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DIPP Press Note No. 4 (2015 Series) dated April 24, 2015
Policy on Foreign Investment in the Pension Sector – addition of paragraph 6.2.17.9 of Consolidated FDI Policy Circular of 2014’
This Press Note states that the Government has decided, with immediate effect, Foreign Direct Investment in the Pension Sector as under: –
Non-resident guarantee for non-fund based facilities entered between two resident entities
Presently, general permission has been granted to nonresidents to issue guarantee for non-funded facilities such as Letters of Credit/guarantees/Letters of Undertaking (LoU)/Letter of Comfort (LoC) entered between two persons resident in India.
This circular clarifies that resident entities that are subsidiaries of multinational companies can also hedge their foreign currency exposure through permissible derivative contracts entered into with a bank in India on the strength of guarantee issued by its non-resident group entity.
This circular now permits banks, after obtaining a NOCfrom the existing lenders in India, to allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender/security trustee, to secure the External Commercial Borrowings (ECB) raised /to be raised by the borrower, if: –
(i) The underlying ECB is in compliance with the ECB guidelines.
(ii) There exists a security clause in the Loan Agreement requiring the ECB borrower to create a charge, in favour of overseas lender/security trustee, on immovable assets/movable assets/financial securities and/ or issuance of corporate and/or personal guarantee.
(iii) T he security must be co-terminating with underlying ECB. Specific conditions in each case are as under: –
(a) Creation of Charge on immovable assets:
i. Such security will be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.
ii. The permission is not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender/security trustee.
iii. In the event of enforcement/invocation of the charge, the immovable asset/property will have to be sold only to a person resident in India and the sale proceeds will be repatriated to liquidate the outstanding ECB. (b) Creation of Charge on Movable Assets The claim of the lender, in case of enforcement / invocation of the charge, is restricted to the outstanding claim against the ECB. Encumbered movable assets can also be taken out of the country.
(c) Creation of Charge over Financial Securities
i. Pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower is permitted.
ii. Pledge on other financial securities, viz. bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter is also be permitted.
iii. Security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with banks in India, standing in the name of the borrower/promoter, can be used as security for ECB.
iv. Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account.
iii. In case of invocation of pledge, transfer of financial securities will be in accordance with the FDI/FII policy including provisions relating to sectoral cap and pricing as contained in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
(d) Issue of Corporate or Personal Guarantee
i. Board Resolution for the issue of corporate guarantee has to be obtained from the company issuing the guarantee.
ii. Specific requests from individuals to issue personal guarantee indicating details of the ECB must be obtained.
iii. This is subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.
This circular provides as under: –
(i) Creation of charge on shares of JV/WOS/step down subsidiary (SDS) in favour of domestic/overseas lender
Bankscan
now, subject to certain conditions, permit creation of charge/pledge on
the shares of the JV/WOS/ SDS (irrespective of the level) of an Indian
party in favour of a domestic or overseas lender for securing the funded
and/or non-funded facility to be availed of by the Indian party or by
its group companies/sister concerns/associate concerns or by any of its
JV/WOS/SDS (irrespective of the level) under the automatic route.
(ii) Creation of charge on the domestic assets in favour of overseas lenders to the JV/WOS/step down subsidiary
Banks
can now (previously, prior permission of RBI was required for the
same), subject to certain conditions, permit creation of charge (by way
of pledge, hypothecation, mortgage, or otherwise) on the domestic assets
of an Indian party (or its group companies/sister concerns /associate
concerns including the individual promoters/ directors) in favour of an
overseas lender for securing the funded and/or non-funded facility to be
availed of by the JV/WOS/SDS (irrespective of the level) of the Indian
party under the automatic route. However, the domestic assets of the
borrower on which charge is being created must not be securitised and
pledge of shares of an Indian company, if any, must be in compliance
with FEMA provisions /regulations as well as FDI Policy.
(iii) Creation of charge on overseas assets in favour of domestic lender
Banks
can now (previously, prior permission of RBI was required for the
same), subject to certain conditions, permit creation of charge (by way
of hypothecation, mortgage, or otherwise) on the overseas assets
(excluding the shares) of the JV/WOS/SDS (irrespective of the level) of
an Indian party in favour of a domestic lender for securing the funded
and/or non-funded facility to be availed of by the Indian party or by
its group companies/sister concerns /associate concerns or by any of its
overseas JV/WOS/ SDS (irrespective of the level) under the automatic
route. However, the overseas assets of the borrower on which charge is
being created must not be securitised.
Some of the condtions that are applicable to the above 3 cases are: –
i)
The period of charge, if not specified upfront, must be co-terminus
with the period of end use (like loan or other facility) for which
charge has been created.
ii) The loan/facility availed by the
JV/WOS/SDS from the domestic/overseas lender must be utilised only for
its core business activities overseas and not for investing back in
India in any manner whatsoever.
iii) A certificate from the
Statutory Auditors’ of the Indian party, to the effect that the
loan/facility availed by the JV /WOS/SDS has not been utilised for
direct or indirect investments in India, must be obtained and kept by
the designated Bank.
This article discusses the orders and
considers broad tax implications. The allegations and findings in the
three cases are similar and hence only Order in case of First Financial –
has been discussed.
The statements in the orders are
allegations and there are no final findings as of now. However, in this
article, for the sake of simplicity, it has been assumed that the
statements/allegations in such orders are true, though later some of the
challenges that would be faced are highlighted.
Allegations in the orders
SEBI
found a pattern of events in the three companies. To summarise, each of
the three companies made a preferential allotment of shares to select
persons. The shares so allotted were locked in for one year in
accordance with the law relating to such preferential issues. This
period of one year also coincided with the provisions of tax laws that
made gains after such period to be generally exempt from tax. During
this period of one year, SEBI found that the prices of the shares of the
companies on the stock markets were systematically increased by a group
of persons connected with the companies. This increase was by concerted
trading within their group at successively higher prices. The increase
in the price was manifold. For example, SEBI found in First Financial’s
case, the price of the shares increased from Rs. 5 to Rs. 263 in 114
trading days. And further increased to a peak of Rs. 296. The trading
volumes also increased astronomically.
Soon after the lock in
period of one year ended, the preferential allottees started selling the
shares. SEBI found that many of the buyers were linked to the people
who participated in the earlier transactions that helped increase the
price. The allottees made gains that were usually in crores of rupees
for each such allottee.
SEBI noted that while the preferential
allotment were made at a premium, the companies did not have operations
or profitability that would warrant (warranted) such premium.
During
the course of investigation, SEBI attempted to physically trace one of
the companies and its operations. It observed that it could not trace
even its offices at the reported addresses. It also noted that the
companies had stated that the issue of shares under preferential
allotment was for certain stated business purposes. However, the
companies did not use the monies raised for such purposes.
What
is more, in many cases, the amount paid by the preferential allottees
was returned by way of advances directly or indirectly to such
allottees.
SEBI held that there was concerted violation of
several provisions of the SEBI Act and the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003. SEBI thus alleged fraud, price manipulation, unfair
practices, etc. by the Company, its promoters, certain named parties and
the allottees.
Based on such findings, it made an interim and
ex-parte Order prohibiting such persons from accessing the securities
markets and also prohibited them from dealing in securities. An
opportunity was given to the parties to present their case before SEBI
within the specified time.
SEBI alleges that object was tax evasion
SEBI
has repeatedly alleged that the object of the chain of acts was evasion
of income-tax. Further, it has referred matter to concerned
authorities. The following statements of SEBI are relevant:-
“From
the above facts and circumstances it can reasonably be inferred that
the preferential allottees acting in concert with First Financial group
have misused the stock exchange system to generate fictitious long term
capital gains (“LTCG”) so as to convert their unaccounted income into
accounted one with no payment of taxes as LTCG is tax exempt. I prima
facie find that the above modus operandi helped the concerned entities
to pay a lower rate of tax on account of LTCG and helped them to show
the source of this income to be from legitimate source i.e. stock
market. “
“I prima facie find that First Financial group and
allottees used securities market system to artificially increase volume
and price of the scrip for making illegal gains to and to convert
ill-gotten gains into genuine one.”
“….while SEBI would investigate into the probable violations of the securities laws, the
matter may also be referred to other law enforcement agencies such as
Income Tax Department, Enforcement Directorate and Financial
Intelligence Unit for necessary action at their end as may be deemed
appropriate by them.”
(emphasis supplied)
Violation of securities laws for tax evasion
While
the objective of the exercise, as SEBI alleges, is tax evasion, the
concern of SEBI arises because this involves abuse of the capital market
for achieving such objects. The following remarks of SEBI make this
clear:-
“I am of the considered view that the schemes, plan,
device and artifice employed in this case, apart from being a possible
case of money laundering or tax evasion which could be seen by the
concerned law enforcement agencies separately, is prima facie also a
fraud in the securities market in as much as it involves manipulative
transactions in securities and misuse of the securities market. The
manipulation in the traded volume and price of the scrip by a group of
connected entities has the potential to induce gullible and genuine
investors to trade in the scrip and harm them.”
“SEBI strives to
safeguard the interests of a genuine investor in the Indian securities
market. The acts of artificially increasing the price of scrip misleads
investors and the fundamental tenets of market integrity get violated
with impunity due for such acts. Under the facts and circumstances of
this case, I prima facie find that the acts and omissions of First
Financial group and allottees as described above is inimical to the
interests of participants in the securities market. Therefore, allowing
the entities that are prima facie found to be involved in such
fraudulent, unfair and manipulative transactions to continue to operate
in the market would shake the confidence of the investors in the
securities market.”
“Unless prevented, they may use the stock ex-change mechanism in the same manner as discussed hereinabove for the purposes of their dubious plans as prima facie found in this case. In my view, the stock exchange system cannot be permitted to be used for any unlawful/forbidden activities. Considering these facts and the indulgence of a listed company in such a fraudulent scheme, plan, device and artifice as prima facie found in this case, I am convinced that this is a fit case where, pending investigation, effective and expeditious ?preventive and remedial action is required to be taken by way of ad interim exparte in order to protect the interests of investors and preserve the safety and integrity of the market.”
(emphasis supplied)
Further implications
Much will depend on what further findings are made in the investigations. As of now, while the findings are substantial, many of them are circumstantial. Further, they do not implicate all the parties in the same manner.
The profits made, as per the orders, aggregate to nearly Rs. 650 crore for these three companies. It appears that the sales of the shares took place in the financial year ended 31st March 2013. Thus, it is very likely that the parties would have already filed their income-tax returns and claimed benefit of exemption for the profits such long term capital gains. If the transactions are held to be bo-gus, then not only it is possible that the amounts may be subject to full tax, but there could be levy of interest and penalty. It is possible that there may be prosecution too. Even the parties who are alleged to be indirectly involved in such cases may be acted against for participating in the alleged conspiracy of tax evasion.
However, much will also depend on the final findings not just of SEBI but of the income-tax department. It would also have to be seen what is the final outcome of the proceedings before SEBI. In case some or all of the findings against some or all of the persons are found to be false, these may also have impact on the tax proceedings.
It is likely that there would be prolonged proceedings pursuant to such orders. It is possible that appeals before the Securities Appellate Tribunal and/or the Courts may be made by the parties concerned. There would also be completion of investigation and final orders passed by SEBI. These orders could then be the subject of further appeals.
Presently, SEBI has made certain interim orders of prohibition to the parties concerned. However, SEBI will certainly pass more comprehensive orders after completion of investigation. While one will have to wait and see the nature of the orders passed, the powers of SEBI, as amended and enhanced from time to time, are quite comprehensive and elaborate.
The following are some of the powers that SEBI has:-
Power to debar the parties concerned generally from accessing the capital markets for a specified period of time.
Power to prohibit the parties concerned from dealing in securities for a specified period of time.
Power to levy penalty on the parties. This could be upto 3 times the amounts involved.
It is even conceivable that SEBI may disgorge the amounts of profits made.
Power to suspend/cancel the registration of intermedi-aries involved.
Power to prosecute the wrong doers.
It has several other powers too. The various powers of SEBI that have been increased from time-to-time would not only be in full display, but be tested before the courts.
Conclusion
The findings of SEBI, if found true, can have far reaching effects. The scope of the orders is quite broad and large amounts are involved. At the same time, considering the complexities involved, it is also likely that the proceedings before SEBI and income-tax department could take a long.
Concerns about use of capital markets for tax evasion purposes have been often expressed even before there was concessional treatment of tax of gains. These orders establish that regulatory and investigating agencies are active and effective in implementing the law in the interest of good governance.
Introduction
Quick Quiz – Does Bombay (apologies for using the old name) as BOMBAY rhyme with BAY .
Interestingly, while the name tends to suggest that ‘Bombay’ is a bay, it actually is an island. History has it that Bombay originally comprised of seven islands under the Portuguese Rule, which were given in dowry to an English prince on his marriage with a portuguese Princess. One of these 7 islands was Mahim island. Paradoxically, this very island has a central role to play in this discussion on a bay!
A spate of recent decisions of the Bombay High Court have held that parts of the island city are actually bays. While this distinction may seem semantic at first, it has a great repercussion for the city’s developer community. What it does is to open up a goldmine for developers, that too on the waterfront. The Coastal Regulation Zone or CRZ restriction in bays is substantially lower as compared to other places. Let us examine this decision and why environmentalists consider it to be a real bolt from the blue!
CRZ Notification
The Ministry of Environment and Forests has issued the Coastal Regulation Zone Notification to protect coastal lines and regulate activities in these areas. In a country like India, and more so in a city like Mumbai, which has a very long coastal line, regulations dealing with protection of this very valuable natural resource have an important role to play. The Ministry had originally notified the CRZ Guidelines in 1991 vide Notification No. S.O. 114 (E) dated 19th February 1991. These were amended and updated from time to time to arrive at the latest Coastal Regulation Notification 2011 issued on 6th January 2011.
Keeping in mind the special needs of Mumbai, several concessions have been provided to CRZ areas within Mumbai.
According to this Notification, the following areas are declared as CRZ:
(i) the land area from High Tide Line (HTL) to 500 mts on the landward side along the seafront. The term HTL means the line on the land up to which the highest water line reaches during the spring tide and so demarcated. HTL will be demarcated within one year from the date of issue of the 2011 notification.
(ii) the land area between HTL to 100 mts or width of the creek whichever is less on the landward side along the tidal influenced water bodies (i.e, bays, rivers, creeks, etc. that are connected to the sea and are influenced by tides).
The significance of declaring an area as CRZ is that the Notification imposes various restrictions on the setting up and expansion of industries, operations or processes, etc., in such areas. The Notification classifies various areas into CRZ-I, CRZ-II, CRZ-III, CRZ-IV, etc. The severity of the CRZ Regulations goes on decreasing as the classification increases.
Hence, maximum construction is not possible in CRZI while in CRZ-IV, those activities impugning on the sea and tidal influenced water bodies are regulated except for traditional fishing and related activities undertaken by local communities. CRZ-IV area is defined as the water area from the Low Tide Line to 12 nautical miles on the seaward side and the water area of the tidal influenced water body from the mouth of the water body at the sea up to the influence of the tide, which is measured as 5 parts per 1,000 during the driest season of the year.
A bay is defined in common parlance as “a body of water forming an indentation of the shoreline, larger than acove but smaller than a gulf”.
Mahim is a Bay
In the case of Hoary Realty Ltd vs. MCGM, WP No. 2383/2014 Order dated 7th October, 2014, the Bombay High Court faced a peculiar issue of, whether a certain plot of land in Mahim fell within the purview of the CRZ area? The issue was whether Mahim was a bay area?
The developer obtained a Certificate from an Institute of Remote Sensing at Chennai which certified that only 7% of the plot area fell within the CRZ IV area as a bay and the balance was not within the purview of CRZ. This Institute is one of the premier bodies in India in the areas of Remote Sensing, Geographical Information System and Large Scale Mapping. Thus, the Institute certified that Mahim was a bay and not a sea shore.
Hence, according to the developer, since only 7% fell within the 100 meters restriction for a bay, it could construct on the balance 93% of the plot which fell outside CRZ. It also obtained a certificate from the National Hydrographer Office which certified that Mahim is considered as a bay and is so depicted on the Official Navigational Chart of the National Hydrographer Office. Accordingly, the developer prayed for relief to carry on construction on the area not within the purview of CRZ.
The Bombay High Court upheld the classification contended by the developer and held that the area was in Mahim which was indeed a bay. Only 7% of the plot fell within the purview of CRZ IV and hence, for this portion, there was a restriction of 100 meters from the High Tide Line. Had it not been a bay, the restriction would have been 500 meters from the High Tide Line. The High Court also relied on the National Hydrographer’s Chart. The MCGM argued that the New Coastal Zone Management Plan was under preparation and hence, it was not possible to sanction the development. This argument was rejected by the High Court. Finally, the Court directed the Municipal Corporation to issue a clearance certificate based on the Certificate obtained by the developer as to how much was within CRZ.
The Maharashtra Coastal Zone Management Authority preferred a Special Leave Petition before the Supreme Court against this decision. However, the MCGM’s SLP was dismissed by the Supreme Court on 19th November, 2014. Thus, the High Court’s ruling is binding now on the Maharashtra Coastal Zone Management Authority as well as the Municipal Corporation of Greater Mumbai.
Bhuleshwar and Bandra join the Club
Buoyed by the decision of the above Bombay High Court and the rejection of the SLP, developers have started knocking the doors of the High Court for similar relief in other parts of the city. The Bombay High Court in the case of Marine Drive Hospitality & Realty P Ltd vs. MCZMA, WP No. 3127/2014 Order dated 17th December, 2014 and Om Metals Consortium vs. MCZMA, WP No. 3152/2014 Order dated 18th December, 2014 had an occasion to consider similar issues. The Court held in Orders similar to the one in Hoary, that Bhuleshwar as well as Bandra (West) were bays. It once again held that the water body at Mahim Bay (Bandra reclamation to Prabhadevi) / Back Bay (Governor House to Colaba) was a bay! Accordingly, it allowed construction on the area outside the 100 meters purview, which in the Bhuleshwar case was an area of about 1 lakh sq. feet while in the Bandra case it was a slum redevelopment project of around 6 lakh sq. ft.
Impact of the Rulings
Development within the bay area can be done with a higher FSI of 3 which was till now allowed only for hotels. Now with the Rulings opening up the area for other development also, developers can develop more lucrative residential complexes. Since these projects would be waterfront projects one can do the math and compute the benefits to the developers.
It
may be noted that the ratio of this decision could also be used in other
coastal parts of India, such as, Goa, Gujarat, Karnataka, etc. The Eastern Coast of India could be the biggest beneficiary
since it abuts the “Bay” of Bengal! In short, this decision could be a game
changer for the realty sector. Certain Press Reports indicate that the
Maharashtra Government is planning to request the Ministry of Environment and
Forests to suitably amend the CRZ Notification to deal with this new phenomenon
of construction in bays. Till such time as the Centre amends this
Notification, the High Court Rulings will prevail.
Conclusion
While the pros and cons of these decisions are
being hot-ly debated by developers and environmentalists only time would tell
what impact they have had on the development of Mumbai and other coastal areas.
However, they high-light one important learning ~ don’t judge a book by its
cover! Outward appearances are often deceiving ~ what appears to be a shore
could turn out to be a bay, keeping all environmentalists at bay (pun
intended)!
The Hon’ble Court held that the circulars issued by the Central Board of Excise and Customs are binding on the Department and the Department cannot be permitted to urge that the circulars issued by the Board are not binding on it. The Court in a series of decisions has held that the circulars issued u/s. 119 of the I.T. Act 1961 and section 37-B of the Central Excise Act, 1944 are binding on the Revenue.
However, a slightly different approach was taken by this Court in Hindustan Aeronautics Ltd. vs. CIT (2000) 5 SCC 365 by two learned Judges which runs counter to the earlier decisions. The view taken in Hindustan Aeronautics Ltd. (supra) being contrary to the subsequent decision of the Constitution Bench of this Court in CCE vs. Dhiren Chemical Inds. (2002) 254 ITR 554 / (2002) 2 SCC 127, cannot be taken to be good law. Earlier ruling of Smaller Bench held stands over rule if a subsequent larger bench lays down law to the contrary.
Appellant 1 is a charitable society registered under the Societies Registration Act, 1960. It runs various institutions as a constituent unit of Catholic Church. Its members after joining the appellant Society renounce the world and are known as ‘Brothers’. Such ‘Brothers’ sever all relations with their natural families and are bound by the constitution of the Society.
One ‘Brother’ of the Society, namely, Alex Chandy Thomas was a Director-cum-Head master of St. Peter High School and he died in a motor accident. The accident was between a Jeep driven by the deceased and a Maruti Gypsy covered by insurance policy issued by the respondent Insurance Company. At the time of death the deceased was aged 34 years and was drawing monthly salary of Rs. 4,190/-. The claim petition was filed before M.A.C.T., by Appellant No. 2 on being duly authorised by the Appellant No.1 the society. The owner of the Gypsy vehicle stated in his written statement that vehicle was duly insured and hence liability, if any, was upon the Insurance Company.
The respondent-Insurance Company also filed a written statement and thereby raised various objections to the claim. But it was clear from the written statement that it never raised the issue that since the deceased was a ‘Brother’ and therefore without any family or heir, the appellant could not file claim petition for want of locus standi. The issue no.1 regarding maintainability of claim petition was not pressed by the respondents. The Tribunal awarded a compensation of Rs. 2,52,000/- in favour of the claimant and against the opposite parties with a direction to the insurer to deposit Rs. 2,27,000/- with the Tribunal as Rs. 25,000/- had already been deposited as interim compensation. The Tribunal also permitted interest at the rate of 12% per annum, but from the date of judgment passed in MACT case.
Instead of preferring appeal against the order of the Tribunal, the respondent-Company preferred a writ petition under Article 226 of the Constitution of India before the Gauhati High Court and by the impugned order under appeal, the High Court allowed the aforesaid writ petition ex-parte, and held the judgment and order of the learned Tribunal to be invalid and incompetent being in favour of person/persons who according to the High court were not competent to claim compensation under the Motor Vehicle Act.
The Hon’ble Court observed that the issue as to who is a legal representative or its agent is basically an issue of fact and may be decided one way or the other dependent upon the facts of a particular case. But as a legal proposition it is undeniable that a person claiming to be a legal representative has the locus to maintain an application for compensation u/s. 166 of the Act, either directly or through any agent, subject to result of a dispute raised by the other side on this issue.
The Court observed that Tribunal had relied on the decision of FB judgement of Patna High Court in Sudama Devi vs. Jogendra Choudhary AIR 1987 Pat 239 wherein it was held that term `legal representative’ is wide enough to include even “intermeddlers” with the estate of a deceased. Further, the proceeding before Motor Accidents Claims Tribunal being summary in nature, unless there is evidence before Claims Tribunal in support of such pleading that the claimant is not a legal representative and therefore the claim petition is liable to be dismissed as not maintainable, no such plea can be raised at a subsequent stage and that too through a writ petition. Accordingly the order of High Court was set aside.
In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed a SLP before Supreme Court. The Court deprecated such practice of the petitioner corporation treating the litigation as a luxury. The corporation must have spent on amount for filing this petition in excess of the amount due to the respondent.
The Law Commission of India in its 155th report has observed that what further aggravates the position is the number of pending litigations relating to trivial matters or petty claims, some of which has been hanging for more than 15 years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved.
The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.
The matters were posted in view of the following statement of Mr. Prashant Bhushan that appeared in the weekly news magazine Outlook, 18-11-2013 (Vol. LIII, No. 45):
“I can only speculate. The Bench is possible hesitant about taking action against the highest law officer of the Govt. who is appearing before them everyday. Perhaps they are meeting him socially and you do tend to be a little diffident in cases involving such people.”
The above statement was made by Mr. Prashant Bhushan to the question that was put to him – “But why didn’t the court pull him up then? Why was it so indulgent ?
Mr. Prashant Bhushan states that he has the highest regard for the Supreme Court. He also tenders apology for his statement published in the weekly news magazine referred to above. In view of the matter, the court observed that nothing further deserves to be done with regard to this aspect.
The challenge has always been to
recognise that PSF’s can grow well and scale up enough only and only if
the human capital is in alignment. This recognition comes to most firms
very late in their life span; sometimes so late that not enough course
corrections can be made. Most good firms that have succeeded and grown
over decades have done a remarkably great job at aligning their human
capital.
It is therefore, required of PSF leaders to understand the dynamics of human capital early in the growth curve of the PSF.
This picture outlines the various stakeholders that draw on an individual’s time:
Let
us analyse the dynamics of human capital engagement for each of the
stakeholders, starting with the PSF’s internal team members – i.e., the
individual himself: 1. The self: Internal teams are the most critical
asset of any PSF. It is all about managing the human capital responsibly
and effectively.
A few questions to ask and examine of each individual team member are:
Who is this professional?
How did he come into being in to our firm?
What are his aspirations?
What
drives him? Is there a conflict in his thought process, his goals and
career aspirations? Will he be a Partner in the firm in a few years? Is
he a good mentor and a team player? Is he a good fit for the firm
currently?
The above are some of the hard questions that a PSF
needs to answer. If the responses to some of the above are not very
encouraging for the firm, then it is clear that the human capital is not
optimally aligned and PSFs have a lot of work to do to bring about an
alignment. The individual within the internal team needs to be
understood, mentored, coached and encouraged to give his or best. His
working style is irrelevant, beyond a point. His weaknesses can be
corrected to a point; but the focus of the PSF should be to “make his
strengths productive” to the firm. It is far more effective to recognise
an individual’s strengths and make it work for him, his team and the
firm, as opposed to trying to constantly correct his weaknesses. Peter
Drucker exhorted this proposition and articulated that people work best
when their strengths are aligned to the needs of the firm. The challenge
for a Partner in the PSF to identify the strengths of his internal team
members and make this happen.
The professional – an individual within a PSF:
It
is incumbent upon the professional to be the best that he can be in the
environs of a PSF. For that to happen, the professional has to learn to
“Manage himself”. Managing oneself is a very critical aspect of
effectiveness and alignment. Unless a professional learns to manage
himself, the team dynamics and client delivery is never going to be
optimum. Managing oneself is all about knowing thy time, assigning
priorities and taking responsibilities for action. A professional is a
manager, akin to an executive in a business, who is required to make
effective decisions, conform to an execution framework, focus on
priorities, have a growth orientation, think with a solution mindset and
multitask between production and management.
The individual has
to have a strong sense of affinity to the society, his family, his
friends, his work colleagues and his clients. It is these interpersonal
relationships and their dynamics, which largely influence the way the
individual conducts himself. Thus, managing oneself is a starting step
in aligning human capital.
2. Teams
Individuals in
PSF’s need to be effective in teams, this would mean being collaborative
in teams, sharing knowledge with the team members, generating a spirit
of camaraderie and sportsmanship and having a congenial disposition on a
day-to-day basis.
Teams get most influenced by team dynamics.
E.g.: If the senior most member in the team cannot set the tone, he will
quickly lose respect. Similarly, someone who is technically brilliant
as a professional will still not be the favourite of the team if he does
not learn to be a go-getter and a real team player. Being technically
brilliant does not mean that they should be intellectually arrogant. In
fact, if these technically brilliant people are also respectful to their
peers and have an intrinsic habit of sharing their knowledge and
expertise, it will go a long way in creating successful future leaders
in their respective firms.
Sharing of ones’ knowledge is
critical to have the team come up to terms with the thought process of
the team leader. This, in other words, assumes that over a period of
time, each professional in the team will get upgraded to a level of
knowledge which will help them converse with their senior team members
and their clients with equal ease. It is also imperative on the team
members themselves to have a constant quest for learning and upgrading
themselves. And, in that they have somebody to look up to in terms of
the team leader, the technically superior member amongst them, who’s
depth of knowledge is a vital resource for the firm to access. The
question then is – Is the congeniality quotient in the team at a level
that permits such free and fair exchange of knowledge? To be in
alignment, PSF’s have to get this rolling, ensure that teams work in a
spirit of sharing and caring, have tremendous respect and affinity to
each and other and for their firm, and truly care for the growth of the
firm and their peers within the firm.
3. Clients
Professionals
have their foremost duty to solving client’s problems and servicing
client efficiency. PSF’s have to create an environment and pursue a
culture where professional respect each and every client and clients
feel that the teams are responsive to their problems and challenges on a
continuous and sustained basis. This needs hard selling of the concept
of “client comes first”.
As the great Mahatma Gandhi eloquently
put it “We exist because of our clients”; “The customer is not an
interruption of our work; he’s the purpose of it”.
Professionals
have to have a mindset of solving problems and challenges of clients.
To be in a continuous frame of mind of being a solution provider needs
reiteration of this tenet and at a deeper level “a connect” with the
client. The Partner concerned does not really have to sell his
expertise; all he needs to do is to engage into a conversation with the
client and understand the client.
This includes the following:
If
you want to win a client’s confidence, give him the chance to talk to
you, person to person, about his needs and his expectations. Make it
easy and comfortable for the clients to share his secrets. In short, if
you really want the client’s business, talk to the client and have a
conversation, make him feel that you are using normal language and not
“corporate speak”. Both parties should engage into a conversation, it
cannot be a monologue.
It’s about a mindset of joint problem
solving, not about trying to win or prevail. Finally, its about allowing
people with different views to learn from each other.
If teams
can achieve this dynamic with their clients and if they work hard at
doing this consistently, the PSF would have created and aligned its
human to create a winning client base.
4. Market
Partners and managers and everybody in between, have to be focused on the markets.
Where is the profession heading?
Would our services be relevant, three years from now and seven years from now?
What do we need to do today to continuously adapt to the marketplace?
Is there a better way of doing what we do?
What are the trends in the market place that the professional can see and that helps him to think about generating more opportunities for his firm?
What can he do about it? In capital markets, they say that the market is a great leveler; one can extend this to professional service market and say that the market is very discerning and will choose the most appropriate service player for its requirements.
Often, what is perceived is the truth. E.g.: If a lawyer provides very high-end technical solutions, he is perceived to be an expert with a very busy schedule with very little time to spend. This preconception comes because of a perception. Perceptions take long to create but can dissipate very quickly. Thus, a PSF should make sure that what Partners say and do is relevant to his chosen segment of clients and stays that way on a continuous basis. A PSF would than be omnipresent in the Market and would be aligned for faster growth.
Regulators
Professionals have to be trained to deal with the entire regulatory ecosystem. We have in our day-to-day existence, a need to deal with various set of regulators, authorities, governmental agencies and the likes. This would include the regulator of the profession; Example: the Bar Council for the Lawyers, The Institute of Chartered Accountants for the Accountants etc. This would also include the revenue authorities, the courts, the justice delivery system, the administration in the state and all departments thereto.
The Chambers and associations, who influence policy making, the public representatives who make the laws, and a wide gamut of people who form the servicing (internal) team of these constituents also deal with Regulators constantly. And professionals need to learn to deal with the Chambers and Associations too.
Professionals need to have skill-sets to deal with them differently, as these are not clients. Some of these are watchdogs, some of them are policy makers and the others are policy implementers. The most successful firms have aligned their human capital to a point where a group of professional within the firm deals with each one of them effectively. This needs lots of training and high quality communication skills that work with bureaucrats and a deep understanding of policy formation.
The best firms thrive in such an ecosystem by having specific people earmarked to deal with this breed – the Regulators.
Peers
PSF’s constantly have a cliental pressure to benchmark themselves with their peers; especially when it comes to the relative size of the firm, the size of the team, the infrastructure, the quality of the delivery, the timeliness and responsiveness and the professional fees/compensation for the engagements.
In this context, the most compared resource is the quality of human capital. That is the biggest differentiator between the good firms and the better and the best firms, as it is partners and managers who are the touch point of the firm and the face of the firm across the ecosystem. The quality of delivery is also a reflection of the level of training, the level of knowledge base, the expertise of the firm and therefore its unique positioning in the marketplace and all of this ties in to the human capital of the firm.
Most successful firms have been growing primarily because relative to their peers, they have done a great job at mentoring their teams.
And most successful firms have been successful because they have been constantly aligning their human capital to the firm’s growth trajectory.
The appellant, a Hindu woman, executed a registered gift deed in respect of an immovable property in favour of the respondent reserving to herself the right to retain possession and to receive rents of the property during her lifetime. The gift was accepted by the respondent. But subsequently the appellant revoked the gift deed by a revocation deed. The respondent filed a suit assailing the revocation deed and seeking a declaration that the same was invalid and void ab initio. The trial court found that the appellant defendant had failed to prove that the gift deed set up by the respondent plaintiff was vitiated by fraud or undue influence or that it was a sham or nominal document. The gift, according to the trial court, had been validly made and accepted by the respondent plaintiff, hence, was irrevocable in nature. It was also held that since the appellant donor had taken no steps to assail the gift made by her for more than 12 years, the same was voluntary in nature and free from any undue influence, misrepresentation or suspicion. The fact that the appellant donor had reserved the right to enjoy the property during her lifetime did not affect the validity of the deed. Accordingly, the suit was decreed. The first appellate court and the High Court in second appeal concurred with the findings of the trial court.
The Hon’ble Court observed that sections 124 to 129 deal with matters like gift of existing and future property, gift made to several persons of whom one does not accept, suspension and revocation of a gift, and onerous gifts including effect of non-acceptance by the donee of any obligation arising thereunder. Section 123 calearly provides that a gift of immovable property can be made by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. When read with section 122 of the Act, a gift made by a registered instrument duly signed by or on behalf of the donor and attested by at least two witnesses is valid, if the same is accepted by or on behalf of the donee. That such acceptance must be given during the life time of the donor and while he is still capable of giving is evident from a plain reading of section 122 of the Act. A conjoint reading of sections 122 and 123 of the Act makes it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required is not a sine qua non for the making of a valid gift under the provisions of Transfer of Property Act, 1882.
The Court further observed that section 123 of the T.P. Act is in two parts. The first part deals with gifts of immovable property while the second part deals with gifts of movable property. Insofar as the gifts of immovable property are concerned, ssection 123 makes transfer by a registered instrument mandatory. This is evident from the use of word “transfer must be effected” used by Parliament in so far as immovable property is concerned. In contradistinction to that requirement the second part of section 123 dealing with gifts of movable property, simply requires that gift of movable property may be effected either by a registered instrument signed as aforesaid or “by delivery”. The difference in the two provisions lies in the fact that in so far as the transfer of movable property by way of gift is concerned the same can be effected by a registered instrument or by delivery. Such transfer in the case of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. If the intention of the legislature was to make delivery of possession of the property gifted also as a condition precedent for a valid gift, the provision could and indeed would have specifically said so. Absence of any such requirement can only lead to the conclusion that delivery of possession is not an essential prerequisite for the making of a valid gift in the case of immovable property.
In the present case, the execution of registered gift deed and its attestation by two witnesses is not in dispute. It has also been concurrently held that the donee had accepted the gift. The recitals in the gift deed also prove transfer of absolute title in the gifted property from the donor to the donee. What is retained is only the right to use the property during the lifetime of the donor which does not in any way affect the transfer of ownership in favour of the donee by the donor.
There is indeed no provision in law that ownership in property cannot be gifted without transfer of possession of such property. As noticed earlier, section 123 does not make the delivery of possession of the gifted property essential for validity of a gift.
The High Court was in that view perfectly justified in refusing to interfere with the decree passed in favour of the donee. The appeal was hereby dismissed.
This circular permits persons going on Haj/Umrah pilgrimage to carry the entire BTQ entitlement in cash/up to the cash limit specified by the Haj Committee of India.
Presently, persons who have availed ECB have to immediately bring into India, for credit to their Rupee accounts with banks in India, ECB proceeds meant for Rupee expenditure in India for permitted end uses.
This circular permits a person who has availed ECB to park ECB proceeds (both under the automatic and approval routes) in term deposits with a bank in India for a maximum period of six months, subject to the under mentioned terms and conditions, pending utilisation for permitted end uses.
i. The applicable guidelines with respect to eligible borrower, recognised lender, average maturity period, all-incost, permitted end uses, etc. have been complied with.
ii. No charge in any form can be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency.
iii. Such term deposits must be exclusively in the name of the borrower.
iv. Such term deposits must be available for liquidation as and when required.
This circular clarifies that all transactions involving acquisition of immovable property in India by NRI/PIO/Non- Residents are subject to the applicable tax laws in India.
This circular states that all exporters, including Units in SEZ, Status Holder Exporters, EOU, Units in EHTP, STP & BTP, must uniformly realize and repatriate export proceeds with respect to export of goods/services/software within a period of 9 months from the date of export. However, in the case of exports made to warehouses established outside India, the period for realisation and repatriaton of export proceeds will continue to be 15 months from the date of export.
The
new Regulations, though they have many amendments, are in many ways
similar in structure with the earlier Guidelines. However, the
Regulations now have far wider reach in three major aspects. Firstly,
they now specifically also cover share-based benefits such as Stock
Appreciation Rights. This is also made clear by the title of the
Regulations that now refers to generically sharebased employee benefits
other than stock options in place of Stock Options and Stock Purchase
schemes. Secondly, instead of providing specifically for how stock
options and share purchase schemes should be accounted for, the
Regulations essentially provide that the accounting shall be carried out
as per the Guidance Note/Accounting Standards of the Institute of
Chartered Accountants of India.
Thirdly, now, the Regulations
specifically provide for dealing in shares by schemes for employees
other than Schemes for stock options/share purchase. The earlier
Guidelines were more or less silent on this. As will be seen later, it
was found that many such schemes dealt in shares of the Company. The
concern was whether these were misused for various purposes. Now the
Regulations specifically recognise and permit, subject to conditions and
restrictions, purchase and otherwise dealing in shares of the Company.
Finally, the change in the legal status of the law from Guidelines to Regulations also has important implications.
These are discussed in detail hereafter.
Eligible employees
The
definition of employees has been modified. Employees of associate
companies (as defined in section 2(6) of the Companies Act, 2013) are
also eligible to such Schemes. Independent Directors are now
specifically ineligible. The conditions under which nominee directors of
institutions may be eligible have been made more elaborate.
Regulations specifically cover SARs
The
Guidelines did cover a form of Stock Appreciation Rights (SARs) but
this was indirect, and of a particular form only. They focused more on
stock option and share purchase schemes. Now, the Regulations provide
specifically for Schemes of SARs.
SARs provide for rights for
being paid for appreciation in the price of the shares. An employee
would thus be given a right to be paid for the increase in the value of
the shares from the date when the right was granted to the date when he
choses to exercise the SAR. The Regulations provide that he can choose
to be paid for the appreciation either in the form of cash or shares.
The
erstwhile Guidelines too did provide for cashless exercise of stock
options. This involved allotment of shares which would be handed over to
a stockbroker. The stock broker would then sell the shares. Of the sale
proceeds, the exercise price would be retained by the Company and the
appreciation paid to the employee.
The Regulations provide for
payment of appreciation directly by the Company without allotting any
shares. However, such appreciation can also be paid in the form of
shares.
The other features of SARs are similar to stock option/
share purchase schemes. There has to be a waiting period of one year
before exercise of the SARs.
General Employee Benefits Scheme (GEBS) and Retirement Benefit Schemes (RBS)
Two
new categories of Schemes have been now specifically covered. However,
such schemes are covered only if they deal or are intended to deal in
the shares of the company that they are required to comply with the
Regulations.
Such Schemes shall not hold more than 10% of their
assets as per the last audited balance sheet in the form of shares of
the Company. For this purpose, the book value or market value or fair
value of the assets is considered, whichever is the lowest.
To which Schemes are the Regulations applicable?
The
Guidelines applied to schemes set up by companies for issue of stock
options and share purchase. It was not clear whether other schemes that
also dealt in shares were also covered. It was seen that there were
Schemes that were for the benefit of the Company but were not apparently
controlled by the Company or its Promoters but also dealt in the shares
of the Company. Under what circumstances would such Schemes be
regulated? The Regulations now have specific provisions to deal with
this.
Firstly, they apply to Schemes of stock options, share
purchase, SARs, general employee benefits schemes and retirement benefit
schemes. Such Schemes should involve dealing in the shares of the
Company, directly or indirectly. Further, the Scheme should have a link
with the Company in any of the following ways:-
(i) the Scheme is set up by the Company or any other company in its group (the term group is widely defined); or
(ii) the Scheme is funded or guaranteed by the Company or any other company in its group; or
(iii) the Scheme is controlled or managed by the Company or any other company in its group.
The
Company of course needs to be a listed company. Thus, companies would
be free to set up Schemes for benefit of employees and the employees
themselves are free to set up such Schemes without being regulated by
SEBI. However, if they deal in the shares of the Company and are
connected with the company in any of the specified manner, then they
will need to comply with the provisions.
Dealing in shares by share based benefits Schemes
As
stated earlier, it was observed by SEBI that several Schemes were set
up apparently for the benefit of employees but dealt in the shares of
the company. They apparently were not connected with the company. They
held shares of the Company that were often acquired from the secondary
market. There were legitimate concerns that the object of such Schemes
was more to carry out illegitimate objects such as surreptitious holding
shares on behalf of the Promoters, carry out insider trading or price
manipulation, give market support to price at time of fall, etc. This
was of even more concern when funds of the Company were directly or
indirectly used.
SEBI did issue certain directions to require
control this aspect. However, it seems that it was also realised that
there may be legitimate reasons why certain Schemes may be required to
hold shares of the Company. The Regulations now provide for more
transparency and clarity. Such Schemes are now allowed to deal in shares
subject to certain restrictions and disclosures.Existing Schemes
holding shares are also required to comply after completion of a
transition period.
In case it is desired that share acquisition
be carried out through secondary acquisition or gift of shares, then
such Schemes should be administered through a Trust. There are certain
restrictions over appointment of Trustees to such Trusts. Further, in
such cases, specific and separate approval of the shareholders by way of
a special resolution is required to set up such Schemes.
SEBI lays down limits upto which the trusts administering such Schemes may hold shares. Stock options, share purchase and Sars may not hold shares more than 5% of the share capital of the Company in the year prior to which approval of the shareholders is obtained (as expanded by bonus/rights issues made later). For general benefits and retirement benefits Schemes, the maximum holding is 2%. however, all such Schemes put together cannot hold more than 5% shares. Such limits will not apply in case of gift of shares by the Promoters or other shareholders or where these are acquired by way of a fresh issue of shares.
The yearly cap on acquisition of shares through secondary market by the trust is set at 2% of the paid up share capital as at the end of the preceding financial year.
In any case, the number of shares acquired through secondary market purchases cannot exceed the grant of benefits in the form of stock options/share purchase/ Sars. If there are such excess holdings, they will need to be appropriated within a reasonable period but not beyond the end of the following financial year. There is also generally a lock in period of six months, except for certain specified manner of disposal.
The trustees of such trusts are prohibited from voting on such shares. This will ensure that such shares are not acquired for supplementing the voting power of the Promoters/management.
Further, the holding by such trusts will not be counted as part of public holding. Companies would thus be required to maintain the minimum public holding as required by law.
Approval of Shareholders Broadly, the requirement of approval of shareholders for such Schemes remain the same as under the Guidelines, i.e., approval should be by way of a special resolution. However, separate approval shall be obtained in certain cases such as permitting acquisition of shares from the secondary market, grant of options etc. to employees of subsidiary/holding/associate companies, etc.
Accounting for stock options, etc.
Accounting for discount on issue of stock options, etc. has always been a controversial issue. the Guidelines had provided in fair detail how such discount should be computed and accounted. Companies were required to follow such accounting as a pre-condition for issue of stock options, etc. at a price they chose to determine. However, it was seen that the accounting provisions were not very detailed particularly to cover the wide variety of such schemes in practice. Further, the accounting method created areas of potential difference between what was recommended by accounting bodies. The Regulations have now simplified the provisions. The accounting for such schemes shall be as per the Guidance note of ICAI or accounting Standards as may be prescribed by from time to time by the ICAI.
The Guidance note of the ICAI on accounting for employee Share Based payments covers such accounting requirements.
Transition Period
Companies that have existing Schemes are required to comply with the regulations within one year. Trusts holding shares in excess of the limits specified in the Regulations are required to bring down the holding in five years.
Regulations vs. Guidelines
The erstwhile Guidelines had, at best, dubious sanctity as an enforceable law. Several earlier important provisions relating to securities markets were in the form of Guidelines. It was uncertain to a large extent whether they could be enforced, whether acts/omissions in violation of law could make the transactions void and above all, whether SEBI could initiate adverse measures in the form of adverse directions, penalties and prosecutions against the parties.
As will be discussed later, it appeared that certain Schemes involved dealing in shares and it was felt that these dealing in shares were for purposes other than purely for benefit of employees. It may have been difficult to enforce the Guidelines or punish any violations in such cases.
Issue of the regulations cures these defects. Thus, this is an important change of the provisions relating to share-based benefits.
This trend of changing Guidelines into regulations is seen in other areas as well and it is expected soon for the provisions in regard to corporate governance.
Conclusion
The regulations, while not overhauling the provisions relating to share-based benefits substantially, do make important changes, remove certain possibilities for abuse align the provisions with the new Companies act, 2013.
HRD Ministry is keen to celebrate 25th December as good governance day to mark the birthdays of A. B. Vajpayee and Madan Mohan Malaviya.
• Promise of Better Governance:
The fact that BJP regime is in power because of the promises they have made to provide better governance is a good sign for it puts pressure on the system to make a visible difference. The Modi government has embarked on an ambitious project – the attempt is to move from a mental model of governance being about dispensing resources to one that actively seeks outcomes, but this needs an ability to convert programmes into measurable and repeatable actions on the ground. This will need a dramatic overhaul of the administrative infrastructures, and its understanding of the nature of power. It might be relatively easier to ring in the big changes, but the real challenge might lie in the everyday experience of governance. Boring, predictable governance is the need of the hour but to deliver that what we need are sweeping administrative reforms. Other more glamorous reforms will be rendered meaningless without fixing the nuts and bolts of governance.
[Santosh Desai in the Times of India dated December 15]
The Petitioner-Society is a Tenant Cooperative Society, as contemplated under Rule 10 of the Maharashtra Cooperative Societies Rules, 1961. The Respondent No. 5 applied for the transfer of shares and suit flat from the name of Respondent Nos. 3 and 4th members of the Petitioner Society on 24th January 2004. Respondent No. 3 was the Director of Respondent No. 5 and also the Secretary of Petitioner Society. The Society refused the said transfer for want of sufficient stamp and registration. The Society never accepted the payment on behalf of Respondent No. 5, and even through Respondent Nos. 3 and 4, and communicated their inability to transfer the suit flat. The Application filed by Respondent No. 5, was therefore rejected and the flat remained, so also the membership, in the name of Respondent Nos. 3 and 4. The Society returned the amount paid to it. Respondent Nos. 6 and 7, on 15th August 2008, filed an Application for transfer of the suit flat and shares from Respondent No. 5 to them. On 26th August 2008, the same was rejected as Respondent No. 5 was not the owner of the suit flat in the above background. Respondent Nos. 6 and 7, therefore, invoked section 23(1) of MCS Act, 1960 before the Deputy Registrar of Cooperative Societies on 13th April, 2009. The Registrar directed that they be admitted as members in respect of the suit shares and the suit flat. The Petitioner Society therefore, preferred a Revision Application and challenged the above order. Respondent No.1 the Divisional Joint Registrar by impugned order dated 15th December 2009, rejected the Revision Application, therefore, the Writ Petition was filed by the Society.
The Hon’ble Court observed that the MCS Act and Rules made there under makes provisions for members and membership and various classes of the same and the procedure to be followed for getting such membership. Mere filing of Application for getting membership is not sufficient. The Society is governed and run by the byelaws, which is basic requirement to consider to grant and/or refuse such membership. Normally, the Society, needs to grant membership if all other requisite elements and/or qualifications are satisfied. Even for rejection, the Society must give sufficient reason and/or must show the grounds for such refusal of admission. In the present case, for the above stated case, the Society refused to accept the membership Application.
The basic scheme and procedure so prescribed under the MCS Act referring to “Member”/”Membership”. Section 2(19)(a) provides the concept of “member”. The concept “deemed member” as provided in sections 22(2) and 23 is not defined. Section 22(2) deals with the members who became members and section 23 provides a procedure for open membership. For deciding the membership issue, the aspect of restriction on transfer or charge of share or interest, as contemplated u/s. 29 is also relevant, so also to maintain the register of members as contemplated u/s. 38 of the MCS Act. Rule 38 of the byelaws provides that the Society needs to follow the byelaws, which binds the Society, as well as, its members. Rule 19 deals with the conditions before admission for the membership. This also provides the detailed procedure to be followed by all the parties. Rule 24 deals with the procedure for transfer of shares, as no transfer of shares shall be effective unless the condition so provided under the Rules and the Act are fulfilled.
Thus for transfer of membership and/or shares, the concerned parties need to follow the various procedure and the supporting material and documents. The Society needs to apply its mind to the law, as well as, the related record before granting and/or refusing admission. The statutory Authorities are also under obligation to consider this, if the Society refused the membership and/or any challenge is made to grant such admission. These, are essential elements before considering the rival case, as well as, the contentions at every stage of admission of members and/or granting membership.
Merely because someone has claimed membership, a Society is not under obligation to grant the same. The lawful occupation, their rights, title and interest in the property, permissible transfer of shares and/or property and/or interest as per the byelaws and all related aspects, just cannot be overlooked by the concerned parties, including the Society, as well as, the Registrar/Authorities.
The Society having refused to grant admission with reasoned order, the interference by the Respondent Authority in the present facts and circumstances of the case and specifically by not giving the reasons in support of their reversal order as contemplated and by overlooking the provisions and procedures of the orders passed by the Authorities are unsustainable, therefore, required to be interfered with.
Thus, the Hon’ble Court held that the fact that Respondent Nos. 6 and 7 have purchased the property and are in occupation of the same since 2008; their entitlement based upon the said transaction and/or related agreements need to be reconsidered in accordance with law by the concerned Authorities afresh, by giving full opportunity to all the parties concerned. Further, the jurisdiction of Registrar u/s. 23, though nowhere contemplated to determine the validity and/or legality of the documents, which are executed in favour of the parties, but still the basic elements as contemplated under the scheme and the provisions as referred above, right from the byelaws of the Society, need to be looked into before granting and/ or refusing membership. The serious issue of validity and/ or legality of the documents may be the matter of trial and/ or inquiry before the appropriate forum, but that itself is not sufficient to deny the membership, if all requirements are prima facie satisfied.
The appellant was the counsel for the 2nd respondent in a matter before the Magistrate Court. The 2nd respondent for the reasons known to him substituted the appellant with some other counsel. The subsequent counsel had filed his vakalatanama in the matter. The appellant sent a letter to the 2nd Respondent stating that his action is against the rule of law. The said letter was followed by filing Writ Petition before the High Court. The appellant submitted that his fundamental right to practice as a Lawyer has been infringed. The learned Metropolitan Magistrate ought not to have noted the change of vakalath filed without following the required procedure.
The Hon’ble Court observed that during the proceedings, a vakalath had been filed on behalf of the second respondent by another Advocate. Admittedly, the consent of the appellant had not been obtained.
The relationship between the Advocate and the client is strictly professional. It depends upon the trust between the parties. The legal profession is not only a service but also a calling. Therefore, when the client wants to engage another counsel, the earlier Lawyer has got no option, except to recuse himself from the case. Acting as a Lawyer to a client is different from any other disputes inter se including the payment of fees etc.
The Court further observed that the any fundamental right of the appellant has not been infringed. It is not as if the appellant has been debarred from doing his profession. It is purely a personal dispute between the appellant on the one hand and the second respondent on the other hand. It is not the case of the appellant that the vakalatanama has not been signed by the second respondent. On the contrary, it is the case of the appellant that the learned X Metropolitan Magistrate, ought to have conducted an enquiry as the change of vakalatanama has been filed without obtaining his consent. Assuming, that the permission of the court is required that aspect, at the best, can be termed as a procedural one. The duty of the Magistrate is to conduct the case before him and not to resolve the inter se between the Lawyer and the party. The Petition was accordingly dismissed.
Legal Requirement
The
Companies Act, 2013 has recognised the long felt need for having a
structured process for evaluation of the performance of the Board of
Directors. Section 178(2) of the Companies Act, 2013 mandates that the
Nomination and Remuneration Committee constituted by the Board shall
carry out an evaluation of the performance of every Director. In
addition, the Code for Independent Directors mandates that the
Independent Directors of a Company shall hold at least one meeting, in
which the performance of the non-independent directors and the Board as a
whole, shall be reviewed. Further, the quality, quantity and timeliness
of the flow of information between the Management and the Board shall
be evaluated. The performance of the independent directors shall also be
done by the entire Board excluding the director being evaluated. Based
on such evaluation, the Board’s report shall contain a statement
indicating the manner of evaluation and the conclusions thereof.
Evaluation Process
Typically,
the performance evaluation of the Board would be on the basis of a
benchmark which could be decided upfront and used for the purpose of
this exercise. The evaluation can also be carried out on specific
matters relating to each committee and those which would apply only at a
Board level as well.
With respect to the evaluation of the
individual directors, the performance evaluation could be done on the
basis of the following macro aspects:
-Allocated Roles and Responsibilities
-Strategic Thinking
-Risk Management
-Core Governance and Compliance Management
-Independence & Ethics
-Corporate Culture
-Compliance with the Code of Conduct of Directors
-Industry/Entity Knowledge
-Talent Management
-Leadership Style
-Unbiased Approach
-Effectiveness of Decision Making
-Entity Performance
In addition, the following specific aspects could also be considered for performance evaluation:
-Attendance and contribution to the meetings
-Application of financial/technical/legal/treasury/other expertise on specific matters
-Quality of debate
-Extent of communications with executive management
-Relationship with other Board members
-Personal eminence and the reputation
-Quality of the feedback provided to the management
The
Act does not stipulate the timing or the period for evaluation of the
Board. Hence, a company could either decide to do the evaluation on an
annual basis similar to the policy followed for its employees or deal
with it by having any other review period on a systematic basis. Each
company needs to assess the specific aspects applicable to it and then
consider the frequency/ periodicity of the evaluation. The review could
be done at a pre-determined frequency or could be performed on an “as
needed” basis. The “as needed” approach may work in situations where the
Board has a clear policy on the triggers that would prompt an
evaluation. However, in situations where such guidelines are not
available, then it is possible that the need for performance evaluation
may be overlooked. Performing the evaluation on an annual basis is the
most common frequency as this in line with the annual planning cycle
and, therefore, useful in adapting the performance expectations with the
strategic needs of the organisation. However, a predictable frequency
could result in the evaluation becoming mundane and routine.
On
an overall level, the performance evaluation should be an ongoing
process and not just an annual event. One of the best practices is to
devise other mechanisms in addition to the annual review to ensure
ongoing performance improvement. Irrespective of the period chosen, the
same may be followed in letter and spirit and on a consistent basis.
Attributes
of a Successful Governance Oversight Model Identifying an appropriate
governance oversight model is the basic starting point for having a
robust evaluation platform. All the subsequent activities will be driven
by this. In general, a successful governance oversight model should
encompass the following attributes:
-Competence – skills required for the Board to effectively execute its responsibilities
-Understands corporate governance and its application to Board structure, operations, processes, and procedures
-Understands the organisation, its businesses, and underlying drivers
-Has relevant, recent experience in the industry, adjacent industries and markets, or competitors
-Has knowledge of the interests and priorities of stakeholders
-Process – processes required for the Board to both understand and properly oversee the activities of the entity
-Understands the risks inherent in the organization’s governance programmes
-Selects qualified, independent Board members, aligning overall Board composition with the organization’s strategy
-Establishes and periodically reaffirms Board leadership
-Establishes and ensures compliance with Board operating principles and governance policies
-Designs and implements a committee structure that complements and enhances the work of the Board
-Assesses and continually improves the Board, its leaders, and committees
-Engages with stakeholders
-Oversees public disclosures related to Board operations
-Information – information required by the Board adequate to support effective oversight and decision making
-Receives verbal and/or written feedback and development plans resulting from periodic assessments
-Receives Board governance documents and related tools (e.g., Board calendars, planning tools) for review and improvement
-Receives thought leadership or continuing education related to Board governance developments
-Behaviour – Board’s behaviour to support and reinforce strong oversight
-Displays ownership and commitment to governance excellence and continuous improvement
-Creates a culture of collaboration, engagement, and healthy tension among Board members
-Holds Board members accountable for their behaviour.
Techniques of Evaluation
The
evaluation can be done by using qualitative techniques such as
interviews, feedbacks, etc. or through quantitative techniques such as
surveys, scorecards, questionnaires etc. A typical questionnaire/
scorecard would cover the aspects indicated under “what will be
evaluated?” and in particular the following aspects:
–
Composition and Quality
-Understanding the business and risks
-Process and procedures
– Oversight of the financial reporting process and internal controls
– assessing related party transactions
– understanding competitive landscape
– understanding risks relating to management override, including significant judgements, assumptions and estimates.
– fair compensation.
– Communication with employees, vendors and customers
– adequacy and effectiveness of Board initiated/ monitored mechanisms such as Code of Conduct, Whistle Blower Policy, PTR, CSR Policy, etc.
– oversight of the audit function
– ethics and compliance
– monitoring activities
– Strategy effectiveness
– management relationship
– Succession Planning & training.
Further, this could be done through face to face discussions, telephonic conversations, e-mails, web based scoring modules etc. Irrespective of the evaluation technique used, due care should be taken in documenting the process and the conclusions reached.
The next step in the process is to decide who will perform the evaluation – whether internally (by the nomination and remuneration Committee) or using specialist consultants or external experts. the decision regarding the same will need to be taken after considering the following factors:
– autonomy of the Board
– Board Culture and dynamics
– Confidentiality
– Perception of Bias
– need for transparency and objectivity
– Skills and experience of Performing evaluations
– time and Cost.
The general process to be followed could be to obtain the self-evaluation from the individual directors about the individual and also about the Board which forms the basis for an independent evaluation by the designated person/ committee/authority.
Evaluation Feedback
The feedback to the Board could be provided not only by the members of the Board, but to make it more transparent and comprehensive, the participant base could be extended to cover the internal and external stakeholders as well. Typically, the internal participants who could be consulted for obtaining the feedback on the performance of the Board could be the CEO and other key managerial personnel who interact with the Board on various matters. Similarly, the external participants could range from the shareholders, key customers & suppliers, internal & external auditors. Whilst the internal participant could provide a more specific feedback, the external participants could provide a general feedback about the company/culture which would reflect the performance of the Board.
The Board should agree upfront the required actions that it can take to improve governance. the performance assessment of the Board would typically be discussed by the Board collectively. With respect to the performance assessment of the individual director, generally the same will be discussed by the Chairman of the Board with the concerned member/director. The practice of releasing the summary of the results of the Board’s performance to the entire organisation is also considered as one of the best practices in connection with the Board evaluation process worldwide.
Whilst section 134 (3)(o) of the Companies act, 2013 requires only a statement indicating the manner in which the formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors and the results of the individual evaluation, distribution of the results of the evaluation to stakeholders would be decided by each company based on various factors including the governance model followed, expectations, complexities, culture etc. Irrespective of the method adopted and the regulatory provisions, the Board should keep in mind that the process of performance evaluation, providing the required feedback and the extent of sharing such feedback with others would reflect its commitment to the entire governance process!
Conclusion
Performance evaluation is very important for the Board for not only in meeting the regulatory requirement but also in setting the right tone at the top. This is one of the key mechanisms for the Board to demonstrate its commitment to continuing improvement. It would be a great value multiplier tool for the company, directors and all those stakeholders who will be impacted by the functioning of the company.
When the Board recognises the importance of this process and attributes sanctity and importance to this process, and implements it with all vigour, this would help in building a sound corporate structure which can avert governance failures. Whilst the process is new to india, the experience gained in implementation would help Indian corporates in fine-tuning it on a continuous basis.
Introduction
“A Rose by any Other Name Smells as Sweet!” Could the above Shakespearean proverb be applied also to a transfer of property by a release or a gift? The answer is yes and no! A release and a gift are both species of transfers of property. However, there is a difference in law between the two. While the ultimate implication of both is that property is transferred (normally without consideration) but the law treats treats the two on a different footing. Let us look at the key differences and some similarities between the two.
Gift
A Gift is a specie of transfer of property with which almost all individuals, especially in India, are familiar. It is, from time immemorial, one of the most famous (and often infamous) modes of transferring movable as well as immovable property. The revenue and the legislation often frown upon the concept of gifts. The amendments in section 56(2) of the Income tax Act are testimony to this.
The Transfer of Property Act, 1882, which deals, mainly, with immovable property and also contains some provisions dealing with movable property, defines the term “Gift”. The Act also lays down some substantive and procedural provisions for constituting a valid gift. This Act defines a gift as a transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the Donor to another, called the Donee, and accepted by or on behalf of the Donee. The important characteristics of a Gift are:
(a) Gift is one of the modes of transfer of property.
(b) A gift can be of immovable or movable property.
(c) T he gift must be voluntary, i.e., without any coercion, fraud, undue influence.
(d) I t must be without any consideration from the Donee to the Donor.
(e) A person cannot make a Gift to himself, there must be a Donor and a Donee.
(f) T he Gift must be accepted by the Donee during the Donee’s lifetime.
(g) I t could be conditional.
Gift of an immovable property must be by way of a Gift Deed in writing which is executed by the Donor and the Deed must be registered under the Registration Act. Further, it must be attested by two or more witnesses. Thus, any gift of immovable property which is not registered would be invalid. Gifts requiring registration are subjected to stamp duty which is levied on the value of the property gifted.
Release
While we are all too familiar with the concept of gift, let us understand what is meant by a release. A release is much larger than a gift and could take various forms. For instance, if a release is made for consideration it would be tantamount to a conveyance while if it was made without consideration it would amount to a gift. What then is a release? Simply put, a release means renunciation of right in property by one co-owner in favour of another co-owner. Thus, the essential ingredient of a release is that both the transferor and transferee must be existing co-owners in the property. In a release the transferee would never be a stranger but would always be one who has an existing right in the property. Hence, a release can never be for the entire property but would always be for a portion thereof. To illustrate, A and B are equal co-owners in a in a flat. A relinquishes his share to B. This can be achieved by a release deed. If in this case, A charges any consideration from B then it could also be termed as a conveyance while if it is without consideration that it can also be termed as a gift.
A release of a share in an immovable property in excess of Rs. 100 requires that the instrument is registered.
Practical experience shows that sometimes a release deed is executed (and accepted by the Registrar) even in cases where the transferee has no interest in the property. In such cases, a gift deed or a conveyance is a better alternative. However, in law, a release deed can transfer title to one who before the transfer had no interest in the property – Kuppuswamy Chettiar vs. A.S. P. A. Arumugam Chettiar 1967 AIR 1395 (SC), although in such cases, the duty would be as on a conveyance or a gift deed.
Stamp Duty
Since Gifts/Release Deeds of immovable property require registration, they would also require to be duly stamped.
The Maharashtra Stamp Act, 1958, applicable in the State of Maharashtra defines an “instrument of gift” to include, in a case where the gift is not in writing, any instrument recording whether by way of declaration or otherwise the making or acceptance of such oral gift. The gift could be of movable or immovable property. The term gift has not been defined and hence, one has to refer to the definition given u/s. 122 of the Transfer of Property Act”.
An instrument of gift not being a Settlement or a Will or a transfer attracts duty under Artice 34 of Schedule-I. A gift deed attracts duty at the same rate as applicable to a Conveyance (under Article 25) on the market value of the property which is the subject matter of the gift. Thus, in case of immovable property, the rates vary depending upon the type of immovable property, (i.e., whether it is a land, building, a flat in co-operative society), and the location (relevant in case of land and building). The maximum rate for immovable property is 5% of the Reckoner Value. Further, any gift of property to a family member (i.e., a spouse, sibling, lineal ascendant/descendant ) of the donor, shall attract duty @ 2% or as specified above, whichever is less.
On the other hand, under the Maharashtra Stamp Act, a release deed attracts duty on an Instrument of Release whereby a person renounces a claim upon other person or property as follows: If the release is of an ancestral property in favour of certain specified relatives ~Rs. 200
Every other Case ~ Same duty as on a conveyance as on the market value of the share, interest or part renounced.
The Bombay High Court, in the case of Asha Krishnalal Bajaj, 2001(2) Bom CR (PB) 629 held that a Release Deed is not a conveyance and only attracts stamp duty as on a release deed. In the case of Shailesh Harilal Poonatar, 2004 (4) All MR 479, the Bombay High Court held that a release deed without consideration under which one co-owner released his share in favour of another in respect of a property received under a will, was not a conveyance. Accordingly, it was liable to be stamped not as a conveyance but as a release deed.
To plug this loophole, in 2005, the duty in the State of Maharashtra was increased on such instruments to Rs. 5 for every Rs. 500 of market value of the property. The 2006 Amendment Act has once again made an amendment in Maharashtra to provide that if the release is in respect of ancestral property and is executed by or in favour of the renouncer’s spouse, siblings, parents, children, grandchildren of predeceased son, or the legal heirs of these relatives, then the stamp duty would only be Rs. 200. In case of any other Release Deed, the duty is equal to a conveyance. Thus, for immovable properties, it would be @ 5% on the market value of the property. What is an ancestral property becomes an important issue.
The Punjab & haryana high Court in the case of Harendar Singh vs. State, (2008) 3 PLR 183 (P&H) has held that property received by a mother from her sons is not ancestral in nature. in another decision of the Punjab and haryana high Court, it has been held that property inherited by a hindu male from his father, grandfather or great grandfather is ancestral for him–Hardial Singh vs. Nahar Singh AIR 2010 (NOC) 1087 (P&H).
In Laxmikant vs. Collector and Assistant Superintendent of Stamps, Ahmedabad AIR (1976) Guj 158, it was held that a release postulates that the claim is renounced in favour of a person, who has got some right in the property. Release also connotes that the person releasing his right does not retain any ownership right over it. Where the property was thrown in the common hotch-pot with the result that while before the said property was thrown, the person throwing the property was the sole owner, after it is so thrown, he remains a joint owner. Therefore, retention of joint ownership, and the fact that the other members of the family had, previous to the throwing of the property in the joint stock of the family, no right in the property, conclusively showed that the transaction did not amount to a release.
Stamp Duty as on a Gift or a release – which to pay?
Having looked at the provisions pertaining to gift deed and release deed, the essential question is which to consider for paying stamp duty? if the property may be called “an- cestral” and is in favour of defined relatives, the obvious answer is release deed since in that case, the duty is only Rs. 200! The definition of conveyance under the Maharashtra Stamp act states that any instrument whereby a co-owner transfers his interest to another co-owner would be a conveyance. hence, in such cases the instrument would not be a release deed but would be a conveyance. however, if no consideration is charged then it would not be a conveyance and the moot point would be should it be considered as a gift? if one sees the wordings used in the Stamp Act, it defines a release deed only as one “where a person renounces a claim upon another or against any specified property”. Would instruments which are in the nature of a gift deed or a conveyance deed also fall under this definition of a release deed is the question? The cur- rent practice suggests that the answer is “yes”.
In Chief Controlling Revenue Authority vs. Rustom Nussewanji Patel, AIR 1968 Mad. 159 (FB), the Court observed that in order to determine whether a document is a release deed or conveyance, the nomenclature or the language used is not decisive. What is decisive is the actual character of the transaction and the precise nature of the rights created by means of the instrument. In rustoms case, the essential ingredients of release were present, there was already a legal right in the property vested in the releasee and the release operated to enlarge that right into an absolute title for the entire property, insofor as the parties were concerned.
A recent decision of the delhi high Court in the case of Srichand Badlani vs. Govt. of NCT of Delhi, AIR 2014 539 (Del), the contention is that in order to qualify as a relinquishment deed, the document must purport to relinquish share of the relinquishor in favour of all the other co-owners of the property and, if the relinquishment is in favour of only one of the two co-owners, it has to be treated as a Gift deed, the property having been inherited from a common ancestor. It further held that one of the co-owners can relinquish his share in a co-owned property in favour of one or more of the co-owners. The document executed by him in this regard would continue to be a relinquishment deed irrespective of whether the relinquishment is in favour of one or all the remaining co- owners of the property. there is no basis in law for the proposition that if the relinquishment deed is executed in favour of one of the co-owners, it would be treated as a Gift deed. the law of stamp duty treats relinquishment deed and Gift deed as separate documents, chargeable with different stamp duties. it is not necessary that in order to qualify as a relinquishment deed the document must purport to relinquish the share of the relinquisher in favour of all the remaining co- owners of the property. Even if the relinquishment is in favour of one of the co- owners it would qualify as a relinquishment deed. more- over, it is immaterial as to what the relationship between the co- owners of the property. So long as relinquishment is in favour of one of the co-owners, the relationship between the relinquisher and the relinquishee is wholly immaterial and of no consequence at all. The law permits one of the co-owners even if they are not related to each other to relinquish his share in favour of other co-owner.
In Manjulaben Amrutlal vs. CCRA, 1994 GLR 1779 (FB) two sons executed a release in favour of their par- ents for their joint family property. it was held that it was difficult to hold that the parents of the applicants did not have any right, title and interest or share in the property for which deed was executed. The document clearly recit- ed that it was no claim release deed. it also recited in the deed that house was purchased by the mother as their guardian. executants and parents were residing jointly and that they were maintained by their parents. It is also stated that by the said deed whatever right and share they had in the house was released in favour of their mother and father. hence, by the impugned deed the executants had renounced their claim against the house which was purchased by their mother in their names. the property was originally purchased in the name of minors. It was treated by the parents at the most as joint hindu family property, as stated by them. Once it was a joint hindu family property, all the members of the h.u.f. would have share in the said property. In the deed itself it was mentioned that the executants (sons) were maintained by the parents. There was no reason to hold that the property was not belonging to the h.u.f. of executants and their parents. Once it is held that the property belonged to an HUF , then there was no difficulty in holding that the deed executed by the applicants was a release deed and not a gift deed.
Taxation
Section 56(2)(vii) of the income-tax act taxes certain gifts received by an individual or an huf from unrelated sources. hence, such gifts are taxed as income from other Sources in the hands of the donee. A receipt under a release deed without consideration would also be cov- ered by the same provision. thus, whether under a gift or a release deed, specified receipts without consideration would be taxable u/s. 56(2)(vii).
An acquisition for consideration of a share in a house property from one co-owner by another co-owner under a release deed tantamounts to a purchase for the purposes of exemption u/s. 54 of the income-tax act. This was the view of the Supreme Court in the case of CIT vs. TN Aravinda Reddy, 120 ITR 46 (SC). It held that a release was a transfer of the releasor’s share for a consideration to the releasee who purchased the share of the releaser and was thus, entitled to relief u/s. 54.
Conclusion
The structuring of an instrument is an important element. Drafting should pay heed to the Law and Language both. While a document drafted in a particular manner and form may yield the desired results it may not always have the desired consequences!
The Respondents purchased the property in an auction, which was held by this Court, after paper publication on 08-03-2012. The said sale was confirmed by this Court and the Court directed the Official Liquidator to execute a sale deed in favour of the Respondents after receiving entire sale consideration.
The Respondents contended that it was not open to the appellants to take a stand that since the guideline value of the properties were increased only in the month of April 2012 and therefore, the Respondents are liable to pay the amount on that basis.
The Respondents vehemently submitted that the law is a well settled in regard to the purchase of property in a Court Auction and the authorities cannot refer the document demanding higher stamp duty unless a fraudulent attempt on the part of parties to document to evade payment of stamp duty is manifest.
When the Respondents had purchased the properties in question by way of sale deeds executed by the official liquidator for the sale value mentioned in the sale deeds, the said value cannot be questioned by appellants at a later point of time merely on the premise that the sale value mentioned in the sale deeds purchased by the respondents cannot be termed as `market value’.
The court observed that section 47A has no application whatsoever, in sofar as the respondents, purchasers of properties in company court auction because of the prime reason that there is no room for entertaining any doubt that there was any under valuation in regard to the sale deeds executed by the official liquidator.
The writ petition was filed asking for a mandamus against the Registrar General, High Court of Karnataka, not to allow Sri Ravivarma Kumar, Advocate General, High Court of Karnataka, 2nd respondent herein, to hoist the Indian National Flag at the Office of Advocate General, High Court of Karnataka i.e., parallel to the Advocates’ Association, Bangalore and to ensure enough solidarity, unity and integrity of the Advocates’ Association and for a mandamus to the 2nd respondent, to participate in the Flag hoisting ceremony of the Advocates’ Association, on the eve of Independence Day.
According to the petitioner, respondent violated the established norm of celebration of Independency Day and Republic Day, by the Advocates’ Association. He submitted that a parallel function was being organised by the 2nd respondent, since, a Circular has been issued to all the Law Officers of the Government, to participate in the function, wherein, he would hoist the National Flag. Petitioner submitted that the 2nd respondent by hoisting the National Flag, by organising a separate function, rather than participating in the Flag hoisting ceremony of the Advocates’ Association, has destroyed the unity and integrity of the Association.
The question that arose for consideration is, whether a mandamus can lie against the 1st respondent, not to allow the hoisting of Indian National Flag.
The Court held that the Right to fly the National Flag freely with respect and dignity is a fundamental right of a citizen within the meaning of Article 19(1)(a) of the Constitution of India, subject to reasonable restrictions under clause (2) of Article 19 of the Constitution of India.
The Court observed that order that a writ of mandamus may be issued, there must be a legal right with the party asking for the writ to compel the performance of some statutory duty cast upon the authorities.
Thus, it is clear, that for issue of a writ of mandamus, there must be a legal right with the petitioner, to compel the performance of statutory duty cast upon the 1st respondent. The petitioner was not able to show that there was any statute or rule having the force of law which cast a duty on respondent No.1, not to allow respondent No. 2, hoist the National Flag near the Office of the Advocate General and to ensure his participation in the Flag hoisting ceremony organised by the 3rd respondent, as the President of the Advocates’ Association.
The facts were that the first respondent/assessee is engaged in the manufacturing of Oil Seals. On account of fire accident on 05-05-2006 in the ‘post cutting area’ of the factory, the work in progress stocks were burnt and rendered unfit for usage, which was informed to the department in writing on the same day. It was further stated that the assessee had availed Cenvat credit on the raw materials, which were to be used for production of Oil Seals. A show cause notice dated 28-12-2006 was issued calling upon the assessee to explain as to why the Cenvat credit availed on raw materials, which were destroyed in fire should not be reversed. The assessee by referring to Rule 2(k)(i) of the Central Excise Rules, 2002 submitted its reply. The Assessee relied on the Tribunal decision in the case of Commissioner of Central Excise, Chennai III vs. Indchem Electronics reported 2003 (151) ELT 393 (Trib. Chennai). The Original Authority, rejected the assessee’s plea and directed the assessee to reverse the Cenvat credit availed.
The assessee preferred appeal before the Commissioner of Central Excise (Appeals). The First Appellate Authority held that the assessee is liable to reverse the credit on inputs contained in the work-in-progress, which were destroyed in fire, by placing reliance on the decision of the Tribunal, in the case of M/s. Tambraparani Coatings vs. Commissioner of Central Excise, Pondicherry: 2006 (193) E.L.T. 80 (Tri.-Chen.)]. As regards the order of the Tribunal in the case of Indchem Electronics, the First Appellate Authority held that the Special Leave Petition filed by the Department as against the said order was dismissed by a non-speaking order and therefore that would not be binding. On the above ground, the appeal came to be rejected.
Aggrieved by the said order, the assessee preferred a further appeal to the CESTAT . The Tribunal after considering the case of the assessee and taking note of the facts held that there is no dispute with regard to the destruction of the goods, when manufacturing work is in progress, and therefore the assessee need not reverse the Cenvat credit availed. The Tribunal by placing reliance on the decision of Indchem Electronics (cited supra) allowed the assessee’s appeal.
On appeal, the Court held that stand taken by the Commissioner (Appeals) is wholly unsustainable and quite contrary to the settled legal position. It is to be noted that the Hon’ble Supreme Court, while dismissing the assessee appeal has assigned reasons. The Hon’ble Supreme Court observed that the Appellate Tribunal in its impugned order had held that Modvat/Cenvat credit cannot be denied on inputs destroyed in the fire accident when the fact that the inputs were actually issued and thereafter destroyed in fire accident, which fact is not disputed by the Department. Therefore, it cannot be stated that it is a non-speaking order. In any event the Commissioner orders are subject to scrutiny by the Tribunal and he is bound by the order passed by the Tribunal and it is wholly untenable on the part of the Commissioner to contend that the decision of the Tribunal would not bind the Commissioner. Therefore, the finding of the Commissioner to that extent is absolutely perverse.
Sheikh Hussein was married to Banu Bibi. During the subsistence of his matrimonial ties, Sheikh Hussein executed a gift deed on 26-04-1952, whereby a “tiled house” with open space was gifted in favour of his wife Banu Bibi. Banu Bibi enjoyed the immovable property gifted to her, during the lifetime of her husband Sheikh Hussein. Sheikh Hussein died in 1966. Even after the demise of Sheikh Hussein, Banu Bibi continued to exclusively enjoy the said immovable property. On 02- 05-1978
02- 05-1978, Banu Bibi sold the gifted immovable property, to V. Sreeramachandra Avadhani. The vendee V. Sreeramachandra Avadhani is the Appellant before the Court (through his legal representatives).
Banu Bibi died on 17-02-1989. On her demise, the Respondents before this Court-Shaik Abdul Rahim and Shaik Abdul Gaffoor issued a legal notice to the vendee. Through the legal notice, they staked a claim on the abovementioned gifted immovable property. In the notice, the Respondents asserted, firstly, that Banu Bibi had only a life interest in the gifted immovable property; and secondly, the Respondents being the legal representatives of Sheikh Hussein (who had gifted the immovable property to Banu Bibi) came to be vested with the right and title over the gifted immovable property, after the demise of Banu Bibi.
In the suit, the Respondents sought a declaration of title, over the “tiled house” with open space, gifted by Sheikh Hussein to his wife Banu Bibi.
The Court observed that the parameters for gifts (under Mohammedan Law) are clear and well defined. Gifts pertaining to the corpus of the property are absolute. Where a gift of corpus seeks to impose a limit, in point of time (as a life interest), the condition is void. Likewise, all other conditions, in a gift of the corpus are impermissible. In other words, the gift of the corpus has to be unconditional. Conditions are however permissible, if the gift is merely of a usufruct. Therefore, the gift of a usufruct can validly impose a limit, in point of time (as an interest, restricted to the life of the donee).
Having concluded that the donor Sheikh Hussein through the gift deed dated 26-04-1952, had transferred the corpus of the immovable property to his wife Banu Bibi, it is natural to conclude that the gift deed executed in favour of Banu Bibi, was valid.
The conditions depicted in the gift deed, that the donee would not have any right to gift or sell the gifted property, or that the donee would be precluded from alienating the gifted immovable property during her life time, are void.
The
Hon’ble Court observed that the word “family” as defined in the
Explanation to Article 58(a) of Schedule I, appended to the Stamp Act,
would mean only such of those persons mentioned in the Explanation. The
definition to the word “family” is exhaustive and not illustrative and
it is applicable only to such of those persons indicated therein and it
will not extend to other persons who do not form part of the definition
“family”. The interpretation of the word “means” in the Explanation will
be specific to the members of the family mentioned therein.
The
definition cannot give an extended or expanded meaning to the word
“grand child” to include “great grand child” also. It is for the state
government to include great grandchild and other remote lineal
descendants, as members of the family, it they chose to, for the purpose
of extending the benefit of the concessional stamp duty applicable to
settlement within the members of the family.
In an article in this column earlier published in the February 2015 issue of this Journal, recent orders of SEBI debarring hundreds of persons from dealing in securities were discussed. It was alleged in these orders that trades were carried out for the purposes of making illegitimate long term capital gains (LTCG) using the stock market which would be exempt from tax. In other words, the allegation was that massive tax evasion has been carried out by indulging in price manipulation and related activities.
Soon thereafter, there have been two more Orders of SEBI (Mishka Finance, dated 17th April 2015 and Pine Animation, dated 8th May 2015) of similar nature. The earlier article referred to orders of SEBI in the case of First Financial Services Limited (“First Financial”), Radford Global Limited (both orders dated 19th December 2014) and Moryo Industries Limited (dated 4th December 2014).
The amounts continue to be large with alleged tax evasion as LTCG as high as Rs. 87 crore in case of a single individual. The price increase reflected in such profits is nearly 8300% over a period of less than two years.
There are related developments too, which will also be discussed. Apparently, on the basis of guidance by SEBI, the Bombay Stock Exchange suspended 22 companies from trading ostensibly on the ground that these companies too had certain similar suspicious features. One of the companies, however, appealed to the Securities Appellate Tribunal which reversed the SEBI’s order. It appears that now the matter is before the Supreme Court. Some parties raised a grievance that only because the second holder in their demat account was debarred, their demat account has also been frozen.
In light of these and a few other factors, an update is in order.
Review of the Orders
A quick review of what the earlier and latest orders involved is given hereafter, though for a detailed discussion the preceding article of February 2015 can be referred to. SEBI made observations as follows that were common in most companies. SEBI found that there were certain companies that had very low activities and revenues/ profits/losses. They made preferential allotment of shares that was many times its existing paid up capital to a large number of persons. The allotment price was not, according to SEBI, justified by the fundamental of such companies. There were off market transfer of existing shares held by the Promoters. The shares were subdivided and/ or bonus shares issued. The share capital thus underwent a massive expansion in terms of total paid up capital and number of shares.
Following this, the share price was allegedly increased by manipulation by entities related/connected to the Promoters. In a short period of time, the price increased many times. In case of Mishka, the increase in price was more than 60 times the cost of the shares/preferential issue price. In case of Pine, such increase was 85 times.
The persons who acquired shares off market and those who were allotted shares by way of preferential allotment sold the shares at such high price. The shares were allegedly purchased by persons connected with the Promoters. Thus, SEBI alleged that the shares went back to the same group from whom shares were acquired. Since there was a gap of more than one year between the date of purchase and sale (also because of lock in period in case of preferential allotment of shares), the gains were long term capital gains and thus exempt from tax. SEBI alleged that this whole exercise was undertaken to generate such bogus LTCG using the stock market.
SEBI referred the matter, inter alia, to income-tax authorities. It also debarred the Company, its Promoters, the persons who had acquired the shares and the persons who gave the exit route to such persons, from accessing the capital markets and also dealing in the stock markets. The demat accounts of such persons were also frozen.
22 companies have already been identified by the BSE and their trading suspended though in one case, SAT has reversed the order of suspension. However, the matter appears to be in appeal before the Supreme Court now.
Debarring other companies? – directions of BSE and decision of SAT
The issue already involves hundreds of persons facing such a bar and hundreds of crores of allegedly bogus LTCG. From press reports, the total amount of such allegedly bogus LTCG may be Rs. 20,000 crore taking into account further companies being investigated. Thus, it is likely that more such orders involving other companies may be released soon.
The Bombay Stock Exchange (BSE) suspended trading of twenty-two other companies with effect from 7th January 2015 by a notice dated 1st January 2015. One of the companies, viz., 52 Weeks Entertainment Ltd. (formerly known as Shantanu Sheorey Aquakult Ltd.), appealed to SAT against this suspension. It is interesting to study this decision though it relates to the facts of one of the twentytwo companies.
The original notice of BSE did not give any reason for the suspension, nor had it given any opportunity to the companies to be heard. SAT directed BSE to give hearing and record decision, which BSE did on 12th January 2015. The SAT Order contains certain details relating to this company which are given below and then proceeds to set aside the Order of BSE, alongwith certain directions.
The company was suspended from 2001 to 2012 on account of non-payment of listing fees, NSDL charges, etc. The company decided to revive its operations in 2012. The company made three preferential allotment of shares in 2013/2014 after taking due approval from BSE as required by law. The aggregate preferential allotment was of 3,07,55,000 shares, and it appears that this took the share capital from 41,25,000 to 3,48,80,000 shares (i.e., by about 8.50 times). The public holding post the preferential issue was about 91%.
The suspension was made, BSE stated, on account of directions given by SEBI in its meeting with stock exchanges. SEBI gave certain parameters to identify companies for this purpose. These were (a) non-existence of the company at the address mentioned (b) making of preferential allotment with or without stock split and following end of lock in period, rise in volumes in trading and exit of the preferential allottees (c) company having weak financials which did not warrant the rise in price. The company disputed the order giving several reasons. It stated that the company did exist at the address given. It pointed out the existence of a representative there who had offered the BSE representative who had visited there to talk to the concerned person on phone.
The company had many upcoming operations/projects. Though some of the preferential allottees were also such allottees in case of Radford/Moryo orders, this cannot be a ground for suspension of trading. After hearing representatives of SEBI and BSE, SAT , vide its order dated 13th March 2015, set aside the order (the two members gave their reasons separately, and in following paragraphs, reasons given by Presiding Officer, Justice J. P. Devadhar are given).
It was noted that in other cases, SEBI had found market manipulation, etc. and passed formal orders while it had passed no such orders in the present case. it also noted that even the existence of the three parameters specified by SEBI were not established. BSE suspended trading “… even though there is not an iota of evidence to show that the appellant-company or its promoters/ directors have directly or indirectly indulged in market manipulation.” (per justice devadhar). SAT also noted that the price had risen from Rs. 2.67 to Rs. 149 but still, assuming there was market manipulation, no action was taken against the manipulators but trading in the company suspended instead. Justice devadhar observed that “…it is not open to SEBI to direct the Stock exchanges to suspend the trading in the securities of the companies if they satisfy certain parameters fixed by SEBI which have no bearing whatsoever with the alleged market manipulation.”
Justice devadhar further stated that, “..the fact that some of those preferential shareholders have allegedly indulged in market manipulation cannot be a ground to consider that all preferential shareholders are market manipulators.”
The SEBI order was set aside. However, directions were also given that the Promoters of the company shall not buy/sell/deal in the securities of the company till 30th june 2015. further, SEBI/BSE could suspend the trading in the securities of the company and restrain the promoters/directors/preferential allottees if prima facie evidence of manipulation by them is found.
It appears that an appeal has been filed against the order of SAT before the Supreme Court for this matter of 52 Weeks entertainment Limited.
Debarment of Joint Account Holders
There was another interesting decision of SEBI. It appears that SEBI has frozen the accounts of certain persons named in its orders. However, in some cases, those accounts where such persons were second holders were also frozen. the result of this was that even though the first holder may not be a person who has been debarred, simply having a debarred person as a second holder resulted in such account getting frozen. this happened in the case of ms. Sachi agrawal and Ms. Sneha Agrawal. Their parents were debarred from dealing in securities in the matter of moryo industries Limited. However, though each of them had a separate demat account, such account was also frozen because their mother, Ms. Neeli Agrawal, who was second holder, had been debarred by an order. They prayed to SEBI claiming that the securities in such account belonged to them exclusively. They also provided several documents including certificates of Chartered accountant in support of their contention. However, SEBI was not satisfied. It held that in view of section 2(1)(a) of the Depositories Act, joint holders were joint beneficial owners. Taking a view that “…it is likely that the aforesaid beneficiary demat accounts would be used by Ms. Neeli agarwal for sale or purchase of securities thereby defeating the purpose of the interim order and ongoing investigation”, it refused to unfreeze the account.
Conclusion
The facts in such cases are clearly prima facie of serious concern. however, it is also seen that orders have been passed by SeBi till now against 5 companies, their Promoters and hundreds of shareholders. They have been debarred indefinitely from accessing the capital markets and dealing in securities. The orders are ad-interim and eXparte. It appears, from the statements of SEBI itself, that it could be a long period before which the final orders would be passed. Trading in 22 other companies has been suspended by BSE, of which in one matter, SAT has reversed the matter and now the matter is before the Supreme Court. It also is seen that SEBI has not yet given opportunity to most of the persons involved to present their case. In some cases, prima facie, it is submitted that orders are arbitrary and may cause injustice to people who are not involved in the alleged manipulation, etc. also, a common order has been passed against all persons even though the orders themselves describe substantially different alleged roles played by different groups.
Interesting question arises: Can SEBI question the eventual motive of a person trading on stock exchange? Can SEBI, purely on suspicion that the transaction is with an intent to avoid/evade tax, of financing, etc., take action against such persons? Parties may have many reasons for dealing through the stock exchange, not all of which would involve violations of Securities Laws. it appears from past decisions that what was relevant was whether price manipulation was involved.
The next few months, and eventually perhaps at least a couple of years will be interesting to watch. Apart from SEBI passing orders in case of several other companies, it is also likely that there will be appeals to SAT and Supreme Court. There will also be objections raised by parties before SEBI itself who will be obliged to confirm or modify the directions in individual cases. More importantly, these cases may also help clarify the role of SEBI in matters where there may be avoidance or violation of other laws such as income-tax.
It will also be interesting to watch how the income-tax department, with whom the information about such transactions has been shared by SeBi, deals with such transactions. More particularly, whether it disallows outright the claims of the parties to exemption leaving them exposed to interest, penalties and even prosecution. Some cases relate to AY 2013-14/2014-15, the returns for which have already been filed while other cases related to AY 2015- 16 for which there is time to file returns.
From the legal and other perspectives, the coming years will result in interesting developments which will be worth closely watching.
The RTI Act Present Status
The RTI Act has caught the imagination of people and the way it has spread is being appreciated and admired around the world. A great change has come in India in the last decade in the power equation between the sovereign citizens of the country and those in power. This change is just beginning and if we can sustain and strengthen it, our defective elective democracy could metamorphose into a truly participatory democracy within the next one or two decades. We have just begun this journey towards a meaningful Swaraj. I believe media-visual, print and social, and RTI have all been a fortunate heady mix. They have the potential of actualizing the promise of democracy. However there are also signs of regressive forces which could stymie these promises.
I am going to refer to the two biggest dangers to RTI :
1. Most established Institutions are unhappy with RTI . When the power equation changes between those with power and the ordinary citizen, resistance is to be expected.
Everyone in power generally feels transparency is good for others, whereas they should be left to work effectively. It is implied that transparency is a hindrance to good governance. We have travelled some distance away from the statement made by a seven judge bench by Supreme Court of India in S. P. Gupta vs. President of India & Ors. (AIR 1982 SC 149). “There can be little doubt that exposure to public gaze and scrutiny is one of the surest means of achieving a clean and healthy administration. It has been truly said that an open government is clean government and a powerful safeguard against political and administrative aberration and inefficiency”.
The former Prime Minister, harried by the uncovering of various scams by RTI , said at the Central Information Commission’s convention in October 2012: “There are concerns about frivolous and vexatious use of the Act in demanding information the disclosure of which cannot possibly serve any public purpose.” The present Prime Minister has taken a pre-emptive action by not appointing a Chief Information Commissioner at all to render it dysfunctional. The bureaucracy is also hardening its stand and in most cases has realised that the Commissioners are not really committed to transparency. This coupled with the long wait at the Commissions and the stinginess of the Commissions in imposing penalties is slowly making it difficult to get sensitive information which could aid citizens to expose structural shortcomings or corruption. A former Chief Justice of India said in April 2012, “The RTI Act is a good law but there has to be a limit to it.” I am amazed at the suggestion that there should be a limit to RTI . The limit has been laid down in the law by Parliament in terms of exemptions. Any interpretation beyond what is written in the law will be a violation of Citizen’s fundamental right to information.
2. A greater danger comes from the selection of Information Commissioners as a part of political patronage. Most have no predilection for transparency or work. Their orders are often biased against transparency and in many places a huge backlog is being built up as a consequence of their inability to cope. Consequently a law which seeks to ensure giving information to citizens in 30 days on pain of penalty gets stuck for over a year at the Commissions. Most of these Commissioners do not work to deliver results in a time bound manner and lose all moral authority to penalise PIOs who do not work in a time bound manner. Commissioners are slowly working less and less. In the Central Information Commission six Commissioners had disposed 22351 cases in 2011, whereas in 2014 seven Commissioners disposed only 16006 cases! Whereas civil society and media are rightly critical of the government for not appointing the balance four Commissioners, at the current rate of disposal eleven Commissioners will not dispose over 25000 cases a year. In 2014 CIC received 31000 cases and presently has a pendency of over 38000 cases. It is evident that at this languorous pace of working RTI will slowly become like the Consumer Act, mainly in existence for the Commissioners. Citizens must wake out of their slumber and focus on getting commissioners who will dispose over 6000 cases each year and give clear signals that they will not tolerate tardiness from Public Information Officers or Commissioners.
Eternal Vigilance is the price for democracy. We have a very useful tool to make our democracy meaningful and effective. It will work and grow if we struggle to ensure its health. We need to put pressure on various institutions so that they restrain from constricting our right, ensure a transparent process of selection for Commissioners and adequate disposal of cases at the Commissions. If we are lazy this right will also putrefy.
Unfairness
Section 194 IA was inserted by the Finance Act, 2013 w.e.f. 01/06/2013. It requires any person, being a transferee, responsible for paying to a resident transferor any sum by way of consideration exceeding Rs.50 lakh to deduct 1% as income tax thereon.
For any other type of TDS viz. u/s. 192, 194C, 194J etc. (collectively referred as other TDS) one need to have TAN but for the purpose of TDS u/s. 194IA, it is to be paid on PAN of deductor.
In case of other TDS, payment of TDS is to be made on or beforethe 7th of next month and TDS returns are to be filed at least 15 days after the end of the quarter. Therefore, there is a breathing time between payment of tax and filing of TDS return.
However, in case of 194IA, there is no separate return as such. The return is embedded in the challan itself. And there lies the problem.
As all are aware, the late fee u/s. 234 E has created havoc across the board. The Hon’ble Bombay High Court has upheld the constitutional validity of the section. Many deductors were not aware of this draconian fee applicable to TDS u/s. 194 IA.
In case of the other TDS, if the payment is delayed by, say a month, but before the due date of filing return, he will be liable to pay only the interest but not the late fee once the TDS return is filed in time.
However, if there is a delay in payment of TDS u/s. 194 IA, one has to pay interest as well as late fee u/s. 234E. Thus, the levy of late fees become automatic and results in double jeopardy.
It may be noted that instances for average individual paying for an immovable property maybe once or twice in his lifetime. The provision of TDS u/s. 194 IA is applicable to every transaction exceeding Rs. 50 lakh irrespective of the fact whether deductor is educated or uneducated, salaried or pensioner, housewife or senior citizen. It is improper to expect everyone to be well aware of the stringent provisions and deadlines just because the consideration exceeds Rs. 50 lakh.
Rather, it is pertinent to note that individuals and HUFs whose turnover of previous year has not exceeded the limit prescribed u/s. 44AB are exempt from the TDS provisions u/s. 194C, 194 J, 194 I, etc. There is no sound logic in thrusting such onerous burden u/s. 194IA on a layperson.
Suggestion
Ideally, section 234E itself deserves to be omitted from the Act. There was already a penalty of Rs. 100/- per day in terms of section 272A which in itself is on higher side. In any case, late fee should not be levied on individuals and HUFs in respect of delay in complying with section 194IA.
Multiple Documents for a Lease
Where multiple documents are executed for a lease transaction, the Act now provides that only the principal document would be exigible with the duty as on a lease. All other instruments would be chargeable with a duty of only Rs. 100. This would avoid double taxation. Earlier this facility was only available for four transactions ~ sale, mortgage, development agreement and settlement.
Ensuring Stamp Duty Payment
Certain State Government Departments, Institutions of Local Self-Government, Semi-Government Organisations, Banks, Non-Banking Institutions, etc., which have been notified by the State Government shall ensure that proper stamp duty is paid on certain unregistered documents which would also be notified. This is to ensure better compliance with the Stamp Act in respect of unregistered documents which may escape payment of stamp duty. The Notification would be eagerly awaited. This would also place an additional burden upon banks / NBFCs. One wonders whether they are capable of determining whether or not an instrument is adequately stamped? Can one expect an officer of a bank or an NBFC to exercise a quasi-judicial function?
Penalty Doubled
Under the Act, if any instrument is inadequately /not stamped, then it shall be inadmissible in evidence for any purpose, e.g., in a Civil Court. Such instruments are admissible in evidence on payment of the requisite amount of duty and a penalty @ 2% per month on the deficient amount of duty calculated from the date of execution. Earlier, the maximum penalty could not exceed twice the amount of duty involved. The maximum penalty now cannot exceed four times the amount of shortfall in duty involved. That is a 200% increase in the ceiling limit – an amazing strike rate even by Twenty20 standards! One would have to be extremely careful and exercise caution while executing instruments so that there is no hefty penalty later on.
Claim for Refund Extended
A claim for refund of stamp duty on an instrument which has not been executed due to refusal of any party to the instrument must be filed within 6 months from the date of the instrument. However, a concession has now been provided in case of a registered agreement to sell an immovable property which has been cancelled by a registered cancellation deed before taking possession of the property. In respect of such an agreement to sell, the application for refund of stamp duty can be now made within 6 months from the date of registration of the cancellation deed.
Amendments in Schedule – I to the Act
Schedule-I to the Act provides for various Articles which lay down the stamp duty applicable on different instruments. Section 3 provides that an instrument shall be stamped as per the rates / amount specified in Schedule-I. Hence, it becomes very essential to ascertain the rate specified in Schedule-I. The 2015 Amendment Act has made several changes to this Schedule-I, let us analyse some key changes:
Conclusion
In recent times, the Stamp Law has become very important and dynamic. Businesses and advisors would be well advised to pay heed to this Act and keep pace with the changes or else they could face unpleasant consequences.
In a winding up petition, the counsel representing the petitioners produced a document which purported to be a Power of attorney issued by UBS AG dated 5th November, 2014, signed by two persons, namely, Celine Teo and Pram Kurniawan, described as Executive Directors. The Power of attorney had been notarised by one Yang Yung Chong, whose seal indicated that he/she was a notary public of Singapore.
A question, therefore, arose as to whether the Court can recognise a notarial act which took place before a notary public at Singapore.
The Court observed that the answer to this question was clearly provided u/s. 14 of the Notaries Act, 1952. So far as section 85 of the Indian Evidence Act was concerned, it provided that the Court shall presume that every document purporting to be a Power of attorney, and to have been executed before, and authenticated by a Notary Public, or any Court, Judge, Magistrate, Indian Consul or Vice- Consul, or representative of the Central Government, was so executed and authenticated. However, it must be held that to the extent it dwells upon presumption as to Powers of attorney, executed and authenticated by a Notary Public, the provision of section 85 of the Indian Evidence Act, 1872, cannot be read in isolation to the specific provision as contained u/s. 14 of the Notaries Act, 1952, insofar as notarial acts done by foreign notaries are concerned. For an Indian Court to recognise a notarial act done by a notary public at Singapore, it is imperative for the Central Government to issue a notification u/s. 14 of the Notaries Act, 1952, declaring that the notarial acts lawfully done by notaries in Singapore shall be recognised within India for all purposes, or as the case may be, for such limited purposes as may be specified in the notification. In other words, unilateral recognition by an Indian Court of a notarial act done by a foreign notary is impermissible in the absence of reciprocity of recognition as contemplated u/s. 14 of the Notaries Act, 1952. The reason is, if it is otherwise, the sanctity of the sovereign power being exercised by an Indian Court will be compromised.
Since there is clearly no such notification of the Central Government in the Official Gazette granting recognition to the notarial acts done by the notary public of Singapore, the Court held that it is unable to take any judicial recognition of the document which has been handed over before the Court by the counsel appearing on behalf of the petitioners.
The Petitioner contended that as per the position of law the mother cannot demand a partition but, in the suit filed for partition among the co-parceners, she is entitled to a share, independent of her husband.
The court observed that the wife may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition, unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived. This position of law is that though the wife is entitled to interest i.e. share, it is to be along with her husband. Any such decision being taken by the Courts, earmarking separate share for herself and one share in that of her husband’s cannot in any way be recognised.
To clarify this position, here it is to be noted that coparcener refers to a male issue i.e. may be a father or a son. The wives of co-owners do not get any interest by virtue of their marriage. It is only a Hindu widow who gets the interest of her husband in the co-parcenary or in the joint family property upon the death of her husband. That interest enables her to claim maintenance and residence. Only a widow can demand partition of the interest which her deceased husband would have been entitled to. Consequently, a wife has no share, right, title or interest in the Hindu Undivided Family in which her husband is a co-parcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act, 2005, with his sisters and daughters also. The wife,may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family, she cannot get any share, right, title or interest in the joint Hindu Family property which that family owns. A wife cannot demand for partition unlike a daughter. She would get a share only if partition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he has as a co-parcener in his Hindu Undivided Family is wholly premature and completely misconceived.
This position clarifies that though the wife is entitled to interest i.e., share, it is to be along with her husband.
Given complex social and economic dimensions to black money, it is not susceptible to easy solutions. Which parts of the Indian ecosystem are conducive for the generation of black money and what immediate steps can the government take to curb it?
First, almost every public works department of most governments in India manufactures illegal money – while awarding contracts for roads, buildings’ construction and other such projects.
This is because the system is very forgiving till ‘quid pro quo’ can be proved as per Sections 8, 9 and 10 of Prevention of Corruption Act 1988. Unless the bribe is taken in full view of a camera where voice samples and video images can be independently authenticated as being genuine and not doctored, it is almost impossible to prove this, thereby encouraging mass retail corruption in government.
India’s forensic abilities are limited and extraordinary investigative abilities are needed to link the money trail to questionable transactions (and not noting in files) and further link them to ‘quid pro quo’ as defined under the Act where it involves public servants.
Second, almost every Indian businessman’s favourite national pastime is over-invoicing and under-invoicing. Most Indian buyers and sellers try to reduce or hide their profits to pay less taxes than due (under-invoicing), or else they over-invoice imports.
Third, India’s real estate sector is the ‘mecca’ of black money generation and habitation. It is estimated that of India’s $2 trillion economy about 10-15% comprises real estate transactions of which about 40% is estimated to be in cash transactions!
It is impossible for an average Indian to sell property while accepting money purely by cheque, even if they are willing to sell their assets at a discount. This generates large sums of black money, which the promised real estate regulator is required urgently to curb.
In addition to addressing the above issues, what else can the government do to curb black money? The usual response of many governments is to announce a ‘one time’ amnesty scheme. These are short-term responses, for no one believes that anything is ‘one time’ in India. Further, while it may generate revenue for the government, it militates against the honest taxpayer.
Opaque instruments such as P-notes, introduced for and by vested interests with deep roots in subverting the system, should be forced to disclose the names of those whose wealth they contain. Likewise shell accounts or donations to trusts, anything that encourages ‘round tripping’ must be investigated.
An amendment to the existing Prevention of Money Laundering Act, to have every Indian citizen disclose all bank accounts and immoveable assets in India and abroad, would be a first step to build an inventory which can provide baseline data upon which changes can be tracked using an electronic tracking system.
Lastly, a request for disclosing names of purported offenders to the public is expected to be placed before Supreme Court by the SIT today. This great clamour and pressure to make all the names public is unwarranted because it will be in clear violation of the confidentiality norm in various bilateral investment and tax treaties, which can lead to a huge reputational risk for India, globally, if that happens.
Clear thinking suggests that one should make a distinction between crime proceeds and black money. The two are fundamentally different and here one is referring to the latter, not the former. Black money is money on which there is legitimate tax due in India but remaining unpaid. Instead of embarrassing a handful, the focus should be on getting to the roots of black money generation and preventing or reducing that significantly.
India should emerge as a torchbearer on the global stage through its concrete actions at home and abroad to curb black money, which will make it a global role model to emulate and not a pariah to shun.
(Source: Extracts from an article in Times of India, dated 03-12-2014)
This circular reminds banks to make all their correspondence with RBI including submission of prescribed statements to the Regional Office of the Foreign Exchange Department of the Reserve Bank, under whose jurisdiction their registered offices function.
This circular reminds Indian Agents under MTSS to make all their correspondence with RBI including submission of prescribed statements to the Regional Office of the Foreign Exchange Department of the Reserve Bank, under whose jurisdiction their registered offices function.
This circular now permits an Indian Alternative Investment Fund (AIF) as defined under the SEBI (Alternative Investment Funds) Regulations, 2012 to invest in foreign securities subject to guidelines issued by RBI & SEBI.
This Notification & circular have made the following two changes in to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 pertaining to FDI in Railway Infrastructure so as to bring it line with the Press Note issued by DIPP.
The amendments are as under: –
1. T he existing Annexure A has been substituted as under: –
“Annexure A”
Sectors Prohibited for FDI
FDI is prohibited in:
(a) Lottery Business including Government/ private lottery,
online lotteries, etc.
(b) Gambling and Betting including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes,
of tobacco or of tobacco substitutes
(h) Activities/sectors not open to private sector investment
e.g.
(I) Atomic energy and
(II) Railway operations (other than permitted activities
mentioned in entry 18 of Annex B).
Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.”
2. Annexure B has been amended as under: –
a. I n the existing entry 12.1, for the clauses (ii) and (iii), the following shall be substituted, namely:
“(ii) Infrastructure” refers to facilities required for functioning of units located in the Industrial Park and includes roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.
(iii) “Common Facilities” refer to the facilities available for all the units located in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility buildings, industrial canteens, convention/ conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.”
b. T he following new Clause 18 has been added and certain other clauses have been re-numbered: –
This Notification & circular have made the following two changes in to Notification No. FEMA. 20/2000-RB dated 3rd May 2000 pertaining to FDI in Defence Sector so as to bring it line with the Press Notes issued by DIPP.
The amendments are as under: –
1. I n Regulation 14(3)(iv)(D) the words “Defence Sector” have been deleted.
2. Paragraph 6 of Annexure B pertaining to “Defence Sector” has been substituted as under: –
Review of Foreign Direct Investment (FDI) policy on the Construction Development Sector – amendment to ‘Consolidated FDI Policy Circular 2014’
This Press Note has with immediate effect revised paragraph 6.2.11 of ‘Consolidated FDI Policy Circular 2014’ as under: –
This circular reiterates that RBI will not issue any instructions under the FEMA, 1999 with respect to submition of certificates on tax payments. Banks will have to comply with the instructions issued by CBDT with respect to requirements under the tax laws, as applicable.
Import of Gold (under 20: 80 Scheme) by Nominated Banks/Agencies/Entities
This circular states that the 80 : 20 scheme for import of gold and all instuctions/restrictions pertaining thereto stand withdrawn with immediate effect.
This
circular states that when funds raised overseas by overseas
holding/associate/subsidiary/group companies of Indian Companies are
routed back to the Indian companies: –
1. Indian
companies/their banks must not issue any direct or indirect guarantee or
create any contingent liability or offer any security in any form for
such borrowings by their overseas holding/associate/subsidiary/ group
companies except for the purposes explicitly permitted in the relevant
Regulations.
2. Funds raised abroad by overseas
holding/associate /subsidiary/group companies of Indian companies with
support of the Indian companies/their banks, as mentioned above, cannot
be used in India unless it conforms to the general or specific
permission granted under the relevant Regulations.
3. Indian
companies/their banks using or establishing structures which contravene
the above will be liable for penal action as prescribed under FEMA,
1999.
1. Facility available to an employee of a company under Regulation 7(8) of Notification No. FEMA 10 will also be available to an employee who is deputed to a group company in India.
2. The term ‘company’ referred to in the said regulation will include ‘Limited Liability Partnership’ as defined in the LLP Act, 2008.
Notification No. FEMA.330/2014-RB dated December 15, 2014 Depository Receipts Scheme
This circular brings out the salient features of the new ‘Depository Receipts Scheme, 2014’ (DR Scheme, 2014) for investments under ADR/GDR which has come into effect from December 15, 2014. With the coming into effect of this new DR Scheme 2014 the present guidelines for Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, except to the extent relating to foreign currency convertible bonds, stand repealed.
The following amendments have been made in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000, (Notification No. FEMA 20/2000-RB, dated 3rd May, 2000): –
1. Two new definitions ((iicc) & (iidd)) have been introduced in Regulation 2.
2. Regulation 13 has been substituted.
3. Schedule 1 has been amended.
4. A new Schedule 10 has been introduced.
The salient features of the new DR Scheme 2014 are as under: –
1. Securities in which a person resident outside India is allowed to invest under Schedule 1, 2, 2A, 3, 5 and 8 of Notification No. FEMA. 20/2000-RB dated 3rd May 2000 will be the eligible securities for issue of Depository Receipts in terms of DR Scheme 2014.
2. A person will be eligible to issue or transfer eligible securities to a foreign depository for the purpose of issuance of depository receipts as provided in DR Scheme 2014.
3. The aggregate of eligible securities which can be issued or transferred to foreign depositories, along with eligible securities already held by persons resident outside India, cannot exceed the limit on foreign holding of such eligible securities under FEMA.
4. Eeligible securities cannot be issued to a foreign depository for the purpose of issuing depository receipts at a price less than the price applicable to a corresponding mode of issue of such securities to domestic investors.
5. If the issuance of the depository receipts adds to the capital of a company, the issue of shares and utilisation of the proceeds will have to comply with the relevant conditions laid down in the Regulations framed and Directions issued under FEMA.
6. The domestic custodian will report the issue/transfer of sponsored/unsponsored depository receipts as per DR Scheme 2014 in ‘Form DRR’ as Annexxed to this circular within 30 days of close of the issue/program.
This circular states that 100% FDI under Automatic route will be permitted in construction development sector with effect from December 3, 2014 provided the investment complies with the terms and conditions mentioned in the Press Note 10 (2014 Series) dated December 3, 2014.
As a result, in the existing Annex B of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, (Notification No. FEMA 20/2000-RB dated 3rd May 2000) entry 11, 11.1 and 11.2, the following shall be substituted as under: –
This circular provides that RBI while granting permission under the Approval Route to proprietorship concern/ unregistered partnership firm in India for investing outside India will take into account/consider the following: –
1. The proprietorship concern/unregistered partnership firm in India is classified as ‘Status Holder’ as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt. of India from time to time.
2. The proprietorship concern/unregistered partnership firm in India has a proven track record, i.e. the export outstanding does not exceed 10% of the average export realisation of the preceding three years and it has a consistently high export performance.
3. The Bank with whom the proprietorship concern / unregistered partnership firm in India deals with is satisified that it is KYC (Know Your Customer) compliant, engaged in the proposed business and has turnover as indicated;
4. The proprietorship concern/unregistered partnership firm in India has not come under the adverse notice of any Government agency like the Directorate of Enforcement, Central Bureau of Investigation, Income Tax Department, etc. and does not appear in the exporters’ caution list of the Reserve Bank or in the list of defaulters to the banking system in India.
5. The proposed investment outside India does not exceed 10% of the average of last three years’ export realisation or 200% of the net owned funds of the proprietorship concern/unregistered partnership firm in India, whichever is lower.
This circular has revised the documentation process for hedging of probable exposures by exporters and importers based on past performanceas under: –
1. Present position – importers and exporters are required to furnish to their banks a quarterly declaration, in the specified format, duly certified by their Statutory Auditor stating the amounts booked with other banks under this facility.
Change – importers and exporters have to furnish a quarterly declaration stating the amounts booked with other banks under this facility as per the format in Annex I to this circular. The declaration has to be signed by the Chief Financial Officer (CFO) and the Company Secretary (CS). In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) has to co-sign the undertaking along with the CFO.
2. Present position – banks can permit importers and exporters to enter into derivative contracts in excess of 50% of the eligible limit if they are satisfied that the requirements of their customers is genuine and the customer submits the following: –
a. Certificate from their Statutory Auditor that all guidelines have been adhered to while utilising this facility.
b. Certificate of import/export turnover during the past three years duly certified by their Statutory Auditor in the specified format.
Change – banks can permit importers and exporters to enter into derivative contracts in excess of 50% of the eligible limit if they are satisfied that the requirements of their customers is genuine and the customer submits the following certificates as per the format in Annex II to this circular, duely signed by the the CFO and CS (in the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) has to co-sign the undertaking along with the CFO): –
a. Declaration that all guidelines have been adhered to while utilising this facility.
b. Certificate of import/export turnover of the customer during the past three years.
3. The statutory auditor, as part of the annual audit exercise, has to certify the following: –
a. The amounts booked with all banks under this facility.
b. All guidelines have been adhered to while utilising this facility over the past financial year.
This article discusses some of the important features of the revamped Regulations. In particular, implications for Chartered Accountants are highlighted.
Broad overview and important conceptual changes
As stated, the Regulations are substantially revamped though the broad scheme remains the same. Insiders and unpublished price sensitive information (“UPSI”) remain core concepts albeit with some changes. Simply stated, insiders are prohibited from communicating UPSI and dealing in shares based on UPSI. A host of related provisions are there mainly to ensure that this does not happen.
There are certain important concepts that are new and discussed here:
a. ‘Trading Plans’ that are meant to allow Insiders to trade by intimating well in advance.
b. Secondly the exceptions to receiving UPSI under certain circumstances which otherwise would constitute a violation of the prohibition on communication/receipt of UPSI.
c. T he third and most innovative concept is the use of “Notes” to explain what the intention of each of the Regulation is. This gives a background of the provision and considering that it is part of the Regulations itself should have greater weight than other external aids to interpretation.
What are prohibitions/ restrictions/requirements?
The Regulations aim at prohibiting insider trading. However, this is achieved not just by making specific prohibitions but also by means of control over UPSI, disclosure of trades, etc. Thus, broadly, the following are the prohibitions/restrictions/requirements:-
1. An Insider shall not deal on the basis of UPSI. 2. A n Insider shall not communicate UPSI.
3. No one shall procure UPSI.
4. There shall be regular disclosures of holdings/dealings by certain persons (Promoters, specified employees, etc.)
5. Manner of communicating UPSI, restrictions over dealings by specified employees, etc.
6. Formulation of Code of Conduct for disclosure and for trading by insiders.
Basic concepts – Insider and UPSI
Insider
The Regulations focus mainly on Insiders. The term Insider is defined quite widely and, as in the 1992 Regulations, complex to some extent. The term “Insider” includes certain “connected persons”. The term “connected persons” in turn is defined by including certain specified persons who are close to the company and have or can be expected to have access to UPSI. By virtue of the new inclusion those persons who have had “frequent communications” with the officers of the company are “connected persons”.
Certain persons are deemed to be connected. If such persons deny that they are connected, then the onus is on them to prove how they are not so connected. Importantly, any person who possesses UPSI is also deemed to be an Insider. Thus, to summarise those close persons who have access or are expected to have access to UPSI and those who actually possess UPSI are insiders.
Unpublished price-sensitive information
“Unpublished price-sensitive information” is yet another important term, which is essentially the opposite of the other term – “generally available information”. Its definition remains broadly the same as in the earlier Regulations. All that is “information”, that is “price-sensitive” and that is not “published” in the prescribed manner is UPSI. There is prohibition on sharing of UPSI (except in specified ways) and dealing in securities on basis of UPSI. There are detailed provisions on how to ensure that UPSI is not disclosed accidentally as also the correct minimum way of sharing UPSI in such a manner that is widely shared or deemed to be so. Thus, for example, sharing (of information) with the stock exchanges who display it on their website is deemed to mean that it is no more UPSI.
Defenses to insider trading
The new Regulations provide for certain defenses/exceptions to acts or omissions that would otherwise be deemed to be insider trading or communication of UPSI. Communication of UPSI is permitted under certain circumstances to a potential acquirer who would be required to make an open offer. In other cases of proposed transactions, such disclosure is permitted provided, inter alia, the UPSI is disclosed to the public at least two days in advance.
There are other prescribed exceptions to what would otherwise constitute inside trading.
Trading Plan
A totally new concept has been introduced in these Regulations with reference to Trading plan. An Insider who deals in the shares of the company may have reason to worry that his trades would be scrutinised for trades based on UPSI. He is obviously close to the company and would be expected to know of developments. However, it is apparent that he often would also need to deal in shares. A Promoter may want to consolidate his holding. A senior executive may want to plan for an important event for which he may want to sell shares. The Regulations have provided for a way for planning for such events or needs. An “Insider” may disclose well in advance his desire to deal in the shares of the company. If such disclosure is made in the prescribed manner, he can deal in the shares without worrying for any inquiry or consequences. However, there are some conditions such as:
a. The sale should be after at least six months.
b. T he Trading Plan should also extend to at least twelve months.
c. T here should not be overlapping trading plans.
d. T he insider should not be in possession of UPSI at time of such disclosure which continues to remain UPSI at the time of sale/purchase.
e. T he insider should also not carry out any form of market abuse through the trades. The disclosure has to be specific and not generic.
f. A bove all, the insider should actually implement the Plan.
The “Trading Plan” also serves the public so that they can anticipate the trades and decide accordingly. Hence, it is made imperative that the plan is actually implemented.
“Notes” to Regulations
The revamped Regulation has created a precedent in securities laws by providing for inbuilt “Notes” that explain the intent of the Regulations. They help in understanding the Regulations and their intent better. Most of the important Regulations contain such a Note. This is following the suggestions of the Supreme Court in M/s. Daiichi Sankyo Company Ltd., Appellant vs. Jayaram Chigurupati & Ors ((2010) 7 SCC 449). The Court there acknowledged the expert committee reports on the SEBI Takeover Regulations which helped it interpret the Regulations. Noting that such background was absent in other Regulations, it suggested:-
“Now that we have more and more of the regulatory regime where highly important and complex and specialised spheres of human activity are governed by regulatory mechanisms framed under delegated legislation it is high time to change the old practice and to add at the beginning the “object and purpose” clause to the delegated legislations as in the case of the primary legislations.”.
The Sodhi Committee which wrote the report on which the new Regulations are based specifically adopted this suggestion and we can thus see the notes in the Regulations as notified. However, it will have to be seen the level of prominence that is given to the notes in interpretation of the regulations. Concerns may also arise if the Notes conflict with the principal part of the regulations.
Relevance For Chartered Accountants
Chartered Accountants (CAs) have direct and serious concern with insider trading regulations for several reasons. They are experts in finance and can be expected to understand the potential implications of price-sensitive information over market prices. Even more importantly, the role they perform in relation to a company brings them very close to price-sensitive information. They may be auditors who have close access to records of accounts and operations. They maybe CFOs who compile the information on accounts and financial plans which are again by definition price-sensitive. They may be directors, advisors, etc. which again put them in similar positions.
The Regulations thus rightly provide specifically for such positions. as auditors, CFos, directors, etc. they are almost always deemed insiders. They would also find it difficult to rebut the allegation that, if there was UPSI, they did not have access to it. Thus, they would have to be very careful in their dealing in the shares of the company with which they are associated. Perhaps a good thumb rule for Cas is not to deal at all in the shares of the company they are associated with!
Auditors, advisers, etc. are also required to frame such a Code of Conduct under specified circumstances.
Code of Conduct
The Regulations provide for a detailed set of requirements. however, as in the earlier regulations, some matters are sought to be self-regulated to the Company or other entities to which the Regulations apply. The object is that the company/entity itself should also have some self- regulation whereby insider trading is prevented and if it still happens it is punished. The entity is thus required to set up a Code of Conduct containing at least the minimum set of prescribed provisions.
The Code should, thus, ensure that uPSi is handled on a need to know basis and there are adequate mechanisms to prevent its leaking. Importantly, designated employees would be required to make disclosure of their holdings and of changes therein as specified to the company. There will have to be periods during which dealing in the shares of the company would be prohibited (e.g., just before and after the declaration of trading results). Further, in case the designated employees propose to deal in the shares of the company when the trading window is not closed, they would still have to obtain clearance in advance and then carry out the transaction within the prescribed time.
Disclosure requirements
The 1992 regulations and the present regulations too provide for disclosure of holdings by specified persons (e.g., Promoters, persons holding significant holdings, etc.). The disclosure is required initially at the time when the regulations come into force, at the time when such persons become the specified persons and at the time when certain persons have significant dealings as prescribed in the securities of the company. This will help monitor the movement in the holdings of such persons. Needless to emphasise, such movements may often indicate the faith (or lack thereof) in the performance and future of the company.
Consequences of violations there are numerous consequences of violations of the regulations. Generally, under Section 15G of the SEBI act, the penalty for certain violations relating to insider trading is Rs. 25 crore or three times the profits made, whichever is higher and with or without prosecution. In case of violation of Code of Conduct, the company can take disciplinary action, in addition to the penal consequences that SEBI may initiate.
Non-disclosure or delayed disclosure of information can result in stiff penalties.
Summary
the new regulations have seen a substantial rewriting. the original structure has been retained too but several new concepts and provisions have been introduced. The requirements of compliance on the Company/entity, insiders, etc. have also increased. Concerns have been raised as to whether the requirements are too detailed and cumbersome.
It is often said that insider trading is rampant in indian markets. more than having strict provisions there is a need to detect actual cases of insider trading. The regulations do not take a big leap in this regard. However, additional powers of investigation provided in the SEBI act and more vigorous mechanism to monitor trades and investigation by SEBI may result in such cases of insider trading being detected. The future will reveal how effective this mechanism works.
Introduction Fable time – “Give me only that much wheat as is equal to the squares in a chess board, just one grain for the first square but double the grains for each subsequent square. Thus, there would be 2 for the second square, 4 for the third and so on until the sixty fourth square.” How many grains of wheat do you think there would be at the end? If you think it would be a small number then think again, the answer is a mind boggling figure of 263 i.e., 2 x 2 sixty three times and if all this wheat were to be stocked in a pile it would reach the moon! This is the power of exponential compounding.
What is an example on Maths doing in a legal subject? It illustrates the concept of Pyramid Schemes and why they are often considered illegal. Several of these schemes are of such a nature that for the last level to make money it would need to rope in all the people in the world and yet there may be a loss! These pyramids are the opposite of the popular management phrase “Fortune at the Bottom of the Pyramid” – here it is only the top which makes money while the bottom is often left high and dry and banging on the doors of courts/police stations.
To curb such schemes, the Centre has enacted the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) declaring them illegal. Let us examine the important features of this Act.
Scheme of the Act
The Preamble to this Act states that it is enacted to ban the promotion or conduct of prize chits and money circulation. Thus, it aims to curb two schemes, the first being prize chits and the second being money circulation schemes. The second type, i.e., money circulation scheme is relevant for this discussion.
Section 3 of the Act bans money circulation schemes and even bans enrolment as members or participation therein. It provides that no person shall:
(a) promote or conduct any money circulation scheme;
(b) enroll as a member to any such scheme;
(c) participate in it otherwise; or
(d) receive or remit any money in pursuance of such or scheme.
Thus, there is a four-pronged ban on promotion/ conducting, enrolling, participating or receiving/remitting money in a money circulation scheme. The penalty for violating this section is imprisonment of a term of up to 3 years and /or a fine of Rs. 5,000. Further, unless there are special and adequate mitigating reasons, the minimum fine is Rs. 1,000 and minimum imprisonment term is 1 year. Hence, it becomes very important to understand what is and is not a money circulation scheme.
Money Circulation Scheme
This brings us to the most important definition contained in section 2(c) of the Act, i.e., money circulation scheme. The Act defines this in an exhaustive manner to mean: “any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;”
The definition is worded in a not-too happy manner and can get a bit ambiguous at times. To simplify matters, the Supreme Court in State of West Bengal vs. Swapan Kumar Guha, 1982 (1) SCC 561 has paraphrased and simplified the definition as follows:
“Money circulation scheme means any scheme, by whatever name called,
(I) for the making of quick or easy money, or
(II) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”
Let us analyse the above definition to bring out its essential elements:
(a) There must be a scheme but its nomenclature is not material. A scheme may be defined as a systematic choice of action;
(b) It must be for the making of quick or easy money (these two terms carry the maximum significance);
(c) A lternatively, it must be for the receipt of any money or valuable thing as consideration for a promise to pay money;
(d) Both of which are contingent or dependent upon the enrolment of more members into such scheme; and
(e) The payment of the money or valuable thing may be derived from the entrance money or recurring subscriptions of the members of the scheme.
Hence, if one were to strip down the definition to bare bones, it would mean a quick or easy money scheme where earnings are contingent or dependent upon getting more and more members. This is the essence or the core of a multi level marketing or a pyramid scheme. If there is no contingency or dependency on an external event of garnering more subscriptions then it cannot be termed as a money circulation scheme. Even in a case where the returns promised are so ludicrous as long as the return is not contingent, it does not fall foul of the Act. For instance, in the above-mentioned Supreme Court case, a scheme was floated in which the investors were getting returns @ 48% – 12% officially and 36% unofficially / in a clandestine manner. The Apex Court held that such a scheme was not a quick or easy money scheme. It makes no difference whether the transactions are in black money or not. While that would violate the Tax Laws, it certainly would not fall within the mischief of this Act.
The Court also gave some interesting analogies to highlight its views – a lawyer who charges a hefty sum for an SLP lasting 5 minutes, a doctor who charges likewise for a tonsil operation lasting 10 minutes and Chartered Accountants (wonder where the Hon’ble Court got that one from)/Engineers/Architects who charge likewise, all make quick and easy money. Similarly, builders and brokers are notorious for making quick money. Obviously all of these cannot be covered within the purview of the Act since the contingency element is absent.
Hence, the Court denied any prosecution under the Act since there was no mutual arrangement which was dependent on an event or contingent on enrolment of members.
Others Considerations
Another decision of the Supreme Court in Kuriachan Chacko vs. State of Kerala, 2008 (8) SCC 708 examined what were relevant and irrelevant considerations when it came to deciding whether or not a scheme was a money circulation scheme? The Court laid down the following guidelines in addition to those laid down in Guha’s case mentioned above:
(a) In the scheme under question, a member would be entitled to double the amount only if after his enrolment, additional 14 members were enrolled in the scheme. The second ingredient, namely, such payment of money was dependent on the “event or contingency relative or applicable to the enrolment of members into the scheme” was thus very much present.
(b) The definition nowhere provided that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the act would apply. the section does not provide for positive or dominant role to be played by a member of the scheme. the requirement of law is “an event or contingency relative or applicable to the enrolment of members into the scheme” and nothing more. It is immaterial by whom such members are enrolled. it may be by members, by promoters or their agents or by gullible sections of the society suo moto (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrolment of more persons into the scheme, nothing more, though nothing less.
(c) The scheme in question was a ‘mathematical impossibility’. the promoters of the scheme very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter, but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money.’
(d) It must be evident for any discerning mind that this scheme cannot work unless more and more subscribers join and the amount paid by them as unit price is made use of to pay the previous subscribers. The system is an inherently fragile system which is unworkable.
(e) Foolish, gullible and stupid persons alone may fall for the scheme without carefully analysing the stipulations of the scheme. it would be totally erroneous to assume that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons.
(f) The Court rejected the argument that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders
Gift Schemes
It is trite nowadays to see advertisements proclaiming “Free Gifts” (the issue of Gifts being Free we will deal with on another day). Do such schemes fall foul of the act? the decision of the Bombay high Court in State of Maharashtra vs. Shivji Kesra Patel, 1988 Mh.LJ 488 dealt with one such issue. A dealer in motor cycles sponsored a gift scheme under which a group of 200 members had to deposit certain monthly instalments for 30 months. Lucky draws were to be held from time to time and the winners would receive a free motor cycle. At the end of 30 months the balance members would have to buy the motor cycles by paying the prevailing market price less instalments contributed. The high Court observed that this was a money circulation scheme. Predominant in the scheme was the element of chance for a very small number of 30 out of 200 members. For the larger remaining 170 members there was nothing but loss of interest for 30 months. Hence, prosecution of the partners of the dealer firm was upheld.
Thus, all schemes providing gifts under a pyramid scheme would be well advised to check the applicability of this act.
However, so far the Courts have not bought their argument on the grounds that the major money comes not from selling products but from making more members. According to some press reports, the economic offences Wing of the Police is probing over 60 multi-level marketing schemes in mumbai alone which have allegedly duped investors of over Rs. 3,000 crore. Some of these schemes were promising returns as high as 500% to investors!
The need of the hour is specific regulation dealing with multi-level marketers or direct selling and not cover them within the omnibus provisions of the act. taking a cue, Kerala and Rajasthan have enacted Guidelines for direct selling. For instance, the Kerala Guidelines provide as follows:
(a) They define Direct Selling to mean the marketing of consumer products/services directly to the consumers away from the permanent retail locations, usually through explanation or demonstration of the products by a direct seller or by mail order sales.
(b) Pyramid Schemes are defined as a scheme or arrangement which also includes any money circulation scheme involving sale of goods and services, where a person for a consideration acquires the opportunity to receive a pecuniary benefit which is not dependent on the volume of goods or services sold or distributed but is based wholly or partly upon the inducement of additional persons to participate in such a scheme or arrangement.
(c) Some of the conditions laid down for a valid direct selling are as follows and those sale activities not following these would not be considered as direct selling and would be dealt appropriately under relevant provisions:
on the quantum of sale of goods and services.
Interestingly, these Guidelines have not been issued under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) ??
Conclusion
There is no limit to human ingenuity and human greed! Ponzi schemes, Pyramid schemes, etc., would continue to thrive on account on these two factors. What is needed is a clear cut law and a dedicated regulator dealing with such schemes. Also, the law must clearly spell out the exclusion conditions for direct selling so that genuine entities are not unduly harassed. The State would have to balance its objectives of protecting innocent investors but at the same time providing a conducive environment for doing business through innovative channels. At the same time, is it not the duty of the investors to do their homework before blindly jumping for get rich quick schemes? doesn’t a 500% return promise sound utopian? after all something which sounds too good to be true, is normally so. Investors would do well if they were to remember and adopt the words from the title of jane austen’s famous novel “Sense and Sensibility”!!
In an excise duty matter, the Appellant argued before the Hon’ble Court that there was no proper application of mind to the controversy, by the Tribunal, in dealing with the submissions canvassed orally and in writing and by a reasoned order either uphold or reject them.
The Hon’ble Court from reading of the impugned order observed that the assessee had raised several contentions before the Tribunal. The order contains several references worksheets and manner of calculations. The findings at internal page 5 of the order in original would denote that it considers the objections with regard to time bar, so also, on merits. With regard to imposition of penalty there were objections that were serious in nature raised by the Assessee. The Tribunal was required to consider the issues raised in the Appeal in-depth and render a complete finding. If a particular issue was pressed or was given up that should be indicated in the order of the Tribunal.
The Hon’ble Court remarked that it was expected from the Tribunal, which is manned by both judicial and technical experts, to be aware of the seriousness of the adjudication and not take up the assignment lightly and casually. There is no specific target which has to be achieved nor could the Tribunal be expected to decide particular number of appeals during a calendar year. Therefore, undue haste is not at all called for. That results in miscarriage of justice and in a given case would result in vital issues of both sides being concluded in the most unsatisfactory manner. The Court expected the Tribunal to guide the Adjudicating Authorities so that they would properly adjudicate the cases with reasoned orders and after considering the evidence on record. It is the duty of the Tribunal which has been repeatedly emphasised and to be performed to the best of its ability. The impugned order of the Tribunal was quashed and set aside and the Appeal was restored to the file of the Tribunal for decision afresh and in accordance with law.
The appeals raise the questions with respect to the validity of section 43 of Bombay Tenancy and Agricultural Lands Act, 1948 as applicable to the State of Gujarat, now known in the State of Gujarat as Gujarat Tenancy and Agricultural Lands Act, 1948. This section places certain restrictions on the transfer of land purchased or sold under the said Act. The appeal raises questions also with respect to the validity of the resolution dated 4-7-2008 passed by the Government of Gujarat to give effect to this section, and which resolution fixes the rates of premium to be paid to the State Government for converting, transferring, and for changing the use of land from agricultural to non-agricultural purposes.
The Hon’ble Court observed that the requirement of payment of premium by deemed purchaser for getting sanction to transfer his agricultural land for non-agricultural purpose is not invalid. The premium charged is neither tax nor fee. The tenant holds the land under State and the premium charged is for granting the sanction. This is because under this welfare statute these lands have been permitted to be purchased by the tenants at a much lesser price. The tenant is supposed to cultivate the land personally. It is not to be used for non-agricultural purpose. A benefit is acquired by the tenant under the scheme of the statute, and therefore, he must suffer the restrictions which are also imposed under the same statute. The idea in insisting upon the premium is also to make such transfers to non-agricultural purpose unattractive. The intention of the statute is reflected in section 43, and if that is the intention of the legislature there is no reason why it should be held otherwise. Plea that the premium charged is unconscionable and is expropriator not tenable in view of scheme of the Act.
The undisputed facts are that, the land appertaining to the plots was the ancestral land of one Krutibas Das and stood recorded in his name. After the death of Krutibas and his wife, the property devolved on his two sons, namely, Banamali and Ramakanta as joint owners thereof, both having 50% share each. Ramakanta being a minor was being looked after by his major brother Banamali, who was managing the joint family properties including the undivided interest of Ramakanta. By registered sale deed, Banamali sold the entire disputed land of 40 decimals on behalf of himself and also as brother guardian in favour of one Agani Dash. Agani in his turn sold the disputed land to one Sanatan and the present petitioner, Kanehei by registered sale deed.
During the consolidation operation, the disputed land was recorded in the name of Sanatan Dash and Petitioner Kanehei. Ramakanta, the present opposite party No.1, filed objection claiming to record his half share in the disputed land in his name on the ground that his brother Banamali had no right to alienate his share.
The Hon’ble Court observed that, where the de facto guardian of a minor is also the Karta or Manager or an adult member of the joint family including the minor himself, for sale by him of the joint family property including the undivided interest of the minor in such property, no permission of the court is necessary. Such sale shall be governed by the uncodified Mitakshara School of Hindu law, according to which sale by the Karta or Manager of the Hindu Joint Family Property without any legal necessity or benefit of estate shall be voidable at the option of the minor with regard to his undivided interest.
Thus, the sale of the minors’ property, in contravention of section 11 of the Hindu Minority and Guardianship Act, 1956 Act, is void and invalid must be applicable to all properties of the minor except where the sale is by a Karta or Manager of a joint Hindu Family of the undivided interest of the minor in the joint family property. The voidability of the sale transaction could only be decided by the Civil Court and not the consolidation Authorities.
The finding of the Consolidation Authorities in the impugned orders that the sale of Ramakanta’s undivided interest in the disputed joint family property by Banamali was void and invalid being in contravention of Section 11 of the Hindu Minority and Guardianship Act, 1956 cannot be sustained.
In the instant case, vendor was landlord and vendee was tenant.
The agreement for sale was arrived at in 1966, but it was oral. On account of failure on the part of the owner landlord, suit had to be filed in which compromise was arrived at and fresh agreement for sale was executed in October, 2010. Thereafter, sale deed was executed in November, 2010. It was pleaded by vendee that as vendor-landlord had only limited right to receive rent, market value should be determined on basis of that limited right on the date the sale deed was executed.
The Hon’ble Court observed that there are two sets of rights enjoyed by a person in respect of the property. One corporeal and the other incorporeal. The corporeal right is the right of ownership in material things whereas incorporeal right is any other proprietary right in rem. The owner of a material object is he who owns a right to the aggregate of its uses. Some of the rights of the owner might have been transferred by way of lease, the right of the user of those rights is as merely encumbrance and not as an owner. The ownership is of general use and not of absolute use. Once certain rights are transferred for a specific purpose, the landlord enjoys residuary rights in the said property. Even if any land may be mortgaged, leased, charged, bound by restrictive covenants and re so on, yet the residuary right remains with the owner. Though the residuary use, so left with the owner, may be of very small dimension and some encumbrancer may own rights over it that is much more valuable than owner, yet the ownership of it remains with the owner and not with the encumbrancer. No such right loses its identity because of an encumbrance vested in someone else. The right of ownership is essentially an inheritable right. It is capable of surviving its owner for the time being. It belongs to the class of rights which are divested by death but are not extinguished by it. The encumbrance does not become owner of the property despite the fact that he enjoys the property to the exclusion of the ownership.
For the aforesaid reason the plea by instrument of sale, the limited right to receive rent is transferred which is the basis for determination of the market value, cannot be accepted. The lessee who is encumbrancer has limited right of enjoyment of the property and nothing more than that. Even if the landlord had limited right of use of property, would not dilute his right of ownership. He continues to enjoy the residuary right in the said property. Once the property has been conveyed, the landlord by virtue of this transfer conveyes to the lessee the right of ownership which does not include only the right of enjoyment of the property, but all the residuary rights which the owner has in the said property.
The High Court concluded that after giving property in tenancy, pleas based on limited right are not tenable.
By virtue of a sale deed executed in favour of the petitioner, ownership has been transferred in his name. It cannot be said that by execution of the sale deed, limited rights have been transferred to the petitioner. As a result of the said sale deed, all the rights of the owner, described herein above, stand transferred in the name of the petitioner. While enjoying these rights, he cannot claim that a limited right of receipt of rent alone has been transferred, which would become the basis for determination of the market value.
One Lata was first married to Hrushi, who died prior to 1956 leaving behind his widow (Lata) and daughter Ratnamani (the plaintiff) as his successors. Ratnamani had only one daughter, namely, Banabasi.
After the death of Hrushi, his widow Lata married Kalakar, who also died prior to 1956 leaving behind Lata as his only successor-in interest. Kalakar had one brother, namely, Kantha. After the death of Kalakar, his widow Lata filed a suit and got the share of Kalakar allotted to her and, getting delivery of possession thereof, she continued to remain in possession of the same. During her life time, for her legal necessity she had sold land to different persons.
The plaintiff’s case that the scheduled land, which is also a part of the properties Lata had got in the partition, has been bequeathed by Lata under an unregistered Will executed in favour of Banabasi, who is Lata’s granddaughter and on the strength of that Will Banabasi, has been in possession and enjoyment of scheduled property.
After the death of Lata, it is claimed, the plaintiff has been in possession of the scheduled properties. It is alleged that D-2 to D-12, being agnates of Kalakar (Lata’s second husband), created disturbance in plaintiff’s possession over the suit land. Hence, the suit for declaration of her right, title and interest in respect of schedule properties. The plaintiff has also sought for declaration of her title over scheduled land in case no title is found to have been passed on to Banabasi under the aforestated Will.
The learned Courts below had recorded concurrent findings that by operation of section 14 of the Hindu Succession Act, 1956 (in short, the Act) Lata became full owner in respect of the property she got in suit and the plaintiff Ratnamani being Lata’s natural daughter through her first husband would succeed to all the properties in respect of which Lata died intestate, irrespective of the fact that the source of the property is Lata’s second husband, who is not the father of the plaintiff.
The Court relied on the case of Keshri Parmai Lodhi and another vs. Harprasad and others, reported in AIR 1971 MP 129, wherein their Lordship observed that from the language used in sub-section (1) and (2) of section 15 of the Act, it is clear that the intention of the Legislature is to allow succession of the property to the sons and daughters of the Hindu female and only in the absence of any such heirs the property would go to the husband’s heirs.
In the Text Book: Principles of Hindu Law by D.F. Mulla, it is commented on section 15(1)(a) of the Act that in case of a female intestate who had remarried after the death of her husband or after divorce her sons by different husbands would all be her natural sons and entitled to inherit the property left by the female Hindu regardless of the source of the property.
The Court observed that in the case at hand, if Lata’s daughter born to her first husband is considered to be her daughter coming within the expression ‘daughter’ appearing in section 15 of the Act, then sub-section (1) of section 15 of the Act would govern the situation. Therefore, the inevitable conclusion is that being a daughter born out of the womb of Lata by her first husband the plaintiff-respondent No.1 comes within the expression ‘daughters’ appearing in section 15(1)(a) of the Act and with the application of Rule-1 of section 16 of the Act, the Appellants, who are coming within the expression ‘heirs of the husband’, are to be kept from succeeding to the properties left behind by Lata even though she inherited the same from her second husband-Kalakar and he is not the father of plaintiff-respondent No.1.
Therefore, it was rightly held that plaintiff-Ratnamani succeeded to the suit properties consequent upon the death of her mother Lata and that the Appellantsdefendant Nos. 2 to 12 are not entitled to inherit the property of Lata.
This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till March 31, 2015: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.
Presently, an Indian company can, under the Automatic Route, issue shares/convertible debentures to a person resident outside India against lump-sum technical knowhow fee, royalty, External Commercial Borrowings (ECB) (other than import dues deemed as ECB or Trade Credit) and import payables of capital goods by units in Special Economic Zones subject to conditions like entry route, sectoral cap, pricing guidelines, etc. and compliance with applicable tax laws.
This circular permits an Indian company to issue equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI under FEMA, 1999 or any rules/regulations framed or directions issued thereunder, if:
1. The equity shares are issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc.;
2. A pplicable taxes have been deducted on the funds payable and the conversion to equity is net of applicable taxes.
However, issue of shares/convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery will continue to be dealt in accordance with extant guidelines.
This circular states that with effect from the first fortnight of September, 2014 banks are not required to submit ENC and Sch. 3 to 6 file under FETERS. Banks have to submit only BOP6 file and QE file under FETERS.
This
circular states that statement on import of Gold, both monthly and
half-yearly, now have to be filed in XBRL format from September, 2014.
However, the monthly and half-yearly statement for September has to be
filed both manually (format annexed to this circular) as well as in the
XBRL format. From October, 2014 only the XBRL statement needs to be
filed.
Presently, FPI are permitted to hedge their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date.
This circular permits FPI, holding securities under the Portfolio Investment Scheme (PIS) in terms of schedules 2, 2A, 5, and 8 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20 /2000-RB dated 3rd May 2000), to now hedge the coupon receipts arising out of their investments in debt securities in India falling due during the next 12 months. The hedge contracts cannot be rebooked on cancellation, but they can be rolled over on maturity if the relative coupon amount is still to be received.
This Press Note, with immediate effect, permits FDI in the following sectors of the Railway Transport Sector: –
Construction, operation and maintenance of the following.
(i)Suburban corridor projects through PPP, (ii) Highspeed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/ coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.
FDI beyond 49% of the equity of the investee company in sensitive areas from security point of view, will be brought before the Cabinet Committee on Security (CCS) for consideration on a case to case basis. Paragraph 6.1 has been amended as under: – 6.1 Prohibited Sectors: FDI is prohibited in:
(a) Lottery Business, including Government/private
lottery, online lotteries etc.
(b) Gambling and Betting, including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) M anufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(h) A ctivities/sectors not open to private sector investment: e.g: (l) Atomic energy and (ll) Railway operations ( other than permitted activities mentioned in para 6.2)
Foreign technology collaboration in any form, including licensing of franchise, trademark, brand name, management contract, is also prohibited for Lottery Business and Gambling and Betting activities.
Paragraph 6.1.12.1(ii) & 6.1.12.1(iii) are amended as under: –
(ii) “Infrastructure” refers to facilitiesrequired for functioning of units located in the Industrial Park and includes roads ( including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.
(iii) “Common Facilities” refer to the facilities available for all units loicated in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrifies railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility building, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.
A new Paragraph 6.2.16, as under, has been added: –
This Press Note has modified Paragraphs 4.1.3(v)(d) and 6.2.6 of ‘Consolidated FDI Policy Circular 2014’ relating to Defence Sector, with immediate effect.
This circular states that banks/FFMC selling pre-paid foreign currency cards for travel purposes are required to follow the same rigorous standards of due diligence and KYC that they follow while selling foreign currency notes / travellers cheques to their customers.
Export of Goods and Services – Project Exports
This circular has: –
1. Done away with the requirement of obtaining approval of the Working Group in case of project exports and deferred service exports proposals for contracts exceeding US $ 100 Million. Henceforth, banks/Exim Bank will consider awarding post-award approvals without any monetary limit and permit subsequent changes in the terms of post award approval within the relevant FEMA guidelines/regulations.
2. R emoved the time limit of 30 days for submission of form DPX1/PEX-1/TCS-1 to the Approving Authority (AA) by the exporters. Exporters now have to submit the appropriate form to their banks for approval.
The revised Memorandum of Instructions on Project and Service Exports (PEM) is annexed to this circular.
A. P. (DIR Series) Circular No. 13 dated 23rd July, 2014 Foreign investment in India by SEBI registered long-term investors in Government dated Securities
Presently, FII, QFI and long term investors can invest up to US $ 30 billion in Government securities. Out of the above limit, a sub-limit of US $ 10 billion is available for investment by long term investors in Government dated securities.
This circular has, while maintaining the overall limit at US $ 30 billion, made the following changes: –
1. T he limit for investment by FII/QFI/FPI in Government dated securities has been increased by US $ 5 billion to US $ 25 billion.
2. T he limit for investment by long term investors in Government dated securities has been reduced from US $ 10 billion to US $ 5 billion.
FII/QFI/FPI will have to invest the said additional sum of US $ 5 billion in government bonds with a minimum residual maturity of three years. Also, all future investments against the limit vacated when the current investment by an FII/QFI/FPI runs off either through sale or redemption will have to be made in government bonds with a minimum residual maturity of three years. However, there will be no lock-in period and FII/QFI/FPI can freely sell the securities (including that are presently held with less than three years of residual maturity) to the domestic investors.
This circular states that Indian Agents under MTSS can treat physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.
This circular states that Authorised Persons can treat either physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.
INTRODUCTION
The law to define and catch insider trading on unpublished price sensitive information is quite widely worded. Moreover, several terms contain legal fictions/deeming provisions. Appellate authorities too have adopted further legal fictions or rebuttable presumptions. The noose of the law has got one notch tighter with a recent decision (in the matter of KLG Capital Services Limited, order of SEBI dated 24th July, 2014). In this decision, SEBI, perhaps for the first time, applied the concept of “temporary professional relationship” of a person with a company that would make him an insider, and thus, held that his trades with unpublished price sensitive information (UPSI), is insider trading. Whether such trades were with such UPSI was also determined by applying deeming provisions. Moreover, two other deeming principles established by earlier cases have also been applied here. Finally, the case is especially noteworthy for the systematic manner in which information is collected, the relationships determined and the sequence of transactions analysed.
Background of law relating to insider trading
The law relating to insider trading is principally contained in detailed Regulations – the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“the Regulations”). The punishable act of insider trading is determined in a fairly complex manner wherein several legal fictions/deeming provisions are applied. Importantly, not all of deeming provisions are rebuttable presumptions, and hence they are presumed to be true with no choice to prove otherwise. Certain persons are deemed to be insiders if have certain specified types of close relationships with the Company. However, several categories of persons are deemed to be connected with the Company and hence insiders.
Insider trading takes place if such insiders trade while in possession of UPSI or if they share such UPSI. However, several types of information are deemed to be UPSI. Then, certain trades by insiders are also deemed to be insider trades in the sense that such trades are simply prohibited. And so on. However, it is ironical that even with such a widely framed law, the cases caught and punished are relatively very few. And even in cases detected and punished, a very detailed investigation is required to establish the violation.
Facts in the present case
In the present case, it was found that a certain company (“Acquirer”) acquired shares of a listed company (“the Company”) that resulted in the Acquirer being required to make an open offer. Certain persons (“the Traders”) were alleged to have acquired shares of the Company while in possession of the UPSI that such open offer would be made. The shares were thereafter sold at a substantially higher price, resulting in a large sum of gains to the Traders.
SEBI alleged that this was in violation of the insider trading Regulations. Let us see how SEBI went about establishing the necessary ingredients of insider trading in the facts of that case using several legal fictions.
Having information of open offer whether UPSI?
Does having information of an impending open offer by itself a UPSI? The answer is yes, though it appears that this was not disputed in this case. Hence, this was not required to be established in detail. A takeover is deemed to be UPSI as per the definition of that term.
Whether the traders in the present case were “insiders”?
The crucial question was whether the Traders were insiders. There were two aspects to this. One was that the fact that the Traders were not connected with the Company but they were connected with the Acquirer. Secondly, even with regard to their connection with the Acquirer, the Traders were not connected in any of the forms specified in the Regulations. The question was whether they could still be deemed to be connected with the Acquirer.
For the first aspect, the issue was whether the Traders need to be connected with the Company whose shares were dealt in, or whether they can be connected to any company. The common understanding is that the inside information usually emanates from the Company whose shares are traded in. A person is closely connected with such company as officer, consultant, director, etc. and becomes aware by virtue of such connection about UPSI. He then trades, based on such UPSI. Thus, a connection with any other company ought not meet the requirement. However, SEBI relied on an earlier decision of the Securities Appellate Tribunal (“SAT ”) which had held that the connection may be with any company. Since the Traders were shown, as is seen later, connected with the Acquirer company, it was held that this was sufficient.
The following words of the SAT in V.K. Kaul vs. Securities and Exchange Board of India (Appeal No. 55 of 2012) were relied on:-
“Regulation 2(e) defines ‘insider’ to mean any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company or; (ii) has received or has had access to such unpublished price sensitive information. It needs to be appreciated that the clause makes a distinction between ‘the company’ and ‘a company’. When it refers to ‘the company, the references is to the company whose Board of Directors is taking a decision and when it refers to ‘a company’, the reference is to a company to which the decision pertains. This has been explained even by the adjudicating officer by way of an illustration in para 30 of his order dated January 4, 2012, in the case of Mr. V. K. Kaul as under:-
“30. To illustrate, if noticee’s submission is accepted then a situation will arise wherein a Director of the company X cannot be held guilty of insider trading if he trades in the scrip of company Y based on the UPSI, that company X is going to make a strategic investment / placing a huge purchase order for plant and machineries in company Y. Such a scenario will defeat the purpose of PIT Regulations.”
We are, therefore, of the view that the term price sensitive information used in regulation 2(HA) is wide enough to include information relating directly or indirectly to ‘a company.’ The solrex had decided to purchase shares of the target company. Here, solrex is ‘the company’ and target company is ‘a company.’ The decision of solrex to purchase shares of the target company is likely to materially affect the price of securities of the target company. Only the insiders of solrex are aware about this decision of the company. If the insiders of solrex are allowed to trade in the shares of the target company ahead of purchase of shares by solrex, surely the trading will be on the basis of insider information. the decision of solrex to purchase shares of the target company is, therefore, UPSI for the insiders of solrex and they are prohibited from dealing in the shares of the target company till such information becomes public. It is not obligatory under the regulations that the upsi must be in the possession or knowledge of ‘a company’ in whose securities an insider of ‘the company’ deals. As long as, an insider of ‘the company’ deals in the securities of ‘a company’ listed on any stock exchange while in possession of UPSI relating to that company, the provisions of regulation 3(i) of the regulations will get attracted.”
The next aspect was whether the traders were connected with the acquirer. the traders were not directors, advisors, etc. of the acquirer. however, the records showed that they had some connection with either the acquirer or companies connected with it. they were involved directly or indirectly with the acquirer in terms of carrying out of certain acts relating to the takeover or otherwise having other connections. the persons who actually traded in the shares were also shown connected and the flow of the UPSI to them was also shown. Based on such findings, SEBI held that the traders had a “temporary professional connection” with the acquirer and hence, were deemed to be connected.
This is relevant for any person connected with a Company, particularly professionals like Chartered accountants. even if they are not statutory auditors and have a one- time connection of any sort, they could be held to have a “temporary professional connection”, and thus deemed to be insiders.
Reliance on Phone/sms records it is interesting to note, how the records of phone/sms between the traders during the critical time when the transactions were carried out were obtained and placed on record. This helped support the case of SEBI.
How to Establish that Insiders Traded while in Possession of UPSI
A regular problem faced in cases of insider trading is how to establish that dealings by insiders were so, while being in possession of UPSI. Not all trades of insiders are automatically insider trading. An additional condition required to be proved is that they were, while in actual possession of inside information. An earlier decision of the sat helped introduce yet another fiction. At that time, the law was worded more strictly and it was required to be proved that the person dealt on the basis of UPSI. However, sat held that once an insider deals in securities, it will be presumed that he has done so on the basis of inside information. SEBI relied on the observation of hon’ble sat in the matter of Rajiv B. Gandhi and Others vs. SEBI (appeal no. 50 of 2007) that:
“We are of the considered opinion that if an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him. The presumption that arises is rebuttable and the onus would be on the insider to show that he did not trade on the basis of the unpublished price sensitive information and that he traded on some other basis. He shall have to furnish some reasonable or plausible explanation of the basis on which he traded. If he can do that, the onus shall stand discharged or else the charge shall stand established.”
Relying on this decision, SEBI held that the insider who trades would be presumed to have traded while in possession of UPSI.
This principle is also important for persons close to the Company which would include Chartered accountants acting as auditors, internal auditors, advisors, independent directors, etc. if they deal in the shares of such a Company, it is possible that they would be presumed to have done so while in possession of UPSI. And then it would be upto them to show how they did not. Thus, such persons may consider adopting a policy to never deal in the shares of a Company in which they are regularly or even temporarily connected.
Whether a Person merely Possessing is UPSI Deemed To be an Insider?
The decision of the sat in Dr. Anjali Beke’s case (Dr. An- jali Beke vs. SEBI (appeal no. 148 of 2005)) was relied on to support the argument that even a non-insider who receives UPSI would be deemed to be an insider person who could violate the regulations if he deals, etc. in the securities. Reliance on this decision explicitly was perhaps necessary since at the time of the alleged acts of insider trading, the law was ambiguous. It was only a few months later that the regulations were amended explicitly and clearly state that a person who merely receives UPSI is an insider.
Reliance on Circumstantial Evidence for Establishing offence of Insider Trading
The next concern arises out of the peculiar nature of insider trading. Many of the ingredients required to prove insider trading are difficult to establish directly. The US Court in rajratnam’s case had held that circumstantial evidence can be relied on in insider trading cases. This decision was applied on by the sat in V. K. Kaul’s case. SAT had observed:-
“…The adjudicating officer has rightly relied on the observations of u. s. Court in rajaratnam case (supra) on the relevance of circumstantial evidence in para 38 of the impugned order which reads as under :-
38. Regarding the issue of relevance of circumstan- tial evidence, the hon’ble district Court southern district of new york in the matter of united states of america V raj rajaratnam 09 Cr. 1184 (rjh) decided on 11.08.2011 has observed as follows: “…moreover, several other Courts of appeals have sustained insider trading convictions based on circumstantial evidence in considering such factors as “(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.” United States vs. Larrabee, 240 f.3d 18, 21-22 (1st Cir. 2001)…”
The above principles are not in conflict with the regulatory framework prescribed by the Board and can be looked into while deciding case of insider trading under the indian regulatory framework.”
SEBI relied on this decision to rely on various circumstantial evidence in the present case.
Disgorgement of Gains with Interest the gains made by the traders were thus worked out. to that, simple interest @ 12% was added for six years. the traders were also debarred from dealing in the securities markets for specified period of time.
Conclusion
This decision reiterates and emphasises several aspects that need consideration by professionals and executives having any connection to the company. The wide definitions and numerous deeming provisions may result in their own trades, or of persons related/connected to them, being held to be insider trading. Apart from suffering disgorgement of the gains with interest, the person may also suffer penalties, prosecution, debarment and of course, loss of reputation.
There was a difference of opinion between the Judicial member and the Technical Member. The appeal before the Tribunal was therefore referred to a Third Member. The Third Member held against the appellant/assessee. Prior to the decision of the Third Member, there was a decision of the Tribunal which supported the appellant’s contention before the Tribunal. That decision was brought to the notice of the learned Third Member before passing the order. The Third Member was bound to consider the judgment of the Tribunal. He, however, did not do so.
Prima facie, at least, even before the Tribunal the position for law appears to be in favour of the appellant. Unfortunately, the third member did not consider the judgment of the Tribunal.
The court also observed that the order of Tribunal was referred not because it has any precedent value in this court but is a indication of what the impugned order of the third member may well have been, had the judgement been considered by the learned third member.
The learned single Judge of Karnataka High Court in a Writ Petition passed an order stating that earlier judgement of a Division Bench of the High Court requires reconsideration and in the absence of any statutory provision empowering him to refer the same to the larger Bench the relevant papers be placed before Chief Justice to examine the question and constitute a larger Bench.
The Hon’ble Court observed that according to Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The expression “all courts” means Courts other than the Supreme Court. The decision of the Supreme Court is binding on all the High Courts. In other words, the High Court’s cannot hold the law laid down by the Apex Court is not binding on the ground that relevant provisions were not brought to the notice of the Supreme Court, or the Supreme Court laid down the legal position without considering all the points. The decision of the Apex Court binds as much the pending cases as the future ones. Even the directions issued by the Apex Court in a decision constitute binding law under Article 141. It is pertinent to state that the Supreme Court is not bound by its own decisions and may overrule its previous decisions. It is also pertinent to state that the Apex Court may overrule the previous decisions either by expressly saying so or impliedly by not following them in a subsequent case. Thus, in view of Article 141 of Constitution of India, when there is a decision of the Apex Court directly applicable on all fours to the case on hand, the Learned Single Judge could have decided the Writ Petitions following the decision of the Apex Court, holding that the decision of the Division Bench is contrary to the law laid down under Article 141 of the Constitution of India. Therefore the learned single Judge could decide the petitions in accordance with the law laid down by the Apex Court.
All the defendants attended the Himayatnagar branch of appellant Bank and deposited the title-deeds of their respective immovable properties, as detailed in the plaint. They had agreed by executing affidavits regarding the confirmation of the mortgage by deposit of title-deeds and had further agreed that the revival of the loan, if any by the borrower i.e. defendant No. 1 shall bind the mortgagor.
The Appellant Bank filed a suit for recovery of an amount of Rs. 27,76,137/- and for preliminary decree for sale of the mortgaged property for recovery of the said amount was decreed against the borrower-original defendant No. 1, but was dismissed against the guarantors i.e., defendants No. 2 to 6. Hence, the appeal was filed against the guarantors.
The Hon’ble Court noted the difference between “the agreement to mortgage” and “mortgage by deposit of title-deeds”. The mortgage by deposit of title-deeds is defined by section 58(f) of the Transfer of Property Act, 1882.
It is undisputed that the city of Hyderabad is a notified city where the delivery of the title-deeds of immovable property can be made with the intention to create a security thereon.
It is a settled position of law that the mortgage by deposit of title deeds requires no registration. However, if any document is executed, which would show that the mortgagee has, under the said document, mortgaged the property by deposit of title-deeds, then only the registration of the said document is required. However, the contemporaneous document fortifying the “intention to create the security” is neither an agreement to mortgage or a mortgage. The deposit of title-deeds itself with intention in the mind of the person that the said title-deeds are being deposited with intention to create a security thereon, is sufficient to culminate the transaction into a mortgage by deposit of title-deeds. This mortgage by deposit of title-deeds is sometimes called as equitable mortgage, as was prevalent in England. However, the ingredients of the equitable mortgage and the mortgage as defined u/s. 58(f) of the Transfer of Property Act are not identical.
The documents on record, coupled with the affidavits as admitted by the defendant and positively proved by the relevant witness of the plaintiff would show that the title-deeds were deposited with the plaintiff Bank, with an intention to create the security thereon.
The title-deeds of the respective respondents were admittedly put in the custody of the appellant Bank at that time. None of the relevant respondents at any time asked for return of those title-deeds, nor complained of keeping the same in the custody of the Bank.
The documents on record would show that the respondents No. 2 to 6 had intention to create the security for the repayment of the loan availed by the principal borrower. Therefore, they showed their readiness to deposit the title-deeds by various agreements and affidavits and also by placing all the title verification certificate by the Advocates, etc. and ultimately, they deposited the titledeeds with the appellant Bank at Hyderabad branch.
The above facts is sufficient to hold that the respondents No. 2 to 6 stood as guarantors and created mortgage of their property for repayment of the loan advanced to the principal borrower by depositing their title-deeds.
In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed SLP before Supreme Court. The Court frwoned upon such practice of the petitioner corporation as the corporation must have spent the amount already by filing this petition more than the total amount involved herein.
The Law Commission of India in its 155th report has observed that what is distressing is that the number of pending litigations relate to trivial matters or petty claims, some of which have been hanging for more than fifteen years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved, besides wasting valuable time and energy of the concerned parties as well as the Court.
The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.
The facts, in brief, are that the complainant booked a 2 BHK flat , the price whereof was Rs. 22,50,000/-. He paid a sum of Rs.1.00 lakh, as booking amount, to the builder. The allotment letter, dated 13-10-2011, was issued in favour of the complainant, in respect of the aforesaid flat. Totally, the complainant paid a sum of Rs. 21,50,000 towards the price of the flat, in question. The remaining amount of Rs.1.00 lakh was to be paid by the complainant, at the time of handing over possession of the flat, by the builder (Opposite Party). The Opposite Party, failed to deliver the possession in time. The complainant wrote a number of letters requesting the Opposite Party, to hand over physical possession of the flat. The opposite Party vide letter dated 06-12-2012 intimated the complainant that possession of the flat shall be delivered on or before 15-01-2013. Even on that date, the possession of the flat was not delivered. It was intended that the complainant suffered a lot of mental agony and physical harassment, on account of non-delivery of possession of the flat, in question, by the stipulated date, or non-refund of the amount deposited by him. It was further stated that the aforesaid acts of the Opposite Party, amounted to deficiency, in rendering service, as also indulgence into unfair trade practice. When the grievance of the complainant was not redressed, left with no alternative, a complaint u/s. 17 of the Consumer Protection Act, 1986 was filed claiming from the Opposite Party compensation for mental agony and physical harassment; refund of Rs. 21.50 with interest @18% p.a. from the date of deposit of the said amount; pay interest @10.75% p.a., which was being paid by him (complainant) to the Bank of India, for the loan facility, availed of by him to purchase the flat, in question; etc.
The state commission observed that as per the evidence produced, on record, it is evident that the complainant only booked one flat, bearing No. 498, in the project of the Opposite Party, for a sale consideration of Rs. 22.50 lakh. There is nothing, on record, that the complainant purchased this flat, for commercial purpose with the intention to resell the same as and when there was escalation in prices. Thus the complainant falls within the definition of a consumer, as defined by section 2(1)(d)(ii) of the Act.
The next question, that falls for consideration, is, as to within which period the possession of the flat was to be delivered. It is evident from this document, that the Opposite Party stated therein, that it would try to give possession of the flat by 15-01-2013. It means that possession of the flat was to be delivered, on or before this date. However, there is no document, on record, to prove that either on 15-01-2013 or immediately thereafter offer of possession of the flat, in question was made to the complainant, but he refused to accept the same. Had the construction of the flat, in question, been complete, in all respects, then certainly the Opposite Party would have sent offer of possession of the flat, after 15-01- 2013, to the complainant. Non-sending of such a letter, in itself, indicates that construction of the flat, in question, was not complete, and as such, the question of offer of possession thereof on or after 15-01-2013 did not at all arise. By making a false promise, that the possession shall be offered by 15-01-2013, and failure to abide by the commitment, the Opposite Party was not only deficient in rendering service but also indulged into unfair trade practice.
Even by the time the complaint was filed, the possession of the flat was not offered to the complainant. The Opposite Party utilised the amount, deposited by the complainant, for a sufficient long period. Neither the possession was offered to the complainant, nor refund of the amount, was made to him. Since the Opposite Party failed to deliver possession of the flat by the stipulated date or even by the time the complaint was filed, it was its bounden duty to refund Rs. 21.50 and Rs. 37,028/- (paid as service tax) to the complainant but it failed to do so. It was, therefore, held that the complainant was entitled to the refund of Rs. 21,50,000/- deposited by him towards the price of the flat and Rs. 37,028/- paid by him, towards service tax to the Opposite Party. By not refunding the amount aforesaid, the Opposite Party was deficient, in rendering service.
For the financial loss caused to the complainant on account of non-refund of the amount, deposited by him immediately after the expiry of the stipulated date for delivery of possession of the flat, the complainant was entitled to refund of the aforesaid amounts, with interest @12% interest p.a. from the respective dates of deposits.
As stated above, neither possession of the flat by the stipulated date, was given to the complainant, nor refund of the amounts paid by him, was made. One can really imagine the mental condition of a person, who deposited 95% of the price of the flat, but was neither delivered the possession thereof nor refund of the amounts deposited by him was made. The complainant, thus, suffered a lot of mental agony and physical harassment, on account of the acts of omission and commission of the Opposite Party. Not only this, the complainant shall also not be able to purchase a flat, at the same rate, on account of escalation in prices. Compensation for mental agony and physical harassment and on account of escalation, in prices to the tune of Rs. 1,50,000/- was granted Litigation cost of Rs.15,000/- also granted. (Dated 02-07-2014 complaint Case No. 41 of 2014).
One of the co-owners can relinquish his share in a co-owned property in favour of one or more of the coowners. The document executed by him in this regard would continue to be a relinquishment deed irrespective of whether the relinquishment is in favour of one or all the remaining co-owners of the property. There is no basis in law for the proposition that if the relinquishment deed is executed in favour of one of the co-owners, it would be treated as a Gift deed. The law of stamp duty (as applicable in Delhi) treats relinquishment deed and gift deed as separate documents, chargeable with different stamp duties. It is not necessary that in order to qualify as a relinquishment deed, the document must purport to relinquish the share of the relinquisher in favour of all the remaining co-owners of the property. Even if the relinquishment is in favour of one of the co-owners, it would qualify as a relinquishment deed.
The Civil Misc. Appeal had been filed against the judgement and decree dated 05-11-2011, passed by the District Judge, Alwar whereby a consent decree u/s.13B of the Act of 2005 had been passed dissolving the marriage between the appellant–wife and the respondent-husband.
It was contended that the appellant is an absolutely illiterate lady and was married to the respondent on 31- 01-2009. It is submitted that the judgment and decree dated 05-11-2011 purportedly by consent for dissolution of marriage has been obtained fraudulently and the appellant at no point of time signed an application u/s. 13B of the Act of 2005, nor even entered the witness box before the District Judge, Alwar nor make any statement as attributed to her before the learned trial court. It is submitted that the judgment and decree for dissolution of marriage on 05-11-2011 is absolutely fraudulent and in fact an outcome of criminal enterprise.
The Court observed that section 96(3) CPC categorically states that no appeal shall lie from a decree passed by the court with the consent of the parties. There is thus a clear statutory prohibition against filing of an appeal against a consent decree. Thus, the court held that u/s. 96(3) CPC, an appeal against a consent decree is not maintainable.
The Hon’ble Supreme Court in the case of Pushpa Devi Bhagar (D) by LR vs. Rajinder Singh & Ors. [AIR 2006 SC 2628 (1)] had the occasion to deal with a situation where a consent decree was sought to be impugned in appeal.
The Hon’ble Court observed that the position that emerges from the amended provisions of Order 23, can be summed up thus :
(i) No appeal is maintainable against a consent decree having regard to the specific bar contained in section 96(3) CPC.
(ii) No appeal is maintainable against the order of the court recording the compromise (or refusing to record a compromise) in view of the deletion of clause (m) Rule 1, Order 43.
iii) No independent suit can be filed for setting aside a compromise decree on the ground that the compromise was not lawful in view of the bar contained in Rule 3A.
(iv) A consent operates as an estoppel and is valid and binding unless it is set aside by the court which passed the consent decree, by an order on an application under the proviso to Rule 3 of Order 23.
Therefore, the only remedy available to a party to a consent decree to avoid such consent decree, is to approach the court which recorded the compromise and made a decree in terms of it, and establish that there was no compromise. In that event, the court which recorded the compromise will itself consider and decide the question as to whether there was a valid compromise or not. This is so because a consent decree, is nothing but contract between parties superimposed with the seal of approval of the court. The validity of a consent decree depends wholly on the validity of the agreement or compromise on which it is made.
Some of the questions that need to be soul searched are:
1. What is it that makes “running a firm” so difficult?
2. Why do we often hear that he is great tax professional, but a lousy leader of people?
3. Why do we often hear that he is a good people person, but lacks the technical skills to become a partner?
4. Why do talented professionals leave good firms?
Similarly, there are questions that abound within professionals that merit serious consideration.
The one word that seeks to address all of the above is “Leadership”.
When professionals have to run their firms…… how can you empower professionals to run their firms? Are they born with such talent? Can these abilities be imparted? Do these abilities need to be upgraded every few years? The answer is a resounding YES.
Almost everyone can be trained to be a good manager. And each good manager can develop himself to become a great leader.
A true professional will primarily concern himself with knowledge acquisition and upgradation, synthesis of facts and solution formulation for clients, and set a precedent for others to be inspired from and emulate. Additionally, he will be looking at market forces – competitors, new players, regulators, associates and other stakeholders, and constantly evaluate and reposition his firm’s strategy. He will be constantly mentoring his team and providing them valuable feedback on how they should be motivated to embrace the challenges of the profession. Professionals who excel at all of these are running their firms successfully.
In pursuit of the above goal of running a firm successfully, there are challenges galore:
? Analysis and interpretation of professional standards, law and regulations
? Human resources management
? Client servicing and delivery
? Risk Management and accountability
? Ethics and values
? Professional upgradation – Life Long Learning
ATTRIBUTES
One can look at the following attributes for a professional who is trying to lead his professional service firm (“PSF”) and the way to think about implementing and executing:
Focus:
Often when professionals are asked “what is the vision of your firm” and someone says to be the market leader or to be the best or to excel in so and so, it is often an empty rhetoric. There is no vision statement written nor do the other partners and/or the managers or even the associates are completely clueless on the founder/ partner’s vision for the firm. It is of paramount importance that there is laser focus (relentless) on the goals of the firm. The firm leadership in an inclusive manner defines the goals. It is the collective responsibility of each member of the firm to ensure that the goals are met. When there is an intent backed with adequate time and resources and coupled with “tone at the top”, goals will get executed. The quality of the execution is purely a derivative of passion and relentless focus.
Planning:
Planning comes naturally to professional service firms who manage projects, e.g., an audit firm is used to planning an audit engagement where there is deployment of resources (team members) and there is a time bound expectations of the final audit report. A well planned engagement is more likely than not going to result into a successful engagement. Conversely, professionals, especially sole practitioners and smaller firms who do not plan adequately often run into cost over runs due to delayed and inefficient completion of engagements. Project management principles always suggest efficient planning as the corner stone of any project.
Execution:
This brings us to execution. No professional service firm can grow or even sustain itself without quality execution and the resultant client satisfaction. Again, one has to remember the mathematical model of clients pay for lack of knowledge or ability. Execution drives the fair market value in the equation. At the end of the day what every client wants from a professional is a solution to their problem. Execution directly impacts the professionals’ perception in the eyes of the client. Professionals who deliver solutions to complex problems are considered premium professionals i.e., the high end intellectual class of professionals. Those who provide expertise and experience are the second category who command a relative premium over the general practitioner. This category primarily comprises of professionals with grey hair i.e. professionals with solid experience and a fair degree of expertise. The rhetoric is “trust us: we have been through this before”. The final category is out friendly neighborhood, general practitioner. He is the go to guy for all first level problems and for the bread and butter solutions.
Now, execution is laser focused in the first category of the premium expert as it is time which is very scarce and therefore commanding a very high premium for these professionals. Their processes are geared up to provide high quality focused execution. No wonder they are at the top of their game.
In the second category, execution is clinical and professional.
In the third category of the general practitioner, execution standards greatly differ from one professional service firm to another. Those firms that practice a high degree or high quality of execution focus will outshine the rest.
Solution:
Professional service firms have to learn to be solutions focused and not be perceived as problem creators or query raisers. Each business has its own dynamic of the professional problems and challenges. A professional service firm that believes in problem solving and thinking about solutions for its clients is a hands down winner. It is this solution centricity that brings us closer to client centricity: one of the key attributes of successful professional service firms. The culture of the firm has to encourage individuals into constantly thinking about client solutions. This again ties in to our model of clients pay for value.
Professionals get paid for the value they deliver. This is not just a clichéd statement. In the ever-growing complex environment, the larger organisations have in-house teams for all vital functions.
Example: It is not uncommon to have a separate M&A team that focuses on new acquisitions/inorganic growth opportunities. If insourcing is a given, why should a client pay to a consultant or a professional advisor? In a real world situation clients pay because either they do not know the solution or they do not know enough about the subject or even if they know, they may not have the ability to be sure about a final opinion – which is demanded by regulations or otherwise. Thus, when clients pay for value, what they are essentially doing is paying for the lack of knowledge and/or ability and/or time. Simply put,
Clients pay for value = Fair market value of lack of knowledge or ability or time
Value is what is perceived and what is delivered. A solution to a complex problem is value delivered, so also is out of the box thinking or innovative application of a tax position or a tax rule, such that it reiterates a client position or saves taxes for a client.
Often, clients are habituated to pay for what is not within their realms of expertise or functional subject matter area. Sometimes it is also to cover oneself from a potential risk of an adverse outcome.
Thus, when a professional demonstrates knowledge and ability to execute, if he delivers significant value, he can often command a premium on his normal charge out rates.
Dynamic Forces in Market Place:
Each country is constantly revisiting the relevance of accounting, tax and business rules and constantly looking at ways to keep them updated. Business transactions evolve constantly and the level of complexity keeps on growing. Demand and supply forces generate lot of incongruity between what is and what ought to be. In such a situation, the dynamic forces in the market place takeover and dictate how a particular profession will grow and respond to these forces. Businesses often reach out to the professional firms in terms of being the harbinger for change. It is upto the professional service firms to create systems that allow rapid response to these dynamic forces. A professional service firm has to be in alignment with the 7-S’ framework1 so as to seize the incongruency and the resultant opportunities that are thrown up.
Clients tend to expect real time responses to questions and day to day challenges. PSFs have to be organised and geared up to provide rapid responses to meet the client need and to answer “what is value to the client?”
III. Counseling vs. Advocacy
Advocacy by definition is all about articulating one’s professional ideals and channelizing the technical knowledge to a given client challenge and finally tying all of these together, to communicate the professional’s intent. It is of deep importance that a PSF leader wears a hat of an advisor when it comes to dealing with a client. It is often found that a deep dividing line can be created between completing a job versus providing professional advice/counseling. To meet this gap, if a professional wears the hat of an Advisor, it is far more permeable to further a client’s interest.
Counseling is all about conveying a point of view to a client. Thereafter, providing alternative scenarios of possible outcomes and associated results.
In contrast, advocacy is sheer representation of a client’s position before a target interest group (“TIG”). This TIG could be a regulatory authority, a court of law, an arbitration panel, a policy maker or even a client interest group. It is clear that when a client’s position is to be conveyed across this broad spectrum, it is the art of advocacy that helps remove all communication barriers and synthesises a technical argument in a manner that the TIG can see the underlying merit and accept the arguments.
Example: The eminent jurist, late Shri Nani Palkhivala, in the case of Kesavananda Bharati vs. the State of Kerala, articulated the matter before the Supreme Court and outlined the Basic Structure doctrine of the Constitution. The Basic Structure doctrine forms the basis of a limited power of the Indian judiciary to review, and strike down, amendments to the Constitution of India enacted by the Indian parliament which conflict with or seek to alter this basic structure of Constitution. Such was the power of his advocacy, that recalling Mr. Palkhivala’s performance during the hearing of the review petition, Justice Khanna remarked, “It was not Nani who spoke. It was divinity speaking through him.” Justice Khanna was speaking for an astounded and grateful nation.
It is therefore important for professionals to learn the art of advocacy as that will put them in good stead when providing representation and litigation advisory services to their clients.
Values, integrity, ethics
A professional is normally called upon for implementing any new policy or regulation. The members of the public trust a professional and inbuilt in that trust is integrity, values and ethics.
Integrity is a personal virtue, an uncompromising and predictably consistent commitment to honour moral, ethical, spiritual and artistic values and principles.
In ethics, integrity is regarded by many as honesty and truthfulness or accuracy of one’s actions.
Values can be defined as broad preference concerning appropriate courses of actions or outcomes. Values reflect a person’s sense of right and wrong or what “ought” to be. Types of values include ethical/moral values, ideological (religious, political) values, social values and aesthetic values. Values have been studied in various disciplines such as anthropology, behavioral economics, business ethics, corporate governance, political sciences, moral philosophy, social psychology, sociology and theology.
Nothing summarises this better than the phrase, “Doing the right things”..
Leadership is all about doing the right things….
management is doing things right, said Peter F. Drucker.
It is so important for the leader in a PSF to set the tone about doing the right things. This, by implication, clearly means that always a leader has to focus on the right path. This is often tough and full of obstacles. Pursuing the right path is never easy and is like traversing a road full of twists and turns. One can never know what to expect at the next juncture. One can expect several resistances on the way including from one’s own fraternity in the firm. It is during this gruesome journey when the mantle of leadership is tested to its core. At that point, a leader of the PSF should consider the right path.
It is normally easy to take a convenient way out, which is full of short cuts and is devoid of any long term substance or depth. To add to this, the temptation of short term positive results create an indiscretion in one’s mind and a leader is often tempted to follow this wrong path in pursuit of short term gains. It is here that a true leader amplifies the spirit of leadership by pursuing the right path and embodying the universally acclaimed principle of doing the right things. The result is often long lasting and sustained and helps creating a firm that lasts and endures generations.
Zero tolerance:
It is important for a PSF to set a culture of zero tolerance for inappropriate conduct, accepting delivery that is less than optimal and enduring professionals who show scant respect for the basic tenets of professional ethics. The survival of individuals within a PSF environment that is cultured with zero tolerance goes a long way in establishing the righteousness and forbearance of morality, ethics and values, integrated with the basic social fibre and the deep rooted belief in doing the right things for the PSF. Zero tolerance also sets a clear roadmap for growth and sustenance of a PSF. All the firms that have grown and sustained over decades have shown tremendous affinity to the concept of zero tolerance.
Fearless approach:
Absolute clarity in one’s technical abilities leads to conduct which is fearless. It is often said that when there is nothing to lose, there is nothing to fear. Once a professional accepts that the final results are not in one’s hands, and therefore one should not endlessly worry about the outcome of a particular matter. What is more relevant and important is that the professional has given his or her best to a particular client situation and there is no technical deficiency in the final product. Thereafter, if a different view is taken by a competent authority, it is not really a reflection of the professional’s quality of delivery. Thus, there cannot be a question of aspersing any doubt on the technical ability of the professional. At that stage, the professional can truly find a sense of equilibrium in his professional practice. His “Dharma” is to conduct himself fearlessly and the resultant outcome will always be optimum.
Client centricity:
Quality work is not equivalent to quality service. If a professional in a PSF can ensure that client service is accorded paramount importance alongside the quality of the client delivery, what he would have created is a culture of “Client centricity” in the firm. All teams of various practice areas would keep the client at the centre whilst rendering their professional services. The client should feel that his or her needs and sensitivities are being addressed contemporaneously by the client service team. Client centricity also deals with ensuring that we do a better job than our competitors at listening to our clients and working out at finding out what they like and don’t like about dealing with us. We also have thoughtful, well executed plans to invest our time and resources in growing relationships with key clients, thereby earning and deserving their trust and future business. Finally, it deals with laying a greater emphasis in the firm’s measurement and reward systems on growing existing client relationships, rather than just pursuing new accounts and “rain-making”.
In conclusion
When professionals have to lead and run their firms, a lot of the above needs to be implemented so as to sustain the firm. And to grow the firm, the leadership of the PSF has to connect the firm to the future and connect the professionals to the firm. Leaders will be expected to set direction, ensure execution, secure commitment and lead by example.
This circular states that banks are no longer required to report remittances under the Liberalised Remittance Scheme (LRS) for acquisition of immovable property outside India because as per A.P. (DIR Series) Circular No. 5 dated 17th July, 2014 facility under LRS can be used for acquisition of immovable property outside India.
This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 31st December, 2014: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.
This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 31st December, 2014: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.
This circular states that RBI has amended the FLA Return. The new return and FAQ for filling up the same have been uploaded on the RBI website – www.rbi.org.in.
This circular requires Authorised Persons, who are Indian Agents under MTSS, to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.
Transfer of assets of Liaison Office (LO)/Branch Office (BO)/Project Office (PO) of a foreign entity either to its Wholly Owned Subsidiary (WOS)/Joint Venture (JV)/Others in India–Delegation of powers to AD Banks
Presently, banks can, subject to submission of prescribed closure documents, allow closure of the accounts of LO/ BO and repatriate the surplus balances.
This circular now permits banks to allow transfer of assets of LO/BO/PO, subject to compliance with the following stipulations by the concerned LO/BO/PO: –
1. T he LO/BO must have complied with the operational guidelines such as (i) submission of AAC (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation), (ii) obtained PAN from IT Authorities and (iii) got registered with ROC under Companies Act 1956. The PO must have complied with the guidelines regarding initial reporting requirements and submission of CA certified annual report indicating project status.
2. They must submit a certificate from their Statutory Auditors furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV value and sale consideration to be obtained. The Statutory Auditor must also confirm that the assets were not re-valued after their initial acquisition. The sale consideration must not be more than the book value in each case.
3. T he assets must have been acquired by the LO/BO/ PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses must be included. Also, no revenue expenses must be capitalized and transferred to JV/WOS.
4. A ll applicable taxes must have been paid before the transfer of assets.
5. T ransfer of assets is permitted only when the foreign entity intends to close their LO/BO/PO operations in India.
6. A mounts received as a result of such transfer of assets can be credited to the bank account of the LO/ BO/PO as a permissible credit.
Banks have to submit the documents for scrutiny by their own auditors and RBI auditors. A. P. (DIR Series) Circular No. 143 dated 16th June, 2014Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Amendment to section 13(2) – Money Changing Activities
This circular requires Authorised Persons to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.
Presently, a non-resident can pledge shares held by him in and Indian Company in favour of a bank in India to secure the credit facilities being extended to the Indian Company for bonafide business purposes.
This circular permits banks to allow pledge of equity shares of an Indian Company held by non-resident investor/s in favour of a NBFC – whether listed or not, to secure the credit facilities extended to the Indian Company for bonafide business purposes/operations, subject to compliance with the conditions indicated below: –
(a) Only the equity shares listed on a recognized stock exchange/s in India can be pledged in favour of the NBFC.
(b) In case of invocation of pledge, transfer of shares must be in accordance with the credit concentration norm.
(c) (i) Bank can obtain a board resolution ‘ex ante’, passed by the Board of Directors of the Indian Company, that the loan proceeds received consequent to pledge of shares will be utilised by it for the declared purpose. (ii) Bank can also obtain a certificate ‘ex post’, from the statutory auditor of Indian Company, that the loan proceeds received consequent to pledge of shares, have been utilised by the investee company for the declared purpose.
(d) Indian company has to follow the relevant SEBI disclosure norms, as applicable.
(e) Credit concentration norms cannot be breached by the NBFC under any circumstances. If there is a breach on invocation of pledge, the shares must be sold and the breach must be rectified within a period of 30 days from the date of invocation of pledge.
Foreign investment in India – participation by registered FPIs, SEBI registered long term investors and NRIs in non-convertible/redeemable preference shares or debentures of Indian companies
Presently, FII/FPI, QFI and long term investors registered with SEBI can invest in corporate debt up to $ 51 billion. Also, an Indian company can issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India.
This circular permits: –
– FII, QFI, FPI and long term investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/Endowment Funds, foreign Central Banks to invest on repatriation basis; and
– NR I to invest both on repatriation and non-repatriation basis in non-convertible/redeemable preference shares or debentures issued by an Indian company in terms of A.P. (DIR Series) Circular No. 84 dated 6th January, 2014 and listed on recognised stock exchanges in India, within the overall limit of $ 51 billion earmarked for corporate debt.
Notification No. FEMA. 301/2014-RB dated 4th April, 2014
Foreign investment in the Insurance Sector – Amendment to the Foreign Direct Investment Scheme This circular states that in terms of and subject to the conditions mentioned in Press Note 2 (2014 Series) FII / FPI and NRI can invest within the overall limit of 26% permitted for FDI in Insurance sector under the Automatic Route.
The amended paragraph 6.2.17.7 of FDI policy is as under: – Paragraph 6.2.17.7 of the ‘Consolidated FD1 Policy, effective from 5th April, 2013’, is replaced by the following:
Presently, under the LRS an individual resident in India can remit up to $ 75,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both.
This circular has increased the said limit from $ 75,000 per financial year to $ 125,000 per financial year. As a result, an individual resident in India can remit up to $ 125,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both. However, remittance under the scheme cannot be made for any prohibited or illegal activities such as margin trading, lottery, etc.
Crystallisation of Inoperative Foreign Currency Deposits
Notification No. 10A and this circular require banks to crystallize and convert credit balances in any inoperative foreign currency denominated deposit into Indian Rupee as under: –
1. In case a foreign currency denominated deposit with a fixed maturity date remains inoperative for a period of three years from the date of its maturity, than at the end of the 3rd year, the bank has to convert the balances lying in the foreign currency denominated deposit into Indian Rupee at the exchange rate prevailing as on that date. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.
2. In case of foreign currency denominated deposit with no fixed maturity period, if the deposit remains inoperative for a period of three years (debit of bank charges not to be reckoned as operation), the bank must, after giving three months’ notice to the depositor at his last known address as available with the bank, convert the deposit from the foreign currency in which it is denominated to Indian Rupee at the end of the notice period at the prevailing exchange rate. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.
Presently, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 25% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.
This circular has increase the limit of 25% to 50%. As a result, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 50% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.
This circular permits with immediate effect: –
A. Star Trading Houses/Premier Trading Houses (STH/ PTH) that are registered as nominated agencies by the Director General of Foreign Trade (DGFT) to import gold under 20:80 scheme. The conditions are: –
i) STH/PTH must have imported gold prior to the introduction of the 20:80 scheme. STH/PTH have to get this import verified by the Department of Customs at any port where they have imported gold consignment in the past.
ii) The first lot of gold under this scheme will be based on the highest monthly import during any of the last 24 months prior to the RBI’s notification dated 14th August, 2013, subject to a maximum of 2,000 kgs.
iii) STH/PTH can import the eligible quantity from any port.
iv) ATH /PTH must submit the import plan, port-wise and quantity-wise, to the concerned Customs office, where the verification of the figures of past performance was done.
v) STH/PTH importers will have to comply with the overall discipline of exporting 20% of each imported consignment before the next consignment is imported.
B. N ominated banks to give Gold Metal Loans (GML) to domestic jewellery manufacturers from the eligible domestic import quota of 80% to the extent of GML outstanding in their books as on 31st March, 2013.
Annexed to this circular is the revised working example of the operations of 20:80 scheme based on the changes announced in this circular.
Presently, an exporter has to obtain prior permission of RBI for receipt of advance where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment. Also, banks have been authorised to permit exporters to receive advance payment for export of goods which can take more than one year to manufacture and ship if the ‘export agreement’ provides for the same.
This circular authorises banks to permit exporters who have a minimum of 3 years satisfactory track record to receive long term export advance up to a maximum tenor of 10 years. This advance has to be utilised for execution of long term supply contracts for export of goods and is subject to the following conditions: –
a) Firm irrevocable supply orders should be in place. The contract with the overseas party / buyer must be vetted and it must clearly specify the nature, amount and delivery timelines of products over the years and penalty in case of nonperformance or contract cancellation. Also, product pricing must be in consonance with prevailing international prices.
b) The company should have the capacity, systems and processes in place to ensure that the orders over the duration of the said tenure can actually be executed.
c) The company must not have come under the adverse notice of Enforcement Directorate or any such regulatory agency or must not be caution listed.
d) Such advances must be adjusted through future exports.
e) The rate of interest payable on such advance, if any, must not exceed LlBOR plus 200 basis points.
f) Documents must be routed through one bank only.
g) Bank have to ensure compliance with AML/KYC guidelines and also undertake due diligence of the overseas buyer to ensure that it has good stand-in/soundtrack record.
h) Such export advances must not be used to liquidate Rupee loans, which are classified as NPA as per the RBI asset classification norms.
i) Double financing for working capital for execution of export orders must be avoided.
j) Receipt of advance of $ 100 million or more must be immediately reported to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI as per the format given in Annex – I to this circular.
Banks, if required, can issue bank guarantee (BG)/Stand by Letter of Credit (SBLC) for export performance, subject to the following guidelines:
a) Issuance of BG/SBLC, being a non-funded exposure, must be rigorously evaluated as any other credit proposal and such facility must be extended only for guaranteeing export performance.
b) BG/SBLC must be issued for a term not exceeding two years at a time and further rollover of not more than two years at a time is permitted, and is subject to satisfaction of relative export performance as per the contract.
c) BG/SBLC must cover only the advance on reducing balance basis.
d) BG/SBLC issued from India in favour of overseas buyer cannot be discounted by the overseas branch / subsidiary of bank in India.
e) Banks must duly evaluate and monitor the progress made by the exporter on utilisation of the advance and submit an Annual Progress Report to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI in format given in Annex – II to this circular within a month from the close of each financial year.
This circular states that a Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008 (6 of 2009), has been notified as an “Indian Party” under Clause (k) of Regulation 2 of Notification No. FEMA.120/RB-2004 dated 7th July, 2004. As a result, with effect from 7th May, 2014, an LLP is permitted to undertake financial commitment to / on behalf of a JV / WOS abroad.
Some related issues have also
been discussed by the Court. Some aspects have been ruled on, some
issues have been flagged for further information or debate and some
issues would be considered later for ruling.
The issues raised
relate to certain important measures under the law that help wider
shareholder participation in decision making, viz., postal ballot and
e-voting. Postal ballot has been in place for several years now and the
2013 Act has extended its reach and nature. Further, yet another similar
measure suited to the digital age, e-voting, has been mandated with
even wider scope. Indeed, e-voting is now required with immediate effect
and applies to all matters except a specified few. Before we go
further, let us recapitulate what these two concepts are.
Postal Ballot and e-voting
Postal
ballot was introduced by the Companies (Amendment) Act, 2000 through a
new section 192A. The section, along with Rules made pursuant thereto,
provided for voting by post in respect of specified matters. The Company
would send voting papers to shareholders by post. The ballots received
from shareholders would be reviewed by a scrutineer who would report on
the votes. The law mandated that certain specified matters should be
decided only by postal ballot. Further, the Company could also use, at
its option, the postal ballot method for any other matters except
certain specified matters (e.g., approval of accounts, etc.) that could
be approved only at a shareholders’ meeting. For matters approved by
postal ballot, a further shareholders meeting was not required.
The
2013 Act extended this concept further to e-voting. E-voting is
mandatory for listed companies and other companies having at least one
thousand shareholders. In e-voting, the shareholders can exercise their
votes electronically through internet in the prescribed manner. The
advantage was that, like postal ballot, the shareholder need not attend a
shareholders meeting but instead vote through the internet. However, in case of e-voting, unlike postal ballot, the meeting would still have to take place.
Thus, those who have not voted through e-voting could participate and
cast their votes at the meeting. As the law stands, those who have
already cast their votes through e-voting would not in the normal course
participate again at the meeting. Further, since the law provides that
the e-voting ends 3 days prior to the meeting, e-voting at the meeting
was not possible.
The law requires that all matters, except a
specified few, should require facility of e-voting. Since this provision
has come into force immediately, all forthcoming annual general
meetings in 2014 would have to provide for e-voting. Considering that
the court decision being discussed herein mandates certain changes to
the e-voting procedure, it has important and immediate relevance.
Court decision – context and issues
The
matter before the Court was a scheme of amalgamation. Such schemes
require meetings of shareholders/creditors in a manner as directed by
the Court. The counsel for the amalgamating companies prayed to the
court that the resolutions be allowed to be passed by postal ballot
instead of meetings being called for that purpose. Here, it may be added
that while this article focuses on the provisions of the 2013 Act, the
amended Clause 49 of the Listing Agreement providing for corporate
governance requirements also mandates for e-voting. Thus, this decision
will apply to such requirement too.
The Court examined the
concept of postal ballot, e-voting and related issues. In particular,
the Court examined the very concept and purpose of meetings and whether
postal ballot/e-voting that essentially eliminate or substantially
reduce the requirement of holding meetings went against the spirit of
shareholder democracy and participation. These and related issues were
discussed by the Court.
Whether new rules have come into force?
A
transitional issue raised by the Court was whether the new Rules
relating to e-voting etc. have come into force. The Court noted that
while the Rules were signed by the concerned authority and also posted
on the website, the prescribed and time tested procedure of publishing
them in the official gazette was not, as per the information available
to the Court, carried out. Hence, the question was whether the rules
were indeed in force. Since numerous rules were prescribed at the same
time, this concern applies to all.
However, it appears that the
department has duly released the gazetted notifications. Hence, this
issue raised by the Court ought not to remain a cause of concern for
current validity of the provisions.
Whether postal ballot/e-voting has benefits
The
Court explained the nature and purpose of such methods of voting. It
noted that considering the fact that many meetings were held at far off
places and for other reasons, shareholders could not attend, participate
and vote at such meetings. Thus, postal ballot and e-voting would help
shareholders at least participate in the voting. Hence, these methods
were laudable.
Whether postal ballot/e-voting can substitute shareholders’ meetings?
This
is the fundamental issue that the Court raised. It noted that voting by
such methods eliminated substantially the need of shareholders meetings
and interaction essential for shareholder democracy. Postal ballot
totally eliminated even the requirement of such meetings. E-voting would
result in lower shareholder participation since shareholders who have
already voted would not attend. The Court therefore expressed a view
that, firstly, that holding of shareholders’ meetings was a must. In the
matter before it, it had discretion whether or not to allow voting by
postal ballot that would eliminate the need of a meeting. The Court thus
rejected such request.
The Court observed, :-
“We must remember that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these, to my mind, is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. In other cases, he may hold strong views and may desire to convince others of his convictions. This may be in relation to matters that are not immediately obvious to the shareholder merely on receipt of written information or a notice. The right to persuade and the right to be persuaded are, as I see it, of vital importance. In an effort for greater inclusiveness, these rights cannot be altogether defenestrated. To say, therefore, that no meeting is required and that the shareholder must cast his vote only on the basis of the information that has been send to him by post or email seems to me to be completely contrary to the legislative intent and spirit to the express terms of the SEBI circular and amended Listing Agreement’s Clauses 35B and 49.” (emphasis here, and elsewhere in this article, is supplied)
The Court also noted that apart from merely deciding on whether to vote for and against, a meeting could even modify the agenda, if the discussion led to a conclusion that such changes are necessary.
WHETHER e-VOTING SHOULD BE ALLOWED AT THE MEETING ALSO ?
The Court then considered how to combine the advantage of remote voting such as through postal ballot/e-voting and the benefits of discussions at a meeting. The Court stated that e-voting was a good concept. However, it explained the nature and need of shareholder participation and stated that even those who had already cast their votes through e-voting should be allowed to participate in the meeting since they would be able to explain their views on the matters. Considering that they had already voted, the question of their voting again would not arise. The rest of the shareholders who are present at the meeting should be allowed to vote by e-voting. In view of this, the e-voting would have to be extended till the date of the meeting. Thus, the requirement under law to conclude the e-voting three days prior to the meeting would not hold good.It observed:
“Electronic voting is a method by which the votes cast by a large number of shareholders could be more accurately ascertained. That does not mean that electronic voting cannot be permitted at the meeting itself. A shareholder at a remote location and a shareholder at a meeting will both be required to use the same portal to cast their votes. This necessitates a single integrated electronic system for voting. This is technologically feasible and, indeed, essential. It cannot be that at the meeting that there be no voting or poll, and that electronic votes or postal ballots cast earlier would be determinative. Those who vote by postal ballot or by electronic voting cannot, of course, be permitted to vote again at a meeting. But they also cannot be restrained from attending that meeting. A shareholder may hold strong views. He may vote by postal ballot or electronic means and then attend the meeting to persuade others. Other shareholders may be undecided and may prefer to attend the meeting. Greater inclusiveness demands the provision of greater facilities, not less; and certainly not the apparent giving of one ‘facility’ while taking away a right. There is no reason why members attending a meeting should not be allowed to use a bank of computers to digitally cast their votes just as they might do if they were voting from a remote location.
20. There is also a question about the determination of electronic votes cast. The rules seem to indicate that electronic voting must stop three days before the meeting. The Chairman of the meeting is to be given a tally of the electronic votes cast and the decision on any item of business is supposed to have been passed or not passed only on the basis of these electronic votes. Ex-facie, this is an untenable mechanism. If, as I have said, electronic voting is not limited to voting from a remote location but must also include electronic voting at the meeting in addition to postal ballots received, then it is a sum total of all these votes that must be taken into account.
21. This means that while a meeting must be held, provision must also be made for electronic voting at the meeting by those shareholders who desire it. Every shareholder being given that option of exercising their votes by postal ballot or by electronic voting, the latter being either from a remote location or at the meeting itself.”
Thus, the Court held that in case of e-voting/postal ballot, a meeting must be held and at such meeting, the shareholders who have not voted should be given an opportunity to vote. Further, those who have voted could also be present and participate and persuade others.
WHETHER POSTAL BALLOT WITHOUT MEETINGS SHOULD BE ALLOWED?
The Court questioned the law which said that if a matter is decided by postal ballot, a meeting for considering such matter is not required. The Court felt that this interfered with a fundamental concept of having a meeting of the shareholders to discuss on an issue. It noted that apart from the matters mandatorily required to be decided by postal ballot, except a specified few, all the rest could also be at the option of the company be decided by postal ballot. It stated that this matter required further consideration before an appropriate bench of the Court and concerned parties may be given a hearing to express their views. It observed:
“On a prima facie view that the elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders’ rights, it is strongly recommended that till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting. Since this is evidently a matter of some importance, the Company Registrar is directed to make a submission and obtain necessary directions on the administrative side to have the matter placed before an appropriate Bench.”
CONCLUSION
It may be emphasised that the decision arose out of a petition for approval of a Scheme of amalgamation and hence the observations arguably have a limited scope and context. In any case, except for limited matters, the Court has not given final decision. Nevertheless, the decision would need consideration for forthcoming shareholders meetings and e-voting. Further, one would have to note what are the further developments when this matter is finally heard and the larger issue of postal ballot and e-voting is decided.
Governance now comes with an adjective: stable. Non- BJP fronts have collapsed before construction. And when stand-alone Arvind Kejriwal threatens to send journalists to jail, and denies his remarks despite video evidence, then he has lost composure because he is losing support.
Petitioner
filed an application u/s. 6 of the RTI Act before the Administrative
Officer-cum-Assistant State Public Information Officer (respondent no.1)
seeking information to the queries mentioned therein. The said
application was rejected by the PIO. An appeal against the said order
was dismissed by the First Appellate Authority. Second Appeal against
the said order was also dismissed by the Andhra Pradesh State
Information Commission vide order dated 20-11-2007. The petitioner
challenged the said order before the High Court. The Writ Petition had
been dismissed by the High Court on the grounds that the information
sought by the petitioner cannot be asked for under the RT I Act. Thus,
the application was not maintainable. More so, the judicial officers are
protected by the Judicial Officers’ Protection Act, 1850 (hereinafter
called the “Act 1850”). Hence, this petition.
Mr. V. Kanagaraj
learned Senior Counsel appearing for the petitioner has submitted that
right to information is a fundamental right of every citizen. The RT I
Act does not provide for any special protection to udges. The petitioner
has the right to know the reasons as to how Respondent no. 4 (the
Appellate Court) has decided his appeal in a particular manner.
Therefore, the application filed by the petitioner was maintainable.
Rejection of the application by Respondent no. 1 and Appellate
Authorities rendered the petitioner remediless. Petitioner vide
application dated 15-11-2006 had asked as under what circumstances
Respondent no. 4 ignored the written arguments and additional written
arguments, as the ignorance of the same was tantamount to judicial
dishonesty.
It was noted that the petitioner has not challenged
the order passed by Respondent no. 4. Instead, he had filed the
application u/s. 6 of RT I Act to know why and for what reasons
Respondent no. 4 had come to a particular conclusion which was against
the petitioner. The nature of the questions posed in the application
were to the effect why and for what reason Respondent no. 4 omitted to
examine certain documents and why he came to such a conclusion.
The
definition of ‘information’ u/s. 2(f) of the RTI Act shows that an
applicant u/s. 6 of the RT I Act can get any information which is
already in existence and accessible to the public authority under law.
Of course, under the RT I Act an 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.
A judge speaks through his judgments or orders passed by him. If any
party feels aggrieved by the order/judgment passed by a judge, the
remedy available to such a party is either to challenge the same by way
of appeal or by revision or any other legally permissible mode. No
litigant can be allowed to seek information as to why and for what
reasons the judge had come to a particular decision or conclusion. A
judge is not bound to explain later on for what reasons he had come to
such a conclusion.
Moreover, in the instant case, the petitioner
submitted his application u/s. 6 of the RT I Act before the
Administrative Officer-cum-Assistant State Public Information Officer
seeking information in respect of the questions raised in his
application. However, the Public Information officer is not suppose to
have any material which is not before him; or any information he could
have obtained under the law. Under section 6 of RT I Act, an applicant
is entitled to get only such information which can be accessed by the
“public authority” under any other law for the time being in force. The
answers sought by the petitioner in the application could not have been
with the public authority nor could he have had access to this
information and Respondent no. 4 was not obliged to give any reasons as
to why he had taken such a decision in the matter which was before him. A
judge cannot be expected to give reasons other than those that have
been enumerated in the judgment or order. The application filed by the
petitioner before public authority is per se illegal and unwarranted. A
judicial officer is entitled to get protection and the object of the
same is not to protect malicious or corrupt judges, but to protect the
public from the dangers to which the administration of justice would be
exposed if the concerned judicial officers were subject to inquiry as to
malice, or to litigation with those whom their decisions might offend.
If anything is done contrary to this, it would certainly affect the
independence of the judiciary. A judge should be free to make
independent decisions.
The Supreme Court held that as the
petitioner has misused the provisions of the RT I Act, the High Court
had rightly dismissed the writ petition.
[Khanapuram Gandaiah vs. Administrative Officer & Ors: SLP (civil) No. 34868 of 2009.]
Section 8 (1) (j)
Vide RT I dated 17-05-2012 the appellant had sought information on 7 points.
PIO vide letter dated 12-06-2012 denied information stating that the same is exempt u/s. 8 (1) (e) (g) and (j) of the RT I Act.
First
Appellate Authority (FAA) vide order dated 06- 08-2012 provided Place
of birth as per service records sought at query no. 4 and other details
as sought at query no 5 and 6.
Remaining information was denied stating that the same is personal information and exempted u/s. 8 (1) (j) of the RT I Act.
Aggrieved
with the decision of FAA, the appellant filed second appeal to Central
Information Commission on 21-08-2012 citing that Shri Ajit Kumar has
submitted fake caste certificate for seeking appointment.
CIC
vide order dated 27-12-2012 dismissed the appeal stating that personal
Information can be disclosed only in the larger public interest and
appellant has not established any such interest.
The appellant
filed Writ Petition No. W P 080 of 2013 in the High Court of Calcutta
(Circuit Bench at Port Blair). The Honorable High Court remitted the
matter to CIC with directions to decide the appeal afresh.
To
decide the matter under the application, the Chief Information
Commissioner constituted a 3 member bench of following Commissioners A)
Shri Rajiv Mathur B) Shri Basant Seth C ) Smt Manjula Prasher.
The
appellant submitted that Shri Ajit Kumar (third party) has obtained
appointment under reserve category by submitting false caste
certificate. On being asked by the Commission as to the evidence he has
to prove the same, he replied that he has information from official
sources.
Shri Ajit Kumar, the third party, submitted that he is
recruited under general category and had not submitted any caste
certificate to his employer. He also submitted that the appellant had
been harassing him and none of his personal information should not be
provided to him.
The CPIO submitted that Shri Ajit Kumar is
appointed under general category and no caste certificate has been
submitted by him. A notice was sent to Shri R. Ajit Kumar under
provisions of section 11(1) of RT I Act. In his response he objected to
furnishing any personal information related to him and also stated that
there is threat to him. PIO also stated that the appellant is habitual
information seeker and filed RTIs against many employees and
blackmailing them.
Ms. Tamali Biswas, advocate on behalf of
public authority, stated that the fact of employment of Shri R. Ajit
Kumar under unreserved category and non-availability of caste
certificate was brought to the notice of Hon’ble High Court also.
The appellant has submitted that decision may be taken on the basis of documents/records and justice be delivered in true spirit as per orders of the Hon’ble High Court of Calcutta (Circuit Bench At Port Blair).
Shri R. Ajit Kumar submitted that his appointment was under Unreserved Category and the appellant is seeking information to harass him .The appellant has a criminal background and is involved in a forgery case and the issue is sub judice. He has requested that his personal information should not be provided to the appellant.
The public authority has submitted that the appellant is a retired employee of their yard and was involved in two criminal cases for forgery. He is misusing the RTI Act against NSRY and its employees. Shri Ajit Kumar was appointed under Unreserved Category and copy of recruitment letter is enclosed with the submissions. A notice was sent to third party by them who responded stating that it is an unwarranted invasion of privacy and perpetuation of biased campaign of maligning his professional image as well as disturbing the personal peace and also seems to be an act of personal vendetta.
DECISION
• “The Commission observes that Shri R. Ajit Kumar has been appointed under unreserved category, hence the plea of getting employment by submitting forged caste certificate does not have any merit and the contention that disclosure sought is in public interest fails”.
• “In Stroud’s Judicial Dictionary, Volume 4 (IV Edition),‘Public Interest’ is defined as: “ a matter of public or general interest does not mean that which is interesting as gratifying curiosity or love of information or amusement but that in which a class of community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected.”
• “The appellant has made mere conjectures and surmises and not able to give any cogent and sound evidence to prove the element of ‘Public Interest.’
• Commission quoted the Hon’ble Supreme Court in its decision dated 13-12-2012 in the case of Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi & Anr:
23. The expression ‘public interest’ has to be understood in its true connotation so as to give complete meaning to the relevant provisions of the Act.
The expression ‘public interest’ must be viewed in its strict sense with all its exceptions so as to justify denial of a statutory exemption in terms of the Act. In its common parlance, the expression ‘public interest’, like ‘public purpose’, is not capable of any precise definition. It does not have a rigid meaning, is elastic and takes its colour from the statute in which it occurs, the concept varying with time and state of society and its needs. [State of Bihar vs. Kameshwar Singh (AIR 1952 SC 252)]. It also means the general welfare of the public that warrants recommendation and protection; something in which the public as a whole has a stake [Black’s Law Dictionary (Eighth Edition)].
24. The satisfaction has to be arrived at by the authorities objectively and the consequences of such disclosure have to be weighed with regard to circumstances of a given case. The decision has to be based on objective satisfaction recorded for ensuring that larger public interest outweighs unwarranted invasion of privacy or other factors stated in the provision.
Certain matters, particularly in relation to appointment, are required to be dealt with great confidentiality. The information may come to knowledge of the authority as a result of disclosure by others who give that information in confidence and with complete faith, integrity and fidelity. Secrecy of such information shall be maintained, thus, bringing it within the ambit of fiduciary capacity. Similarly, there may be cases where the disclosure has no relation- ship to any public activity or interest or it may even cause unwarranted invasion of privacy of the individual. All these protections have to be given their due implementation as they spring from statutory exemptions. It is not a decision simpliciter between private interest and public interest. It is a matter where a constitutional protection is available to a person with regard to the right to privacy. Thus, the public interest has to be construed while keeping in mind the balance factor between right to privacy and right to information with the purpose sought to be achieved and the purpose that would be served in the larger public interest, particularly when both these rights emerge from the constitutional values under the Constitution of India.”
• The Hon’ble High Court of Delhi in its judgement dated 05-02-2014 (Shail Sahni vs. Sanjeev Kumar & Others ) have observed:
“… This Court is also of the view that misuse of the RTI Act has to be appropriately dealt with, otherwise the public would lose faith and confidence in this “Sunshine Act”. A beneficial Statute, when made a tool for mischief and abuse must be checked in accordance with law…”
• Keeping in view above, the Commission held that the information sought by the appellant is personal information of Shri R Ajit Kumar and protected from disclosure U/S 8 (1) (j) of RTI Act as no larger public interest is established.
[Ch. Rama Krishna Rao vs. Naval Ship Yard, Port Blair, (Third Party: Shri R. Ajit Kumar) Decided by the full bench on 05-05-2014. File No. CIC/LS/A/2012/002430/RM.]
Introduction
Trade is often said to be one of key drivers of an economy. The importance of trade can be gauged from the fact that the western world was constantly asking India to open its doors to foreign investment in retail trading. When trade is such a vital constituent of a country’s economy it is essential that we understand the laws governing trade. The sale of goods in India is governed by the Sale of Goods Act, 1930 (“the Act”). While the Transfer of Property Act, 1882 applies to the transfer of immovable property, the Sale of Goods Act applies to the sale of certain movable property, being goods. This Act was earlier a part of the Indian Contract Act, 1872. However, in 1930 it was felt that there is a need for a separate dedicated legislation and hence, a separate Act was carved out. Let us examine some of the key facets of this Act.
Goods
The pivot of the Act is the definition of the term “goods”. If a particular property cannot be termed as goods then the Act does not apply to the same. This definition is also relevant since certain other Acts also refer to this definition, since what constitutes goods is often relevant for several issues.
Goods are defined under the Act to mean every kind of movable property. It includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. However, actionable claims and money are not goods. Thus, the definition is very wide to include all types of movable property other than what is expressly excluded. According to the General Clauses Act, 1897, things attached to or forming part of the land are treated as immovable property. However, the Sale of Goods Act states if they have been agreed to be severed before or under the Contract of sale, then they become goods. Since the definition revolves around movable property it also becomes essential to understand what constitutes movable and what is immovable property. Sale of immovable property is governed by the Transfer of Property Act, 1882 and this Act applies to the sale of movable property.
The following three landmark decisions of the Supreme Court dealing with what is immovable property are very relevant:
(A) T he Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.
(B) Further, the decision of the Supreme Court in the case of Duncan’s Industries Limited vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished the Sirpur’s case and held that whether a machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent ? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertilizer plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. It was held that it could be said that the plant and machinery could have been transferred by delivery of possession on any date prior to the date of conveyance of the title to the land.
(C) In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Court held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.
The Central Board of Excise and Customs has, under the Central Excise Act 1944, after considering several Supreme Court decisions (including those mentioned above), clarified that:
(A) if items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.
(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.
In the context of sales tax, the Supreme Court in the case of Tata Consultancy Services Ltd vs. State of AP (2005) 1 SCC 308, has held that software, even though intangible, is goods.
Shares and stock are expressly included in the definition of goods. The Companies Act also states that shares in a company shall be movable property. However, a debenture does not constitute movable property as held by the Supreme Court in the case of RD Goyal vs. Reliance Industries Ltd, (2003) 1 SCC 81.
Actionable claims are governed by section 130 of the Transfer of Property Act and are hence, outside the purview of this Act.
The goods may be existing or future goods which would come into the seller’s possession. If however, the goods are specific, i.e., are identified when the agreement is made and they perish thereafter, the agreement becomes void. However, they must perish due to no fault of the seller or buyer.
Sale
The next vital cog in the wheel is the definition of “sale”. Section 4 of the Act defines a contract of sale of goods as:
(a) A contract. Thus, all the elements of a valid contract as laid down in the Indian Contract Act, 1872 must be fulfilled.
(b) In which there is a seller, i.e., a person who sells or agrees to sell goods;
(b) H e transfers or agrees to transfer property in goods;
(c) The transfer is to a buyer, i.e., a person who sells or agrees to buy goods; and
(d) The transfer is for a price.
Thus, the pre-requisite of a sale is the transfer of movable property being goods. This view has also been expressed in State of Madras vs. Gannon Dunkerley & Co., (1959) SCR 379 – “sale of goods …. is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.” Halsbury defines a sale as “the transfer by mutual consent of the ownership of a thing from one person to another for a money price.”
The contract may be absolute or conditional. If property in goods is transferred from seller to buyer, then such a contract becomes a sale. However, if property is transferred in future or is conditional, then such a contract is termed as an agreement to sell. Eventually, when the conditions are fulfilled or the time period elapses, an agreement to sell becomes a sale. The principles of a sale have been succinctly summed up by the Apex Court in the case of State of Tamil Nadu vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648 as follows:
“…in order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title to the goods and that such agreement should be supported by money consideration and as a result of the transactions the goods. article or the property must actually pass to the purchaser. It is settled law that the expression “sale” under the Sales Tax Act has to be understood with reference to the definition of “sale of goods” under the Sale of Goods Act. But if the title of the goods passes without any contract between the parties, express or implied, there is no sale. Similarly if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not a sale in the strict sense of the law..”
The most vital part of the definition is that the title of goods must pass from the seller to the buyer.
PRICE
A sale of goods under the Act is always for a price, i.e., for a money consideration. A price is an essential element of a contract of sale of goods. If there is no price there is no contract. This is also an essential ingredient under the Contract Law. Hence, a sale of goods as understood under the Act cannot be for a barter or for any non- monetary consideration. Such a transaction would be an exchange and not a sale. This is a very important fundamental distinction which is relevant even for several fiscal statutes. The Transfer of Property Act defines an exchange on the other hand, to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act, CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC); CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC); CIT vs. B. M. Kharwar 72 ITR 603 (SC). Recently, the Bombay High Court in Bharat Bijlee Ltd. [TS-270-HC-2014(BOM)], distinguished a slump exchange from a slump sale and held that a slump exchange does not entail capital gains tax.
The price may be either fixed by the contract or left to the negotiation of the parties or may be fixed as agreed upon. However, in the absence of the above, the buyer must pay a reasonable price. What is a reasonable price depends upon the facts of each case. In some cases, the price determination is to be decided by the valuation of a third party. If such third party cannot fix the value, then agreement is avoided.
TRANSFER OF PROPERTY IN GOODS
When the property in the goods is transferred from the seller to the buyer is the most important effect of a contract for sale of goods.
Unascertained Goods: If the goods are unascertained, then property passes only when they are ascertained. E.g., the seller agrees to sell 50 kgs. of rice but at that time he has 250 kgs. in his warehouse. No property passes to buyer until the seller identifies and appropriates 50 kgs. of rice towards this agreement. Thus, there must be a clear-cut identification as to which goods out of the generic mass are towards satisfaction of the contract.
Where there is a contract for the sale of unascertained / future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract the property in the goods passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made. Thus, an appropriation must be made by the seller or the buyer and only then would the property in such unascertained goods pass to the buyer. Further, the appropriation of unascertained goods must be unconditional. Till property passes there is no sale.
E.g., in Emperor vs. Kuverji Kavasji, 1941 43 BLR 95, a merchant agreed to sell 20 litres of liquor out of a cask containing 100 litres. It was held that until the 20 litres are separated or bottled, the property does not pass to the buyer.
The Supreme Court in the cases of New India Sugar Mills Ltd vs. CST, 1963 AIR 1207, CST vs. Husenali Adamji & Co., 1959 AIR 887, M/s. Carona Sahu Ltd vs. State, 1966 AIR SC 1153 has held that in case of sale of unascertained goods, no property is transferred to the buyer unless and until the goods are ascertained and there is unconditional appropriation of the goods in a deliverable state.
Ascertained Goods: However, if they are ascertained / specific, then property passes in accordance with the contract, i.e., when the parties want it to pass. In this respect, section 2(2) of the Act is also relevant. It defines the term delivery to mean a “voluntary transfer of possession from one person to another”. Thus, delivery of goods is one of the ways in which possession can be transferred.
Section 30 of the Act provides that a seller need not have actual physical possession of the goods sold. It is enough that he has control over the goods by making over a document of title to the goods. Possession of documents of title enable the holder of document to transfer the goods. Section 30 does not require the seller to be in actual physical possession of goods – Pramatha Nath Talukdar vs. Maharaja P M Tagore, AIR 1966 Cal 405. This view has also been laid down in Halsbury’s Laws of England, 3rd Edition Vol. 34 @ p.84 and in the English case of Nicholson vs. Harper, (1895) 2 Ch. D. 415. Unless a different intention arises from the contract, the following three rules have been laid down under the Act to determine the intention of the parties as to when the property passes to the buyer:
(a) When contract is for sale of specific goods in a deliverable state, property passes to buyer when contract is made, irrespective of whether time of payment or delivery is postponed.
(b) However, when under a contract for specific goods and the seller has to do something to the goods for putting them in a deliverable state, then property passes only when such thing is done and the buyer is given notice of the same. E.g., a 2nd hand car dealer agrees to sell a car but it needs certain repairs before it can run properly. Property passes only once the repairs are done and the buyer is intimated about the same.
(c) When contract is for sale of specific goods in a deliverable state but seller has to weigh, measure, test or do some act for ascertaining the price, the property passes to buyer when such act is done and buyer is given notice of the same. E.g., a seller sells cotton at a price per ton. To ascertain the price, he needs to weigh the cotton. Till such act is done, property does not pass.
It is essential to determine when property passes because if there is any damage or loss to the goods then the same would be borne by the seller in cases where property has not yet passed to the buyer. The Act provides that unless the contract provides otherwise, the goods remain at the seller’s risk till property passes to the buyer. However, where the property has passed risk passes to the buyer even if the delivery has not yet been made. E.g., a seller sells a certain vase to a buyer but both payment and delivery are postponed till the next day. Before delivery can be effected, the vase breaks due to mishandling. The loss is to the buyer’s account since property of specific goods in a deliverable state under an unconditional contract passes immediately even if delivery is postponed. But when delivery is delayed due to the fault of any one party, the risk of loss is to his account.
NEMO DAT QUAD NON HABET
‘No one can give a better title than what he himself has’ is the meaning of the above Latin maxim. Thus, a sale by a person who is not the legal owner of the goods does not give any title to the buyer. The actual owner can recover possession of the goods from the buyer without compensating him. However, if the seller has authority of the owner; he is an authorised mercantile agent (e.g., broker, factor); he is a joint owner, etc., then he can give a good title to the buyer. Whether the buyer can raise a plea of being a bona fide purchaser without notice is a matter which depends upon the facts of each case – Sumitra Debi Jalan vs. Satya Narayan Prahladka, AIR 1965 Cal 355.
CONDITIONS AND WARRANTIES
A contract of sale may come with conditions and warranties as to the quality, fitness, title, etc. of the goods. A condition is a stipulation essential to the main purpose of the contract. If breached, the contract may be repudiated. A warranty on the other hand is collateral to the main purpose and a breach of the same gives rise to a claim for damages but not a right to repudiate the contract. Thus, sale of soft drinks with pesticides is a breach of a condition, i.e., it is fit for human consumption. However, sale of soft drinks in glass bottles instead of plastic bottles, as contracted, is a breach of a warranty. The former entitles the buyer to cancel the contract while under the latter the buyer can sue for damages. It may not be always a cut and dried situation as to whether a stipulation is a condition or a warranty and the determination of the same depends upon the contract as a whole. Even a Share Purchase Agreement (SPA) carries conditions and warranties from the seller as to the shares. Breach of material conditions can lead to cancellation of the SPA.
CAVEAT EMPTOR; QUI IGNORARE NON DEBUIT QUOD JUS ALIENUM EMIT
Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another – buyer beware of what you buy for the seller has no obligation to caution you is the meaning of this maxim. Section16 of the Act lays down that subject to this Act and any other law in force, there is no implied condition or warranty as to the fitness or quality of the goods sold by a seller. This is a statutory recognition of the above maxim. The Supreme Court in Commissioner of Customs (Preventive) vs. M/s. Aafloat Textiles (I) P. Ltd. has explained the maxim as follows:
“….Caveat emptor means “Let the purchaser beware.” It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence.
21. “Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.” (See Wallis vs. Russell (1902) 21 R 585, 615).
22. “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication he represents such defects not to exist.” (See William R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d. Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.
23. Caveat emptor, qui ignorare non debuit quod jus alienum emit. A maxim meaning “Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another. Hob. 99; Broom; Co., Litl. 102 a: 3 Taunt. 439.
24. As the maxim applies, with certain specific restrictions, not only to the quality of, but also to the title to, land which is sold, the purchaser is generally bound to view the land and to enquire after and inspect the title- deeds; at his peril if he does not.
25. Upon a sale of goods the general rule with regard to their nature or quality is caveat emptor, so that in the absence of fraud, the buyer has no remedy against the seller for any defect in the goods not covered by some condition or warranty, expressed or implied. It is beyond all doubt that, by the general rules of law there is no warranty of quality arising from the bare contract of sale of goods, and that where there has been no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in the goods, unless there are circumstances beyond the mere fact of sale from which a warranty may be implied. (Bottomley vs. Bannister, [1932] 1 KB 458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers) 14
26. No one ought in ignorance to buy that which is the right of another. The buyer according to the maxim has to be cautious, as the risk is his and not that of the seller.
27. Whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he made enquiry and took requisite precautions to find out about the genuineness of the SIL* which he was purchasing. If he has not done that consequences have to follow.”
* SIL = Special Import Licence
However, the Law also provides for the following statutory exceptions to this Rule:
(a) Where the buyer makes known to the seller that he requires goods for a particular purpose, then goods must meet such purpose. In Eternit Everest Ltd. vs. Abraham, AIR 2003 Ker 273, it was held that corrugated asbestos sheets are mainly used for roofing of buildings for protecting the building from sun and rain and it is not being used for a variety of purposes. The leakproof of the asbestos sheet is the essential quality of the sheets and only if it is leakproof, it can be said to be fit for the purpose for which it is purchased.
(b) Where goods are bought by description from a seller who deals in goods of that description, then there is an implied condition as to the merchantable quality of the goods. In Agha Mirza Nasarali Khoyee & Co. vs. Gordon Woodroffe & Co., AIR 1937 Mad 40 it was held that goods are treated as being of merchantable quality if they are of such quality that any defects which a buyer of ordinary diligence and experience would have detected by due diligence in the use of all ordinary and usual means (what is due diligence, depending upon the circumstances).
(c) An implied warranty or condition as to quality or fitness for a purpose may be annexed by the usage of trade.
CONCLUSION
This is a very important mercantile Law which is relevant for commercial matters. It is essential for businesses to keep in mind the provisions of this Act while entering into contracts for sale and purchase of goods.
In 1900, Baikuntha Nath Dutta had founded a “thakurbari.” He installed this deity and started worship. By his will dated 30-07-1916 various properties of the testator were dedicated to the above deity. Shebaits were appointed. Clause 5 of the Will dealt with the devolution of Shebaitship.
Many years had passed since the making of this dedication. The main question that was posed before the court was whether the stipulation in the Will and in the Codicil that Shebaitship would vest only in sons of the Shebaits was valid or not.
The issue in this case was in regard to the rule against perpetuity. The rule applied equally to transfer of property inter vivos as it did to transmission of property by succession. In this case those rules regarding transmission of property by succession were relevant. The owner of a property, while bequeathing it, could not postpone the vesting of the absolute legal and beneficial ownership thereof indefinitely. He could not fetter the powers of alienation, indefinitely.
Hence, if A is disposing of his property by Will or by creation of a trust, he cannot hold up its absolute vesting in some other person, for an uncertain period. Neither can he tie this person’s hands regarding alienation for an uncertain time.
If there was any further postponing of absolute legal and beneficial ownership of the property, the bequest or settlement was void as it violated the rule against perpetuity. The law against perpetuity did not favour, as observed earlier, tying up of property without its vesting, for an indefinite period of time.
The Indian Succession Act, 1925, section 114 enacts as follows:
“114. Rule against perpetuity. – No bequest is valid whereby the vesting of the thing bequeathed may be delayed beyond the life-time of one or more persons living at the testator’s death and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the thing bequeathed is to belong.”
Hence, the Clause in the will devolving Shebaitship only on grandson and on death of grand sons to their sons violates the rule against perpetuity.
Triveni Engineering & Industries Ltd vs. The State of Karnataka & Ors AIR 2014 Karnataka 75
The doctrines of per incuriam and sub silentio operate as exceptions to the rule of precedent. Incuriam literally means carelessness. In practice, per incuriam means per ignorantium. Doctrines of per incuriam and sub silentio have been taken recourse to by the courts for relieving from injustice perpetrated by unjust precedents. A decision which is not express and is not founded on reasons or consideration of the issue, could not be deemed to be a law declared having binding effect as is contemplated under Article 141 of the Constitution.
The doctrine of per incuriam has no application in a case to ignore the principle laid down after analysing the relevant provisions of law by a co-ordinate bench. The doctrine of per incuriam is resorted to when decisions are rendered without reference to statutory prescriptions or other binding authorities.
While hearing on SLP against an order passed by the High Court in context of a complaint filed u/s. 138 of the Negotiable Instrument Act, 1881 the court was required to consider the meaning of term ‘months’.
Proviso (a) to section 138 provides that the cheque should be presented within six months from the date on which it is drawn. Word month has been defined u/s. 3(35) of General Clauses Act to mean a month reckoned as per British calendar. Period of six months cannot therefore be calculated on 30 days basis.
As regards computation of six months period section 9 of General Clauses Act has to be pressed in service proviso (a) to section 138 of the Act uses the expression “Six months from the date on which it is drawn.” Once the word “from” is used for the purpose of commencement of time, in view of section 9 of the General Clauses Act, the day on which the cheque is drawn has to be excluded and the last day within which such act needs to be done is to be included. In other words, six months period stipulated in section 138 would expire on day prior to the date in the corresponding month and in case no such day falls, the last day of the immediate previous month. For calculating period of six months for cheque drawn on 31-12-2005 the first day, i.e., 31-12-2005 has to be excluded and the period of six months will be reckoned from the next day i.e. from 01-01-2006; meaning thereby that according to the British calendar, the period of six months will expire at the end of the 30th day of June, 2006.
