), the ‘order’ discusses the issue in detail and takes a view contrary to the view taken by many earlier decisions of the Commission. The said clause 8 (1)(j) provides the following: Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen information, which relates to personal information, the disclosure of which has no relation to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information. Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.

    As the subject matter of this case is of interest to the profession and as it is a landmark decision, I reproduce this part of the decision almost completely:

    “The final exemption claimed by the Department as in the case of Dr. Naresh Trehan and three other third parties is under the Section 8(1)(j). The three other third parties are the Escorts Heart Institute and Research Centre, Delhi, Escorts Heart Institute and Research Centre, Chandigarh, and Escorts Heart Institute and Research Centre Ltd. Section 8(1)(j) is with regard to personal information and, therefore, it can only be claimed by natural persons and not by corporate entities. The three institutes cannot claim to have ‘personal’ information. There is a difference between having a personality, i.e., a legal personality, and owning ‘personal information’. Personal information is information relating to a natural person, not a legal person. Words in a law should normally be given, including the meanings, in common language. In common language, we would ascribe the adjective ‘personal’ to be an attribute, which applies to an individual and not to an institution or a corporate body. From this, it flows that ‘personal’ cannot be related to institutions, organisations or corporates. Hence Section 8(1)(j) cannot be applied when the information concerns institutions, organisations or corporates. Therefore, the Commission is of the opinion that Section 8(1)(j) cannot be relied on by these three third parties, as they are not natural persons.

    With regard to the information relating to Dr. Naresh Trehan, it has been argued by his representative that the information sought is personal as it contains personal financial information of the assessee, including various assets, income and expenditure and the disclosure of this information has no relationship with any public activity or interest. It has been alleged that the information has been sought with ill will and malice, with the motive to harass and blackmail the assessee. Furthermore, the Appellant is likely to misuse the information and could endanger the life and property of the assessee if the information goes in the hands of unsocial elements. There is no larger public interest served in disclosing this information to the Appellant.

    The Commission has considered the submissions made by the Appellant, the Department and the representative of Dr. Naresh Trehan. To qualify for this exemption, the information must satisfy the following criteria:

    1. It must be personal information.

    There is no doubt that information with regard to Dr. Naresh Trehan is personal information.

    2. It must not have been disclosed to the public authority as part of a public activity

    The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have been given in the course of a public activity. Various public authorities, in performing their functions, routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Also when a citizen provides information in discharge of a statutory obligation, this too is a public activity. Therefore, information provided by an assessee to the department for purposes of income tax assessment is information disclosed in relation to a public activity and therefore this part of Section 8(1)(j) is inapplicable in the present case..

    3. The disclosure of the information would lead to unwarranted invasion of the privacy of the individual.

    Certain human rights such as liberty, freedom of expression or right to life are universal and therefore, would apply uniformly to all human beings worldwide. However, the concept of ‘privacy’ is a cultural notion, related to social norms, and different societies would look at these differently. Therefore referring to laws of other countries to define ‘privacy’ cannot be considered a valid exercise to constrain the citizen’s fundamental Right to Information in India.

    Parliament has not codified the right to privacy so far, hence in balancing the Right to Information of Citizens and the individual’s Right to Privacy, the Citizen’s Right to Information would be given greater weightage.

    The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a citizen. In those circumstances, special provisions of the law apply; usually with certain safeguards.

    Therefore, where the State routinely obtains information from citizens, this information is in relationship to a public activity and will not be an intrusion on privacy. As this information has been provided by the assessee to meet his legal obligations, there is no unwarranted invasion of his privacy by the state. Therefore the disclosure of the same information to another person cannot be construed as being an unwarranted invasion of the privacy of the individual.

    Given our dismal record of misgovernance and rampant corruption which conspires to deny citizens their essential rights and dignity, it is in the fitness of things that the Citizen’s Right to Information is given greater primacy with regard to privacy.

    Hence information provided by individuals in fulfillment of statutory requirements will not be covered by the exemption under Section 8 (1) (j).

    It has come out during the hearing before the Commission, – and through the submissions made by the various parties, – that the Appellant is an informer for the Department. Escorts has also raised the matter in its written submissions of 17 September 2009, and asked the Commission to decide, ‘Whether an informer of the I.T. department can seek information in respect of the records of a third party for an ulterior motive?’ The ulterior motive being referred to appears to be the reward money, which the appellant might get.

    The Appellant has given a list of additions made by various Tax evasion officers relating to the information being sought by him”

    The Order then gives details of such additions (same are not reproduced here) running into crores of rupees.

    Thus, the appellant has pointed out that Assessing officers have added hundreds of crores as additional income and CIT (A) has also confirmed some of them. He fears that a lot of alleged tax evasion will go unpunished, leading to a loss of revenue and perhaps his reward money. If citizens monitor this through RTI, it could be a major gain for public revenue and perhaps a good check on corrupt officials.

    Based on above, Commission directed PIO to provide the inspection of the records and also the other information sought by the appellant before 15th January 2009.

    [Mr. Rakesh Kumar Gupta vs. The PIO c/o CIT (Central)-2 New Delhi: No. CIC/ LS/A/2009/000647/SG/5887 of 14-12-2009]

Part B:  The RTI Act
Continuing from October to January BCAJ, the summary of two reports:

One
study by PricewaterhouseCoopers (PWC) as appointed by the Department of
Personnel and Training (DOPT), titled “Understanding the key issues and
constraints in implementing the RTI Act.” Its final report as Executive
Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment

  
 Analysis Group (RaaG), in collaboration with a number of other social
bodies including TISS, Mumbai under the title “Safeguarding the Right to
Information”.

    DOPT-PWC Report:

Institutionalising third party audit

It
is strongly felt that in the absence of a strong review mechanism,
there is a high probability that the level of RTI implementation would
regress to lower levels.

Key issues observed

Some of the key facts observed during the study:

  
 Limited infrastructure/processes with SIC to carry out
responsibilities under Sections 19(8) (a), 25(1), 25(2), 25(3f) 25(3g)
and 25(5), leading to non-compliance by PAs with regard to RTI
provisions.
 

    No/inadequate mechanism for monitoring
proactive disclosure, resulting in low compliance to Section 4(1b) of
the RTI Act (65% of the PAs have not published their proactive
disclosure on the websites).

    Non-adherence to service levels of 30 days causing delay in providing information to the RTI applicant.

    Recommendations

  
 To ensure better service delivery by authorities and officials, third
party audits should be institutionalized to support the Information
Commission in carrying out responsibilities under Sections 19(8)(a),
25(1), 25(2), 25(3f), 25(3g) and 25(5). Institutionalising regular
audits would facilitate the Public Authorities’ compliance with the RTI
Act (through the audit findings made available by Information
Commission). In this context, it is recommended to have a third party
audit (at least annually) to support the Information Commissions and RTI
Implementation Cell to monitor the performance of Public Authorities
and to take appropriate action in case of any deviation.

  
 Moreover, it is also suggested that the SIC website should have a list
of all the Public Authorities within the jurisdiction of the Information
Commission. The website should have a feature for citizens to report
noncompliance (through tick-mark options) for a Public Authority. The
reports generated through this application, would be helpful for a
Public Authority and the Information Commission to take appropriate
actions.

    Raag & NCPRI Report:

Current status and Preliminary Findings:

(7) RTI and the Courts

This
component is compiling data on court cases, in which appellants have
challenged State or Central Information Commissions. Analysis is being
driven by the following questions:

    What types of CIC and SIC rejections are being taken to the High Court and to the Supreme Court?

    What types of appellants are tending to do this?

    How quickly is the higher judiciary resolving these cases?

  
 Have judicial rulings, by and large, upheld the spirit of the RTI? In
which cases have judicial rulings tended to be in favour of appellants,
and in which against?

    Has the referral of such cases to the
court influenced the offending public authority to provide requested
information, even if there is a judicial ruling?

Preliminary findings

Status
– This analysis has commenced with a review of RTI cases in the Delhi
High Court. Since many of the appeals heard by the Central Information
Commission are referred to the Delhi High Court, this makes it potential
representative of the RTI cases being heard by other High Courts as
well. Additionally, many Delhi Right to Information Act cases are
currently also lying before the Delhi High Court.

While 18
RTI cases have been located in the Delhi High Court records so far, only
15 of these have been selected for examination for analysis for the
Interim Report. These were filed before the Delhi High Court and Supreme
Court of India from 2006 to 2008.

In most of these cases,
the applicant—and not the Government—has taken the case to Court. Only
in four cases has the Union of India (UOI) approached the Courts. Even
though the sample size is small, a preliminary analysis reveals that the
Courts have shown sensitivity by admitting Writ petitions that
challenge the decisions of the Central Information Commission. However,
it must be pointed out that it is premature to comment upon the normal
outcome of such cases given that very few have as yet been decided.

But
given the way cases have been progressing, it can be inferred that many
RTI cases are pursued much like regular cases, in a “run of the mill”
manner. In one pending case, in which the applicant sought information
about the responsibilities of MCD officials charged with cleaning public
places of a certain village of Delhi, the judiciary has ignored the
public cause involved and MCD threats to the applicant and his family.
The case has lain before court for more than 1.5 years.

However,
in other cases, landmark judgments have been made, and that too
expeditiously, pointing to the beginning of systemic change in the
judiciary’s approach to RTI. One such is the Bhagat Singh vs. CIC &
Income Tax Department of Dec 2007, in which the judgement is liberal. It
interprets the exemption to information disclosure under Sec 8 (1) (h)
that disallows disclosure on the ground that “information which would
impede the process of investigation or apprehension or prosecution of
offenders”. The judgment is particularly important as it sets a
precedent and strongly supports the spirit and underlying principles of
the Right to Information Law. Further, the judgment was delivered within
8 months of its filing.


    RTI and International Donors

Background:
While international donors fund social, infrastructural, and
institutional capacity -building activity, they have historically only
been required to report to the Indian Government. Resultantly, citizens
often have little information or say in how these programmes work or the
impact they have.

This component of the study is studying donor
disclosure policies to understand what kinds of information they require
donors to share directly with the Indian public, how these policies
compare with the requirements that the Right to Information Act places
upon Indian public authorities, and how the Right to Information Act is
shaping donor thinking on this issue. The analysis will also examine
donor disclosure policies in practice, and whether donors are sharing
the maximum information permissible or just their minimum requirement.
Also being studied is donor spending on RTI programmes in India, to
understand the manner in which they are attempting to influence the RTI
regime in the country.

Eleven international donors are being
studied, including nine of the largest multilateral and bilateral
government donors to India (World Bank, Asian Development Bank, Japanese
Bank for Inter-national Cooperation, GTZ, Russians, United Nations
Development Programme, European Union, DFID and USAID) and two of the
world’s largest private grant -giving foundations with operations in
India (Bill and Melissa Gates Foundation, Ford Foundation).

Research
comprises a desk review of the public information disclosure policies
and practices of the selected international donors, complemented by
face-to -face interviews with key stakeholders (including international
donors’ governance and accountability advisors in India, government
officials, beneficiaries, and members of the public).

Research is
still at a preliminary stage, although the desk review of information
disclosure policies and practices of all donors is now almost complete.

Early findings

  •   
     UNDP, ADB and World Bank disclosure policies were easily available on
    the Internet; other donors’ disclosure policies were not so easily found

  •   
     While UNDP’s, ADB’s and the World Bank’s public disclosure policies
    have undergone a series of revisions, ADB was the first to revise its
    policy following stakeholder consultations.

  •     With respect to information that is exempt from disclosure:

 UNDP – Broad definition of exceptions

 ADB – well defined list

 WB – everything else apart from documents about WB strategies and programmes is denied / discretionary

 UNDP,
ADB and the World Bank all provide a list of documents related to their
operations (strategies, programmes and projects), but only ADB’s policy
appears to have a presumption in favour of disclosure.

Part C : Others News

Important Pronouncements by the Commission :

When
Shailesh Gandhi, CIC, was in the BCAS office addressing RTI activists
and journalists, he distributed compilation of 8 important and pro-found
pronouncements by the Central Information Commission (Continuing from
January 2010)

2. Alternative routes to access information

No
Claim has been made by the PIO of any exemption under the RTI Act to
deny the information. If a public authority has a process by a Citizen
other than the route provided by the Right to Information Act, it is the
Citizens’ right to decide which route he wishes to use. The existence
of another method of accessing information cannot deny the Citizen his
freedom to use his fundamental right codified under the Right to
Information Act. If Parliament wanted to restrict his right, it would
have been stated in the law. Nobody else has the right to constrain the
rights of the Citizen.

There is no Provision in the Right to
Information Act, which restrains the Citizen’s right to use it, if
another route to access information has been of-fered or is available.
It is a Citizen’s right to use the most convenient and efficacious means
avail-able to him.

    Section 2(h) of the RTI Act

In
the last issue of BCAJ, under Part A, was cov-ered the Order of CIC on
section 2(h). I had there mentioned that many bodies operate primarily
as service to the citizens of India but they take a negative view that
they are not covered under section 2(h) and hence RTI Act does not apply
to them.

    It is reported that following bodies disputing
application of RTI to them are now held by Delhi H.C to be covered under
RTI Act.

  •     Indian Olympic Association

  •     The  Commonwealth  Games  Organizing Committee

  •     Sanskriti School

Justice Bhat stated:

The
RTI Act recognizes that non-state actors may have responsibilities of
disclosing information which would be useful and necessary for the
people they serve as it furthers the process of empowerment, assures
transparency and makes democracy respon-sive and meaningful.

  
 CIC has ruled that the Bar Councils are covered under the RTI Act and
they have been directed to set-up a mechanized for operation of RTI.
CIC’s decision is based on the fact that Bar Councils are set-up under
the Advocate Act 1961, Passed by Parliament.

    Against above rulings, it is interesting to note what happened in the Supreme Court early in January’10

The
Supreme Court stayed the Orissa high court order, which had upheld a
2006 order of Naveen Patnaik government bringing Reliance Power owned
two power distribution companies under the purview of RTI Act.

The
advocate of the power distribution companies argued before the Supreme
Court that the RTI Act was applicable only to “public authority”, the
meaning of which was erroneously expanded by the government and agreed
to by the HC to include the power distribution companies under the RTI
Act.

In this connection remarks of Hon. Justice Chandra-chud as
reported in BCAJ of Dec 09 (Page 117) are very relevant. He said:
“Definition of ‘Information’ given in the Act, covers information
relating to any private body which can be accessed by a Public Authority
under any other law for the time being in force”. Thus, what can be
accessed by Public Authority can be accessed by any individual citizen
also. Therefore, though the implementation is presently focused on
Public governance or Public officials, it has to be extended to private
governance in course of time.


    Missing File
 

nine
applicants got jobs with various central government organisations,
1,993 applicants got placement in state government offices,
quasi-government and local bodies affiliated to the state and the
central government provided placement to 1,265 applicants and 1,115
placements came from private sector.

“The exchange does not give
jobs to lakhs of educated youngsters. Only a lucky few get placements.
They have become irrelevant in today’s privatised economy,” said RTI
economist Chetan Kothari who had filed a query.

    The Judgement of the Courts

The
Supreme Court ruled that the judge cannot be asked under the RTI Act as
to why and how he came to a conclusion in a judgement.

Said the
bench of Chief Justice K G Balakrishnan and Justice B S Chauhan: ‘A
judge speaks through his judgments and he is not answerable to anyone as
to why he wrote the judgement in a particular manner’.

    Renaming of High Courts
 

The
BMC has lost the file of a controversial South Mumbai building, which
was in the name of Dawood Ibrahim’s wife. This information was revealed
in a reply to the RTI application filed with the municipal
commissioner’s office. In his reply dated December 22, 2009, T M Bhatia,
assistant engineer-building and factories (C ward), said the file
papers pertaining to the building were not traceable/available.

    Disclosure of assets held by Public servants

After
politicians and judges of the Supreme Court, now the assets of babus
have also been prised open to public scrutiny by RTI. In a landmark
order, the Central Information Commission (CIC) has said that disclosure
of information such as assets of public servant, routinely collected by
the public authority, should be made available to the public under the
Right To Information Act.

    Employment Exchanges – how they operate!

In
reply to an RTI query, it is gathered that only 4,532 of the total
number of 30 lakh-plus job-seekers, who went through the Maharashtra
employment exchanges last year, got jobs. One hundred and fifty

In
reply to the RTI query, the ministry of law and justice has stated that
it has received the proposal to change names of four high courts.

  
 The proposal to change the names of Bombay HC to Mumbai HC, Calcutta
HC to Kolkata HC, Gauhati HC to Guwahati HC and Madras HC to Chennai HC
is under consideration of the government.

    RTI Act and Consumer Protection Act (CPA)

Very
interesting and a landmark judgement both for the RTI Act and the CP
Act has been delivered under the CP Act. Issue is whether failure to
furnish information without valid reason constitutes a deficiency in
service for which compensation can be sought by a consumer complaint.

The
applicant, Dr. Rao won the matter before the District Consumer Forum
but lost it before the Karnataka State Commission. The issue has now
been decided by the National Commission in a trend setting judgement.

The
National Commission observed that the settled law was that even if a
particular law barred the jurisdiction of courts, a complaint could
still be filed under the provision of the CPA as it provided an
additional remedy. The RTI Act did not bar the jurisdiction of the
consumer fora. Also, the provisions for appeal under the RTI Act were
restricted to the failure to furnish the information sought, but there
was no provision to claim compensation for deficiency in service. An
applicant under the RTI Act has to pay fees for getting the information,
and hence he acquires the status of a consumer. If there is any
deficiency in service in respect of providing such information, a
complaint could be filed under the CPA for claiming compensation.

ORDERS OF CIC

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Right to information

 S. 2(f) :

S. 2(f) defines the word ‘Information’ :

Sunil Kumar had asked Department of Revenue a series of
questions aimed at eliciting from the Department of Revenue their interpretation
of the provisions of the Budget, the Finance Act and the notifications issued
thereof.

Citing certain decisions of the Commission and the definition
of information u/s.2 (f) of the RTI Act as well as on the basis of the
confidentiality of the Budget and its provisions including the Finance Act,
respondents declined to disclose the information through CPIO’s communication
dated 25-3-2010 and the decision of the Appellate Authority, dated 23-4-2010.

Central Information Commissioner (CIC), A. N. Tiwari, held
that ‘given the nature of the queries appellant had included in his RTI
application, it is obvious that he has been seeking from the respondents their
interpretation of various provisions of the Budget, the Finance Act and the
notifications thereof. This cannot qualify to be information u/s.2(f) and hence
has been rightly declined by the respondents.’

During the hearing, it was stated on behalf of the
respondents that on the basis of the feedback received from the citizens and
various trade and financial organisations, government, from time to time, issues
clarifications regarding specific points in various Acts, Rules, notifications,
etc. One such clarification has been issued by the Ministry of Finance covering
most of the grounds and the points mentioned in appellant’s RTI application.
Respondents were willing to provide a copy to the appellant for his reference
and use. They however reiterated their point that it was not open to any private
citizen to use the RTI Act to seek from the respondents their specific comments
about interpretation of laws, Acts, Rules and notifications. CIC held that
respondents’ contention is valid and was upheld.

[Sunil Kumar v. Department of Revenue, No. CIC/AT/A/2010/00342
dated 3-9-2010]

  •  Co-operative
    Bank

— whether Public Authority : S. 2(h) :

CIC Mr. M. L. Sharma has ruled that Co-operative Banks are
not Public Authority in the matter of two appeals by Preeti Goyal.

CIC stated that a bare reading of clause (h) of S. 2 of the
RTI Act would indicate that a private body or a co-operative society can be said
to fall in the domain of this clause, if it is substantially financed, directly
or indirectly, by the funds provided by the appropriate Government. Admittedly,
the society in question has not received any funds either from the Central
Government or the Government of Union Territory of Chandigarh. By this logic, it
cannot be said to be a public authority. Needless to say, once it is held that
the society in question is not a public authority, it has no liability to
provide any information under the RTI Act.

General Manager Mr. Dhillon of Chandigarh State Co-operative
Bank Ltd. appeared before the Commission and in a written representation relied
on certain decisions, the ratio whereof is that Co-operative Banks do not fall
in the ambit of S. 2(h) of the RTI Act.

The relevant para of the representation is extracted below :

“In the latest judgment reported as 2009 (5) RCR (Civil) 394
— Bidar District Central Co-operative Bank Ltd., Bidar v. The Karnataka
Information Commission, Bangalore and another and 2009 (5) RCR (Civil) 833;
Dattaprasad Co-operative Housing Society Ltd. v. The Karnataka Information
Commission, Bangalore and another, it has been held by the Karnataka High Court
that co-operative society does not fall within the purview of S. 2(h) of the RTI
Act. Similar view has been taken by the Bombay High Court in a judgment reported
as AIR 2009 Bombay 75, wherein it has been held that a Co-operative Bank
registered under the Maharashtra Co-operative Societies Act is not a public
authority.”

Based on above CIC held that the Chandigarh State
Co-operative Bank Ltd. is not a public authority.

[Preeti Goyal v. Chandigarh State Co-operative Bank Ltd.,
Appeals No. CIC/LS/A/2010/000657 & 658, decision dated 16-9-2010]

PART B : THE RTI ACT, 2005

In the last two issues of BCAJ, I had covered talks by Gopal
Krishna Gandhi and Nandan Nilekani at the inaugural and concluding sessions
respectively at CIC’s 5th annual convention held on 13th & 14th September 2010.
Hereunder is the brief summary of talks at the inaugural session by Mr. Veerappa
Moily and at four technical sessions in between :

Dr. Veerappa Moily agreed RTI has caught our imagination.

Right to Information has the key to strengthening
participatory democracy and ushering in people centred governance. For creation
of a global information society, it is essential to safeguard plurality of
opinions, and to promote ‘open access to networks for service and information
suppliers’ and ‘free expression of ideas’.

The 1st technical session ‘RTI and Public Private
Partnership Projects’ was chaired by A. N. Tiwari, CIC (now Chief Central
Information Commissioner).

He summarised the discussion and concluded that many
infrastructure projects on PPP mode satisfy the basic tenets of a Public
Authority as defined under the RTI Act. He also observed that in the years to
come the RTI may go a long way in operationalising the PPP more objectively. He
was of the opinion that the governments themselves should declare whether a
particular PPP project is a public authority under RTI Act or not.

The 2nd technical session : ‘Responsibility of Political
Leadership in Promoting RTI’ was chaired by V. Narayansamy, Hon’ble Minister
of State, Planning & Parliamentary Affairs.

Sri Narayansamy: Right to Information is a tool in the hands of citizens which keeps the bureaucracy on its toes. However, he stated that the citizens are suffering in getting the information, even though they fulfill all their obligations as required under the Act. They are given misleading, truncated and irrelevant information and some people misuse it as well. He commended the role of the Commissions and cited two decisions of CIC. In one of the cases the Commission directed the PMO to disclose the assets of the Ministers, which they complied and while in another case, the Commission, directed the DoPT to disclose file notings. The Hon’ble Minister expressed his grief over the killings/threats of RTI activists. He said that the Government is sensitive to the situation and is bringing about special legislation for whistle blowers protection and privacy Act. The role of the politicians, the law makers does not stop with the enactment, it includes efforts in ensuring implementation. Shri Narayansamy concluded that the Judiciary should be made accountable. All three wings of the government have to function under the provisions of the RTI Act.

The 3rd technical session : ‘RTI & Judiciary’ was chaired by Wajahat Habibullah. One of the panelists was Justice A. P. Shah. His conclusions were:

Conclusion : Demands for change to existing systems in the judiciary must be met rationally, bearing in mind the objectives sought to be achieved. Will the proposed changes promote public respect for the judiciary and the rule of law? Will they strengthen democratic principles ? How do they relate to the constitutional requirement of judicial independence? The guiding principle should always be accountability but let it always be commensurate with judicial independence and impartiality. The challenge is to develop mechanisms of accountability that do not undermine judicial independence.

The 4th Technical Session : ‘Challenges and Opportunities in RTI — Role and Responsibility of Media/CSO’ was chaired by Ms. Mrinal Pande, Chairperson, Prasar Bharti.

One of the panelists, Ms. Ravi Singh stated that RTI is as important as the right to food and right to education. Since constant vigilance is the price for freedom, the role of NGOs, the media, the courts and the civil society is important.

Another panelist, Shailesh Gandhi observed that all the stakeholders of the RTI have to work together to create a supportive environment for the Act to flourish.

                                      

                                            Part C: Information On & Around

   Ration offices in Mumbai and around:

Vigilance Committees play a crucial role in addressing the grievances of local residents against ration shops. But information obtained under the RTI has revealed that due to vacancies in these committees, several areas are under represented.

Anil Galgali, an RTI activist who procured this information, said, “A Vigilance Committee is supposed to meet once a month to redress the grievance of the residents. But the provision for a Vigilance Committee is meaningless if it does not have any members.”

The vigilance committee also ensures that commodities in rationing shops are sold as per the directives of the government. “An inefficient vigilance committee is a setback for below poverty line (BPL) ration card holders who rely heavily of essential items sold through ration shops. Absence of an efficient vigilance body means that there are no effective checks and balances on the public distribution system (PDS),” he added.

It has come to light that in five of the 53 rationing offices in Mumbai, Thane and Navi Mumbai, there is not a single member on the vigilance committee.

    University of Mumbai flouting RTI Act:

PIO of the University of Mumbai and also AA never responded to the RTI Application/Appeal filed by S. K. Nangia, RTI activist even after repeated reminders. However, on the application dated 15-3-2010, finally, AA fixed the hearing on 30-10-2010.

Now, the activist has written to Rajan Welukar, vice-chancellor at the University of Mumbai, highlighting the problems faced by citizens in seeking information from the university. He has also asked for reasons for the delay of more than six months for an appeal hearing to be held.

Senior official at the university states that they were tied up with other routine work in the university and shall write a regret letter to the applicant for the delay.

   Taxis in Mumbai:

According to the data provided by the RTO, from April 2009 to March 2010, 303 cases of refusals, 1,236 cases of meter tampering and over charging and 85 offences of rude behaviour were registered. In comparison, complaints launched between April and September shot up to 3,500, with the offence of drivers refusing multiplying eight times from 303 to 2,400 cases.

STOP PRESS

Information on selection of Judges:

A two-judge Bench of the Supreme Court wondered whether the time had come to make public the details of appointment of judges to the Supreme Court and High Courts. A Bench comprising Justices B. Sudershan Reddy and S. S. Nijjar referred to a constitution Bench, the crucial question on disclosing correspondence between the Chief Justice of India and the Law Minister on appointment of HC and SC judges under the RTI Act.

This is a significant development as 19 High Courts have opposed the order of the Delhi HC allowing disclosure of information on appointment of judges. Even the Delhi HC has opposed the pronouncement on administrative grounds. The sole exception is the Gauhati HC.

Echoing the views of the HCs, Attorney General G. E. Vahanvati told the Bench, “Information made available to the CJI in respect of appointment of judges of HCs as well as the SC is held by him in trust and in fiduciary capacity.”

Justice Reddy said, “The current debate is a sign of a healthy nation. This debate on the Constitution involves a great and fundamental issue.” Writing the judgment for the Bench, he said precedents relating to interpretation of the Constitution on this issue need not mean stagnancy. “The ultimate question must be, what do the words of the text (Constitution) mean in our time,” he said. The bench framed the following questions for the consideration of constitution Bench:

  •    Whether the concept of independence of judiciary requires and demands prohibition of furnishing of the information sought?
  • Whether the information sought amounts to interference in the functioning of judiciary?

  •     Whether the information sought cannot be furnished to avoid any erosion in the credibility of the decisions and to ensure a free and frank expression of honest opinion by all constitutional functionaries, which is essential for effective consultation and for taking the right decision ?

  •    Whether the information sought is exempt u/s.8(1)(j) of the RTI Act?

Very sensitive and crucial issue for RTI to get wide spectrum of coverage now awaits fill this judgment gets pronounced.

Right To Information

Part A: Decisions of the Court and CIC

S. 2(h), 2(f), 8(1)(e), 8(1)(j) of the RTI Act :

    It is a very unusual court case when the Supreme Court of India (SCI) files writ petition to the Delhi High Court (DHC) ! The issue came up before the DHC whether the Chief Justice of India (CJI) is a Public Authority and whether CPIO of the SCI is different from the office of the CJI and if so, whether the RTI Act covers the office of CJI.

    The writ petition covers a number of issues and the judgment runs into 70 printed pages (85 paras). Decisions on some of the issues are reported hereunder.

  •      The CJI is a public authority u/s.2(h) of the RTI Act.

  •      Asset declaration by the SC Judges, pursuant to the 1997 resolution is ‘Information’ within the meaning of the expression u/s.2(f) of the RTI Act. In Para 36 of the judgment, the DHC gave a very significant interpretation for this expression ‘Information’. It says :

    As is evident, the definition is extremely wide; the crucial words are ‘any material in any form’. The other terms amplify these words, explaining the kind of forms in which information could be held by an authority. It also includes ‘information relating to any private body, which can be accessed by a public authority under any other law for the time being in force.’ Facially, the definition comprehends all matters which fall within the expression ‘material in any form’. There is no justification in cutting down their amplitude by importing notions of those materials which are mandatorily held by it. The emphasis is on the information available, having regard to the objectives of the Act; not the manner in which information is obtained or secured by the authority. Thus, inter se correspondence of public authorities may lead to exchange of information or file sharing; in the course of such consultative process, if the authority borrowing the information is possessed of it, even temporarily, it has to account for it, as it is ‘material’ held. As far as the later part of the definition, i.e., accessing of information by or under any law is concerned, it appears that this refers to what is with a private organisation, but can be accessed by the public authority, under law. The Court deduces this, because the theme is included by the conjunctive ‘and’; but for such inclusion, such private information would not have been subjected to the regime of the Act. Therefore, it is held that all ‘material in any form’ includes all manner of information; the absence of specific exclusion leads this Court to conclude that asset declarations by judges, held by the CJI are ‘information’, u/s.2(f).

  •     CJI does not hold such declarations in a fiduciary capacity or relationship and hence not exempt under clause (e) of S. 8(1) of the RTI Act.

  •      Contents of asset declarations pursuant to the 1997 and the 1999 Conference Resolution are entitled to be treated as personal information, and may be accessed in accordance with the procedure prescribed u/s.8(1)(j). Here, I also reproduce para 62 of the judgment which is very enlightening :

    The right to access public information, that is, information in the possession of State agencies and governments in democracies, is an accountability measure empowering citizens to be aware of the action taken by such state ‘actors’. This transparency value, at the same time, has to be reconciled with the legal interests protected by law, such as other fundamental rights, particularly the fundamental right to privacy. Certain conflicts may underlie particular cases of access to information and the protection of personal data, arising from the fact that both rights cannot be exercised absolutely in all cases. The rights of all those affected must be respected, and no single right must prevail over others, except in clear and express circumstances. To achieve these objectives, and resolve the underlying tension between the two (sometimes) conflicting values, the Act reveals a well-defined list of 11 kinds of matters that cannot be made public, u/s.8(1). There are two types of information seen as exceptions to access; the first usually refers to those matters limited only to the State in protection of the general public good, such as national security, international relations, confidentiality in cabinet meetings, etc. The second class of information with State or its agencies, is personal data of individual citizens, investigative processes, or confidential information disclosed by artificial or juristic entities, like corporations, etc. Individuals’ personal data is protected by the laws of access to confidential data and by privacy rights. Often these guarantees — right to access information, and right to privacy, occur at the same regulatory level. The Universal Declaration of Human Rights, through Article 19 articulates the right to information; Article 12 at the same time, protects the right to privacy :

    “no one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference of attacks.”

    [CPIO, Supreme Court of India v. Subhash Chandra Agarwal & Anr., W.P. (C) 288/2009 decided on 2-9-2009]

 S. 8(1)(a), (e) and (j) of the RTI Act :

    The applicant, Sh. Chetan Kothari (of Mumbai) filed an RTI application with the CPIO, Ministry of Health & Family Welfare seeking information about medical, surgical or such other health-related problems of the Prime Minister. Specific points as follows :

    (a) Major and minor types of operations done on the Prime Ministers of India during their tenure as Prime Ministers during the last five years, giving yearwise break-up of major/minor surgeries separately;

    (b) Medical-related expenses incurred during each such operation, giving yearwise break-up of last five years;

    (c) For how many days were the patients hospitalised during such major/minor operations giving yearwise break-up with names of the hospitals for last five years;

    (d) Who bore the medical expenditure, whether deducted from PM’s salary or paid by the Government of India in a yearwise break-up form;

    Both CPIO and the first AA refused the information sought on the ground that the medical care scheme for the Prime Minister being a classified document, information pertaining to the same was exempt from disclosure.

The evasive response of the Respondent Public Authority compelled the appellant to file a second appeal before the ere. The appellant contended that denial of information by the respondent public authority without quoting the appropriate Section, under which exemption from disclosure was sought, indicated the deliberate attempt of the public authority of hiding the information and leading to wrongful denial of information.

Extracts from  the decision:

  •     The first query seeks information about the number of major and minor operations done on the Prime Minister / s during the last five years. This information is an indicator of the health and medical history of the present Prime Minister of the country and is classified as sensitive and ‘Secret’ information as per the Government Notification as also defined in the Office Memorandum of the Government of India, Ministry of Home Affairs, dated 6-2-2002 titled Guidelines on review of departmental security instructions wherein the Clause 2.1 of the Security Classifications clearly defined ‘Secret’ as “…. information and material, the unauthorised disclosure of which could be expected to cause serious damage to the national security or national interests or cause serious embarrassment to the Government in its functioning”. Thus this information is exempt u/s.8 (l)(a)’of the RTI Act since disclosure of information about the health and/ or medical problems of the Prime Minister could be misused and/or abused to the detriment of the national interest and security. Hence, such sensitive information, which could jeopardize national security and interest, need not be disclosed.

  •     In so far as the information as sought by the appellant against the points (b), (c) and (d) is concerned, some information already exists in the public domain like the information pertaining to the present Prime Minister’s by-pass heart surgery, number of days spent in hospital, medical expenses incurred for the operation and as to who – paid for the operation.

The remaining information, if any, still unavailable in public domain, despite the wide coverage by the media, deals with information of personal nature and is exempt under the scope of S. 8(1)G) of the RTI Act. In fact, the appellant has not made out a case that the said information is sought to serve any cause of larger public interest.

  • The respondent in his oral submissions has further sought exemption from disclosure of information under provisions of S. 8(1)(e) of the RTI Act, on account of the said information being of fiduciary nature between the Prime Minister and his team of doctors and medical experts. At this juncture, ‘fiduciary relation’ needs to be analysed in the light of its various connotations. The word ‘fiduciary’ is derived from the Latin termfiducia meaning’trust’.

The fiduciary relationship can also be one of moral or personal responsibility due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling. In short, it is a relationship wherein one person places complete confidence in another in regard to a particular transaction or one’s general affairs of business.

S. 16 of Indian Contract Act also clarifies ‘fiduciary relationship’ while defining ‘Undue Influence’.

In fiduciary relationship, a person with the legal duty to act primarily for another’s benefit enjoys a position of trust, good faith and responsibility.

Thus the word ‘Fiduciary’ is often used as an alternative term for ‘trustee’. The relationship between doctor-patient, lawyer-client or banker-customer are the various examples of fiduciary relationship. Thus, the Respondent Public Authority stands in fiduciary relation with the Prime Minister, holding the information in trust/ confidence.

In view of the above-mentioned facts and circumstances of the case, the Commission observes that the information, as sought by the appellant, and if not already available in the public domain, the respondent public authority holding the said information in fiduciary capacity on behalf of their patient (in this case, the Prime Minister), is exempt under provisions of S. 8(1)(e) of the RTI Act. So whether the patient is a Head of a State or a common person, the information nevertheless re-mains fiduciary and is exempt from disclosure to the public at large,since it is held in great confidence and trust.

Thus, it was held by the Commission that the information as sought by the appellant is exempt on the threefold grounds of national security, protection of individual’s right to privacy and also because the information is available with the DGHS in fiduciary capacity.

  • Therefore, among the information sought, the in-formation about the health and medical problems of the present and former Prime Ministers which already exists in the public domain, due to extensive media coverage or otherwise, like the recent cardiac surgery of the present Prime Minister, may be provided by the CPIO by 15 November, 2009 to the appellant.


[Sh. Chetan Kothari v. 1. Ministry of Health & Family Welfare 2. DGHS, CIC/ AD/C/2009/000620 decided on act. 15, 2009 by CIC Annapurna Dixit]


Part 2 : The RTI Act

Continuing from October & November BCAl, the summary of two reports :

One study by PriceWaterhouseCoopers (PWC), appointed by the Department of Personnel and Training (DOPT), is titled as ‘Understanding the key issues and constraints in implementing the RTI Act.’ Its final report as Executive Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment Analysis Group (RaaG) in collaboration with number of other social bodies including TISS, Mumbai under the title ‘Safeguarding the Right to Information’.

DOPT-PWC report    :

Common infrastructure & capacity  building:

The study also focussed on the information provid-ers to understand how well-equipped the Government/PA machinery is to respond to the needs of the RTI. This was studied from various aspects – training/knowledge, usage of IT, availability of basic infrastructure (like availability of photocopier at Panchayat level), etc. and whether adequate bud-gets existed to address the limitation.

o Key issues:

  • Record  management:

o More than 38% of PIOs stated ineffective record management system for delay in pro-cessing

o Approximately   43% of the  PIOs  were  not aware of the record  management  guidelines

  • Training/Knowledge:

o Approximately  45% of PIOs mentioned  that they had not been provided  training  in RTI

o Approximately 43% of PIOs were not aware of the proactive disclosure of their PAs

o Approximately 39% of the PIOs were not aware of key SIC (State Information Commission) judgments

o Training was limited to the provision of the RTIAct. Key aspects related to public dealing, motivation, technology, service levels, etc were not addressed.

  • Usage of information  technology:

o Lack of software application capturing details mentioned in S. 25(3)

o Lack of software application to improve effi-ciency at the Information Commission

  • Low motivation  of PIOs :

o Most of the PIOs have taken up the role un-willingly, leading to low motivation among them. Often, junior officers have been given the role of the PIOs and First Appellate Authority

o There was a perception among PIOs that lack of adequate budget and infrastructure ham-pers RTI implementation

o Approximately 89% PIOs said that there was no additional allocation of staff for RTI, while their work has increased.

The gaps highlighted above are partly due to lack of clear accountability established through appropriate Government rules and lack of controls to measure the level! effectiveness of implementation. This has been addressed in the report through detailing the roles and responsibilities of various entities and establishing a control mechanism through the use of IT and Third-Party Audits.

o Recommendations:

  •     Re-organisation of record management system to promote information management. A separate study is recommended to improve the current record management guidelines and make them ‘RTI friendly’.

  •     The following interventions in training to be taken:

o Knowledge Resource Centre should be the owner of developing and updating the training content.

 o At the State level, the State Nodal Department Agency should design a training implementation plan with support from the State Administrative Training Institute and National Training Agency.

  •     Head of the Public Authority should own the responsibility of training the officials in its Department through State Administrative Training Institute or State-empanelled agencies.

  •     Preparation of RTI ready plan: It is suggested that each Public Authority should do a self evaluation and identify areas of improvements and budget requirements. This would help in meeting the infrastructural needs, thereby meeting the requirements of the Act.

  •     In order to ensure good performance of PIOs in implementing the RTI Act :

    Allocation of responsibility of PIOs and AAs ~ to senior level officials in a Public Authority
is required.

o A mandatory column on the PlO’s performance must be added into the forms of Annual Confidential Reports (ACRs)/even if the posting as PlO is only a part of the over-all responsibilities handled by him/her.

o A monetary incentive for the PIOs may be considered at PA level. Often, the PIOs are”‘ liable to pay penalty, for reasons beyond their control. So while a penalty has been man-dated by the Act, the PAs should also get rewarded for good performance. This is important at places where PIOs handle a high volume of RTI applications.

  • Specific software applications/’information request management’ for implementation at Pub-lic Authority level and at the Information Commission.

  •     Usage of RTI-compliant standard template for quick and rational responses to the applicant.

  •     The ARC report had suggested that as a one time measure, GoI should earmark 1% of the funds of all flagship programmes for a period of five years for updating records, improving infrastructure, creating manuals, etc. (an amount not exceeding 25% of this should be utilised for awareness generation). This was a good suggestion to address the above-mentioned issues. On the  same lines,  it is suggested that  all Central and State Ministries/Departments should earmark 1% of their planned budgets for implementing the recommendations suggested in this report.

Raag  & NCPRI    Report:

Current    status and  preliminary findings:

3) Analysis of RTI Rules made by States and High Courts:

Background:  The RTI empowers State Governments and Competent Authorities to frame rules to operationalise the Act, as also to educate both Government functionaries and citizens about the Act. These rules are critical, since they detail application fees, payment for information requested, and mode of payment. Moreover, the RTI Act [So 7(5)] states that the application fee shall be ‘reasonable’, so as to facilitate the use of the Act by ordinary citizens.

The People’s RTI Assessment 2008 is analysing the RTI rules made by the Central and State Governments (appropriate government) and the Supreme Court, High Courts, the Parliament and State Legislatures (competent authorities) to determine whether they keep with the Act in letter and in spirit, and how people and transparency friendly they are. The necessary data was collected through desk research and by filing RTI applications asking for the required information.

The analysis of High Court RTI rules is now almost complete, as is that of the variety of RTI-related payment modes required by individual states.

Preliminary findings:

High Court R1’I rules – Of India’s 21 High Courts (excepting in [ammu and Kashmir), RTI rules have been framed for at least 17 (Allahabad, Andhra

Pradesh, Assam, Chhattisgarh, Delhi, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Kolkata, Madras, Mumbai, Orissa, Patna, Punjab, Haryana, and Rajasthan).

A detailed analysis of these rules suggests that many of these rules seem to be in violation of the RTI Act, and some go beyond the scope of the RTI Act, under which they have been framed.

For example, the High Courts of Karnataka, Chhattisgarh, Delhi, Gujarat, Punjab and Haryana have through the rules, sought to add exemptions over and above the exemptions specified in the RTI Act, specifically in S. 8(1) and S. 9. These High Courts have also sought to set up, through the rules, an appeals process which is at variance with that laid down in the RTI Act. The RTI rules of the High Courts of Delhi, Kolkata, and Gujarat also ignore the penalties specified in the RTI Act and specify their own penalties which are at variance with the ones specified in the RTI Act.

Similarly, the High Courts of Patna, Punjab & Haryana, Gujarat, Delhi, and Himachal Pradesh have framed rules that explicitly violate S. 6(3) of the RTI Act. Whereas the RTI Act says that where a PlO receives an application that in whole or part asks for information that is with some other public authority, the PIa must transfer that information to the concerned PIa within 5 days. However, the rules of the said High Courts state that all applications shall be rejected if the information they seek is outside the jurisdiction of the public information officer. These rules go on to declare that applications will also be rejected if the information they seek can be obtained under High Court rules or other general rules (Civil/Criminal) operational in a High Court. This is despite the fact that the RTI Act specifies that where there is an inconsistency with any other law, the RTI Act will prevail (S. 22).

All this is despite the fact that there are several rulings of the Supreme Court of India saying that rules cannot go beyond or modify the statute under which they are framed.

Modes of payment – In filing RTI applications in states other than the one you reside in, a major problem is the transmission of application fee and the additional fee that is to be paid for photocopying, etc. Different states prescribe different modes of payment (and different rates of payment). In some states they only accept treasury chalans, but making treasury chalans in Delhi for other states has proved to be nearly an impossible task and despite spending nearly a week running around, we have not yet been successful. Others demand court fee stamps or non-judicial paper of their state – which of course is not available in Delhi or in any other state!

Demand Drafts are also sometimes problematic, since these can only be accepted if made in the name of a specifically-designated official and the name of the designated officer is often not available, not even on the PA website or the State RTI portal. The RAAG team had to call up each department, and even then it was difficult to get this information. In many cases, we were thus compelled to request our teams in the concerned state to make payment on our behalf. But this is not possible for all citizens to do.


Part C : Other News

Blatant case of corruption    exposed:

In a blatant case of corruption, a civic body spent Rs.2.5 lakh on fitting paver blocks on a particular road. But the road continues to be in as pathetic a state as ever.

On paper, the Kalyan-Dombivli Municipal Corporation (KDMC) is said to have got the work done from a contractor, even paid him the money. But the paver blocks are nowhere in sight.

As per papers available with Mumbai Mirror, paver blocks were to be installed on a 300 metre stretch of Gaushala Road in Kalyan (W). The task was sanctioned in March 2008 and work began in November 2008, the work was completed in January 2009. What’s more, a month later KDMC even paid the contractor Rs.2.5 lakh !

The seam was exposed after Narsinh Deshmukh, from Kalyan, obtained details under the RTI Act, and even filed multiple complaints. When nothing came of the complaints, he decided to go on a hunger strike.

“I just sat on the footpath with  all the documents. I also  initiated a signature campaign. However, hours after  I began my hunger strike, it started raining heavily  and my resolve was weakened,” he said.

But friends and locals who had seen the papers pertaining to the road, got him umbrellas and stood by him.

Finally, KDMC Commissioner Govind Rathod heard about Deshmukh’s hunger strike, and decided to check things out. “I went to the road and found that paver blocks were not in sight. Later, I found that our engineers had got the paver blocks fixed on another road, which was a private area,” confirmed Rathod. He added that it is nothing but a blatant case of corruption.

Rathod  immediately    ordered an inquiry,  and even issued show-cause notices to a deputy engineer and junior engineer concerned. It was only after the inquiry committee was set up that Deshmukh called off his hunger strike.

Rs.28 lakh  on decoration, mostly  on flowers!

When Karnataka Government decided to hold cabinet meeting in Gulbarga, they spent Rs.28 lakh on decoration alone – most of it on flowers. Information was obtained by The Times of India by filing RTI query.

The decoration expenditure included putting up many buntings and welcome arches for 34 ministers, their secretaries and staff, who had taken the trouble of travelling 623 km from Bangalore to Gulbarga for the cabinet meeting.

The total expenditure for this one meeting was a shade lower than Rs.1 crore – Rs.92.39 lakh.

Speed-Post is now ‘snail’ post! !

An article sent through Speed-Post is supposed to reach its destination – be it any part of the country within 24 hours. However, Post Office data shows that 27,774 items sent even within Mumbai limits from Post Offices in the western suburbs overshot the deadline.

The 2006 postal directive to all Post Offices states that under the money-back guarantee scheme, the sender has the right to ask for refund in case the article does not reach within the stipulated time. “It is unfortunate that things sent to destination even within Mumbai do not reach on time,” said Dadar based RTI activist Milind Mulay. Articles, worth around Rs.5.90 lakh, were delivered late. Mulay claimed that all the senders should now demand for
a refund.

Political posters in Mumbai :

In 2008, political parties plastered the city with approximately 20 lakh posters and hoardings of candidates – birthdays, festival greetings, victories, welcomes, etc. Of these, just 1,590 were legal as they had taken permission from the BMC. This means 19,98,410posters, etc. were liable to pay a fine to the BMC – between Rs.1,000 and Rs.5,000 each.

RTI application has revealed that not a single political party paid the fine, a loss of Rs.30 lakh approxi-mately, to the BMC exchequer.

This year too, till September 19, of the 52,788 political posters, just 1,349 had BMC permission. Here again not a rupee was paid to the BMC – a loss of Rs.12 lakh. The same was true for 2007. There are no figures available for the pre-assembly and post-poll posters, etc., but the figures would be phenomenal.

In contrast, the BMC collected Rs.51,89,901 as fine from non-political hoardings, primarily of films, product advertisements, etc.

R. B. Bhosale, Deputy Municipal Commissioner (Special) said, “It is very difficult to nail an offender in the case of illegal posters/banners/hoardings. For instance, if it’s a banner celebrating Vilasrao Deshmukh’s birthday, we can’t go and ask him to pay the fine. Even if it has the signature of the party’s office bearer’s name, he washes his hands off, saying he hadn’t authorised it. For non-political hoardings there is always a mention of a store or a product and it is easier to nail the offender.”

Leader  of Opposition in RTI ambit  :

After ruling that the office of the Supreme Court of India comes under the ambit of the Right to Information (RTI) Act, the Central Information Commission has ruled that the office of the Leader of Opposition in the Lok Sabha was also covered under the RTI Act. It is a public authority as it is created by a notification of the government, but reserved his decision on whether the office was part of the Lok Sabha Secretariat or an independent office. Disregarding the orders of the ClC, the Lok Sabha Secretariat has not set up the information office for the leader of opposition as per the requirement of the RTI Act despite repeated letters from L. K. Advani’s office.

How  much of snacks, etc. in 8 months!

An RTI query revealed  that Puducherry  Chief Minister  V. Vaithilingam  and  his five colleagues  had spent  more  than  Rs.36  lakh  on tea,  snacks  and beverages while hosting visitors in just eight months between  Sept.  2008 and  April  this  year.  Welfare Minister  topped  the list by spending  Rs.l0.5  lakh.

Do the  Right  Thing:

The limes of India in the Editional on November 3, 2009 covers some significant points on life in a democracy. I reproduce it fully hereunder:
 
It has been four years since the Right to Information (RTI)Act came into force, ushering in a new era of transparency and accountability, or so it was hoped. While RTI might not have been the unqualified success many expected it to be, it is an important tool that civil society can use to keep the government honest. That’s why we are watching the debate raging over the appointment of the next Chief Information Commissioner (ClC) with some apprehension.

Civil society groups have every right to suggest a name for a post as important as that of the ClC. RTI is an instrument that gives citizens some measure of control over information, and it is understandable that civil society would be wary that excessive intervention from: the bureaucracy would blunt the Act’s powers. But by asking that decorated police officer Kiran Bedi be appointed to the top post and demanding that the merits of a different choice be explained to them, information rights activists have polarised the debate to the point of blackmaiL

Lobbies are a fact of life in a democracy, but the kind of pressure tactics that those lobbying on behalf of Bedi have employed are likely to put the government on the defensive. In entering into a confrontation with the government over the post of ClC, the activists have failed to take into account that it is not only they who have a stake in RTI and its functioning, the State is also a stakeholder, and as with all disagreements where many actors are involved, all views must be taken on board and a consensus involved.

Since its inception, RTI has met with mixed success. The results of a recent study into the conduct of information commissioners across the country indicate that only 27% of RTI applicants receive the information they asked for, while a significant chunk of the population remains unaware of how to file an application for information. Another potential problem is that only two of every 100 RTI Act violations are penalised. Even when Information Commissioners direct officers to release information, a majority- as much a 61% – ignore the order. With so many questions over the implementation of the Act, it is important that the debate over RTI is not restricted to the appointment of the ClC. Information rights activists should work towards strengthening RTI by beginning a discussion on how best to expand its scope.

(Arvind Kejriwal retorted on above as published in The Times of India on November 6, 2009. Though not reproduced here, due to constraint of space, you may view it on timesofindia.indiatimes.com)

ORDERS OF CIC

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Right to information

Part A: ORDERS OF CIC


S. 8(1)(e) & (h), S. 11 and S. 22 :


The first time a multi–member Bench of the Central
Information Commission has not given a unanimous decision. It is a split
decision. Two Information Commissioners : Mr. A. N. Tiwari and Mr. Satyananda
Misra delivered one decision and Information Commissioner Mr. Shailesh Gandhi
delivered the counterdecision.

Mr. C. Seetharamaiah (Mr. CS) made an RTI application to the
Commissionerate of Customs and Central Excise (CCCE), in which he requested for
the correspondence, telephone conversations, etc. between the Central Bureau of
Investigation (CBI) and CCCE in connection with the prosecution under the
Prevention of Corruption Act launched
on his son who was working as an Inspector of Central Excise.

The CPIO and the AA denied the information stating that if
furnished, it would impede the process of prosecution, exemption being covered
u/s.8(1)(h).

Further, the AA stated that as the information sought for
includes the third party’s (CBI) investigation report, the matter was referred
to CBI and it had replied that the same may not be revealed as the case is under
trial and parting with these documents would impede the prosecution of
offenders.

Due to the fact that certain important points of law needed
to be decided, the matter was referred to a three-member Bench by Mr. A. N.
Tiwari.

In the proceedings of this matter, all 3 parties viz.,
Mr. CS, CCCE and CBI made extensive submissions: Mr. CS submitted that the very
purpose of the RTI Act would be defeated if such information is not furnished.
“The officers who are being prosecuted for matters pertaining to discharge of
their official duties, if innocent, have to go through the vexatious prosecution
for years together. Revealing of information, as provided under the Right to
Information Act, 2005, may hasten the judicial process and help the innocent. As
already held by the Central Information Commission, there cannot be misuse of
the truth and the information available to a prosecutor should be made available
to the alleged offender also. It would be appreciable for everyone if the pace
of the judicial process is increased with the help of information obtained under
spirit of democracy.”

The CCCE and CBI argued that an accused in an ongoing
prosecution should not be allowed to access any information which may be
evidence in that prosecution. An accused in ongoing prosecution is free to
demand such information from the Trial Court and it is a matter which is
entirely within the jurisdiction and the discretion of the Trial Court.

Two members stated that the word ‘impede’ used in
S. 8(1)(h) holds the key to whether information requested by the appellant
should be allowed to be disclosed.

It was also the two members’ view that information which is
evidence or is related to evidence in an ongoing prosecution comes under the
control of the Trial Court within the meaning of S. 2(j) of the RTI Act, which
states as follows :


‘ “right to information” means the right to information
accessible under this Act which is held by or under the control of any
public authority and includes the right to . . . . . .’


I now reproduce 3 paras (part or full) of the decision :

28. It is significant that this S. 2(j) uses two
expressions about the location of given information, i.e., ‘held’ and
‘under the control of’. In our view, expression ‘held’ implies that a public
authority has physical possession of given information. The word ‘under the
control of’ implies that the information, regardless of which public authority
holds it, is under the control of a specific public authority on whose orders
alone it can be produced in a given proceeding. In the present case, the
material sought by the appellant is undoubtedly related to an ongoing Court
proceeding and hence it can be rightly said to be under the control of the
Trial Court, who alone can decide how the information is to be dispensed. Any
action under the RTI Act or any other Act for disclosure of that information
to the very party who is arraigned before the Trial Court or to anyone
representing that party, would have the effect of interfering with the
discretion of the Court, thereby impeding an extant prosecution proceeding.

29. Since the Information requested by the appellant is
under the control of the Trial Court, it is open to the appellant to approach
that Court through an appropriate proceeding under the criminal laws or if he
so wishes, u/s.6(1) of the RTI Act. The Court can then take action u/s.2(f) of
the RTI Act in case it decides that the petitioner should be allowed access to
the information he had requested. The key point is that either of these two
actions has to be before the Trial Court and not the respondent-public
authority (viz. Office of Commissioner of Customs, Central Excise and
Service Tax) or the third party (viz. CBI) as in this case. We agree
with the respondents that the integrity of a criminal proceeding before a
Trial Court in matters of what to allow to be produced as evidence should be
taken by the Court itself and not otherwise. We also note the fact that under
criminal laws, a public authority is authorised not to produce a certain
information or record in the Trial Court unless so directed by the Court
itself. Forcing the public authority to part with any such information — which
it would otherwise not have disclosed before the Trial Court — through an RTI
— proceedings would amount to imposing on the prosecuting public authority,
obligations which it was not obliged to bear.

30. It is, therefore, important that all determinations
about disclosure of any information relating to an ongoing prosecution should
be through the agency of the Trial Court and not otherwise.

The two members further noted :

33. According to the preamble to the RTI Act, one of the
purposes the Act designed to sub-serve was to combat corruption. We look
askance at any effort to convert the RTI Act into a tool to weaken the edifice
of law which seeks to bring to book errant public servants, especially when
such public servants have all the means available to them to present their
case before the Trial Court and seek from it the very information they now
want them to be provided through the RTI Act.




34.       The two members also noted that their
decision is also backed by the fact that the whole matter falls within the
ambit of S. 11(1) read with S. 7(7) of the Act since “it relates to or has been
supplied by a third party and has been treated as confidential by that third
party…..”

 

CBI had argued
that its objection to disclosure of information u/s.11 can be ignored only if
“public interest in disclosure outweighs in importance any possible harm or
injury to the interests of such third-party”.

 

CBI had argued
that there was no public interest. On the contrary, public interest is
positively harmed when interested parties are given the privilege of
interrogating a prosecuting agency about its actions vis-à-vis that party
through an RTI — proceeding when the prosecution before a Trial Court is
already extant.

 

Based on the
above, two members took the view: “Neither the provisions of the RTI Act, nor
the canons of justice, or equity commend disclosure of information as requested
by this appellant.”

 

Dissenting
decision:

 

IC Shailesh
Gandhi came to the conclusion that the information sought must be disclosed,
since there are no reasons in law to deny the information. IC writes thus:

“The
Commission’s decisions have been unanimous so far, and I am hesitant to break
this tradition. But I believe when there are different views on transparency,
it is worthwhile to voice them. I am inspired by Justice Mathew who had said in
the Supreme Court in State of UP v. Raj Narain (1975), ‘in a government of
responsibility like ours, where all the agents of the public must be
responsible for their conduct, there can be but few secrets. The people of this
country have a right to know every public act, everything that is done in a
public way, by their public functionaries. They are entitled to know the
particulars of every public transaction in all its bearing. The right to know,
which is derived from the concept of freedom of speech, though not absolute, is
a factor which should make one wary, when secrecy is claimed for transactions
which can, at any rate, have no re-percussion on public security. To cover with
veil of secrecy, the common routine business, is not in the interest of the
public. Such secrecy can seldom be legitimately desired. It is generally
desired for the purposes of parties and politics or personal self-interest or
bureaucratic routine. The responsibility of officials to explain and to justify
their acts is the chief safeguard against oppression and corruption.” I
sincerely believe that India could benefit immensely from RTI which is but a
search for the truth as it exists on the records of public authorities. Denial
of information must be an exception, since it is a denial of the fundamental
right of the sovereign citizen of India, and must rigorously meet the
requirements of the exemptions of S. 8(1) of the RTI Act. I cannot agree to
views which I feel do not reflect the law in letter and spirit.

 

He first dealt
with submissions of CBI that S. 8(1)(e) and S. 8(1)(h) and S.11 are applicable.

 

He held that for
S. 8(1)(e) to apply, there must be a fiduciary relationship and the holder of
information must hold the information in his fiduciary capacity. All
relationships usually have an element of trust, but all of them cannot be
classified as fiduciary. In these relationships, the lawyer and the doctor act
on behalf and in the interest of their client and patient. But in the present
case the Department would not be considering the report on behalf of CBI or in
the interest of any particular entity or individual. Therefore exemption
u/s.8(1)(e) claimed by the CBI is not tenable under the Right to Information
Act.

 

Mr. Shailesh
Gandhi then referred the provisions of S. 22.

 

“S. 22
provides:

The provisions
of this Act shall have effect not-withstanding anything inconsistent therewith
contained in the Official Secrets Act, 1923, and any other law for the time
being in force or in any instrument having effect by virtue of any law other
than this Act.”

 

He quotes
Justice Sanjeev Khanna of the High Court of Delhi in ‘Union of India v. CIC’:

“S. 22 of the
RTI Act gives supremacy to the said Act and stipulates that the provisions of
the RTI Act will override notwithstanding anything to the contrary contained in
the Official Secrets Act or any other enactment for the time being in force.
This nonobstante clause has to be given full effect to, in compliance with the
legislative intent.”

 

The two members
had taken the view that S. 8(1)(h) applies. Two reasons were given for it.

 

One: Disclosing
names of the officials involved in the report would impede the prosecution. Mr.
Gandhi argued?: “The officials may claim exemption u/s.8(1)(g), but this would
again be open to judicial scrutiny by the Commission and would not be
necessarily accepted. Even if this were accepted, the Commission u/s.10 could
direct severance of the names of the officers mentioned in the report.”

 

Two: According
to Mr. Gandhi, no reasons have been advanced showing how the prosecution would
be impeded by disclosing the information. When denying a right to the citizen,
it has to be established beyond doubt that prosecution or apprehension of an
offender would be impeded. This has not been done. If the Parliament wanted to
exempt all information which was the subject matter of a prosecution, it would
have said this. The Parliament has specifically exempted only the information
which would ‘impede’ the process of investigation or prosecution.

 

Further, he
writes:

 

“The argument
that the information can be made available to the appellant’s son in
accordance with the provisions of the Criminal Procedure Code is in itself
self-defeating. This is because it establishes that CBI and the prosecuting
agencies have no objection in the appellant’s son accessing the information per
se. Their objection is to the route adopted and to the fact that the Commission
may order the disclosure of information. The majority decision appears to subscribe
to this. With regard to the Right to Information Act, the Commission is the
final decision-making body. The Trial Court has jurisdiction over matters
coming before it, but not over appeals and complaints under the Right to
Information Act. The Commission cannot abdicate its re-sponsibility and
authority in deciding about disclosure of information under the RTI Act to any
Court. The existence of an alternative route to access information, does not in
itself provide an exemption to disclosure u/s.8(1) of the RTI Act. Unless the
information sought is proven to be exempt u/s.8(1) or 9 of the RTI Act, the
Commission cannot accept any other exemption external to either of these
provisions. The CBI has not advanced any spe-cific argument to show how the prosecution
would be impeded to claim exemption from disclosure u/s.8(1)(h).

 

Mr. Shailesh
Gandhi contradicts the interpretation of the majority decision on S. 2(j)
referred to in para 28 (supra). He states:

 

“The word used
in the provision is ‘or’ and not ‘and’. Thus information may be sought either
from the public authority holding the information or the public authority
having control over the information. The Parliament has deliberately drawn this
distinction as in some cases these two public authorities may be two entirely
different entities. Therefore, if a public authority holds the information, it
must provide the same to the RTI applicant in accordance with the provisions of
the RTI Act. It is not at all necessary for that public authority to control
that information as well. In the present case, the Trial Court may have control
over the record, but the CBI is the public authority holding the SP report.
Therefore, the SP report can be sought from the Commissioner of Customs &
Central Excise or from the Trial Court. Since the appellant has sought it from
the Commissionerate, the public authority holding the information must provide
the same.”

 

As to arguments
advanced for application of S. 11,

Mr. Shailesh
Gandhi writes:

“It is clearly
stated at S. 11(1) that ‘submission of third party shall be kept in view while
taking a decision about disclosure of information’. S. 11 does not give a third
party an unrestrained veto to refuse disclosing information. It only gives the
third party an opportunity to voice its objections to disclosing information.
The PIO will keep this in view and take a decision about disclosure of
information. If the PIO comes to the conclusion that the exemptions of S. 8(1)
apply, he may refuse to disclose the information.”

 

 

“S. 11 of the
RTI Act is a procedural provision which requires the PIO to approach a third
party if the information sought relates to such third party. S. 11 is not a
substantive provision and therefore is not an exemption in addition to those
provided in S. 8(1) and S. 9. Once the PIO receives the objections, raised by
the third party, he must keep these in view while deciding whether to disclose
the information or not. This decision has to be in consonance with the other
provisions of the RTI Act and therefore exemptions claimed by the third party
have to be justified by the PIO u/s.8(1) or S. 9. The provision of S. 11(4)
gives the right to the third party to appeal against the decision of the PIO.
This would not have been relevant if the mere denial by the third party of
disclosure of information were to be considered to be final.

 

Then disagreeing
with the contention raised in para 33 (supra), he writes?:

“I most
respectfully disagree with this contention since it appears to propound a
principle that an accused in a corruption case can be denied his fundamental
right. Right to Information is a fundamental right of the citizens codified by
the RTI Act, 2005. A fundamental right cannot be curtailed arbitrarily and
without the sanction of law. It does not matter if the person accessing the
information or the person in relation to whom information is sought is a
convict or an accused. He cannot be denied his fundamental right. The duty of
the Commission is to ensure that the RTI Act is implemented properly and to ensure
that it does not take into account extraneous considerations while deciding on
appeals and complaints before it.”

 

Finally, paras
51 and 52 of his decision:

51.  To summarise:

 

(a)        The information sought is not exempt
u/s.8(1)(e) or (h) for reasons explained above.

(b)        The RTI Act clearly overrides all other
prior Acts in matters of disclosures of information as per S. 22.

(c)        Refusal of information can only be based
on the RTI Act, when an application is made under this Act. The Commission is a
creation of the RTI Act and can only agree to denial of information which is
expressly exempted u/s.8(1) or u/s.9 of the RTI Act.

(d)       If there are various routes by which a
citizen can access information, it is his prerogative to use one which he finds
convenient.

(e)        S. 11 is not a provision which can be
used to justify exempting information from being disclosed, unless it is
covered by S. 8(1).

 

 

52.       In view of the reasons stated above, I
find the arguments put forward for the denial of information to be untenable.
Hence I cannot agree with the majority decision, and it is my considered
opinion that the information sought by the appellant is not covered by the
exemptions of S. 8(1) of the RTI Act and hence should be disclosed.

 

Note?: Full
decision shall be posted on website of BCAS and PCGT for anyone interested in
reading these extremely well-reasoned two counter decisions.

 

[Mr. C.
Seetharamaiah v. Commissionerate of Customs & Central Excise (Third Party?:
Central Bureau of Investigation)?: Appeal No. CIC/ AT/A/2008/01238 dated
19-9-2008 — decision dated 7-6-2010]

 

 

PART B: THE
RTI ACT

 

Payment of
fee under the RTI Act, 2005:

 

S. 6(1), S. 7(1)
& S. 7(5) provide for fee payable for accessing information being
application fee and fee for information supplied in photocopies, print or in
any electronic format. Proviso to S. 7 states that the fee prescribed by the
rules shall be reasonable. DoPT of Persmin, Government of India vide office
Memorandum (No. 12/09/2009.IR) has issued some clarifications on this subject.
The same are summarised hereunder?:

 

  •        
    The Rules or the Act do not give power to the
    PIO to charge any fee other than prescribed in the Fee and Cost Rules.
  •    
    Attention is drawn to the common order of the
    CIC in one appeal and one complaint which reads as under:

            “Thus, there is provision for
charging of fee only u/s.6(1) which is the application fee: S. 7(1) which is
the fee charged for photo-copying, etc. and S. 7(5) which is for getting
information in printed or electronic format. But there is no provision for any
further fee and if any further fee is being charged by the public authorities
in addition to what is already prescribed u/s. 6(1), u/s.7(1) and u/s.7(5) of
the Act, the same would be in contravention of the Right to Information Act.
The ‘further fee’ mentioned in S. 7(3) only refers to the procedure in availing
of the further fee already prescribed under 7(5) of the RTI Act, which is
‘further’ in terms of the basic fee of Rs.10. S. 7(3), therefore, provides for
procedure for realising the fees so prescribed.”

 

·        
It is hereby clarified that where a Public
Information Officer takes a decision to provide information on payment of fee
in addition to the application fee, he should determine the quantum of such fee
in accordance with the fee prescribed under the Fee and Cost Rules and give the
details of such fee to the applicant together with the calculation made to
arrive at such fee. Since the Act or the Rules do not provide for charging of
fee towards postal expenses or cost involved in deployment of manpower for
supply of information, etc., he should not ask the applicant to pay fee on such
account.

 

 

Part 3 :
INFORMATION ON & AROUND

 

·        
Appointments of Information Commissioners

 

The Government
will be appointing 22 commissioners this year. Of the 22 commissioners who are
retiring, six are with the Central Information Commission, including its chief
Wajahat Habibullah.

 

In August 2008,
DoPT recommended its Secretary S. N. Mishra, Annapura Dixit, Ashok K.
Mohapatra, R. B. Shreekumar, M. L. Sharma and Shailesh Gandhi for appointment
as information commissioners in the Central Information Commission.

 

Except  Gandhi, 
whose  name  was 
proposed  by several RTI
activists, names of the others were not recommended by anyone. But their
bio-data got included in the proposal for appointment of information
commissioners.

 

On the other
hand, three persons — Ravi Shankar Singh, Sudhanshu Ranjan and Dr. Krishna
Kabir Anthony — who applied and were also recommended by politicians did not
find a place in the agenda for the selection committee headed by the Prime
Minister. There were 12 others like them.

 

Arvind Kejriwal
who got the above info under RTI query says:

“it appears the
DoPT has become the de facto selection committee and the selection committee
provided under the law has been reduced to an endorsement committee.”

 

·        
BMC employees not being transferred:

 

Months after
Bandra residents managed a landmark victory forcing the transfer of at least
eight engineers who had been tossed around in the H-West ward for 20 years, an
RTI query has revealed that a similar situation exists in Andheri as well. As
many as 50 employees, including peons, engineers and clerical staff, haven’t
been transferred, some since the 80s.

 

The RTI query
filed by activist Aziz Amreliwala revealed that despite the BMC Rules that make
rotation of officials mandatory every three years, at the K/East ward, 11
engineers, including sub, junior and assistant engineers, have enjoyed the same
post for several years. In fact, some of them have even been promoted. Experts
blame a nexus between officials and politicians that make the transfers of
employees impossible.

 

·        
Maharashtra Chief IC

 

Dr. Suresh
Joshi, Chief Information Commissioner retires on 12-10-2010 (exactly on the 5th
anniversary of RTI).

 

Political
activist Chandrashekar Prabhu, additional chief secretaries M. Rameshkumar and
Bhupati Prasad Pandey, retired bureaucrats Leena Mehandale, S. S. Hussain and
state human rights commission member Subhash Lala are prominent among the
150-and-odd persons competing for the post of the State CIC.

 

Dr. Joshi has
gone on leave and entrusted his task to the junior-most IC, Ramanand Tiwari.
Other Information Commissioners who are senior to Mr. Tiwari have taken
objection to the decision of Dr. Joshi.

 

Ever since the
appointment of retired IAS officers as info commissioners, a cold war is on
between IAS and non-IAS commissioners. When the process of appointment of
Information Commissioners was in progress, activist Anna Hazare had personally
called on the then CM and President of India, saying that the Government should
not appoint retired babus for such sensitive posts. Currently out of the 7
commissioners, 3 are retired IAS and 4 are non-IAS officers.

 

Meanwhile, over
42 serving and retired IAS officials and 89 individuals have applied for the
post of info commissioners. The Nashik Information Commissioner’s post is lying
vacant. Aurangabad IC died in July 2010.

 

·        
Panchayati Raj Ministry:

 

The Panchayati
Raj Ministry, responsible for decentralisation and local governance in states,
but more importantly, empowering the rural poor, has been spending crores every
year as rent on space acquired at a 5-star hotel in south Delhi being 5,500
sq.ft. space on the sixth floor of Samrat Hotel in Chanakyapuri.

 

This information
came to light in reply to an RTI application filed by a Delhi-based activist.
Rent per month was `190 per sq.ft., for a period of two years commencing from
September 1, 2006, to be extended further with an increase of 8% after expiry
of the tenure. After the period lapsed on August 30, 2008, the present rate of
rent became `210.60 per sq.ft., from September 1, 2008. The total adds up to
more than `5 crore spent as rent so far.

 

·        
Corruption Eradication Committees:

 

Maharashtra
State Government’s commitment to combating corruption is facing its real test
in Thane, where a citizen activist has put a spotlight on the District
Collectorate for failing to comply with rules concerning the setting up of
Corruption Eradication Committees (CEC) at the taluka and district level.

 

The watch-dog
committees, comprising 10 citizens, selected after police verification, besides
a team of administrative and police officials, have been armed with the authority
to inquire into complaints of corruption. The anti-graft panels, initiated in
1996 during the Shiv Sena-BJP regime, raised hopes of finally getting justice
among aggrieved citizens as non-official members would ensure redressal of
public issues during monthly meetings.

 

 

The Thane
Collectorate, however, seems to be an exception to the rule aimed at equipping
people with the authority to question the corrupt. Of the 15 talukas, none has
a fully constituted CEC. In fact, the district CEC has just three non-official
representatives as against the mandatory ten.

 

·        
Cost of getting the information:

 

Citizens and RTI
activists have a reason to cheer. Now, they can save thousands of rupees which
they pay fee to get ‘readily available’ information under the RTI Act,
According to the Information Commission, they will get the information for Rs 2
per page, as stipulated in the Act.

 

Several RTI
applicants had complained that they were made to pay through their nose,
particularly while seeking information from BMC’s property-related departments,
such as assessment. Also officers often did not sign or attest papers while
giving information. When they were asked to sign on the documents, they used to
ask applicants to pay as per the BMC rate card which existed before the RTI Act
came into existence. The practice continued despite the fact that the RTI Act
has a superseding effect on all prior rules.

 

For example,
certified copies were charged at `230 per property in the assessment
department. If the applicant had to ask property details or building details
for more than one property, they would pay in thousands. Apart from this, the
inspection of voluminous information that is free for the first hour and `5 for
every 15 minutes was being charged `150 per hour.

 

The order from
Information Commission comes after a sustained battle of over one and a half
year by NGO, Mahiti Adhikar Manch, and some active citizens. The State Chief
Information Commissioner, Dr. Suresh Joshi, who heard the matter in March 2009,
passed order dated July 9, 2010, after a series of meetings with additional
municipal commissioners.

Right to Information

Part A : Decisions of CIC

l S. 2(f) and S. 7 :

    Mr. Rakesh Agarwal sought the following information under RTI application to Mr. K. S. Rawat, PIO, Tis Hazari Courts, Delhi :

    1. Whether intimations are sent by each traffic court of Delhi presided over by Spl. M.M.S. as required by S. 210 of the Motor Vehicles Act 1988 ?

    2. If not, reasons for the same.

    3. If yes, copies of all such intimations that pertain to convictions on 9 and 10 January 2008 across all Traffic Courts of Delhi.

    The PIO held that information sought for was not held by or under the control of any public authority and therefore did not fall u/s.2(f) of the RTI Act, which defines ‘information’.

    Further, the PIO stated that the appellant was representing his newspaper/magazine called ‘Nyay Bhumi’ and had filed 3 RTI applications in 15 days and the appellant was working for promotion of his business rather than serving social interest. Hence, it was a blatant misuse of the RTI Act.

    The First Appellate Authority (FAA) directed the PIO to collect the information from the Courts dealing with traffic cases and send it to the appellant within 20 days. The order was passed by FAA beyond 45 days and no hearing was given.

    The following two were grounds of appeal before CIC :

  •     The PIO demanded payment for providing information thereby violating S. 7(6)

  •      FAA did not afford a hearing to the appellant and received the FAA’s order on 25-2-2009 thereby exceeding the time limit set in the Act.

    It may be noted that the PIO had first held that information sought was not covered u/s.2(f) and only when FAA directed to furnish information, he agreed to provide it but only on payment of prescribed fee (i.e., Rs.2 per page). While the appellant’s contention was that having not validly denied supply of information, the same has to be submitted free as provided u/s.7(6) which reads as under :

        S. 7(6) : Notwithstanding anything contained in Ss.(5), the person making request for the information shall be provided the information free of charge where a public authority fails to comply with the time limits specified in Ss.(1).

CIC in the decision stated :

    “It is a basic tenet of statutory interpretation that words of a statute should be interpreted keeping in mind the context in which they appear. Information is to be provided free of cost if S. 7(1) is not complied with. Rejection of a request for any of the reasons specified in S. 8 or S. 9 has to be valid rejection in law. If a ground for exemption from disclosure is wrongly relied upon, then it does not amount to ‘rejection of a request’ as started in S. 7(1). It is absurd to contend that the appellant must be made to pay the additional fees when the PIO wrongly denies information. The Commission finds the PIO’s deliberate misconstruction of the law unacceptable. This is an attempt to obstruct the implementation of the RTI Act and to delay the provision of information to the appellant without any reasonable cause.

    CIC also observed that the PIO on several occasions, all of which are on record, has made unwarranted and irrelevant observations which give the impression that the PIO is malafidely denying information to the appellant. The Commission strongly advised the PIO to refrain from making such comments in future.

    Based on the above, the Commission directed the PIO to provide the information to the appellant free of cost. He was also asked to show cause as to why penalty should not be imposed and disciplinary action be not recommended against him u/s.20(1) of the RTI Act.

    [Mr. Rakesh Agarwal v. PIO, Tis Hazari Courts, Delhi, CIC/SG/A/2009/000675/3390, dated 22nd May 2009]

Ration card :

    The appellant had applied for a ration card in 2006 and in spite of repeatedly being shunted to various places did not get any ration card. The PIO stated that the Government has subsequently declared as to how many BPL cards will be issued and time was set for applications to be made for BPL cards. The Delhi Government accepted applications for BPL cards in February-March 2009 and decided on a maximum number of cards which are to be given. He stated that the applications were received and sent to a Vigilance Committee headed by MLA of the area. He admited that these cards are supposed to be given in 45 days, but the time at the Vigilance Committee headed by MLAs takes indefinite time.

CIC Shailesh Gandhi in the decision stated :

    The appellant has not been given any appropriate reply indicating what is happening to her ration card application. The approximate loss to her per month of free foodgrain and kerosene is about Rs.500 per month. The appellant should have got proper answer to her RTI application by 6-4-2009. The loss of free foodgrain due to her is already for three months by which she has suffered loss of Rs.1500. The Commission also feels that the loss of time and trauma which she suffered on account of not getting her due entitlement and pursuing this application and appeal should be compensated with another Rs.1000. Hence the Commission awarded a total compensation of Rs.2500 to the appellant for loss of entitlement and to compensate for the effort and the trauma suffered in pursuing this matter.

    The PIO was directed to give the information to the appellant before 10th July 2009 about the status of her application giving names and designations of the officers who have dealt with the BPL card application and where the application is presently.

    [Smt. Nagina Devi, Delhi v. PIO, Food Supplies & Consumer Affairs, GNCT of Delhi, CIC/SG/A/2009/001213+1214/3969, dated 2nd July 2009]

   

Part B : The RTI Act

Annual Report Maharashtra State Information Commission :

Please refer to RtoI of June, 2009. Under other news, I had reported some statistics as covered in the Annual Report of Maharashtra State Information Commission. Now the report in English is published and Dr. Suresh Joshi, CSIC has kindly sent me a copy.

It is Third Annual Report of the year 2008. Some interesting extracts from it:

  • 1,23,000 applications in 2006, 3)6,000 in 2007 and 4,16,090 in 2008 have been received respectively. In bigger States of our country less than one lakh applications come in one year. In the international arena England receives about 60,000, Mexico about 94,000. Similarly the Central Government receives about two and a half lakh applications. Thus it is seen that the people of Maharashtra have given tremendous response to this Act.

  • Understanding the important issues touching the lives of the people by using this Act agitating them on proper platform, fighting injustices, checking corruption, increasing the commitment of government employees to work and increasing the overall transparency in government functioning – many such like issues have been addressed due to the use of this Act.

  • Many young people have thrown themselves in this movement of the Right to Information. Similarly, many people above 60 years have also participated in spreading awareness about right to information. It is heartening to see that associations of officers, employees of the Government of Maharashtra have declared their support for this Act and have appealed to their members to give maximum information to the people through this Act. All these factors have proved useful in obtaining people’s support for this Act.

  • Maharashtra is the only State in the country where Benches of the Information Commission have been set up at the Division, level. Greater Mumbai, Konkan, Pune, Aurangabad, Nagpur already have Benches. Towards the end of 2008 Amravati Bench was constituted and on 24 December 2008 the Information Commissioner was appointed there. Only Nashik Bench now remains to be established and I am hopeful that it would be done soon.

  • Due to the formation of Divisional Benches the Commission’s work has reached nearer to the people. Commissioners have not only heard appeals at the divisional headquarters, but have attempted to hear them at the District level. Therefore people realised that ‘the Commission has come to our doors’ and this was perhaps one of the reasons for increasing number of RTI applications.

  • In 2007 the Commission decided 3611 appeals and complaints. This number is 15026 for the year 2008. The Commission has also started arranging hearings through video conferencing.

Annual Report 2006-07 of Central Information Commission :

(continuing from  July 2009)

v) Collection of Charges by Public Authority (Vide: S. 25(3)(e) of RTI Act) : All the Minis-tries/Departments/ Apex-level Offices taken together collected Rs.30,71,167 in the year 2006-07. In the year 2005-06, the amount collected was Rs.5,08,490. There is six times increase in the amount collected in year 2006-07 over the previous year. Top 10 Ministries collected a total of Rs.22, 82,984 (74.33% of the total) in the year 2006-07.

vi) Disposal  of appeals  (Vide:  S. 25(3)(c) of RTI Act) : All the Ministries/Departments/ Apex-level Offices, on an average, disposed 75% of the appeals received during the year 2006-07. Out of 57 Ministries/Departments/ Apex-level Offices, 22 Ministries have disposed 100% appeals during the year and 65 Public Authorities have received more than 50 appeals.

vii) Implementation   of the Act (Vide:  S. 25(3)(f) of RTI Act) : Efforts taken by Public Authorities to administer and implement the spirit and intention of RTI Act include launching of website to disseminate information with respect to Act and developing Public Grievance Redressal and Monitoring System (PGRMS) by some Ministries. Suggestions were received from Public Authorities about increasing fee for seeking information, for filing first and second appeals, increase in time to respond for older records, and taking up more capacity building programmes.

viii) Recommendations   for Reforms,  etc. (Vide:  S. 25(3)(g) of RTI Act) : The Central Information Commission has made valuable recommendations for reforms and with respect to specific Ministries with a view to make RTI Act more effective. The recommendations include (a) streamlining the procedure of dealing with RTI applications, (b) strengthening of the staff for efficient disposal of RTI applications, (c) implementation of homogeneous fee structure, (d) full conformance with spirit of RTI Act, (e) respect for dignity of citizens. In addition CIC made some observations with similar objectives. These observations are with respect to (a) promotion of employees of Public Authorities, invasion of the privacy, (c) interpretations of rules and Acts, (d) language issues, (e) communication issues, (f) adherence to record retention policies and process of weeding out information, (g) computerisation, (h) training of the staff, and status of governing body and strengthening of staff grievances redressal system.


Part C : Other News

•  Unclaimed money in the banks:

Coming down heavily on banks that keep funds in ‘suspense accounts’, the Central Information Commission has asked RBI to disclose details regarding ICICI Bank. CIC also directed RBI to provide information in 10 days if other banks, including govt-run ones, were following this practice. In his order, Information Commissioner Satyananda Mishra asked RBI to give a “comprehensive reply stating categorically if the RBI had ever issued any instruction on the subject and if according to them such practice was being followed in other banks including public sector banks”. The decision could have far-reaching impact in bringing information on unclaimed money into the public demain.

•  File notings    :

[Further to file notings as appeared in July 2009 issue]

In a Circular issued in the third week of June, DoPT has stated, “It is hereby clarified that file notings can be disclosed except those containing information exempt from disclosure u/s.8 of the Act.” DoPT’s move comes after the CIC had issued notice to two Department officers seeking reason why they should not be prosecuted for disobeying its orders. The Commission had asked the Department to correct its website which said notings couldn’t be disclosed under the Act. DoPT Minister Prithviraj Chavan has said that notings were not part of the proposed amendments to the RTI Act.

•  BSE and  SEBI :

Yogesh Mehta, a former sharebroker, and whom BCAS foundation RTI clinic on ongoing basis provides assistance has again received an order from CIC in his favour. CIC in a landmark order has directed the SEBI to procure information from the BSE’s Investor Protection Fund (IPF) and provide it to Mr. Mehta whose shares worth lakhs of rupees are lying impounded with IPF since last 13 years.

While BSE did not have any objection in providing information to SEBI, it was of the view that SEBI cannot provide the same to the citizen under the RTI Act. It is learnt that now a big battle awaits between BSE, SEBI and the applicant.

•  Mediclaim Policy refund:

The RTI Act has come to the help of thousands of Mediclaim policy holders who have been struggling to get refund for the excess premium they have paid. The Central information Commission (CIC) has directed New India Assurance Company Ltd. to make public the details of the total number of policy holders who are still to get a refund for the excess premium charged. The CIC has asked the company to provide the information on the company’s website and send a copy of information to the Insurance Regulatory Development Authority.

Is vacation an excuse to delay on RTI application?

CIC has ruled that there is no law that allows Courts to give up their obligation under the Right to Information Act even if many staff members are on vacation. CIC’s disapproval came on HC’s failure to furnish an RTI response to an applicant on the ground that staff is lean owing to vacation.

“The Commission finds it difficult to accept that any public authority can claim vacation from RTI for one month which is not provided for in law,” Information Commissioner Shailesh Gandhi noted in a recent decision.

ORDERS OF CIC

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Part A : ORDER OF CIC

In the last (August 2010) issue, I reported on one full-bench
(split) decision of CIC. In this issue, I report two full-bench decisions
pronounced, one in June and the other in July.

© S. 8(1)(e) and S. 2(f) :


An interesting matter came for decision in this case. The
appellants, Sri Manohar Parrikar of Goa and two other individuals, had made RTI
applications seeking all documents including correspondence, notings,
explanations between the office of AG (Audit) and certain bodies like Goa
Infrastructure Development Corporation, Government of Goa, etc.

The PIO furnished certain documents and denied some other
information sought, including the intermediary documents. FAA held that “the
intermediary documents are merely working papers and may not come within realm
of ‘information’ under the RTI Act and the same be furnished. The PIO did not
comply with the same.

The appellants then filed appeals before CIC. Before deciding
the matter, CIC sought the advice of the Secretary General of Lok Sabha and the
comptroller and the Auditor General of India. The Commission received the same.

In the view expressed by the C&AG, it held that “audit notes,
etc. are work papers and do not contain the final view of the Accountant
General. The information therein is based on the document obtained from the
auditee only. Such information would come within the scope of S. 8(1)(c)* of the
Act and disclosing such information may cause a breach of privilege of the
Parliament. This would be against the oath taken by the C&AG to uphold the
Constitution and the laws of the land.”

The C&AG also pointed out that based upon the Audit Report,
the CBI had launched a criminal proceeding against the appellant, Shri Manohar
Parrikar in Case No. RCO0015A/2007. It was, therefore, mentioned that any
disclosure at this stage would impede the process of ongoing
investigation/prosecution and thus bring the matter within the scope of S.
8(1)(h)** of the RTI Act.

The C&AG note also cited a passage from the U.K. Freedom of
Information Act, 2000, in which audit-related matters were exempt from
disclosure. It argued that the logic of the UK Act would also apply in the
Indian context as the United Kingdom and India were both parliamentary systems.

Appellant argued before the CIC that the C&AG’s
constitutional obligation to carry out specific mandate could not be treated as
a bar on the disclosure of the information, which undoubtedly is held in the
control either of itself or the office subordinate to it. Learned counsel for
appellant cited an order of the Delhi High Court, in which it was held that
authorities entrusted with constitutional obligations also carry a moral
responsibility of transparent conduct. He argued that the information given to
the Accountant General by the departments or the authorities under the
Government — Central or State — was neither fiduciary, nor was it confidential.
To call any information as immature, preliminary, intellectual input, unfinished
and so on, could not be a reason to withhold such information from disclosure
when S. 2(f) of the RTI Act defines all such items of information — and much
more as ‘information’ within the meaning of the Act. The stage of evolving
information was not a reason to bar its disclosure. The appellants’ counsel
further pointed out that this particular Accountant General’s Report was already
placed before the Legislative Assembly of Goa State and was thereby an open
document.

The C&AG’s representative also submitted that all reports
placed before the Parliament were in fact the property of the Parliament. As
such, all material connected with such a report should also be treated as the
property of the Parliament, which could be disclosed only if the Parliament so
authorised it. He pointed out that all Accountant General and C&AG Reports
placed before the Parliament are examined by the Public Accounts Committee,
whose deliberations are not open to public and thereby are confidential. All
material relating to the C&AG or the AG Reports are, therefore, inferentially
before the Public Accounts Committee and thereby become confidential as the
deliberations before the Committee are held to be confidential.

Decision Notice :

The Three-member bench held that provisions of S. 8(1)(c) of
the RTI Act are not attracted. The decision notes :


“As has been pointed out by the Secretary General of Lok
Sabha, the Constitution does not mention items such as draft reports, half
reports, half margins or draft audit notes and so on. If these are
information within the RTI Act, their disclosure liability has to be
determined in terms of the provisions of the Act. On the subject of whether
disclosure of this variety of information would constitute premature
revelation of matters before the Parliament or the State Legislature, the
Secretary General, Lok Sabha citing Kaul & Shakdher in ‘Practice and
Procedure of Parliament’, stated that premature publicity in the press to
notices of questions, adjournment motions, resolutions, answer to questions
and other similar matters connected with the business of the House did not
comprise breach of privilege, although it may be ‘improper’. It was no-doubt
breach of privilege to publish any part of the proceeding or evidence given
before a Parliamentary Committee before such proceedings or evidence or
documents had been reported before the House, unless the Committee itself
decides that either all or part of its proceedings may be publicised.
According to the Secretary General “it is doubtful whether the report of
C&AG qualifies to be treated as the report of a Parliamentary Committee or
evidence tendered before a Parliamentary Committee. Half margins, draft
audit notes, etc., as already stated, do not have any relevance insofar as
parliamentary papers are concerned.”

The Commission also went through clauses 1.4(XII) and
(XIV) of the parliamentary procedure. It then held :

“It is then obvious from a reading of the Secretary General’s note to the Commission as well as the extracts of the parliamentary procedure, that while all evidences and depositions before the Parliamentary Committees are no doubt held secret as well as proceedings before it, it cannot be stretched to mean that every single item of information, held anywhere, that may, now or in future, become part of the proceeding before the Parliamentary Committee, or may be required to be produced as evidence before it, should also come under the exemption from disclosure. While all evidence or material, which is part of a proceeding before a Committee of the Parliament, has to remain secret until the Committee wills otherwise, every other material, which does not answer that description, is beyond the bar. In other words, while the actual material in a proceeding before a Parliamentary Committee is prohibited from disclosure, such prohibition would not apply to such material, which is not yet part of an ongoing proceeding. The audit notes, marginal notes, etc. come decidedly in the latter category.”

The Commission was also not persuaded by the C&AG’s argument that these items of information were at a very preliminary stage and should not be allowed to be disclosed for that reason. According to the C&AG’s own averments, these are items of information within the meaning of S. 2(f) of the RTI Act. And if it were so, the only reason why it should be prohibited from disclosure, was that it attracted one of the exemption Sections of the RTI Act 2005. That is not the case in the present matter. Therefore, it held that these items of documents and records, being information in themselves, merit disclosure.

Based on above, the Commission directed the CPIO to disclose all information requested by the three applicants.

[(1) Shri Manohar Parrikar, (2) Shri Jayanta Kumar Routary, (3) Shri Gurbax Singh v. (1) Accountant General, Goa, (2) Accountant General (Civil Audit), Orissa, (3) Accountant General (Audit), Punjab : Appeal No. CIC/AT/A/2007/00274, CIC/AT/ A/2008/00726 and CIC/AT/A/2009/000732, decided on 10-6-2010]
    
S. 8(1)(j), S. 2(f), S. 2(j) and S. 2(n):

The three-member CIC decision in the application by Mrs. Bindu Khanna has significant implication. It is my view that media has wrongly interpreted this decision.

The appellant Ms. Bindu Khanna, a teacher in a private school, namely, Pinnacle School, wanted certain information relating to her employment, mainly her service records, leave and other statutory allowances, working hours, medical facilities, pension and gratuity benefits, etc. She made various oral as well as written requests to the school. When she did not get the said information, she approached the Directorate of Education by filing an RTI application dated 11-2-2008.

When in response to her RTI application, she did not get the information sought, she had made an appeal to the Commission, which directed the Directorate to secure the information from the school and provide to the applicant.

Pinnacle School which is third party in these proceedings approached the Delhi High Court by filing writ petition No. 6956/2008 and contended before the Court that the RTI Act was not applicable to the school, inter alia, for the following reasons :

    i) Pinnacle school is a private school;

    ii) The Delhi School Education Act and Rules framed thereunder do not provide for disclosure of information.

The School also contended before the H.C. that the Commission passed the impugned order without hearing them and without complying with the principle of natural justice. The High Court by order dated 15th September, 2009 set aside the impugned order dated 15th September, 2008 passed by the Commission on account of failure to comply with the provisions of S. 19(4) of the RTI Act and remanded the matter back to the Commission for fresh adjudication in accordance with law.

At the time of hearing before the full bench, the petitioner submitted that the Delhi School Education Act and Rules framed thereunder are a complete code governing all aspects of functioning of aided and unaided recognised schools. A combined reading of S. 2(f) of the RTI Act and the Delhi School Education Rules

[in particular Rules 50(xviii) and (xix)] shall conclusively establish that the respondent Directorate as the governing authority of the school, has the requisite powers vested in it to access the information sought by the appellant. The petitioner further submitted that the third party by denying the information u/s.8(1)(j) of the RTI Act has already conceded the applicability of the RTI Act and had not made any representation to the effect that the information sought could not be given as the provisions of the RTI Act were not applicable to them.

The third party submitted that the RTI Act is not applicable to the private schools and it is the Directorate of Education, which had to be approached in this connection. They further contended that the Delhi School Education Act and Rules framed thereunder do not provide for disclosure of information. This stand of the third party was in contradiction of the stand already taken before the PIO and the First Appellate Authority that the information sought by the appellant was exempted u/s.8(1)(j) of the RTI Act and cannot be disclosed.

The Commission came to the conclusion that the third party had conceded in all earlier proceedings that the RTI Act applies to it and now cannot contend that the RTI Act does not apply to it. Hence, that issue was not dealt with at all.

Hence the issue for determination was:

“Whether the third party, a private school performing public function, can refuse to furnish the information u/s.8(1)(j) of the Act, particularly when the FAA of the respondent has ordered to disclosure of information.”

The Commission analysed three items of definitions from S. 2, namely, ‘information’ (2f), ‘right to information’ (2j) and ‘third party’ (2n). The Commission also looked into The Delhi Education Act and the Rules, especially 2 clauses of Rule 50, reproduced hereunder :

“Rule 50 : Conditions for recognition — No private school shall be recognised, or continue to be recognised, by the appropriate authority unless the school fulfils the following conditions, namely :

    xviii) the school furnishes such reports and information as may be required by the Director from time to time and complies with such instructions of the appropriate authority or the Director as may be issued to secure the continued fulfilment of the condition of recognition or the removal of deficiencies in the working of the school;

    xix) all records of the school are open to inspection by any officer authorised by the Director or the appropriate authority at any time, and the school furnishes such information as may be necessary to enable the Central Government or the Administrator to discharge its or his obligations to the Parliament or to the Metropolitan Council of Delhi, as the case may be.”

Based on the above, the Commission held:

“The order passed by the First Appellate Authority directing the third party to provide complete information to the appellant and the decision of the Commission affirming the orders of the First Appellate Authority are perfectly in compliance with the provisions of the Act. The third party is hence obliged to comply with the said orders. The Commission, therefore, directs the respondent to seek compliance of the aforementioned order from the third party-Pinnacle School to provide information as sought by the appellant.”

The Commission also in the penultimate para stated as under:

“The issues relating to management and regulation of schools responsible for promotion of education are so important for development that it cannot be left at the whims and caprices of private bodies, whether funded or not by the Government.”

It is my view that the decision does not rule that the RTI Act ‘per se’ applies to the private unfunded schools. If the school concedes that the Act applies, then it cannot escape in furnishing information if under the combined definitions u/s. 2(f) and u/s.2(j) read with the rules of the relevant Education Act, the information is covered, then it is accessible and cannot be denied.

[Ms. Bindu Khanna v. Directorate of Education, Government of NCT of Delhi, (third party, Pinnacle School, New Delhi) : Decision No. 5607/IC(A)/2010 of 14-7-2010]

                                                       PART B : THE RTI ACT

Extracts from the Article of Antara Dev Sen, editor of the Little Magazine in the AGE of 24-7-2010.

Thinking allowed:

    Earlier this week, Amit Jethwa was shot dead in front of the Gujarat High Court. He was in his thirties, a caring, law-abiding citizen, committed to the environment, humanity and animal life. And like most dedicated souls, he believed that he could stem the rot in the system and make a difference by diligently using democratic tools of empowerment.

He relied heavily on the Right to Information Act to plug the holes in the system. Till the holes got him.

Amit Jethwa was fighting against illegal mining in the Gir forests, which hosts the world’s last Asiatic lions. But he was up against the mining mafia, the Forest Department and politicians involved in the racket. Not an easy fight for a lone ranger. Besides, he had made enemies by campaigning against corruption.

But he was losing faith in civil society. Barely a week before he was gunned down he had told a reporter about his disenchantment. “I know how risky it is for me and my family to wage war against mining mafia”, he lamented. “Without the support of people nothing is possible.”

Which is precisely where the power of the RTI lies. In the hands of the masses, it is a potent tool to chisel democracy with. But in the hands of a lone passionate soul, it may be a dangerous weapon ready to explode in your face.

Information is power only when you are allowed to use it. It works wonders in a free society, where people have justiciable democratic rights, where governance has not failed as miserably as in our country. The right to information can be a human right only where there has been a certain level of development, where certain democratic freedoms are protected. If the state cannot protect your right to life, it’s best not to exercise your right to information too much.

  •     Let’s look at some of the cases this year. In January 2010, Satish Shetty, 39, was hacked to death in Maharashtra. The activist had been battling land scams and government corruption, had received death threats and asked for police protection — which he didn’t get — and was killed while taking his morning walk.

  •     In February, also in Maharashtra, RTI activist Arun Sawant was shot dead near the Badlapur Municipal Office in Thane for fighting administrative corruption.

  •     Meanwhile in Bihar, RTI activist Shashidhar Mishra was gunned down in front of his home in Begusarai. A tireless crusader against corruption in welfare schemes and the local government, he was called ‘Khabri Lal’ for his dedication to information.

  •     Meanwhile  in  Gujarat,  Vishram  Laxman Dodiya, who had filed an RTI petition regarding illegal electricity connections by Torrent Power, was murdered.

  •     In April, RTI activist Vitthal Gite, 39, was killed in Maharashtra for exposing village education scams.

  •     And in Andhra Pradesh, Sola Ranga Rao, 30, was murdered in front of his home for exposing corruption in the funding of the village drainage system.

  •     In May, Dattatray Patil, 47, was murdered in Kolhapur, Maharashtra. A close associate of activist and RTI guru Anna Hazare. His fight against corruption had got some of the area’s top policemen removed and action initiated against local municipal corporators.

Besides murder, there are failed murder attempts, violent threats and fake police cases. Take Maharashtra:

  •     In March, environmentalists Sumaira Abdulali and Naseer Jalal were ruthlessly attacked by a politically backed sand mafia in Raigad, and survived only because journalists accompanying them used their influence and mobile phones. None of the accused was arrested. In April, Abhay Patil, advocate and RTI activist, had a mob clamouring for blood at his door. Apparently, they wanted him to withdraw all complaints of corruption against MLA Dilip Wagh. When his wife, a police constable, called the cops for help, they asked her to come to the police station and lodge a complaint. Later she faced fake charges and was suspended, allegedly at the behest of Home Minister R. R. Patil. Then in July, Ashok Kumar Shinde was attacked for his RTI and Public Interest Litigation (PIL) against a corruption racket in the Public Works Department linked to the Bombay High Court.

  •     Worse than physical assault is abusing the law to attack activists. Take the case of E. Rati Rao, senior scientist, activist and journalist, in Karnataka. In March she was charged with sedition and attempting to cause mutiny or communal discord for protesting against ‘encounters’ and atrocities on dalits, tribals, Muslims and other minorities. Meanwhile, in distant Orissa, another activist-journalist, Dandapani Mohapatra, was targeted by the police, his home raided and his books and magazines confiscated without a warrant. He was labelled as a suspected Maoist.

  •     An activist fighting for our rights cannot win without our muscle. Once an RTI activist is killed, civil society must force the police to investigate not just the murder, but all that he was unearthing. Only then will we be able to stop this murderous silencing of the activists.

  •     By not protecting the RTI activists, by allowing cases of harassment they file to be closed without punishing the perpetrators, the state is failing to uphold the spirit of the RTI Act. And weakening the spirit of democracy.

                                             

                                            Part C  : InformatIon on & around

    Info on funds of political parties:

An analysis of the Income-tax Returns of political parties accessed by the ADR under the RTI Act has revealed that the BSP had a maximum growth rate of 59% in total asset from 2002-03 to 2009-10, followed by the NCP (51%) and SP (44%).

It appears that all political parties are in the pink of financial health :

 

Income

Aggregate income :

 

for 2009-10

2002-03 to 2009-10

 

 

 

Congress

497

1518

BJP

220

—

BSP 182

—

 

CPI

1

7

RJD 4

15

 

SP

39

263

NCP 40

109

 

CPM 63

339

 

 

 

 

    Emergency period in India’s history:

An RTI query was made to get certain documents pertaining to emergency period 1975-77. Request was for correspondence between the then president Fakhruddin Ali Ahmed and the Government. Both the Ministry of Home Affairs and National Archives of India replied that they have no such records.

15 questions listed in the RTI application pertain to the competent authority’s duly attested copy of all relevant records or documents, including the noting portion, on causes leading to the declaration of emergency and its nature, on the proceedings, recommendation and resolution adopted by the Union cabinet to declare the state of emergency and the names of those who attended the cabinet meeting, on how the recommendation was conveyed to the President and by whom, orders, directions, guidelines, wireless, telex and telegraphic messages issued by the Government to impose the state of emergency.

The presumption is that they (the officers) have either destroyed them or they don’t want to give them.

The complaint u/s 18 of the RTI Act is made to Chief CIC, but so far he has not responded to the same.

    Assets disclosure by the Ministers of the Central Government:

All efforts under the RTI Act to get details of assets of the Ministers in the Central Government so far have brought no results.

When PMO was asked to furnish such information, it referred the matter to the Lok Sabha Secretariat (LSS) to get its nod to disclose the Ministers’ assets.

In reply LSS stated that there is no provision of such permission under the RTI Act and that the PMO itself has to take a call on such sensitive matter. Now PMO has to take a decision whether to disclose or deny.

Brihanmumbai Municipal Corporation (BMC):

If you wish to lodge a complaint with BMC, you no longer have to search for the name of the officer concerned. After an RTI query, the BMC has now decided to create 3,000 e-mail addresses based on officers’ designations instead of their names.

After pursuing the matter for a year, RTI activist Vihar Durve finally succeeded in getting general e-mail addresses created for the BMC officials.

“These days people are more comfortable writing e-mails than sending letters or going and meeting the officials personally. Though the BMC has a provision for mentioning e-mail addresses, it had not posted any e-mail address on website” said Durve.

The BMC has now created and posted e-mail addresses of top officials like the Commissioner and Additional Municipal Commissioners on its website. For the rest of the officers, the same are in the process of being created and posted on the website.

    An  interesting  write-up  in  MIDDAY(30 July, 2010) by Hemal Ashar:

    Once upon a time in Mumbai

Now that the movie ‘Once Upon a Time in Mumbai,’ about the city’s underworld has been released amidst much controversy, here is what actually happened Once Upon a Time in Mumbai.

We could go to the movies for Rs.20 a ticket and spend Rs.10 on samosas and Rs.10 on a popcorn packet while touts would murmur outside in a sinister, hush-hush manner, “70 rupees mein black.” Beggars would actually be happy with the Re.1 you gave them and not look like you are entitled to give them a blue-chip share instead.

Getting your children into school did not mean intense stress levels, high BP and cardiac conditions like blocked arteries resulting in an angioplasty as admission day neared.

A flat in the city’s toniest South Mumbai area would go for Rs.3 lakh and South Mumbai’s swish club like Willingdon offered the much-coveted life memberships at Rs.15,000, that too, payable in instalments. Page 3 was just another page in a book, newspaper or magazine and not a description of a person.

People thought that RTI always stood for Ratan Tata Institute on Hughes Road where you went to buy baby clothes and Parsi-style embroidered nightwear and not Right to Information to dig out dope on corrupt deals.

Your English teacher would scoff at this junk you are reading saying, “think of all the trees being chopped down to print the rubbish this columnist has written and here you are wasting time reading it” and you would hang your head in shame instead of laughing like you are doing now.

    Court’s view on ‘information’ under the RTI Act:

The gap between the judiciary’s traditionally insular self-image and the public’s rising expectations of accountability from all institutions is evident from the rather surprising interpretation made by the Supreme Court and some of the High Courts on the nature of information that would fall under the ambit of the RTI.

Making a mockery of this much-vaunted legislation, these courts have made out on their administrative side that the only kind of information that can be accessed by citizens under RTI is what is already ‘in the public domain’.

When it challenged the Central Information Commission’s direction on the declaration of assets by judges, the SC, in its petition before the Delhi HC earlier this year, had claimed the RTI’s definition “shows that the information which is required to be given must be information in the public domain.” Accordingly it argued that the application regarding declarations of assets by judges under a 1997 resolution of SC judges was “not maintainable inasmuch as the information sought for was neither in the public domain, nor was it required to be given or maintained under any statute or law.”

If the SC’s interpretation of the definition of information were to be valid, none of the public authorities should have been, for instance, disclosing file notings because, given the confidential manner in which they are written by bureaucrats and ministers during decision-making, they are clearly not in the public domain. It is the operation of RTI that has brought into the public domain all manner of information that would have otherwise remained behind the official veil of secrecy. The wide-ranging definition of information contained in S. 2(f) of RTI does not bear out the SC’s claim that it is limited to material lying in the public domain. In fact, the SC seems to have imported the expression ‘in the public domain’ into its petition on the basis of the rules framed by the Delhi HC.

For, under the rules framed by it in 2006, the Delhi HC assumed the power to withhold “such information that is not in the public domain or does not relate to judicial functions and duties of the court.”

(Extracts from The Times of India of 14th August)

Right to Information

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Part A : CIC’s decisions



Mr. D. E. Robinson of Goa requested for certain financial information from the
Commissioner of Income Tax, Panjim in respect of all the contesting candidates
for election in Goa in the year 2006.


The information sought was :

Whether in all the cases where the contesting candidates have
declared immovable property viz. ‘urban land’ as defined in S. 2(ea),
explanation 1(b) of the Wealth Tax Act, (including agricultural land situated
within the 8 km limit of notified towns), the values declared were verified in
the context of tax liability under the Wealth Tax Act.

Further he had asked in how many cases such lands were
declared in the tax records or not declared and in how many cases action was
taken to bring the said properties to tax under the Wealth Tax Act, etc.

The information was declined citing exemption u/s.8(1)(j) of
the RTI Act. Reply also stated that the matter was under verification and the
results could be disclosed only after the process was completed.

The Appellate Authority interestingly dealt the matter very
differently. He held that information requested by the appellant was general
statistical information and there was no question of referring it to a third
party — as was done by the CPIO — as the requisite information was not supplied
by that third party. He noted that this information was presented by private
persons/party in the affidavits filed before the Election Commission. The CPIO,
according to the AA, was responsible only to furnish information held by his
office and not which was held by other public authorities such as the Election
Commission. He noted that information requested covered information relating to
all candidates who contested election in Goa in the year 2006, which according
to the Appellate Authority was ‘general in nature’. He advised the appellant to
identify and specify the information required by him and to submit a fresh
application to the CPIO where the information was known to be held. The
Appellate Authority dismissed the first appeal of the appellant.

The appellant before CIC contested the conclusion of the
Appellate Authority with very detailed submissions in writing. In one of the
paras he also wrote : “It is evident from the facts that neither the field
officers, nor their superiors took any action to collect the revenue
legitimately due to the State by performing their bounden duty. In such
circumstances, the CPIO should have informed the appellant that no action had
been taken and the field officers and the Commissioner have failed to do their
duty. The reply given by the CPIO is evasive and seeks to cover up serious lapse
on the part of the Department.”

CIC gave interesting decision. He praised the appellant as a
public-spirited person who wishes to use the RTI Act to bring into open,
attempts by certain candidates in the elections to State Legislatures and the
Parliament to escape public scrutiny of the statements they make to the Election
Commission and to the Income-tax authorities as well as to other State agencies
about their personal wealth. The appellant believes — and rightly so — that if
declarations by these candidates were to be carefully analysed by public
authorities dealing in tax collection as well as those engaged in conducting
free and fair elections such as the Election Commission, a number of skeletons
will come tumbling out of cupboards. He bemoaned the fact that public
authorities failed to take coordinated action to prevent, what he believed to
be, manifest violation of the laws of the land by contesting candidates in
election.

However the issue is decided as under :

The response of the Appellate Authority (AA) has been to
examine the matter strictly within the four-corners of the RTI Act. Hence his
conclusion that the CPIO was required only to give that information which he
held and not what was in the control of other public authorities. AA did not go
into the subject of the obligation of the Income-tax Department to collect all
information from wherever it might be available in order to make a correct tax
assessment of an assessee and especially when such assessee happens to be a
candidate contesting in an election, which requires him to make a correct and
complete disclosure of his income and wealth.

The force of the logic employed by the appellant is
compelling. All he urges is that public authorities expand the focus of their
responsibilities and travel beyond the narrow limits of their assignments to
reach out to the information held at multiple points in order to make a correct
assessment which will have vast implications for tax collection as well as for
the sanctity of elections. One would be tempted to grant him the information he
has requested, but the difficulty is that the type of information he has asked
for is not maintained centrally by the public authority to which his RTI
petition is addressed.

In view of the above, it is not possible for the Commission
to go against the decision of the Appellate Authority. The type of information
which the appellant has requested is decidedly not maintained centrally in the
usual course of business. The RTI Act cannot be invoked to force a public
authority to collect information in a particular manner. In fact, it can only
direct disclosure of the information that is available. As such, in spite of
empathy with the spirit of the appellant’s RTI application, this Commission is
unable to order the public authority to provide him the requested information.

However, considering much of what this appellant has said in his RTI submissions – which from all accounts, appears to be an expression of the anguish of a public-spirited and a concerned Indian citizen about overt violations of law regarding various types of disclosures – the public authorities connected with the type of information he has requested, viz. the respective Income-tax Departments and the Election Commission, may take note of these submissions to consider putting in place systems and mechanisms which would create conditions for automatic cross-check and scrutiny of incomes and wealth statements filed, not only before the Income-tax authorities, but also before authorities such as the Election Commission by contesting candidates. The system, if devised, has the potentiality to help the long reach of law to force candidates in elections (who also happen to be tax assessees) to act truthfully and responsibly in matters of disclosure of incomes.

CIC then directed that a copy of his order may be sent to the Chief Election Commission as well as to the Revenue Secretary of the Government of India and the Chairman of the CBDT for such action as they may deem fit, given the objectives spelt out above.

[Mr. D. E. Robinson v. Income-tax Department, ENo. CIC/ AT/ A/2007 /01522 of 27-6-2008]

•  What  is the Third    Party  infonnation?

Shri R. K. Sarkar in his RTI application sought information pertaining to Shri Kalyan Chowdhury, who was the Commissioner of Income-tax, Burdwan. The queries were generally related to whether any enquiry was conducted against Shri Chowdhury by his superiors as, according to the appellant, Shri Chowdhury attended office only thrice a week on account of he residing in Kolkata although his posting was at Burdwan. Besides, the appellant wanted to know the details of reimbursement of his telephone bills and so on.

The information was denied on the ground that this was personal information and exempt u/s.8(1)(j) of the RTI Act.

CIC in his decision held that the reasoning of the respondents is flawed. The queries which the appellant has made were regarding Shri Kalyan Chowdhury’s functioning as a government employee and there is no reason why such information should be withheld from the appellant. The Commission in the past has authorised disclosure of information related to individual government servants, which concerned his function as such public servant.

In view of the above, the matter was remitted back to the Appellate Authority to examine the issue denovo with regard to the each query in the light of the observations made as above and to give his finding within 4 weeks from the date of receipt of the order.

[Shri R. K. Sarkar v. Income-tax Department, ENo. CIC/ AT/ A/2008/00232 of 30-6-2008]

Part B : The RTI Act

In the August issue, I had reported on some of the major recommendations on ‘Enforcement of S. 4 of the RTI Act’ of the conference of all ercs and SICs. In this issue, I report on some interesting recommendations of the said conference on other issues connected with the RTI Act.

1. There are instances  of non-compliance    of orders passed by the Commission. Specific provisions may be included in the RTI Act itself for dealing with contempt proceedings.

2. S. 20 of the RTI Act provides that subject to the contents and conditions of that Section, CIC/ SIC shall impose a penalty.

Issue is: What is the meaning of the word ‘shall’. Does it mean that it is mandatory on CIC/SIC to levy the penalty if the conditions of the Section are covered or is it discretionary?

 To reduce uncertainty in this matter, the conference recommends: S. 20 should be amended so as to give discretion to the Commission to decide the quantum of penalty. The word ‘shall’ appearing in S. 20(1) may be substituted by the word ‘may’.

3. Today, only PIOs are made accountable under the Act, the conference recommends: Accountability of public authorities and First Appellate authorities should be ensured: Amendments may be made in S. 20 and S. 2l.

4. The conference also recommends that the Commission be given power to dismiss frivolous or vexatious complaints and the power to review its own decisions.

5. For furthering evolution of the RTI regime, the conference recommends:

  • The RTI Act should be included in the syllabus at high school and college-level education.
  • Information of public interest can be taken to door-steps of citizens.
  • Commissions  can prioritise  second appeals/ complaints,  which  are  of public  interest, over the ones which are self-centric and self-serving.
  • Uniformity in fees, further fees (costs) and charges for inspection, etc. throughout the country.
  • Uniformity as regards disclosure obligations for items such as Annual Confidential Reports (ACRs), Annual Property returns (APRs), DPC proceedings, Income-tax returns, etc.
  • More publicity on the RTI Act should be done by Doordarshan and All India Radio. Alternatively, the Central Information Com-mission can run its own private TV channel dedicated to RTI.
  • RTI journal be made for circulation among the Commissions.
  • Honorarium/incentives to PIOs/ APIOs for doing additional work.

Part C : Other News

Good  governance:

N. Vittal, the former CVC writes regularly in Mumbai Mirror. In one of his recent articles, what he has written is very relevant for all of us to read:

Non-governmental organisations represent a growing significant element in the dynamics of better governance in our country. In a backward State like Rajasthan, the activism shown by Aruna Roy and her Mazdoor Kisan Shakti Sangathan (MKSS)have made the Right to Information (RTI) Act a significant element in checking and monitoring programmes affecting the public. The national Rural Employment Scheme, perhaps, is best monitored in that State, thanks to the tradition of MKSS activism.

An interesting aspect was highlighted by a visiting American professor, Sussman, an expert on the Freedom of Information Act in the United States, who has been studying the implementation of the Right to Information Act in India. He found that in West Bengal, the bureaucracy was very defensive, making access to information  as difficult as possible. All applications  have to be made on a Rs.10 stamp paper, which most of the time is not available. On – the other hand, in Bihar, he found that the Government and the media were going out of the way to introduce jingles and advertisements to educate the public about the right available to them under the RTI Act. In Tamil Nadu, the Information Commissioner is optimistic that in due time, this Act may turn out to be effective in empowering the people by bringing greater transparency in the system.

Using the Right to Information Act, active NGOs can effectively monitor the performance of bureaucracies and ensure that there is greater transparency and less corruption. This is the formula needed for good governance.

Travel bills of the Ministers of Maharashtra Government:

Ministers of Maharashtra Government ran up travel bills worth over Rs.7 crore in the first three years of their tenure. The public exchequer had to shell out these funds to pay for Ministers’ trips to their constituencies as well as some foreign jaunts.

Chief Minister Vilasrao Deshmukh’s globe-trotting took him to the top of the list as he incurred expenses of Rs.63.96 lakh. The CM’s domestic travel expenses came to Rs.32.45 lakh, while his foreign jaunts cost Rs.31.51 lakh.

Next in line whose travel bills ran up to Rs.47.86 lakh is Anil Deshmukh, Public Works Department. Maharashtra’s Ministers incurred a total travel bill of Rs. 7.44.crore from April 1, 2004 to March 31,2007, according to figures provided by the Pay and Accounts Office of the State Government in reply to the RTI query.

•  Do MPs/ MLAs constitute public authorities? :

UPA Chairperson Sonia Gandhi, who played a pivotal role in seeing the RTI Act through, is herself in the dock. As an MP, she faces the possibility of being penalised Rs.250 per day for not responding to an RTI plea, as a citizen has complained to the Central Information Commission (CIC).

Whether information sought by an applicant from public representative qualifies as information sought under the RTI is the issue. Whether an individual, as an MP or an MLA, constitutes a public authority is also an issue. The Lok Sabha Secretariat (LSS) has taken a stand implying that an MP is not a public authority as defined under the RTI Act.

An RTI. application is also made to MP Rahul Gandhi seeking information on recommendations made by him or his representatives to Ministries and Departments on assistance to NGOs.

The CIC has taken up hearing of five complaints under the RTI, two against Sonia Gandhi and one each against MP Rahul Gandhi, MLA Sahib Singh Chouhan, and Sunita Sharma, municipal councilor. As the issues were related, the complaints were grouped together.

The CIC, in its interim decision, held that an MP has been conferred a specific authority by the Constitution, in return of which he receives remuneration from public funds. But, before taking a decision in this regard, it felt that the interested parties be given an opportunity to be heard.
 
The CIC has asked the Central Public Information Officer of LSS to appear before it on September 15.

CAG wants to conduct ‘performance audit’ of the Central Information Commission:

In a clash between two apex bodies of accountability, the Central Information Commission (CIC) has reacted adversely to the ‘performance audit’ proposed by the Comptroller and Auditor General (CAG) on the implementation of the Right to Information Act.

CIC questions the very jurisdiction of CAG to hold it to account. It asked CAG to ‘specify the terms of the reference’ of the proposed performance audit before it takes a call on whether it should submit at all to the constitutional body’s jurisdiction.

In an attempt to give a legal cover to its jurisdictional objection, the CIC pointed out that it was “an autonomous entity and the orders passed by it are final and binding, subject to scrutiny only by way of a writ under the Constitution of India.”

Already, very sensitive issue, whether the RTI Act covers the Courts beyond their administrative matters is under controversy. Now this becomes another sensitive issue.

•  Power  bills:

In the July issue, report was made on power bills of the President of India. Now the RTI application has brought to light ‘light’ bills of the Maharashtra Ministers. The following table shows two interesting figures where the bills in 2007-08 cross Rs.I0 lakhs.

The elected representatives defended themselves stating that the power bills are’ quite normal’ as the residential area is huge and they also have servant quarters which have connection from the same meter. “We see to it that the power consumption is minimised in all ways. Strict instructions have been given to all those who are employed here to use the power judiciously”, Bhujabal said.

•  Driving licence:

The RTI query reveals that the three RTOs in Mumbai issued 11.12 lakh duplicate licences in the last five years, while they issued 12.12 lakh new licences during the same period.

This effectively means that Mumbaikars lose 609 licences every day, which looks more like a Ripley’s believe-it-or-not factoid.

•  PMO  does  not  respect the  spirit of RTI :

On taking the oath of office, every Minister is handed a copy of the code of conduct. It says, among other things, that Ministers should disclose to the PMO details of their assets, liabilities and business interests along with those of their family members.

On 6-11-2007, ‘India Today’ invoked the RTI, seeking information from the Prime Minister’s Office (PMO) whether Union Ministers had filed details of their assets and liabilities.

No information is provided on this application except replies that “the matter is under consideration of the competent authority and the information/reply will be sent in due course.”

Three reminders have been sent, but there is no action. Complaint has been made to CIC on 17-3-2008. Even that is yet not taken up for action.

•  RTI fee may be scrapped:

A Parliamentary Committee has decided to recommend scrapping of fees at the time of filing applications seeking information from Government Departments under the Right to Information Act. The Parliamentary Committee, headed by Dr. E. M. Sudarasna Natchiappan, has said scrapping of fees at the initial stage would help in effective implementation of the two-year old law.

“The technicality of admitting an application only on receiving a fee of Rs.10 is undermining such a revolutionary law. We feel that there is an urgent need to do away ‘With this step which reflected a bureaucratic mindset,” Natchiappan told HT.
 
Study efficacy of RTI :
The Department of Personnel and Training has decided to get international accounting firm Pricewaterhouse Coopers to study the efficacy of the Right to Information Act as it marks its third year on October 12. The RTI Act has been showcased by the UPA Government as one of its key achievements.

Suspicious that this study could end up helping babus instead of citizens, leading RTI activists, including Aruna Roy and her Mazdoor Kisan Shakti Sangathan (MKSS) and Shekhar Singh and his National Campaign for People’s Right to Information (NCPRI) have launched their own alternative study.

They have formed RAAG (RTI Accountability and Assessment Group) which will examine what they call/the RTI regime.’ Significantly, Google Foundation has stepped in to make this study possible by offering $ 250,000 as an initial grant.

•  PAN card:

In one appeal before ClC, the appellant wanted to know from the Income-tax Department as to what has happened to his application for cancellation of his PAN card. In reply, the Department has informed the appellant that the Income-tax Department was not empowered to cancel any PAN card once it was issued.

Readers may consider whether information furnished is correct. Ss.(7) of S. 139(A) provides:

7) No person who has already been allotted a permanent account number under the new series shall apply, obtain or possess another permanent account number.

All those who were issued two PAN cards were compelled to surrender one. Obviously the same must have been cancelled by the Income-tax Department. Further, what happens after the PAN holder dies, the firm which is allotted PAN gets dissolved, etc. Are PAN numbers not to be cancelled?

Right To Information

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Part A : Decision of the High Court of Delhi

This feature, divided into three parts, normally starts with
CIC’s decisions. In past, more than once a departure was made, instead of CIC’s
decisions, it covered Courts’ decisions. Since long, I have been making efforts
to procure RTI decisions of the Courts, High Courts and Supreme Court, when
CIC’s/SIC’s decision is challenged under the writ. Search has remained elusive.
However, one CA member requested me to give him citation of the Delhi High Court
Order reported under ‘Other News’ in BCAJ of April, 2008 under “Mere existence
of an investigation, no ground for refusal of information”. I had no citation
available. It gave me the motivation to really search hard — a challenge. With a
friend of mine, we went on serious search on Net and finally traced out the
order through Google search. It deals with the tax evasion petition submitted to
the investigation wing of the Income-tax Department, hence interesting to the
readers. The said order is briefly summarised hereunder :


Before I do so, let me record that CIC’s decision against
which the writ is filed was reported in this feature in September, 2006.


Mr. Bhagat Singh, the petitioner in this case, was married in
2000 to Smt. Saroj Nirmal. In November, 2000, she filed a criminal complaint
alleging that she had spent/paid as dowry, Rs.10 lakhs. Alleging that these
claims were false, the petitioner, with a view to defend the criminal
prosecution launched against him, approached the Income-tax Department with a
tax evasion petition (TEP) dated 24-9-2003. Thereafter, in 2004 the Income-tax
Department summoned the petitioner’s wife to present her case before them.
Meanwhile, the petitioner made repeated requests to the DIT (Investigation) to
know the status of the hearing and TEP proceedings. On failing to get a
response, he moved an application under the RTI Act in November 2005. He
requested for the following information :

(i) Fate of the petitioner’s complaint (tax evasion
petition) dated 24-9-2003.

(ii) What is the other source of income of the petitioner’s
wife Smt. Saroj Nirmal than from teaching as a primary teacher in a private
school.

(iii) What action the Department had taken against Smt.
Saroj Nirmal after issuing a notice u/s. 131 of the Income-tax Act, 1961,
pursuant to the said TEP.


The application was rejected by PIO of the Income-tax
Department u/s.8(1)(j) of the RTI Act, holding that information sought was
personal in nature and did not further public interest. The Appellate Authority
also dismissed the appeal citing provisions of S. 8(1)(j) and also 8(1)(h) under
which exemption is granted, if the information would impede the process of
investigation or apprehension or prosecution of offenders.

In the second appeal, CIC vide its order dated 8th May 2006,
set aside the rejection of information and held that “as the investigation on
TEP has been conducted by DIT (Inv), the relevant report is the outcome of
public action which needs to be disclosed. The same cannot be exempted
u/s.8(1)(j) as interpreted by the Appellate authority. Accordingly, DIT (Inv)
was directed to disclose the report as per the provision u/s.10(1) and (2),
after the entire process of investigation and tax recovery, if any, is complete
in every respect.

After the above Order also, the Income-tax Department did not
furnish the information, probably
holding that the entire process of investigation is not complete yet. Enquiry by
CIC’s office at the instance of the petitioner, to the Income-tax Department
(Investigation) for its comments with respect to non-compliance of the Order and
to show cause as to why a penalty should not be imposed u/s.20 of the RTI Act,
also brought no response.

The petitioner in this writ petition requested the Court to
partially quash CIC’s Order insofar as it directs disclosure after the entire
process of investigation and tax recovery is completed. “It was urged that CIC,
after appreciating that there was no merit in the plea regarding applicability
of S. 8(1)(h), and being satisfied, should not have imposed the condition
regarding completion of proceedings, which could take years. Such power to
restrict access to information did not exist under the Act.

Paragraphs 11 to 14 of the Order reflect the tenor of the RTI
Act and hence instead of paraphrasing them are reproduced in original :

11. The Universal Declaration of Human Rights, adopted by the United Nations in 1948, assures, by Article 19, everyone the right ‘to seek, receive and impart information and ideas through any media, regardless of frontiers’. In (the case of) Secretary, Ministry of Information and Broadcasting, Govt. of India and Ors v. Cricket Association of Bengal and Ors., [1995 (2) SCC 161], the Supreme Court remarked about this right in the following terms :

The right to freedom of speech and expression includes the right to receive and impart information. For ensuring the free speech right of the citizens of this country, it is necessary that the citizens have the benefit of plurality of views and a range of opinions on all public issues. A successful democracy posits an ‘aware’ citizenry. Diversity of opinions, views, ideas and ideologies is essential to enable the citizens to arrive at informed judgment on all issues touching them.

This right to information was explicitly held to be a fundamental right under Article 19(1)(a) of the Constitution of India for the first time by Justice K. K. Mathew in State of UP v. Raj Narain, (1975) 4 SCC 428. This view was followed by the Supreme Court in a number of decisions and after public demand, the Right to Information Act, 2005 was enacted and brought into force.

12. The Act is an effectuation of the right to freedom of speech and expression. In an increasingly knowledge-based society, information and access to information holds the key to resources, benefits and distribution of power. Information, more than any other element, is of critical importance in a participatory democracy. By one fell stroke, under the Act, the maze of procedures and official barriers that had previously impeded information has been swept aside. The citizen and information seekers have, subject to a few exceptions, an overriding right to be given information on matters in the possession of the state and public agencies that are covered by the Act. As is reflected in its preambular paragraphs, the enactment seeks to promote transparency, arrest corruption and to hold the Government and its instrumentalities accountable to the governed. This spirit of the Act must be borne in mind while construing the provisions conained therein.

13. Access to information u/s.3 of the Act is the rule and exemptions u/ s.8, the exception. S. 8 being a restriction on this fundamental right, must therefore be strictly construed. It should not be interpreted in a manner as to shadow the very right itself. U / s.8, exemption from releasing information is granted if it would impede the process of investigation or the prosecution of the offenders. It is apparent that the mere existence of an investigation process cannot be a ground for refusal of the information; the authority withholding information must show satisfactory reasons as to why the release of such information would hamper the investigation process. Such reasons should be germane, and the opinion of the process being hampered should be reasonable and based on some material. Sans this consideration, S. 8(1)(h) and other such provisions would become the haven for dodging demands for information.

14. A rights-based enactment, akin to a welfare measure, like the Act, should receive a liberal interpretation. The contextual background and history of the Act is such that the exemptions, outlined in S. 8, relieving the authorities from the obligation to provide information, constitute restrictions on the exercise of the rights provided by it. Therefore, such exemption provisions have to be construed in their terms; there is some authority supporting this view [See Nathi Devi v. Radha Devi Gupta, 2005 (2) SCC 201; B. R. Kapoor v. State of Tamil Nadu, 2001 (7) SCC 231 and V. Tulasamma v. Sesha Reddy, 1977 (3) SCC 99]. Adopting a different approach would result in narrowing the rights and approving a judicially mandated class of  restriction on the rights  under  the Act, which is unwarranted.

Thus holding,  the Court stated  that Orders of PIO, and CIC do not reflect any reasons why the investigation process would be hampered. It further stated “S. 8(1)(j) relates only to investigation and prosecution and not to recovery. Recovery in tax matters, in the usual circumstances, is a time-consuming affair, and to withhold information till that eventuality, after the entire proceedings, despite the ruling that investigations are not hampered by information disclosure, is illogical.

As to the issue of whether the investigation has been complete or not, the Court held that the authorities have not applied their mind about the nature of information sought. As is submitted by the Petitioner, he merely seeks access to the preliminary reports of investigation pursuant to which notices u/s.131, u/s.143(2), u/s.148 of the Income-tax Act have been issued and not as to the outcome of the investigation and reassessment carried out by the Assessing Officer. As held in the preceding part of the judgment, without a disclosure as to how the investigation process would be hampered by sharing the materials collected till the notices were issued to the assessee, the respondents could not have rejected the request for granting information. The CIC, even after overruling the objection, should not have imposed the condition that information could be disclosed only after recovery was made.

The Court then ruled that “the order of the CIC dated 8th May 2006 insofar as it withholds information until tax recovery orders are made, is set aside”. PIO and AA were directed to release the information sought, on the basis of the materials available and collected with them, within two weeks.

The Court also made adverse comments on the Income-tax Department’s PIO and AA by stating that the materials on record clearly show the lacka-daisical approach by them in releasing the information sought.

Part B : The RTI Act
 

Chapter 5 of the Annual Report 2005-06 as published by the Central Information Commission is titled: Significant initiatives by Ministries/Departments/Public Authorities (hereinafter referred to as entities) and suggestions for reforms.

Some significant initiatives taken by the entities are summarised hereunder.

S. 25(3)(f) of the RTI Act mandates the public authorities to report:
“Any facts which indicate an effort by the public authorities to administer and implement the spirit and intention of the Act.”

Report presents efforts made by some entities to administer and implement the Act beyond mandatory requirements.

10 entities have set up Information Facilitation Centre/RTI Cell to accept information requests and payment of fees and/ or a separate RTI Section/Cell to implement the Act.

Some entities have drafted an internal procedure to implement the RTI Act, some have set up cash register for application and other information fees, so that the money received can be monitored and accounted for. Some reported that they have taken the initiative of designating alternate Public Information Officers and Assistant PIOs. Three of them viz. the Noida Special Economic Zone (Ministry of Commerce & Industry), the Office of the Registrar of Companies Tamil Nadu-Coimbatore (Ministry of Company Affairs) and the State Bank of India (Ministry of Finance) have reported that they have disseminated awareness about the Act amongst the public.

Several public authorities have also reported that they have undertaken training of their Public Information Officers and issued guidelines about implementing the Act.

The National Information Centre (NIC) is in the process of setting up a RTI Request Management Information System (RRMIS) to monitor requests received u/ s.6 of the Act. There are three modules. The concerned public authority, the Central Information Commission and the Assistant Public Information Officer at the Department of Posts can use these modules:

  • Request and First Appeal Module for Public Authority

  • Second Appeal Module for Central Information Commission (CIC)

  • Request and Appeal Module for Central Assistant Public Information Officer (CAPIO), Department of Posts.

There is also an updation system  where  the stage at which the application is, can be updated as and when required.
 
Suggestions received from public authorities for reforms shall be covered in the next issue.
 

Part C: Other News
 
RTI gives visually impaired great relief:
The RTI Act came to the rescue of 200 visually impaired and physically-challenged Thane residents. Their battle of five years came to an end when in response to RTI application, State Chief Information Commissioner (SCIC) directed Thane Municipal Corporation (TMC) to provide details of the allotment of telephone booths and also requested TMC to expedite the matter. It is understood that the applicant has received the details and also the allotments have been made. serc Mr. Joshi was very pleased and remarked:

“The Order went beyond the RTI Act’s ambit as the panel considered the anguish of the hundreds of physically-challenged people who were willing to put in hard labour, but denied employment opportunities”.

• CIC’s office has no information:
RTI application revealed the shocking state of affairs in the very office which is the last refuge under RTI regime. One RTI activist, Shruti Singh Chauhan sought details of cases heard by the erc, but where verdicts were still not announced. She was told that the Commission did not maintain records of cases with it. Information has shocked one and all including erc Chief, Mr. Habibullah. He has now cracked the whip and ordered an in-house upgrade of records. CIC advises public authorities to ensure transparency in maintaining records. The Act also so provides. It was a shame that CIC’s own office defaulted in it. Who will fine it! Now it is ordered that within one month it will get up-to-date in its record keeping.

The Times of India wrote an editorial in this context to say that it is unconscionable that the very body created to bring about greater transparency in the working of public bodies is itself unable to furnish information about its own operation. Further two paras read :

  • The Right to Information Act is perhaps the most powerful legislation that empowers citizens to check on the functioning of public establishments. It has the ability to curb corruption, which is one of the biggest evils facing the country. Lack of transparency and accountability on the part of Government officials increases the propensity for corruption.

  • Although the Right to Information Act is landmark legislation, it is just a stepping stone towards eradicating corruption and bringing about lucidity in the working of the Government. Right to information has to mature and translate into duty to inform. Just like businesses are accountable to investors, the Government too should be made accountable to citizens.

• Maharashtra MLAs – unjust allowance:
RTI has many dimensions. Recently unexpected dimension came to light: Action taken out of fear of exposure under RTI. It is understood that the Maharashtra State Government has approved a proposal to allow each legislator to claim Rs.25,000 per month as mileage allowance without any obligation to produce bills to avoid giving explanations to citizens under the Right to Information Act or in response to a Public Interest Litigation (PIL).

As per existing rules, a legislator can demand a vehicle from the district collector to tour his/her constituency. If the administration fails to. provide one, the legislator can make his own arrangements and produce the bills before legislature secretariat and claim a maximum of Rs.25,000 in a month (based on a rate of Rs.I0/km).

Being aware that RTI can expose the legislators, it is now suggested to remove the need to produce bills, the mileage allowance would be credited to the account of each legislator every month. The State Cabinet accepted the proposal.

• Our MPs don’t pay MTNL telephone bills!
The telephone line of an average Mahanagar Telephone Nigam Limited subscriber would be disconnected if he did not pay bills by the stipulated due date. But the telephone lines of several MPs and various State and Central Government establishments ate still operational even though bills amounting to crores are still pending.

RTI query revealed that outstanding from such leaders (?) who have to set example of discipline have outstanding dues of Rs.375 crores over the last 3 years.

• S. 8(1)(a), (d) and (e) of the RTI Act:
Can the details of a Memorandum of Understanding (MOU) signed between the State Government and a multinational chemical firm undermine the sovereignty and integrity of the nation? The Maharashtra State Industries Department thinks so.

RTI application had sought information on MOU signed between the Industries Secretary and Dow Chemicals International Pvt. Ltd. for starting a facility to manufacture some chemicals at Chakan near Pune. Dow is responsible for producing Agent Orange and napalm – used in the Vietnam War. It also produces ozone-depleting CFCs and the widely-used insecticide, Dursban.

In reply to RTI application, the PIO of the Indutries Department rejected the application by stating that it is exempt information under clauses (a), (d) and (e) of S. 8(1) of the RTI Act.

It is felt that denial is unjustified as it is difficult to appreciate how a commercial deal between private chemical firm and the State can harm the interests of the nation [clause (a)], or can be considered as disclosing trade secrets / intellectual property [clause (d)] or can be considered as information pertaining to private party held in a fiduciary relationship [clause (e)].

• Asset declaration by judges:
In response to RTI application, the Supreme Court’s CPIO has stated that the information relating to declaration of assets by Judges is “not held by or under the control of” its registry and therefore could not be furnished by him.

Reply has exposed the SC’s resistance to transparency. Though the CJI can easily say whether Judges have been filing declarations of their assets, the CPIO has claimed that the information is not in possession of the registry. The matter is now pending before the CIC.

• Mumbai City Police:
The details of the city police budget obtained under the RTIAct reveal that Rs.559 crore (i.e., more than 75%) is being spent only to keep 40000 personnel in service out of the budget of Rs.716 crore.

Experts feel that at a time when the city faces the threat of organised crime and terrorism, the police should not spend all its money on salaries, though conceding that maintaining a police force is expensive as unlike other Government departments, it does not earn revenue. Yet, it still does not justify the present scenario.

Right To Information

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r2i

Tax records of political parties :


Very interesting and significant decision is given by CIC Mr.
A. N. Tiwari under appeal decided on 29-4-2008.

One Ms. Anumeha C/o. Association for Democratic Reforms (ADR)
of New Delhi had sought information from the CPIO, Central Board of Direct
Taxes, New Delhi as noted hereunder. The said application was transferred to
appropriate 9 CPIOs i.e., the appropriate Commissioners of Income-tax
(including CIT of Mumbai, New Delhi, Chennai). The information sought was on the
following three points :

(i) Whether the political parties mentioned in the RTI
application have submitted their Income Tax Returns for the years 2002-03,
2003-04, 2004-05, 2005-06, 2006-07.

(ii) PAN allotted to these parties.

(iii) Copies of the Income-tax returns filed by the
political parties for the afore-mentioned years along with the corresponding
assessment orders, if any.


While CIT, Jammu & Kashmir and Guwahati provided the
information, all other CPIOs declined to divulge information citing various
reasons, some of which were :


  •  Information is covered u/s.8(1)(d), (e), (g), (h) or (j) of the RTI Act.



  • Permanent Account Number (PAN) is a statutory number, which functions as a
    unique identification of each taxpayer. Making PAN public can result in misuse
    of this information by other persons and could compromise the privacy of the
    financial transactions linked with PAN.



  • Information relates to third parties who have objected to the disclosure of
    this information.

  •  Information is subject to confidentiality u/s.138 of the Income-tax Act, 1961.



In the first appeal made to CCIT, Bhubaneswar, the matter was
remanded to the CPIO but in other cases, concerned CCITs dismissed the appeals.

Before the Commission in the second appeal, the appellant
made certain submissions including the following :

(i) The avowed objective of a political party in a
democracy is to represent people in Parliament and Legislature that are
law-making bodies through the process of elections and that their very
existence is indicative of their goal of representing the interests of the
people who elect them to power.

(ii) Each and every act of theirs should be open to public
scrutiny. Transparency in their working and financial operation is essential
in larger public interest and all sections of government, including the
Income-tax Department, are duty bound to hold the public interest above the
interests of political parties.

(iii) The disclosure of financial information relating to
political parties including I.T. returns and assessment orders to general
public would promote such transparency and reduce the role of black money and
other undesirable, even illegal activities in the operation of political
parties.


Since the information sought involved significant issues, the
Commission decided to issue notices of hearing to all the 20 political parties
in respect of which information was sought and also to the Election Commission
and the Ministry of Law and Justice asking them to file their written
submissions.

Both the Election Commission and the Ministry of Law &
Justice filed their comments. Also political parties submitted their comments.
While CPI & CPM submitted ‘no objection’ to the disclosure of information, other
political parties including (1) BSP (2) NCP (3) The Samajwadi Party (4) BJP (5)
DMK (6) AICC objected to the disclosure of information on various grounds.

The applicant in her rejoinder to the replies submitted by
the above-noted parties made written submissions, which included following
points :


  • That she herself and her organisation are completely non-political and non-partisan. The Association for Democratic Reforms (ADR), which she represents, works for improving the governance, democratic, political and electoral processes in the country. Earlier also they have filed Public Interest Litigations (PILs) in the Delhi High Court, which resulted in the landmark and historic judgment of the Supreme Court (March 13, 2003) making it mandatory for candidates contesting elections to State Assemblies and Parliament to disclose their criminal antecedents, if any; assets and liabilities; and educational qualifications, by way of a sworn affidavit to be filed as an essential part of the nomination form.

  • It is also pertinent to refer to the recommendations of the Law Commission of India contained in their 170th Report on ‘Reform of the Electoral Laws’. An extract from para 3.1.2.1 of which is reproduced below :

“It is therefore, necessary to introduce internal democracy, financial transparency and accountability in the working of the political parties. A political party which does not respect democratic principles in its internal working cannot be expected to respect those principles in the governance of the country. It cannot be dictatorship internally and democratic in its functioning outside.”

The appellant also submitted that where plural remedies occur under different enactments, even if inconsistent, they empower a person to choose one, (Bihar State Cooperative Marketing Unions Ltd. v. Uma Shankar Saran, AIR 1993 SC 1222). In the alternative, assuming without prejudice that there is no inconsistency or discordance between the provisions of the RTI Act and S. 138 of the Income-tax Act and both can be given effect to, then the existence of an alternative remedy u/s.138 of the Income-tax Act or any other Act would not bar a citizen from seeking information tinder the RTI Act, 2005 and to accept any other interpretation would mean to render the RTI to a nullity. The RTI Act is an encompassing piece of iegislation and S. 2(f) of the said Act specifically defines ‘information’ to include If information relating to a private body which can be assessed by a public authority under any other lawfor the time being in force. ” The Right to Information Act, 2005 (RTI Act) on the other hand is a specific and special piece of legislation directed towards providing for access to information under the control of public authorities.
 
The Commission framed the following issue for determination:

Whether income tax returns along with its assessment order and PAN of various political parties can be considered to be exempted u/s.8(1)(d), (e), (g), (h) and (j) of the RTI Act and as to whether such information can be disclosed in larger public interest?

In its decision covering 22 paras and running into nearly 8 pages, the Commission, ruled on the above issue. Some paras in full and others in part are reproduced hereunder:

  • Political parties are a unique institution of the modern Constitutional State. These are essentially civil society institutions and are, therefore, non-governmental. Their uniqueness lies in the fact that in spite of being non-governmental, political parties come to wield directly or indirectly influence exercise of governmental power. It is this link between State power and political parties that has assumed critical significance in the context of the Right of Information Act which has brought into focus the imperatives of transparency in the functioning of State institu-tions. It would be facetious to argue that transparency is good for all State organs, but not so good for the political parties, which control the most important of those organs. For example, it will be a fallacy to hold that transparency is good for the bureaucracy, but not good enough for the political parties, which control those bureauracies through political executives.
  • In modern day context, transparency and accountability are spoken of together as twins. Higher the levels of transparency, greater the accountability. This link between transparency and accountability is sharply highlighted in the Preamble to the RTI Act.

  • The RTI Act aims at expanding accountability through transparency at all levels of governance. It is difficult to be persuaded by the argument that though political parties control the political executives who are their appointees these parties should be allowed to be insulated from the demands of transparency.

  • The question that additionally needs to be asked is whether the avowed purpose of the RTI Act, as set out in its Preamble to combat corruption is being achieved by allowing the finances of the political parties to remain beyond public scrutiny or even public view. There is now widespread concern about a hyphenated relationship developing between party finance and political corruption. The lack of openness and transparency in party finance is matched by the lack of adequate State regulation of such finance.

  • The scheme of the Act makes it abundantly clear that disclosure of information to a citizen is the norm and non-disclosure by a public authority an exception and it necessitates justification for any decision not to disclose information.

  • Democratic States, the world over, are engaged in finding solutions to the problem of transparency in political funding. Several methodologies are being tried such as State subsidy for parties, regulation of funding, voluntary disclosure by donors at least large donors and so on. The German Basic Law contains very elaborate provisions regarding political funding. S. 21 of the Basic Law enjoins that political parties shall publicly account for the sources and the use of their funds and for their assets. The German Federal Constitutional Court has in its decisions strengthened the trend towards transparency in the functioning of political parties. It follows that transparency in funding of political parties in a democracy is the norm and, must be promoted in public interest. In the present case that promotion is being effected through the disclosure of the Income-tax returns of the political parties.

Based on the above, the Commission  ruled as under:

The Commission directs that the public authorities holding such information shall, within a period of six weeks of this order, provide the following information to the appellant:

Income-tax returns of the political parties filed with the public authorities and the assessment orders for the period mentioned by the appellant in her RTI-application dated 28-2-2007.

The Commission also directs that the PAN of those political parties whose Income-tax returns are divulged to the applicant shall not be disclosed. It has been decided not to disclose PAN in view of the fact that there is a possibility that this disclosure could be subjected to fraudulent use, reports of which have lately been appearing. It is, therefore, considered practical that while Income-tax returns and the assessment orders pertaining to political parties be disclosed, there should be no disclosure of the PANs of such parties.
 
[Ms. Anumeha, Clo ADR, New Delhi v. CCITICIT of 9 jurisdictions in nine appeals bearing different numbers]


Part B : The RTI Act

Standing Committee of the Parliament on RTI Act, 2005:

National Campaign for People’s Right to Information (NCPRI) has made a presentation before the above committee. Some of the items of the said presentation are worth noting to understand present deficiencies of the RTI Act.

In February 2009, the items were reported  :

1. Level of awareness.

2. Use and misuse  of the RTI Act.

Hereunder other  2 items:

Reduction of 20-year period for keeping documents:

A common misunderstanding is that the RTI Act only allows access to information that is less than 20 years old. In fact, the RTI Act does not exempt information on the basis of how old it is.

Currently the law [(So8(3)] only allows three categories of exemptions for information older than 20 years, namely, national security [8(1)(a)], Parliamentary privilege [8(1)(c)], and cabinet papers [8(1)(i)]. Therefore, the law does not restrict access to information, which is more than 20 years old, but actually makes it easier to access older information than current information, which is less then 20 years.

However, this does not mean that departments have to preserve records for perpetuity. Departments are free to destroy records or to transfer them to archives as per their rules and procedures related to the destruction or archiving of records. S. 19(8)(a)(iv) of the RTI Act empowers and obligates the Information Commissions to examine the rules and procedure relating to the destruction of records of any public authority and to give directions as necessary to bring these in tune with the intention of the RTI Act. Therefore, we do not think any change is required.

Impediments, including the Official Secrets Act : Our study suggest that the major impediment to the implementation of  the RTI Act  is the  lack of awareness among the people on how to use the Act and what benefits it could have.

A close second is the mindset of the public authorities and the PIOs to find all possible reasons to deny information. The fact that Information Commissions are not imposing penalties, as mandated by the RTI Act, has made many PIOs think that there are no costs to be paid for denying information on the flimsiest of grounds.

Though the RTI Act specifically provides for the overriding of the Official Secrets Act, when there is a conflict between the two, the fact is that the continued existence of the Official Secrets Act (OSA) does cause a fair amount of confusion among both the applicants and the PIOs. Therefore, it might be the best to repeal the OSA and to put the few important provisions that are required, despite the RTI Act, either into an another existing Act like the National Security Act, or into a new Act.

Voluntary    disclosures:

We believe that the suo motu voluntary disclosure of information is critical to the success of the RTI Act. As already mentioned, this is perhaps the most effective way in which the pressure of RTI applications on government departments can be minimised. Suo motu declarations not only save time, but also provide protection to applicants from the weaker segments of society, who are otherwise targeted by those who have a vested interest in keeping the information secret.

Suo motu declarations also ensure that government is not just reactive to those who seek information but treats all potential applicants equally. For example, our experience shows that where suo motu declarations are not insisted upon, ration shop owners make sure that those few people who file RTI applications are properly serviced and do not have a cause for complaint. However, this leaves out the very large majority, who for one reason or another either do not file applications or cannot file them. On the other hand, where the complete records of a ration shop are put into the public domain suo motu, the ration shop owner cannot anticipate who among the various customers would check the records and point out any discrepancies. Therefore, the ration shop owner is forced to ensure that everyone’s records are accurate.

Our experience is that most public authorities do not bother to be in compliance of S. 4, and certainly do not put out all the information that could be put out, suo motu. Partly this is because the law does not directly mandate any penalty for non-compliance with S. 4. In addition, there are also no incentives for public authorities to make the effort.

It would perhaps be best if an independent agency from within the government, like the National Informatics Centre (NIC) of the Government of India is given the responsibility of creating, maintaining and updating websites and printed material giving the required suo motu information for all ministries and departments of the government. Additionally, the concerned ministries and departments could also be given positive incentives -like perhaps trophies for those who perform best in terms of suo motu disclosures.

It is also important that suo motu disclosures are not just web-based, as many people in India do not have r access to the web. These should be in printed form, through sign-boards, radio, TV, and even by using voice mail in cell phones and innovatively communicating information through songs and theatre (like the MKSS songs that sing out all the provisions of the RTI Act, and explains them in verse !)


Part C : Other News

Justice D. Y. Chandrachud on the RTI Act:

The Right to Information Act has brought about an enormous change in the way we are governed, assured Justice D. Y. Chandrachud of the Bombay High Court at a recent talk on ‘Democracy, Governance and the Rule of Law’. It transpired that people don’t just seek details of case backlog or judges’ salaries, sometimes there are ‘wholly frivolous’ que-ries as well. Recently, an RTI application asked the High Court to reveal how much was spent on flower decoration at a recent function or at the banquet. The Judge, however, said people have a right to ask even irrelevant details. A Court officer is now tracking the floral budget. He might just come out smelling of roses.

BMC to punish the officer  for RTI delay:

The Brihanmumbai Municipal Corporation’s city engineer has issued a show-cause notice to a Public Information Officer – in this case, the Deputy Chief Engineer (Planning and Development) – asking why his increment for next year should not be withheld. The order comes after State Information Commissioner Suresh [oshi levied a fine Rs.25,000 on the officer for not dispatching a Right to Information (RTI) application to the department concerned in time. The State Information Commissioner had also said in his order that the Municipal Commissioner should investigate the delay and take action as necessary.

Answer sheet on examination paper:

The Calcutta High Court allowing transparency in the evaluation system ruled that students had the right to see their answer sheet and educational institutions should allow it. The verdict came on an appeal by Calcutta University against a Single Bench’s order directing it to show a maths answer sheet to Presidency College student Pritam Rooj after he had sought a re-evaluation. Under the current system, students who doubt the marking can seek a revaluation of their answer sheets. But that is done by the examiner and students have to take the examiner’s word for it. Giving its ruling, a Division Bench comprising Chief Justice S. S. Nijjar and Justice Dipankar Datta directed those concerned to act on all such pending applications and show the answer sheets to aggrieved students within a month. The Bench, however, also set a time limit for students to see their answer sheets.

Performance of Information Commissioners of Maharashtra    :


Project  expedited on RTI application:

Today the villagers of Rangpar (a tiny village of 750 people, 25 km from Wankaner in Rajkot district) were happy to see that there is a 2 km road connecting their village to highway. The Gando Baval (babool) shrubs along the roadside have been cleared by the grampanchayat authorities. It took a visually challenged Ratna Ala, 26, to open the eyes of the authorities through the right to information (RTI)Act. At last some development work has been started by grampanchayat in Rajkot. For the last two years Ala has been using RTI to get information on how many schemes the panchayat implemented and how much money they spent. Though he did not get accurate information, it helped the panchayat realise that its inefficiency would be exposed. Ala’s struggle is on, but he is happy that the road has been constructed and the dense shrubs, which were a hindrance to passers-by, are cleared.

Discloser of the  assets  of Commissioners of Information:

Information Commissioners have chosen not to disclose their own assets on the ClC’s website in a development which may cause many to wonder whether the transparency watchdog has trouble following what it preaches to others.

In a candid admission, Chief Information Commissioner Wajahat Habibullah said “All Information Commissioners have declared their assets, but they felt that this information should not be put on the Commission’s website. They did not want it on the ClC website.”

Queried further on why the transparency watchdog was not keen on disclosure of its assets, Habibullah said, “The Commissioners felt that they could put up the information on their personal websites”. Crucially, none of the eight Commissioners have their own website.

Right To Information

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r2iPart A : CIC’s decisions

Guidelines on scrutiny
of income-tax returns by CBDT :

A very interesting and important issue regarding scrutiny
policy for non-corporate assessees and disclosure of instructions, directions
and clarifications issued by the CBDT on the scrutiny policy came up before CIC.
The same is decided by a Bench of 3 Commissioners.

Shri Kamal Anand of People for Transparency of Sangrur was
the appellant. He had sought for a number of information, some were furnished by
PIO and AA, and some were denied by holding that the same are exempt u/s.8(1)(a)
of the RTI Act. Hence, the matter came up before CIC. The issue for
determination before CIC was :

Whether supply of instructions, directions, clarifications
relating to scrutiny policy for non-corporate sector could be held to be
prejudicial to economic interest of the State and hence could be denied
u/s.8(1)(a) of the Right to Information Act, particularly when broad
parameters of the scrutiny guidelines have already been provided to the
appellant ?


It may be noted that initially this appeal was heard by a
Single Member of the Commission and he had directed the Department of Revenue to
have the matter considered by the highest level in the public authority and come
up to the Commission with the Department’s viewpoints.

The Department made detailed submissions
after having been duly considered by the Union Finance Minister and as approved
by him. In the submissions, the Department stated that it is of the view that
disclosure of scrutiny guidelines adversely affects the economic interest of the
State and facilitates committing the offence of tax evasion. Therefore, these
should not be disclosed to the public.

Three Members’ Bench after considering the submissions
received, held as under :

It is certainly within the domain of the concerned public
authority to decide and determine as to whether disclosure would adversely
affect the economic interest of the State or not. The Commission can only look
into as to whether the determination by the Department about the probable effect
of a particular policy disclosure is based on objective criteria or not, or as
to whether the Department has arrived at a particular conclusion in a reasoned,
or in a mechanical or arbitrary manner. Here is a case where a public authority
at the highest level has analysed the whole issue at our behest and has given
its considered opinion to this Commission about the possible effect of the
disclosure on economic interest of the State. We must conclude that the
implications of disclosure have been put to the closest scrutiny.

The Commission cannot, therefore, enter into the adequacy or
otherwise of the criteria taken into account by the concerned public authority.
It cannot surpass an objective consideration and place its own subjective
consideration thereon. When a denial is covered by an exemption clause u/s.8 of
the Right to Information Act, so long as such application of exemption is based
on objective criteria and is not arrived at in a mechanical or arbitrary manner,
this Commission does not intend to interfere in such issues.

Based on the above, the Commission held that denial of
information is justified u/s.8(1)(a) of the RTI Act.

[No. CIC/AT/A/2007/00617 : Shri Kamal Anand v. Central
Board of Direct Taxes, 11-2-2008]


For the information of the readers, S. 8(1)(a) reads as
under :

8. Exemption from disclosure of information —


(1) Notwithstanding anything contained in this Act, there
shall be no obligation to give any citizen, —

(a) information, disclosure of which would
prejudicially affect the sovereignty and integrity of India, the security,
strategic, scientific or economic interests of the State, relation with
foreign State or lead to incitement of an offence.





RTI Act v.
S. 138 of the Income-tax Act :


Three issues for determination before the Bench of 3 Members
of the Central Information Commission were :

1. Whether certain information can be provided to the
appellant under the RTI Act when S. 138 of the Income-tax Act prohibits
disclosure of such information ?

2. Whether in such a situation the overriding provision as
contained in S. 22 of the RTI Act comes into play ?

3. Whether S. 8(1)(j) of the RTI Act is applicable to the
case of the appellant ?

The application was made by Shri G. A. Rawal of Ahmedabad,
who is an informant to get information on ‘Tax payable as per the decision of
Settlement Commission in the case of Winprolene Plastics and tax paid by the
said company.’ Information sought was denied by holding that the same is
prohibited u/s.8(1)(j) of the RTI Act.

Decision and reasons :

l
Both the Right to Information Act, 2005 and S. 138 of the Income-tax Act, 1961
deal with disclosure of information. While the Right to Information Act is a
general law concerning the disclosure of information by public authorities, S.
138 of the Income-tax Act is a special legislation dealing with disclosure of
information concerning assessees. This Commission in Rakesh Kumar Gupta v.
ITAT, of 18th September, 2007 decided by a Full Bench, has dealt with the
issue of applicability of special law to the exclusion of the general law. (Note
: This decision was extensively covered in this feature in the BCAJ of November
2007.)


•  Crucial two terms u/s.8(1)(j) are ‘personal information’ and ‘invasion of the
privacy’. In the decision, the Commission has analysed the ambit and scope of
both the terms.


•    The interpretation of S. 8(1)(j) has been the subject of some dispute. The Section deals with excluding from the purview of the RTI Act (a) in-formation of a personal nature which has no relationship to a public activity or interest, and (b) whose disclosure would lead to unwarranted invasion of privacy.

•    Insofar as (b) is concerned, there is very little doubt that there could be a set of information which may  be said  to belong to the  exclusive private domain and hence not be liable to be disclosed. This variety of information can also be included as ‘sensitive and personal’ information as in the U.K. Data Protection Act, 1998. Broadly speaking, these may include religious and ideological ideas, personal preferences, tastes, political beliefs, physical and mental health, family details and so on.

•    But when the matter is about personal information unrelated to public activity, laying down absolute normative standards as touchstones will be difficult. This is also so because the personal domain of an individual or a group of individuals is never absolute and can be widely divergent given the circumstances. It is not possible to define ‘personal information’ as a category, which could be positively delineated; nevertheless it should be possible to define this category of information negatively by describing all information relating to or originating in a person as ‘personal’ when such information has no public interface. That is to say, in case the information relates to a person which in ordinary circumstances would never be disclosed to anyone else; such information may acquire a pub-lie face due to circumstances specific to that information and thereby cease to be personal. It is safer that what is personal information should be determined by testing such information against the touchstones of public purpose. All information which is unrelated to a public activity or interest and if that information be related to or originated in person, such information should qualify to be personal information u/s.8(1)(j).

•    Insofar as the assessment details are concerned, they are definitely personal information concerning some individual or legal entity. The assessment details if disclosed may result in an undue invasion to the privacy of an individual. Disclosure of such details, therefore, cannot be permitted unless there is an overriding public interest justifying disclosure. But in the instant case, what has been asked for by the appellant in his RTI application is as follows:

“Tax payable as per the decision of the Settlement Commission in the case of Winprolene Plastics and tax paid by said company.”

•    Based on above, the Commission directed the CPIO to provide the information within a period of two weeks from the date of the order.

[No. CIC/ AT/ A/2007 /00490, dated  5-3-2008 in the matter of Shri G. R. Rawal v. Director General of Income Tax (investigation), Ahmedabad]

Note: S. 24 of the RTI Act provides that the Act shall not apply to certain organisations. The Second Schedule lists such organisations. Ss.(2) of S. 24 empowers the Central Government to amend the Schedule by including therein any further organisation. It is understood that on 28-3-2008, (may be to undo such decision in future) the Notification is issued, under which the Directorate General of Income-tax (Investigation) is included in the Second Schedule.


Part B : The RTI Act

Chapter 6 of the Annual Report 2005-06 as published by the Central Information Commission (CIq deals with suggestions to reform by the CIC.

•    All stakeholders – citizens, civil society organisations, public authorities and the Information Commissions – have felt that the implementation of the RTI Act has been a mixed experience.

•    CIC is of the view that though S. 4, requiring the Government to publish all information except that which  the law permits  to be kept  a secret, is the key to the RTI Act, unfortunately,   public  authorities  neglected  it the most  in 2005-06. Public authorities  find  themselves  too overwhelmed   by information  seekers to focus their energies  on furnishing  or even  expanding  the scope  of suo moto disclosures  of information.  For this exercise to be fruitful,  there has to be an attitudinal change.

Based on the above, CIC suggests that Citizen’s Charters adopted by most public authorities should be made an integral part of S. 4(1)(b) disclosures, so that the public is aware of the commitments of a public authority towards it.

•    There has been a lot of demand to expand the modes of depositing the fee of making an RTI application. In an effort to do so, the Government recently decided to accept Indian Postal Orders as a mode of payment. The Commission would recom-mend that even a Rs.lO postal stamp affixed to the application should be considered as valid payment of fee for registration of an RTI application. There is also a case for ensuring that rates of fees across the country are made uniform.

•    One complaint has been that the beneficiaries of the Act have largely been public officials and the educated urban people, and the benefits have not percolated to the poor and the people from the rural areas. This indicates that there is a need on the part of Government to fulfil its obligations u/ s.26 of the Act. Public authorities must set aside a specific budget for dissemination of knowledge amongst citizens, so that the provisions of the Act can be utilised at all levels of society, through heightened public awareness.

•    The Commission feels handicapped about not being able to hold Central PIOs and public authorities accountable for non-implementation of its orders/ decisions. To give teeth to its powers, it is essential that the Commission be given powers of contempt of Court.

•    Provision will need to be made to apply the CIC’s decisions to States with all attendant penalty provisions; to allow State Commissions to refer a matter to the CIC; and to empower the CIC to withdraw a case, which may be before it or a State Commission for appeal.

•    The Commission should be empowered, financially and administratively, to allocate funds and undertake suitable research and development activities for the promotion of relevant programmes that are critical for strengthening the information regime, as envisaged in the Act. The Government may set up a Centre for Accountability and Transparency for undertaking activities relating to research in best practices in creating an open access regime and other such related activities that would effectively strengthen the Commission in pursuing its mandate.


Part C : Other News

•  BCAS appreciated in Loksatta:

CA Prof. Suresh Mehta has sent a cutting of an article in the Marathi daily ‘Loksatta’ in which appreciation is made of the contribution of BCAS in spreading of RTI movement.

•    No provisions for flats for differently abled citizens:

Vijaya Kalan (37) is partially paralysed and she is a heart patient. But what makes her situation worse is the fact that she has to drag herself up and down seven floors from her apartment, whenever there is load shedding in her complex at Kharghar.

From the reply received in response to RTI application, it is gathered that CIDCO, that developed the housing complex, has blatantly over-looked the rights of handicapped people. They have not reserved any apartments for them in the housing societies developed since 1995.

•  Is the RTI effective in curtailing corruption?

Ms. Aruna Roy, the mother of the RTI movement in India, is of the view that response of the people has been better than expected. The existing statistics on RTI are based on appeals made to Commissioners and do not reflect the real picture. Actually, a much larger number of people ask for information and get it. Media coverage has focussed on the use of RTI by urban activists or the controversies that have arisen by denial of information in some cases. On the other hand, in rural areas, in a more routine manner, a lot of information is being sought and obtained regularly to serve very useful purposes such as improving the public distribution system.

•  Suppression of information:

Justice Chandrachud, talking about his experience as a Judge, said that each time he heard a matter he asked himself “Do I make a difference ?” because he did not see the orders being implemented. “We must contemplate the need to incorporate citizens as stakeholders and increase the participation of citizens in governance as well as allow experimentation”. One of the greatest problems faced by the judiciary was access to information. There is a deliberate act of suppression of information and the Right to Information.Act is performing a valuable function.

•  PIO seeking bribe!

In the first case of its kind after the Right to Information Act was enacted nearly three years ago, the Anti-Corruption Bureau (ACB) has trapped an Ulhasnagar Information Officer and his assistant while they were accepting a bribe.

Ulhasnagar resident Gulshan Anand Sachdeo had submitted an RTI application for information on certain plots of land. While the Public Information Officer (PIO) gave him the documents, they were not attested. The PIO and his assistant told Sachdeo that he would have to first pay Rs. 12,000 for things to move.

Sachdeo went straight to the Thane ACB Deputy Commissioner Kishore Jadhav. He named the officer, Raosaheb Govind Bhalerao, and senior clerk Ramchandra Gavit. The ACB told Sachdeo to go back and pretend to hand over the money, which he did. Bhalerao and Gavit were caught in the act.

This is the first time an Information Officer has been caught for asking for a bribe to provide certified documents.

•  Power  bills of the  President of India:

The whole country suffers from power shortage. However, Rashtrapati Bhavan is always kept brightly lit ! Rashtrapati Bhavan has incurred power bills of Rs.16.71 crore over the past five years, almost doubling from Rs.2.4 crore in 2003 to Rs.4.39 crore in 2007.

The information on electricity usage in the President of India’s official residence was revealed in a recent RTI reply. In the five-year period from January 2003 to December 2007, Rashtrapati Bhavan consumed 2.69 crore units of electricity. Its usage rose from 37 lakh units of power in 2003 to 68 lakh in 2007. Last year’s bill of Rs.4.39 crore was higher than the Rs.4.02 crore spent in 2006.

•    UNDP report, just released, has found that corruption continues to be a crippling problem in countries in the Asia-Pacific region:

The report has published three sets of ranking produced by Transparency International, the World Bank and the International Country Risk Guide. While India has improved slightly on Transparency International’s corruption index for 2007, it has done worse or remained static in the other two rankings. This is a worrying trend which shows that India’s rapid growth over the past few years hasn’t contributed to a decline  in corruption.

Under’ A Thought for Today’ (june 16) “It is difficult, though not impossible, to stop government officials from hiding their corrupt take.” Editorial in The Times of India writes:

“However, the picture is not entirely gloomy. There are encouraging signs of success in tack-ling corruption. Right to Information (RTI) laws have had the effect of making governments more accountable. In 1990, there were only 13 countries in the Asia-Pacific with RTI laws. By 2007, the number had risen to 70. In India, RTI, which is considered to be one of the most progressive such legislations in the developing world, has forced government officials to become more transparent.”

•  Fight for your Rights:

A new programme on Right to Information is being telecast every Saturday at 9 p.m. on NDTV Metro Nation (not NDTV India or Profit or Imagine or other associated channels). It is a one-hour long programme called ‘Fight for your Rights’. Arvind Kejriwal is the anchor. The first episode was telecast on Saturday, May 17th. Repeat telecasts can be viewed on Sundays (it is available on the regular cable channel and on Tata Sky DTH, you can access it on NDTV  24 x 7 channel).

Right To Information

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Part A : Decisions of CIC and SIC




S. 8(1)(g) of the RTI Act :


S. 8(1) of the RTI Act provides exemption from disclosure of
information, clause (g) thereof says : “Information the disclosure of which
would endanger the life or physical safety of any person or identify the source
of information or assistance given in confidence for law enforcement or security
purposes.”

The issue in the case of Brij Lal v. Deputy Commissioner
of Police was whether a copy of the enquiry report which was conducted by
vigilance branch of the police can be supplied. PIO held the view that the same
cannot be provided due to exemption u/s.8(1)(g). The first AA ordered that
copies shall be provided after deleting the name and identity of the witnesses.
In the appeal before CIC, Mr. Brij Lal asked : “It is appealed that a full and
clean copy of the Inquiry Report indicating clearly the names of the persons
concerned be provided.”

The restriction mentioned in S. 8(1)(g) would seem to clearly
apply to this case as the witness gives assistance in confidence for law
enforcement. Therefore, the names and identity of witnesses are generally not
disclosed, as it may endanger their life or physical safety.

On examination of the report however CIC found that it also
deletes the names of complainant, accused and enquiry officer. The definition
above equally and clearly does not cover names of complainant, accused or
enquiry officer. This will be particularly so when the RTI applicant himself is
either the complainant or the accused. To this extent, therefore, CIC directed
that a fresh copy of the enquiry report be provided to the appellant restoring
the names of the complainant, the accused and the enquiry officer wherever
deleted.

[Brij Lal v. DCP, North West, Appeal No. CIC/WB/A/2007/00516,
decided on 15-5-2007]


 S. 6(3) of the RTI Act :


In the last month, one decision of SIC of Maharashtra was
reported. Herewith is one other decision of Dr. S. V. Joshi (CSIC, Maharashtra)

Shri S. K. Nangia had sought from Jt. Chief Registrar,
Directorate of Industries, Government of Maharashtra, information regarding
Notification/ order issued by the Government designating co-operative industrial
estates in Mumbai as public authority.

PIO replied that this information be obtained from the
Government. Citing the provisions of S. 6(3) (which requires PIO to transfer the
RTI application to the appropriate public authority if the information sought is
held by that another public authority, etc.) Shri Nangia insisted that PIO so
do. There was no response. He then filed another RTI application. Again, this
application and the first appeal also remained unattended to. Hence, he filed
the complaint before SCIC. Dr. Joshi made the following order :

In his submission before the Commission, PIO admitted that
as per his knowledge there is no system of publishing the names of the
institution to whom RTI Act is applicable in the Gazette. In fact, this fact
ought to have been made clear by the PIO to the applicant instead of asking
applicant to go to the Government.

PIO has however given instance of his commitment to RTI.
According to him, taking advantage of difference of opinion about
applicability or RTI to co-operative institutions, when Kandivali Co-operative
Industrial Estate was avoiding appointment of PIO, he doggedly pursued the
matter and saw to it that they appoint PIO.

His lapses were basically because of lack of knowledge.

“This Commission feels that all the replies to the
application should have been given by the PIO without him making reference to
the Government or asking applicant to go the Government which he should do
within 5 days of receipt of this order.” Taking into consideration the fact
that he has tried to reply within the time limit and also his commitment to
RTI, Commission decided to give him a chance to work better and discharge his
responsibility under RTI properly by merely reprimanding and not by imposing
any fine.

[Shri S. K. Nangia v. PIO and Joint Chief Registrar,
Directorate of Industries, Mumbai, Complaint No. 2008/621/02, decided on
10-11-2008]


Part B : The High Court decision


The petitioner is PIO, Dr. Celsa Pinto. She has challenged
the order dated 27-7-2007 passed by the Goa Information Commission, holding her
responsible for furnishing incorrect, incomplete or misleading information.

The complainant had sought information on various letters
from GPSC for filling up certain posts, seniority list, etc. She also had asked
the following information :

(i) Copy of the seniority list of the common cadre of the
Librarian post from the Directorate of Education, Technical Education and
Higher Education.

(ii) Why the post of curator was not filled up by promotion
after retirement of V. B. Hubli, and the post filled by direct recruitment
through GPSC ?

(iii) Why the Librarian from the Engineering College was
not considered for promotion for the post of Curator in the Central Library
when it was fallen vacant due to retirement of Shri V. B. Hubli ?


Initially, Dr. Pinto replied to all items of information sought including two questions above as ‘Not available’.

The matter came up before the Goa Information Commission in appeal.

The Goa Information Commission has held the petitioner guilty of furnishing incomplete, misleading and false information and has imposed a penalty of Rs.5,000 which is liable to be deducted from the petitioner’s salary.

Before the High Court, it was submitted that SIC has wrongly held that the petitioner provided incomplete and misleading information, etc.
 

The High Court  passed the following  order:

The Commission has with reference to question No. 1 held that the petitioner has provided incomplete and misleading information. As regards point No. 1, it has also come to the conclusion that the petitioner has provided false information in stating that the seniority list is not available. It is not possible to comprehend how the Commission has come to this conclusion. This could have been a valid conclusion if some party would have produced a copy of the seniority list and proved that it was in the file to which the petitioner, Information Officer, had access and yet she said ‘Not Available’. In such circumstances it would have been possible to uphold the observation of the Commission that the petitioner provided false information in stating initially that the seniority list is not available.

As regards the requisition Nos. 2 and 3 by which the petitioner was called upon to give information as to why the post of Curator was not filled up by promotion and why the Librarian from the Engineering College was not considered for promotion, the petitioner had initially answered by stating that the information was “N.A.” (Not Available). Thereafter, she had clarified by stating that it means “I don’t know”. The Commission has initially observed in para No. 13 that it does not see anything wrong in the petitioner’s reply that she does not know the information because “P.LO. cannot manufacture the information.”

It can be recalled that the petitioner corrected the information by explaining that “Not Available” meant “she does not know.” It is not possible to accept the reasoning of the Commission. There is no substance in the observation that merely because the petitioner initially said “Not Available” and later on corrected her statement and said she does not know, the petitioner provided incomplete and incorrect information. In the first place, the Commission ought to have noticed that the Act confers on the citizen the right to information. Information has been defined by S. 2(f) as follows:

“S. 2(f) – Information means any material in any form, including records, documents, memos e-mails, opinions, advices, press release, circulars, orders, logbook, contracts, reports, papers, samples, models, data materials held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force.”

The definition cannot include within its fold answers to the question ‘why’, which would be the same thing as asking the reason for a justification for a particular thing. The Public Information Authorities cannot expect to communicate to the citizen the reason why a certain thing was done or not done in the sense of a justification, because the citizen makes a requisition about information. Justifications are matter within the domain of adjudicating authorities and cannot properly be classified as information.

In this view of the matter, the order of the Commission appears to suffer from a serious error of law apparent on record and results in the miscarriage of justice. In the result, the impugned order is hereby set aside.

[Dr. Celsa Pinto v. Goa SIC & Anr., W.P. No. 419 of 2007, decided on 3-4-2008]

 Part C : Other News

•  RTI information provided with condition:

In an ingenious attempt to have its cake and eat it too, AIIMS has made a disclosure under the RTI with the condition that it was meant only for the applicant’s ‘personal consumption’ and he should not share it with the media without the ‘written permission’ of its director.

Such conditional disclosure is contrary to the scheme of RTI as it allows the applicant to use the law for any purpose. This is evident from S. 6(2), which exempts the applicant from giving “any reason for requesting the information”.

•  SIC, Maharashtra needs police  protection:

Chief Information Commissioner Suresh [oshi was among those stuck in office till late in the night on 26/11 though he was nowhere near CST, Hotel Taj, Hotel Oberoi-Trident or Nariman House where terrorists struck. He had been besieged by a group of six RTI activists who allegedly made him sit back well past midnight demanding that he pass an order on an RTI appeal that very day.

Joshi has now written to Police Chief Hasan Gafoor seeking police protection, pointing out that many of the people who visit his office are accused in bomb blasts or named in criminal cases.

Speaking to Mumbai Mirror, Joshi said: “The RTI activists are good people, but they were adamant and were unwilling to leave. Their desire was that I pass an order the same day, but I was firm (on not doing their bidding). They cannot dictate to us. Earlier, we did not feel the need for protection, but now we can’t predict the nature of people visiting our office.”

•  RTI and  Stamp  Duty  refunds:

If you are still waiting to get your refund from the stamp duty office even after months of filing your application for the same, the Right to Information (RTI) Act can come to your rescue.

The information law can not only help you get the refund, but also penalise the errant bureaucrat who hasn’t responded to your queries.

Tarun Ghia, a chartered accountant, had sought information on the number of applications that had come for stamp duty refund and the total amount of refund that had been disbursed in the last two years. Mr. Ghia also said that the unreasonable delay may instigate corruption and will be the cause for misery for the common man.

A person is eligible for refund when he has paid the stamp duty, but the document remains unexecuted. Such cases are common, especially in real estate transactions, and the stamp duty office is flooded with applications for refund.

The State Information Commission (SIC) has imposed a penalty of Rs.25,OOOon the Deputy Super-intendent of Stamps, Mumbai, for not providing information to an applicant on stamp duty refunds.