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Category: Corporate And Other Laws

Hindu Law – Devolution of property of male dying intestate: Hindu Succession Act, 1956, sections 8 and 10:

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Narinder Singh Rao vs. Air Vice Marshal Mahinder Singh Rao & Ors. (2013) 9 SCC 425

Rao
Gajraj Singh and his wife Sumitra Devi were occupiers of the suit
property. The property had been constructed somewhere in 1935 and as per
the municipal record, it belonged to Rao Gajraj Singh. A document was
executed by Rao Gajraj Singh to the effect that upon death of himself or
his wife, the suit property would be inherited by the survivor. The
said writing was attested by Rao Devender Singh, the son of Rao Gajraj
Singh’s real sister.

Rao Gajraj Singh expired on 29th March, 1981
and thereafter Sumitra Devi, who had eight children, started residing
at Ranchi with the Appellant. Somewhere in 1980s, Sumitra Devi had
constructed some shops in the suit premises and the said shops were
given on rent.

On 1st June, 1989, Sumitra Devi executed a Will
whereby she bequeathed the suit property to one of her sons, namely,
Narinder Singh Rao (the present Appellant and original Defendant No. 1)
and she expired on 6th June, 1989.

After the death of Sumitra
Devi, her four children, one of them being the present Respondent No. 1,
filed a suit for declaration claiming their right in the suit property.
Subsequently, the plaint was amended so as to make it a suit for
partition. According to the case of the said children, the Will was not
genuine and therefore, the said Will could not have been acted upon and
as Sumitra Devi was survived by eight children, the suit property would
be inherited by all the children. Thus, each child had a 1/8th share in
the suit property.

Even after the death of Rao Gajraj Singh, the
suit property continued to remain in his name because nobody had got the
property mutated in the names of his heirs/legal representatives after
his death. Upon the death of Rao Gajraj Singh, no mutation entry was
made in the Municipal Corporation records to show as to who had
inherited the property in question and the said property continued to
remain in the name of late Rao Gajraj Singh.

By virtue of the
Will executed by Sumitra Devi, whereby the property had been bequeathed
to the present Appellant, the Appellant claims complete ownership over
the suit property.

The Hon’ble Court observed that so far as
inheritance of the suit property by the present Appellant in pursuance
of the Will dated 1st June, 1989 executed by Sumitra Devi is concerned,
the Will was validly executed by Sumitra Devi, which had been attested
by two witnesses, one being an advocate and another being a medical
practitioner.

The next question which was to be considered by the
High Court was with regard to the ownership right of the suit property.
The property was in the name of Rao Gajraj Singh and no evidence of
whatsoever type was adduced to the effect that the property originally
belonged to Sumitra Devi. Thus, the findings that the suit property
belonged to Rao Gajraj Singh cannot be disturbed. As Rao Gajraj Singh
died intestate and was the owner of the property at the time of his
death, the suit property should have been inherited by his widow, namely
Sumitra Devi and his eight children in equal share, as per the
provisions of the Hindu Succession Act, 1956. In that view of the
matter, the High Court arrived at the conclusion that the suit property
would be inherited by all the nine heirs, i.e., Sumitra Devi and her
eight children and therefore, Sumitra Devi had inherited only 1/9th of
the right and interest in the suit property whereas 1/9th of the right
and interest in the suit property belonged to each child of Rao Gajraj
Singh.

Though the Will executed by Sumitra Devi has been treated
as a validly executed Will, Sumitra Devi, who had only 1/9th of the
right and interest in the suit property, could not have bequeathed more
than her interest in the suit property. If Sumitra Devi was not a
full-fledged owner of the suit property, she could not have bequeathed
the entire suit property to the present Appellant, Narinder Singh Rao,
who has claimed the entire property by virtue of the Will executed by
Sumitra Devi. At the most Sumitra Devi could have bequeathed her
interest in the property which was to the extent of 1/9th share in the
said property. So the High Court rightly came to the conclusion that the
1/9th share in the suit property belonging to Sumitra Devi would be
inherited by the present Appellant – Narinder Singh Rao by virtue of the
Will executed by her. In addition to his own right and interest in the
suit property to the extent of 1/9th share, which the present Appellant
had inherited from his father. Thus the present Appellant would get
1/9th share in the suit property as he also inherited the share of his
mother Sumitra Devi whereas all other children of Rao Gajraj Singh would
get 1/9th share each in the suit property. Thus, the present Appellant
would be having 2/9th share in the suit property

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Minor – Sale of Minors property – By father (Natural Guardian) – Without prior permission of Court – Voidable at instance of minor. Hindu Minority and Guardianship Act 1956, section. 8 (2):

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Rameshwar Lal & Ors vs. Jai Prakash & Ors AIR 2014 Rajasthan 72.

The present Respondent Nos. 1 and 2 – (original plaintiffs) had filed a suit for cancellation of sale deed and for possession of the suit property against the appellants and respondent No. 4 Bhagwan Lal (their father) with the averments that the plaintiffs had purchased the suit property by a registered sale deed dated 01-02-1974 from Suresh Chandra for a sum of Rs. 26,000. The defendant Nos.1 to 3 were tenants in the said house and a sum of Rs.1,000/- were deposited with Suresh Chandra as earnest money.

The rent deed has been executed by the eldest brother in favour of Suresh Chandra, which has been handed over to the plaintiffs by Suresh Chandra on the date of sale. By notice dated 06-02-1974, Suresh Chandra had informed defendant No.1 (i.e., tenants) by a registered notice that he has sold the house to the plaintiffs and therefore, the rent be paid to them and the deposit of Rs.1,000/- had also been transferred to them. The defendants admit them to be owners of the house and one months rent was sent by money order and therefore, based on attornment, the defendant Nos. 1 to 3 have become plaintiffs tenants. On 23-06-1974, the plaintiff No.1 became major and plaintiff No. 2 was still a minor. The suit property was required by the plaintiffs reasonably and bonafidely. However, the respondent No. 4, their father sold the suit house to the defendant Nos. 1 to 3 for a sum of Rs. 28,000/- on 15-06-1974 and has executed a sale deed and therefore, the defendants do not treat them as landlord which is incorrect. The defendant No. 4 had not obtained permission u/s. 8 of the Hindu Minority and Guardianship Act,1956 (the Act) from the competent court and therefore, the sale deed was illegal and void and the plaintiffs are entitled for getting the same cancelled. The plaintiff was becoming a major eight days after the date of sale and therefore, the defendant No. 4 had no reason to sale the same to the defendant Nos. 1 to 3; the defendant No. 4 had no requirement as guardian of the money; as the defendants are plaintiffs tenants, they are entitled for possession and therefore, the suit be decreed and the sale deed dated 15-06-1974 be cancelled and possession of the suit house alongwith the due rent be decreed.

Once the property is owned by a minor, the provisions of section 8 of the Act are attracted. While s/s. (1) confers power on a natural guardian of a Hindu minor to do all acts which are necessary or reasonable and proper for the benefit of the minor or for the realisation, protection or benefit of the minors estate. The guardian can in no case bind the minor by a personal covenant, however, the said power is subject to the other provisions of section 8.

S/s. (2) provides for such conditions/restrictions, which inter alia mandates that a natural guardian shall not, without the previous permission of the court mortgage, charge, transfer by sale, gift, exchange or otherwise any part of the immovable property of the minor and s/s. (3) provides that any disposal of immovable property by a natural guardian in contravention of s/s. (1) and (2) is voidable at the instance of minor or any person claiming under him. Even the grant of permission by the court is circumscribed by s/s. (4), wherein except in case of necessity or for an evident advantage to the minor such permission cannot be granted.

Though, s/s. (1) permits a natural guardian to do all acts necessary for the benefit of minor and for benefit of minors estate, but the same is subject to other provisions of section and s/s. (2) clearly provides that without previous permission of the court transfer by sale of immovable property shall not be made by the guardian and any sale in contravention of s/s. (2) is voidable at the instance of the minor. The said s/s. (2) does not admit of any exception, whereby for any condition the minors estate could be transferred by the natural guardian without previous permission of the court.

It is for the minor, on attaining majority, not to question the transfer which is in contravention of s/s. (2) of section 8, but if he decides to question the same, the same is voidable at his instance. In the present case, the Plaintiff No.1 has on attaining majority chosen to question the transfer made by the defendant No.4 Bhagwan Lal, his father in favour of the defendant Nos. 1 to 3 (tenants) without seeking previous permission from the Court and therefore, the same was rightly declared void by the trial court.

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Gift – Validity – Delivery of possession is not an essential prerequisite for making of valid gift in case of immovable property: Transfer of property Act. Section 123.

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Renikuntha Rajamma (D) by LRS vs. AIR 2014 SC 2906

A reference was made to a larger bench for an authoritative pronouncement as to the true and correct interpretation of sections 122 and 123 of The Transfer of Property Act, 1882. The Plaintiff-Respondent in this appeal filed for a declaration to the effect that revocation deed dated 5th March, 1986 executed by the Defendant-Appellant purporting to revoke a gift deed earlier executed by her was null and void.

The Plaintiff’s case as set out in the plaint was that the gift deed executed by the Defendant- Appellant was valid in the eyes of law and had been accepted by the Plaintiff when the donee-Defendant had reserved to herself during for life, the right to enjoy the benefits arising from the suit property. The purported revocation of the gift in favour of the Plaintiff-Respondent in terms of the revocation deed was, on that basis, assailed and a declaration about its being invalid and void ab initio prayed for.

The suit was contested by the Defendant-Appellant herein on several grounds including the ground that the gift deed executed in favour of the Plaintiff was vitiated by fraud, misrepresentation and undue influence. The parties led evidence and went through the trial with the Trial Court eventually holding that the deed purporting to revoke the gift in favour of the Plaintiff was null and void. The Trial Court found that the Defendant had failed to prove that the gift deed set up by the Plaintiff was vitiated by fraud or undue influence or that it was a sham or nominal document. The gift, according to Trial Court, had been validly made and accepted by the Plaintiff, hence, irrevocable in nature. It was also held that since the 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 donor had reserved the right to enjoy the property during her life time did not affect the validity of the deed, opined the Trial Court.

The First Appellate Court also held that the gift deed was not a sham document, as alleged by the Defendant and that its purported cancellation/revocation was totally ineffective.

The first Appellate Court also affirmed the finding of the Trial Court that the donee had accepted the gift made in his favour. The appeal filed by the Defendant (Appellant herein) was dismissed.

The High Court declined to interfere with the judgments and orders impugned before it and dismissed the second appeal of the Appellant, holding that the case set up by the Defendant that the gift was vitiated by undue influence or fraud had been thoroughly disproved at the trial.

The Court observed that Chapter VII of the Transfer of Property Act, 1882 deals with gifts generally and, inter alia, provides for the mode of making gifts. Section 122 of the Act defines ‘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. In order to constitute a valid gift, acceptance must, according to this provision, be made during the life time of the donor and while he is still capable of giving the gift. It stipulates that a gift is void if the donee dies before acceptance.

Section 123 regulates mode of making a gift and, inter alia, provides that a gift of immovable property must be effected by a registered instrument signed by or on behalf of the donor and attested by at least two witnesses. In the case of movable property, transfer either by a registered instrument signed as aforesaid or by delivery is valid u/s. 123.

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. Judicial pronouncements as to the true and correct interpretation of section 123 of the T.P. Act have for a fairly long period held that section 123 of the Act supersedes the rule of Hindu Law if it contained any stipulation in making delivery of possession an essential condition for the completion of a valid gift.

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, section 123 makes transfer by a registered instrument mandatory. This is evident from the words “transfer must be effected” used by the Parliament insofar 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 insofar as the transfer of movable property by way of gift is concerned, the same can be effected by a registered instrument or by delivery. 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.

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 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.

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Press Note No. 9 – DIPP File No. 9(8)/2014-IL(IP) dated 20th October, 2014

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Press Note No. 9 – DIPP File No. 9(8)/2014-IL(IP) dated 20th October, 2014

Streamlining the procedures for grant of Industrial Licences

This Press Note contains 3 clauses which modify the existing preocedures as under: –

1. Increasing the validity of the Industrial Licence
This Press Note, in supersession of Press Note No. 5 (2014 Series) dated 2nd July, 2014, provides for 2 extensions of 2 years each in the initial validity of 3 years of the Industrial Licence.

2. Removal of stipulation of annual capacity in the Industrial Licence
Annual capacity for defense items for Industrial Licence has been de-regulated. The Licencee now has to submit half-yearly production returns to the DIPP & Department of Defence Production, Ministry of Defence in the proscribed format.

3. Sale of Defence items to Government entities without approval of Ministry of Defence
Licensee’s are allowed to sell Defence items to Government entities under the control of Ministry of Home Affairs, State Governments, Public Sector Undertakings and other valid Defence Licenced Companies without prior approval of the Department of Defence Production. Sales to others will require prior approval of the Department of Defence Production.

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Are sebi’s answers to Faqs binding on sebi and/or third parties?

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Synopsis
This article touches upon the issue of legal sanctity, enforceability & binding nature of the answers to ‘frequently asked questions’ (FAQs), that are provided by the SEBI. It raises some fundamental questions – whether SEBI has the authority to issue such FAQs, whether these FAQs are binding on SEBI and/or third parties, and can these FAQs override regulations issued by the SEBI?

These challenging questions have been debated in the light of a recent SEBI order where the SEBI-issued FAQS were relied upon & also considered valid in deciding the questions of law. The article, after comprehensive analysis, demonstrates a view that is inconsistent with the view held in the recent SEBI order.

Basic issue
How far are answers by SEBI to Frequently Asked Questions (‘FAQs’) on SEBI Regulations, etc. binding? Can they even be relied on by SEBI? More so, when substantive legal issues are to be decided which may result in grant/rejection of relief to parties or even levy of penalty for violation of Regulations. SEBI has recently passed an Order (dated 30th October, 2014 in matter of Mr. A. B. Gupta) where it relies on the FAQs. Further, SEBI asserts that FAQs are valid and can be relied on by SEBI for answering questions of law.

What are FAQ s?
As is known, SEBI (like many other regulators) issues Frequently Asked Questions (‘FAQs’) from time-to-time (the correct term should be AFAQ – Answers to Frequently Asked Questions, but that is perhaps a semantic issue).

Thus, they are generally answers to specific questions that SEBI anticipates or has received from timeto- time. The answers are usually not reasoned in detail though in some cases, where the Regulation itself answers the question, due reference is given. Often they are answers about how the Regulations would be viewed in practice and also about matters of procedure. Such details may not always be possible to be inserted in Regulations.

However, several questions arise. If the Regulations say one thing and the FAQs something different, or even the opposite, will the FAQs override the Regulations? If the Regulations do not cover certain matters, can the FAQs fill in the gaps and provide for such matters, even if by this it would mean extending or amending the Regulations? In particular, can the FAQs be binding in regard to the Regulations, when these FAQs give clarifications on substantial matters and/or matters which can result in penalty/prosecution or other adverse directions? Indeed, in the other extreme, can SEBI even rely on such FAQs in any manner? ?

How are FAQ s issued?
There does not seem to be any prescribed procedure by which the FAQs are issued. Indeed, as we will see later, there is no legal power or basis to issue FAQs either which gives them any legal sanctity. Generally, they seem to be issued by way of display on its website. It is not clear under whose authority, if any, these are issued – i.e., whether it is issued by the authority of the Board with contents duly confirmed by it, or by the Chairman of SEBI or by a senior official. Further, the FAQs can keep changing from time-to-time and while it appears that at least in a couple of cases, they have highlighted the change and when it was made, it is possible that the FAQs could be changed without any notification. The FAQs can be added to, deleted from, and amended generally from time to time without any notice or even a mention.

SEBI’s order
In this background, let us consider what the recent SEBI Order said.

SEBI, as stated earlier, recently passed an order in which it relied on its own FAQs for arriving at answers to substantive issues of law under the Regulations. While doing so, it made some observations. The case concerns an allegedly hostile takeover and is on some objections made by certain persons against open offer made. The core issues in that case are interesting. However, this post focuses only on one matter and that is on the manner in which SEBI has relied on FAQs (Frequently Asked Questions) on the SEBI (Substantial Acquisition of Shares and Takeovers), Regulations 2011 (the Regulations), released by it.

SEBI relied on the FAQs to arrive at the conclusion on two issues raised. The issues were significant. Depending on which way SEBI had decided it, certain parties could have gained or lost substantial rights. Hence, the Order interpreted the Regulations. Whether the interpretation was correct or not could be a matter of debate. What is worth reviewing here are observations SEBI made while relying on the FAQs.

At first, SEBI relied on the FAQs while answering the issues raised. The complainant objected to SEBI’s reliance on FAQs saying they do not have the force of Regulations. SEBI rejected this argument and said:-

“9. The complainant’s Advocates acknowledged the existence of SEBI’s FAQs as reproduced on pages 15-16 of this Order but argued that FAQs does not have the force of regulations and therefore should not be considered at all. The question before me is whether SEBI can interpret its own regulations, which it has done in the form of FAQs. I am of the opinion that it can and it should, otherwise doubts raised about the effect of regulations would bring the entire business to a halt. I am of the opinion that such interpretations are valid so long as these are transparent and applied consistently without discrimination. No case has been made out that SEBI interpreted regulations 3(1), 3(2) and 4 otherwise in any other matter, or that SEBI’s interpretation was not known publicly.”

Several questions arise.
– Do FAQs have the force of Regulations?
– Is SEBI’s interpretation expressed through FAQs binding on third parties?
– Does SEBI’s interpretation bind SEBI itself?

Assuming such interpretations are valid, what are pre-requisites for reliance on such FAQs – whether it is enough that they are (i) transparent/published and known publicly (ii) applied consistently without discrimination?

SEBI seems to have taken a view that the FAQs are binding if they are transparent and applied consistently. On one of the issues raised, it even gave a few examples of similar practices adopted in the past where it had applied in practice the same interpretation that it was applying in the present case. However, does practice make or amend law in such circumstances?

Nature of FAQ s as per the FAQ s
Firstly, let us examine the FAQs themselves. This is what the introductory paragraphs to the FAQs to the SEBI (SAST) Regulations 2011, which are the subject matter of this decision, say:-

“These FAQs offer only a simplistic explanation/ clarification of terms/concepts related to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [“SAST Regulations, 2011”]. Any such explanation/clarification that is provided herein should not be regarded as an interpretation of law nor be treated as a binding opinion/ guidance from the Securities and Exchange Board of India [“SEBI”]. For full particulars of laws governing the substantial acquisition of shares and takeovers, please refer to actual text of the Acts/ Regulations/Circulars appearing under the Legal Framework Section on the SEBI website.” (emphasis supplied).

Thus, the FAQs themselves clearly say that are not to be regarded as interpretation of law. Further, they are not binding on SEBI or third parties nor do they have the status of any guidance from SEBI. For knowing the law, it is the actual text of the Regulations, etc. that has to be read.

Nature of Regulations and manner of their issue

The SEBI Act, 1992 empowers SEBI to issue Regulations for certain specified purposes. The Regulations are required to be made – and amended – in the prescribed manner u/s. 31 of the SEBI Act, 1992. They have to be released and notified as prescribed under the Act. They have to be then laid before the House of Parliament for prescribed period. Any changes agreed by the Houses have to be duly incorporated.

Further, violations of the Regulations have significant consequences under the Act and the Regulations them- selves. These include penalties, prosecution, directions, etc. Thus, there is a clear basis of Regulations as a law, clear prescribed procedure of how they are to be made and notified. Finally, it is this clear basis which gives them a force of law such that violations of Regulations have adverse consequences in law.

Whether There is any Power To issue FAQs?
SEBI does not have power under the Act to issue such “clarifications” to the Regulations where such clarifications would have binding force of Regulations, particularly when they contradict the Regulations or result in extended application of the Regulations. Indeed, there is no concept of FAQs under the Act.

There have been several decisions of the Courts and even the Securities Appellate Tribunal that uphold Regulations over circulars. And that in case of any contradictions between the Regulations and circulars, it will be the Regulations that would apply.

Undoubtedly, the FAQs would help a party, particularly a lay person, in throwing some light at what the Regulations are trying to say. They may even be a sort of guidance of how SEBI views certain issues, though it seems from the introduction to the FAQs themselves that they may not be binding even on SEBI.

In case the Regulations are clear, therefore, it is submitted then FAQs have no relevance. Indeed, it cannot be even said that in case of ambiguity, the FAQs could be looked into and the views in the FAQs could apply.

It appears that SEBI has erred in stating that the FAQs have any binding legal status. SEBI, it is submitted, cannot take any adverse action in terms of penalties/prosecution/directions by relying on FAQs that contradict the Regulations. The Regulations are self-contained in this sense; the FAQs cannot add or modify the Regulations.

In conclusion, it is reiterated that the issue here is not whether the interpretation given in the FAQs is correct or not, it is on how much, if at all, can they be considered binding on SEBI and/or parties. The better view seems to be that FAQs cannot be relied on at all while deciding on substantive legal issues. They are neither binding on SEBI nor they are binding on any third party.

REITs: Providing Liquidity to Illiquid Assets!

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Synopsis
When a cheque issued to a creditor is dishonoured, where does the creditor file a suit against the debtor – in the Court which has jurisdiction over the creditor or in a Court which has jurisdiction over the debtor? This one issue has been oscillating back and forth with several Supreme Court decisions giving their view one way or the other. There now seems to be some finality on the matter …. … … … or is it?

Introduction
According to a 2008 Report of the Law Commission of India, over 38 lakh cheque bouncing cases were pending at the Magistrate Level as of October 2008. Over six years have passed since that Report and this figure is expected to have leapfrogged! The Magistrate is the first Court in the hierarchy of criminal justice in India and if this entry level forum itself is clogged, one can very well understand why justice in India often takes so long.

Section138 of the Negotiable Instruments Act, 1881 (“the Act”) is one of the few provisions which is equally well known both by lawmen and laymen. The section imposes a criminal liability in case of a dishonoured or bounced cheque. One of the most litigious issues in relation to a bounced cheque has been which Court has jurisdiction over a case? Say a debtor which has its registered office in Ranchi, Jharkhand issued a cheque drawn on a Ranchi bank to a creditor based in Mumbai and the cheque bounces, should the suit be filed in Mumbai or in Ranchi? This answer could make a big difference since the ease of filing a case in one’s own city or State is manifold as compared to a remote location. This issue has recently seen several Supreme Court and High Court decisions leading to a see-saw, one way and the other. A slew of decisions have come out strongly in favour of the accused unlike the earlier decisions which were procomplainant. Let us look at the history and the current position on this very important aspect which has made several creditors and banks jittery.

The Law: Section 138 of the Negotiable Instruments Act
Before we plunge into the issue on hand, let us pause for a moment and examine the impugned section. Section138 of the Act provides that if any cheque is drawn by a person to another person, and if the cheque is dishonoured because of insufficient funds in the drawer’s bank accounts, then such person shall be deemed to have committed an offence. The penalty for this offence is imprisonment for a term which may be extended to two years and/or with a fine which may extend to twice the amount of the cheque. In order to invoke the provisions of section138, the following three steps are necessary:

(a) the cheque must be presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier;

(b) once the payee is informed by the bank about the dishonour of the cheque, then he must, within 30 days of such information, make a demand for the payment of the said account of money by giving a notice in writing, to the drawer of the cheque; and

(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee of the cheque, within 15 days of the receipt of the said notice.

A fourth step is specified u/s.142 of the Act which provides that a complaint must be made to the Court within 30 days from the date from which the cause of action arises (i.e., the notice period).

Where to file the case – Bhaskaran sets the stage!
A two-member bench of the Supreme Court in K. Bhaskaran vs. Sankaran Vaidhyan Balan (1999) 7 SCC 510 laid down five important components for filing a compliant u/s. 138 of the Act:

(1) D rawing of the cheque,
(2) Presentation of the cheque to the bank,
(3) Returning the cheque unpaid by the drawee bank,
(4) Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount, and
(5) Failure of the drawer to make payment within 15 days of the receipt of the notice.

The Apex Court finally concluded that since an offence could pertain to any of the above five acts there could be five offences which could be committed at five different locations and hence, the suit could be filed in any Court having jurisdiction over these locations. Thus, the complainant can select any of the five Courts for filing his complaint within whose jurisdiction the five acts were done.

To continue our example above, the creditor could file his case against the Ranchi Company before the Magistrate Court in Mumbai (or Ranchi) and save himself a lot of trouble and effort, not to mention money! Suppose further, that the creditor has operations in all major cities and also bank accounts in all these cities. He deposits the cheque in his Ahmedabad branch which bounces. He issues the Notice from his Hyderabad office. As per Bhaskaran’s decision, not only can he file the suit in Mumbai or Ranchi but even from Ahmedabad and Hyderabad. Thus, the payee has full freedom to decide where to sue the drawer from. At times, this can also be used as a tool for harassment and as a pressure tactic.

Subsequent Cases Queer the Pitch
There have been several subsequent decisions but two noteworthy cases stand out. In Harman Electronics P. Ltd. vs. National Panasonic India (2009) 1 SCC 720, another two-member Bench held that the correct Court would be the one where the Notice for the bounced cheque was received and not where the Notice was sent. It also observed that section138 is being rampantly misused for territorial jurisdiction.

A subsequent three-member Bench in Shri Ishar Alloy Steels vs. Jayaswals Neco Ltd. (2001) 3 SCC 609 clarified that to be able to file a case u/s. 138 the cheque must be presented within six months on the bank of the drawer and not to the bank of the payer. The place where the complainant presented the cheque would not be relevant. Thus, the decisions of Harman and Ishar Alloy suggest that the Court of the accused should be the place where the suit should be filed. To continue our example above, the creditor could file his case against the Ranchi Company before the Jharkhand Courts.

Interestingly in Nishant Aggarwal vs. Kailash Kumar Sharma (2013) 10 SCC 72 the Supreme Court held that the ratio laid down by these two decisions in the case of Harman and Ishar Alloy did not dilute the principle stated in Bhaskaran’s case. This view was followed by the Supreme

Court in FIL Industries Ltd. vs. Imtiyaz Ahmad Bhat (2014) 2 SCC 266 and in Escorts Ltd. vs. Rama Mukherjee (2014) 2 SCC 255 all of which followed Bhaskaran.

Dashrath Rathod’s case – Cat amongst the Pigeons?
A recent decision of the three-member Supreme Court decision in the case of Dashrath Rupsingh Rathod vs. State of Maharashtra, Cr. A. No. 2287 /2009 Order dated 1st August, 2014 has led to debtors across the Country celebrating and creditors panicking. The decision of the Apex Court was as follows:

(a) T he offence contemplated u/s. 138 stands committed on the dishonour of the cheque, and accordingly the Magistrate at the place where this occurs is ordinarily where the Complaint must be filed, entertained and tried. The place, situs or venue of judicial inquiry and trial of the offence must logically be restricted to where the drawee bank, is located. The law should not be warped for commercial exigencies.

(b) T he place of the issuance or delivery of the statutory notice or where the Complainant chooses to present the cheque for encashment by his bank are not relevant for purposes of territorial jurisdiction of the complaints.

(c)    It is also now manifest that traders and businessmen have become reckless and incautious in extending credit where they would heretofore have been ex- tremely hesitant, solely because of the availability of redress by way of criminal proceedings.

(d)    Every magistrate is inundated with prosecutions u/s. 138 NI act, so much so that the burden is becoming unbearable and detrimental to the disposal of other equally pressing litigation.

(e)    Courts are not required to twist the law to give relief to incautious or impetuous persons and hence, the territorial jurisdiction is restricted to the Court within whose local jurisdiction the offence was committed, which in the present context is where the cheque is dishonoured by the bank on which it is drawn.

(f)    Bhaskaran’s case permitting prosecution at any one of the five places has resulted in hardship and inconvenience to the accused. Thus, it overruled Bhaskaran’s case and all subsequent decisions which followed it. Consequently, it endorsed the views expressed in the cases of harman and Ishar alloy.

(g)    Courts must avoid an interpretation which can be used as an instrument of oppression by the complainant.

The Supreme Court also observed as follows in respect to the problem this order would create for Creditors:

(a)    It is always open to the creditor to insist that the cheques in question be made payable at a place of the creditor’s convenience.

(b)    the relief introduced by section 138 of the act is in ad- dition to the contemplations in the Indian Penal Code. It is still open to such a payee recipient of a dishon- oured cheque to lodge a First Information report (FLR) with the Police or file a Complaint directly before the concerned magistrate. If the payee succeeds in establishing that the inducement for accepting a cheque which subsequently bounced had occurred where he resides or ordinarily transacts business, he will not have to suffer the travails of journeying to the place where the cheque has been dishonoured.

Coming back to our example, the case must now deffnitely be filed before the Courts in Ranchi. Thus, it is the creditor who now would have to travel to ranchi every time  there  is  a  hearing  and  appoint  local  lawyers. this substantially pushes up the cost of litigation.

Decision Retrospective or Prospective?
Is  this  decision  retrospective  or  prospective?  the  Supreme Court in Dashrath’s case held that this decision applied retrospectively and not just to complaints filed after the date of the Order!

The Court however held that this decision would not apply in those pending cases where the accused has been summoned to give evidence u/s. 145(2) of the act. Section 145(2) requires that the complainant has given evidence under an Affidavit and he has been summoned and examined.

All other cases where evidence recording has not commenced would be bound by this order and shall be returned to the proper jurisdictional Court in accordance with the Order laid down by the Court. If they are refiled within 30 days of their return then they shall be deemed to have been filed in time else they would be treated as being filed late. This decision would cause a series of transfer of cases in Courts across India.

Section 145(2) – a gaTeway? Considering the gateway given u/s.145(2), a series of cases have come up before the Courts as to whether they are exempt from the decision of Dashrath’s case. Some of the important principles laid down by the Bombay high Court in this respect are as follows:

(a)    Peter David Pinto vs. Dinesh Ranawat, Cr. WP No. 4421 /2013 dated 9th September 2014 – Mere filing of an affidavit cannot take the case out of the princi- ples laid down by the Supreme Court. Section 145(2) would apply only when the complainant has been ex- amined/cross-examined.

(b)    Suresh K. K. vs. Mansingaram, Cr. WP No. 923/2013 dated 9th September, 2014 and Sanjay Ramchandra Shrikande, Cr. WP No. 3619/2013 dated 19th Septem- ber, 2014 – even in a case which has travelled beyond section 145(2), the gateway provided by Dashrath’s case would not be available where the challenge of territorial jurisdiction has been given before the Supreme Court Order. Thus, the Supreme Court’s gateway is only applicable to cases where an objection to jurisdiction has been raised on the basis of the judgment. the Bombay high Court held that the Supreme Court order was retrospective in nature. Thus, Courts are loath to allow the gateway very easily.

Back to square one?
Can the decision in Dashrath’s case be distinguished in those cases where the cheque has been issued at par? thus, can it be said that for all cheques which are pay- able at par, the place where the cheques are deposited would  have  jurisdiction?  this  was  the  issue  before  the Bombay high Court in the case of Ramanbhai Mathurbhai Patel vs. State of Maharashtra, Cr. WP No. 2362/2014 dated 25th August, 2014. the Bombay high Court was faced with a case where “at par cheques” drawn on an ahmedabad      Branch      were      dishonoured.      They were    deposited    at    a    branch    in    mumbai.       The Court  held   that   by   issuing   cheques   payable   at all  branches,  the  drawer  of  the   cheques   had   given an option to the banker of payee to get the cheques cleared from the nearest available branch of bank of the drawer. It, therefore, held that the cheques were dishonoured within the territorial jurisdiction of the Court were they  bounced.  the  Bombay  high  Court  took  this  view based on its interpretation of Dashrath’s case.

It may be noted that the delhi high Court in similar facts in GVPR Engineers Ltd. vs. A. K. Tiwari, Cr. MC 3689/2009 dated 31st January, 2011 has held that the mere fact that a cheque is payable does not confer territorial jurisdiction on the place where the cheque is dishonoured. this decision was not considered by the Bombay high Court.

Stay
The Supreme Court vide its order dated 16th September, 2014 in SLP (Crl.) No. 7251/2014 has granted an interim stay to the Bombay High Court’s Order in Raman-bhai Mathurbhai Patel vs. State of Maharashtra. A final decision of the Supreme Court on this issue of cheques payable at par is expected soon.

Conclusion
One hopes that a judicial see-saw of this type where the complainants are in the dark over where to file suits is resolved soon. A reading of Dashrath’s decision shows that the question of cheques “payable at par” was not an issue before the apex Court. Since a majority of cheques are payable at par, based on this Bombay high Court decision, the suit could be filed at the place where they were deposited. the view endorsed by the Bombay high Court merits consideration considering centralised processing and clearing systems/electronic fund transfers. In today’s day and age the cheque does not physically travel to the drawer’s branch. In fact, even within a bank after centralised processing, it is the centralised unit which clears all cheques without physically receiving a cheque. One would have to wait and watch how the Supreme Court deals with these interesting arguments while finally deciding the issue!

Family Settlement – Registration – Document not compulsorily registrable –Registration Act, section 17:

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Vikaram Singh & Anr. vs. Ajit Indersingh; AIR 2014 Del 173

The learned Single Judge held that Memorandum of Family Settlement not being a registered document was inadmissible in evidence and also held that family arrangements are governed by special equities and principles applicable to dealings between strangers do not apply to dealings within the family.

On appeal, the division Bench held that the tenth recital records that a family settlement was being reduced into writing because it had already been acted upon by the parties. Thus, it is clear that the Deed of Family Settlement is a Memorandum i.e., a written record of what the parties had orally agreed upon at an earlier point of time and had acted thereupon. The second thing which emerges is that parties have acknowledged antecedent title. Thus, the court agreed with the view taken by the learned Single Judge in view of the law declared in the decisions. AIR 1958 SC 706 Nanibai & Ors. vs. Geeta Bai Kom Rama Gunge, AIR 1976 SC 807 Kale & Ors. vs. Deputy Director of Consolidation & Ors., and AIR 2007 SC 18 Hansa Industries vs. Kidar Sons Industries Ltd. The Deed of Family Settlement does not require any registration u/s. 17 and is a document admissible in evidence.

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Coparcenary property – Right of daughters – Section 6 as amended by Amendment Act (2005) is available to all daughters living on date of coming into force of 2005 Amendment Act : Hindu Succession Act, 1956:

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Badrinarayan Shankar Bhandari & Ors vs. Omprakash Shankar Bhandari AIR 2014 Bombay 151 (FB).

The Full Bench of the Bombay High Court held that the provisions of amended section 6 are retroactive in operation, and daughters living on 9th September, 2005 get rights in coparcenary property with effect from 9th September, 2005.

The Amendment Act applies to daughters born any time provided the daughters born prior to 9th September, 2005 are alive on the date of the coming into force of the Amendment Act i.e., on 9th September,2005. There is no dispute between the parties that the Amendment Act applies to daughters born on or after 9th September, 2005.

A bare perusal of sub-section (1) of section 6 would, thus, clearly show that the legislative intent in enacting clause (a) is prospective i.e. daughter born on or after 9th September, 2005 will become a coparcenary by birth, but the legislative intent in enacting clauses (b) and (c) is retroactive, because rights in the coparcenary property are conferred by clause (b) on the daughter who was already born before the amendment, and who is alive on the date of Amendment coming into force. Hence, if a daughter of a coparcener had died before 9th September, 2005, since she would not have acquired any rights in the coparcenary property, her heirs would have no right in the coparcenary property. Since section 6(1) expressly confers right on daughter only on and with effect from the date of coming into force of the Amendment Act, it is not possible to take that view of the heirs of a deceased daughter would get such a right.

On examination of amendment section 6 of the principal act and bearing in mind the words ‘on and from commencement of the Hindu Succession Act, 2005 found in section 6’, it must follow that the rights under the amended section 6 can be exercised by a daughter of a coparcener only after the commencement of the Amendment Act, 2005. Therefore, it is imperative that the daughter who seeks to exercise such a right must herself be alive at the time when the Amendment Act, 2005 was brought into force. It would not matter whether the daughter concerned is born before 1956 or after 1956. This is for the simple reason that the Hindu Succession Act, 1956, when it came into force applied to all Hindus in the country irrespective of their date of birth. The date of birth was not a criterion for application of the Principal Act. The only requirement is that when the Act is being sought to be applied, the person concerned must be a existence/ living. The Parliament has specifically used the word “on and from the commencement of Hindu Succession(Amendment) Act, 2005″ so as to ensure that rights which are already settled are not disturbed by virtue of a person claiming as heir to a daughter who had passed away before the Amendment Act came into force.

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Citizenship by Registration – Eligibility Criteria not fulfilled:Citizenship Act, 1955 section 5(1)(a):

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Shah Mohammed Anwar Ali & Ors vs. The State of Assam & Ors. AIR 2014 Gauhati 156

The appellant Nos. 1 and 2 filed a writ petition, praying for a direction to the respondents to consider their applications filed u/s. 5(1)(a) of the Citizenship Act, 1955 and to pass appropriate orders thereon, in accordance with law, contending inter alia that both the petitioners were born in Gauhati and the petitioner no. 1’s father was also initially a citizen of India born in undivided India. It has further been contended that after partition, the father of the petitioner no. 1 permanently settled in Shylet district of the then East Pakistan (now Bangladesh) and due to his old age ailments, the petitioners along with their first child Shah Mohammad Aminul Islam, who is the appellant no. 3 went to Bangladesh in the month of September, 1991 and stayed in Bangladesh up to the month of March, 1992, during which period the second child, namely, Jakia (appellant no. 4) was born in Bangladesh on 30-12-1991. The further contention of the writ petitioners was that they again went to Bangladesh in the month of November, 1996 to attend to the ailing father of the appellant no. 1 with the intention to return to India as early as possible, but unfortunately as the father of the petitioner no. 1 fell seriously ill, for which they had to stay back in Bangladesh.Thereafter though they wanted to return to India, they could not do so and under compelling circumstances they had to obtain the passports from the Government of Bangladesh and entered India on 10-05-1997 as Bangladeshi nationals. It has also been pleaded that after the expiry of the initial period of visa, they filed an application for extension from time to time and accordingly the visa was extended and though their application for further extension of visa dated 21-03-1998 was under active consideration of the Government, they were arrested along with their minor children on the ground that they overstayed in India beyond the period for which visa was granted.

The court observed that sub-section (2) of section 9 of 1955 Act, empowers the Central Govt. to determine the question as to whether, when or how any citizen of India has acquired the citizenship of another country, if such question arises for consideration. It is, therefore, the Central Government and no other authority, who can determine such question. The writ court would also, ordinarily, not enter into such determination unless of course the determination made by the Central Government is put to challenge by the aggrieved party.

In the instant case, the applicants never at any point of time, prior to filing of the writ petition, claimed that they had under compulsion and not voluntarily acquired the citizenship of Bangladesh. On the other hand, they had filed the application u/s. 5(1)(a) of 1955 Act seeking registration of their names as Indian citizen, upon accepting that they had voluntarily acquired the citizenship of Bangladesh.

Since the question as to whether, when or how the applicants acquired citizenship of Bangladesh, did not arise at all, there was no question of determination of such question by the Central Government, before passing an order of deportation.

The appellants having approached the writ Court for a direction to the respondent authorities to consider their applications filed u/s. 5(1)(a) of the 1955 Act, they must demonstrate that they have fulfilled the requirement of the said provisions of law for getting their names registered, which they had failed to do. The writ Court rightly refused to issue directions, which if issued, would be a futile writ, when the appellants on their own admission have accepted that they have not fulfilled the requirement of section 5(1)(a) of the said Act.

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Bombay Stamp Act, 1958 – Delay in filing application before Chief Controlling Revenue Authority – Specific exclusion of Limitation Act – Executive cannot condone delay taking recourse of limitation Act: Limitation Act section 5, 29:

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Jayminbhai Navinbhai Doshi & Ors vs. State of Gujarat & Ors AIR 2014 Gujarat 220

The petitioners challenged the orders passed by the authority u/s. 53 of the Bombay Stamp Act, 1958, by which, the said authority, viz., the Chief Controlling Revenue Authority refused to condone the delay in filing the proceedings on the ground that those were not filed within 90 days from the date of order passed by the competent authority because of lack of power with such authority to condone the delay.

The Bombay Stamp Act is a self contained code dealing with all relevant matters exhaustively therein and its provisions show an intention to depart from the common rule, qui facit per lalium facit per se. In the Bombay Stamp Act, 1958, there is no provision incorporated by which the provision of the Limitation Act is extended to the proceedings under the said statute. The provision of the Limitation Act applies only to courts and courts alone, and it does not even apply to any Tribunal or any other authority unless by virtue of the statute creating such Tribunal or the Authority, the provisions of the Limitation Act have been specifically made applicable.

Thus, in the instant case, the authority u/s. 53 of the Act not being a Court could not take the assistance of the provisions contained in section 29(2) of the Limitation Act. Section 54 of the Bombay Stamp Act however, unlike section 53, specifically gives power to the Chief controlling Revenue Authority to condone delay in preferring an application beyond the period of limitation fixed therein, namely, 60 days, but that power of condonation by the Chief Controlling Revenue Authority is also limited to only to a further period not exceeding 30 days.

Thus, if the Chief Controlling Authority has no power of condonation, it necessarily follows that the High Court in exercise of power under Article 226 of the Constitution against the order of the Chief Controlling Revenue Authority cannot condone the delay.

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A. P. (DIR Series) Circular No. 36 dated 16th October, 2014

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Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999

This circular states that powers of compounding have been further delegated to Regional Offices with immediate effect as under: –


Since three divisions of Foreign Investment Division (FID) viz. Liaison/Branch/Project office (LO/BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division has been transferred to FED, CO Cell, Reserve Bank of India, 6, Sansad Marg, New Delhi – 110001 with effect from 15th July, 2014, the officers attached to the FED, CO Cell, New Delhi office are now authorised to compound the contraventions as under: –

The powers, as mentioned above, to compound contraventions have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the above contraventions for amountof contravention below Rupees one hundred lakh (Rs.1,00,00,000/-). The contraventions of Rupees one hundred lakh (Rs.1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA, not covered above, will continue to be compounded at Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, 5th floor, Amar Building, Sir P. M. Road, Fort, Mumbai 400001.

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A. P. (DIR Series) Circular No. 35 dated 9th October, 2014

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Memorandum of Instructions for Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses

This circular has expanded the list of permitted transactions with respect to Vostro Accounts from 13 to 14. Accordingly, remittances to the Prime Minister’s National Relief Fund through the Exchange Houses is now permitted if the remittances are directly credited to the Fund by the banks and the banks maintain full details of the remitters. The revised list is as follows: –

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A. P. (DIR Series) Circular No. 34 dated 30th September, 2014

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Risk Management and Inter Bank Dealings : Hedging under Past Performance Route

Presently, resident importers can book contracts up to 50% of their eligible limit i.e., the average of the previous three financial years’ import turnover or the previous year’s actual import turnover, whichever is higher.

This circular has brought importers and exportors on par by pemitting resident importers to book forward contracts, under the past performance route, up to 100% of their eligible limit. Importers who have already booked contracts up to 50% of their eligible limit can book the forward contracts for difference arising as a result of the enhanced limits.

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SEBI corporate governance provisions further amended

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Background
SEBI had notified in April 2014 a fully revised Clause 49 (“the Clause”). This was immediately after the coming into force of corresponding provisions in the Companies Act, 2013, from 1st April, 2014. However, this new Clause 49 was to come into force from 1st October 2014. SEBI had issued earlier a Concept Paper to discuss proposed amendments consequent to enactment of the Companies Act, 2013, and was awaiting the provisions of that Act to come into effect. After having amended Clause 49, it had sought feedback from top 500 listed companies on issues they faced in implementing it. It had also otherwise generally sought suggestions. Based on such feedback, it made, on 15th September 2014, certain amendments to the revised Clause 49. The amendments are well in time considering that all, except one, of the provisions come into effect from 1st October, 2014. The revised Clause 49 was already discussed in an earlier article in this column. This article discusses the important amendments now made.

Applicability
Clause 49 applies to companies whose equity shares are listed on a recognised stock exchange. However, for the time being, the Clause shall not apply to following companies:-

1) Companies whose equity share capital is less than Rs. 10 crore and whose net worth is less than Rs. 25 crore. This position is with reference to the end of the previous financial year. If any of the limits are subsequently crossed, then the Company shall comply with the provisions within six months.

2) Companies whose equity shares are listed exclusively on SME and SME-ITP Platforms.

Woman Director
It was earlier required that the Board of Directors should have at least one woman director. This requirement, like other requirements, was to come into force from 1st October, 2014. It appears that SEBI has taken into account ground realities considering that it would be quite difficult for many companies to appoint a woman director by 1st October, 2014. Hence, the requirement is now amended to come into force from 1st April, 2015.

Note that no further qualifications are required for such woman director. She can be part of the Promoter Group. She can be an executive director. In particular, she need not be an Independent Director.

Independent Director – condition regarding pecuniary relationship
The “independence” of a director is judged, inter alia, with the fact whether he has or had in the past, pecuniary relationship with the Company or its holding or subsidiary companies or their Promoters or directors. Pecuniary relationship is commonly understood to be having monetary/ financial relationship.

The existing Clause provided that a person who had a pecuniary relationship in the current or two preceding financial years would not be an Independent Director. This obviously caused concern if a person had a negligible relationship which could not possibly affect his independence. Hence, now it is provided that there needs to be a material pecuniary relationship during the specified period with the specified person for a director to be said to have lost his independence.

What would constitute material has not been defined. Indeed, what constitutes a relationship is also not defined.

It also does not matter whether the relationship is or was at arm’s length and this is fair enough. A material pecuniary relationship does cast a shadow on independence.

Tenure of an Independent Director
There was a mismatch between the tenure specified under the Act and under the Clause. In particular, there was mismatch over whether the future tenure of an Independent Director could be reduced by the tenure he had already served in the past. The mismatch would have automatically resulted in a lower tenure for listed companies since in case of two provisions applicable, the stricter would have applied.

SEBI has amended the Clause to align its requirements to the Act. It has simply stated that the maximum tenure will be as per the Act and clarifications/circulars issued thereunder from time to time.

Disclosure of Independent Director’s terms of appointment
The existing Clause requires the Company to issue a formal letter of appointment to the Independent Director in the manner required under the Act. Further, this letter alongwith the profile of the Independent Director should be disclosed on the website of the Company and the stock exchanges.

The Clause has been amended in two aspects. Instead of the whole letter of appointment and the profile, only the terms and conditions of the appointment need to be disclosed. Further, such disclosure shall be only on the website of the Company.

The profile of the Independent Director does not have to be disclosed. Further, the requirement of formal letter of appointment does not apply to non-executive directors.

Training of Independent Directors
The Clause required that the Company should provide training to the Independent Directors to familiarise them with regard to the Company, their role, rights, responsibilities and certain other matters. The details of such training was required to be disclosed in the Annual report. Now, in a slight tweak to the requirement, it is required that the Company shall familiarise the Independent Directors for the same matters. Further, perhaps to save on printed pages, the information of training is now required to be given only in the website of the Company. The annual report will now give only the link to such information on the website. It is possible that the word training could have implied formal training conducted in classroom manner and hence the requirement was made less rigorous.

Chairman of Nomination and Remuneration Committee
The changed requirements now provide that the Chairman of the Company may be appointed as a member of the Nomination and Remuneration Committee. However, he cannot be Chairman of this Committee.

It may be recalled that this Committee is intended to be the screening, nomination and evaluation Committee for the Board, key managerial personnel etc.

Sale of shares/assets of subsidiaries
The Clause earlier provided that any sale of shares of a material subsidiary leading to reduction of holding to less than 50% should require a prior special resolution. Further, a similar approval was required for sale, disposal or leasing of more than 20% of the total assets of a material subsidiary. Now, an amendment provides for an exception to divestments made under a Scheme of arrangement that is duly approved by the Court/Tribunal.

Amendments related to related party transactions
There are several amendments made relating to related party transactions.

The definition of related parties has been seemingly narrowed and simplified but this is not wholly true. Earlier, the definition appeared to be quite extensive and covered several types of entities generally and specifically. Generally, persons who can control the other or have significant influence over the other were included. Having given this broad definition, certain parties were specifically included such as related parties as defined under the Act.

The amended definition has only two categories. One covers those parties as defined under the Act. Other covers those persons who are considered as related parties under applicable accounting standards. The definition under the Accounting Standards is wider and general. Hence, the list of related parties will continue to be broad.

The definition of material related party transactions has undergone a change. Earlier, a transaction or group of transactions would be material if they exceeded the higher of 5% of the annual turnover or 20% of the networth of the Company. Now, there are two changes. Firstly, the consolidated figures are used. Secondly, now there is only one criteria – the transactions would be treated as material if they exceed 10% of the annual consolidated turnover.

The definition of material related party transactions is relevant as such transactions need approval of the shareholders by way of a special resolution.

As a rule, all related parties transactions require prior approval of the Audit Committee. However, considering the fact that certain transactions may be of a similar nature and continuing throughout the year or frequent, a concept of omnibus approval has been provided for. The Audit Committee can grant such omnibus approval and then such transactions can be carried out without any further prior or post approval. However, there are certain conditions.

Firstly, the Audit Committee needs to satisfy itself that such transactions are needed and are in the interest of the Company.

The approval shall specify the name and of the related parties, the nature of the transaction, the period during which they may be carried out, and the indicative base price/current contracted price and the formula for variation if any. They may impose further conditions.

However, if the need cannot be anticipated or the details required are not available, the Audit Committee may still grant approval of upto Rs. 1 crore per transaction.

The Audit Committee would have to make a quarterly re-view of such transactions carried out pursuant to omnibus approval. The omnibus approval would have validity of one year. Related party transactions between two government companies will now not require approval of Audit Committee or of the shareholders by way of special resolution. There is a similar provision for transactions between a Company and its wholly owned subsidiary provided that the accounts are consolidated and placed before shareholders for approval.

A query had arisen regarding who can vote at the special resolution for approval of material related party transactions. It was earlier provided that “the related parties shall abstain from voting on such resolutions”. The question was where all entities that are related parties were barred from voting or whether only those related parties the transactions with whom were the subject of the special resolution. Now it is specifically clarified that all related parties are barred from voting, whether they are parties to such transaction or not.

    Conclusion

An attempt has been made to synchronise several of the requirements of Corporate Governance under the Act and under Clause 49. However, divergence remains in some areas. In case of listed companies to whom the Clause applies, such companies will have to comply with both. And in case of any overlap or contradiction, they will have to apply the narrower of the two provisions. Coupled with the requirements of e-voting which gives wider access to vot-ing to shareholders, the new requirements ensure much closer involvement of shareholders. Further, considering that (i) now a special resolution is required (ii) related parties are barred from voting, the shareholders have now an even greater say in case of related parties transactions. In these days of shareholder activism and vocal proxy advisory firms, related party transactions would particularly be under closer watch. All this augurs well for shareholder democracy in India and corporate discipline.

Section 8(1) (j) – Personal Information:

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A Few Facts of the case
The petitioner, Kashinath Shetye, was working as a junior engineer in the Electricity Department. The respondent no. 4, Dinsh Vaghela, applied to the Public Information Officer to supply information in respect of the petitioner on the following Electricity Department counts:

The information was in regard to the number of days of paid, unpaid sick, earned and casual leaves enjoyed by the petitioner.

The Public Information Officer gave notice to the petitioner to show cause as to why the information sought should not be supplied. The petitioner filed reply contending that the information being personal, should not be supplied and demanding or supplying of such information, would be an invasion of his privacy. The Public Information Officer i.e., the Superintendent Engineer, refused to supply the information on the ground that the department is exempted from supplying the information as it falls under clause (j) of section 8(1) of Right to Information Act. The respondent preferred appeal before the Chief Engineer, who dismissed the appeal. The appeal was preferred by him before the Goa Information Commissioner, which allowed the appeal and set aside the orders of the authorities below and directed that the information be supplied as sought. Hence, the petitioner has come up in writ petition.

The learned Counsel for the petitioner submitted that the order is bad in law on two counts. (i) The information sought, is personal information and (ii) it invades the right of privacy and no larger public interest is involved.

The court noted:
The first thing that needs to be taken into consideration is that the petitioner is a public servant. When one becomes a public servant, every member of public gets a right to know about his working, his honesty, integrity and devotion to duty. In fact, nothing remains personal while as far as the discharging of duty. A public servant continues to be a public servant for all 24 hours. Therefore, any conduct /misconduct of a public servant even in private, ceases to be private. When, therefore, a member of a public, demands an information as to how many days leave were availed of by the public servant, such information though personal, has to be supplied and there is no question of privacy at all. Such supply of information, at the most, may disclose how sincere or insincere the public servant is in discharge of his duty and the public has a right to know.

“The next question is whether the applicant should be supplied the copies of the application at all. It was contended that the copies of the application should not be supplied for, they may contain the nature of the ailment and the applicant has no right to know about the ailment of the petitioner or his family. To my mind, what cannot be supplied is a medical record maintained by the family physician or a private hospital. To that extent, it is his right of privacy, it certainly, cannot be invaded. The application for leave is not a medical record at all. It, at the most, may contain ground on which leave was sought. It was contended that u/s. 8(1) (j), the information cannot be supplied. In this regard, it would be necessary to read proviso to that section. If the proviso is read, it is obvious that every citizen is entitled to have that information which the Parliament can have. It is not shown to me as to why the information as is sought, cannot be supplied to the Parliament. In fact, the Parliament has a right to know the ground for which a public servant has taken leave since his salary is paid from the public exchequer.”

In the circumstances, the court ruled that it does not find that the Information Commission committed any error in directing such information to be supplied. According to the court there was no substance in the writ petition, petition was dismissed.

[The High Court of Bombay at Goa: Writ petition No. 1 of 2009]

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Precedent – Reference to Full Bench – Cannot be made inview of larger Number of cases filed in subject matter. [Constitution of India Article 225.]

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Kalpana Rani vs. The State of Bihar AIR 2014 Patna 173 (FB)

The
reference had been made keeping in view the large number of cases filed
in the subject matter and not because the Bench did not agree with the
view expressed in the matter of Smt. Renu Kumari Pandey [(2011) (4) PLJR
297]. In the opinion of the Court, unless the latter Bench, for cogent
reasons, disagrees with the earlier view taken by the collateral Bench,
the question of referring the matter to a larger Bench shall not arise.
Reference can be had to the judgment of the Full Bench of this Court in
the matter of Akhauri Krishna Kumar Sinha and Ors. vs. Mundrika Prasad
[MANU/BH/0108/1985 : 1986 PLJR 1119]. Nevertheless, as the Appeal has
come up for hearing before this Bench, the Appeal is heard and is
decided on merits.

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Precedent – Binding nature – Reference to Full Bench – Co-ordinate Bench cannot decide appeal on merits by taking contrary view.

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Jagadish Deka vs. The State of Assam & Ors. AIR 2014 Gauhati 143.

Once a decision was rendered by one Division Bench in one appeal arising out of common order, a fortiorari, such decision was binding on another Division Bench (whether consisting of the same Judges or other) to avoid passing of 2 conflicting orders in one case. If for any reason, the later Division Bench did not agree to the view taken by the earlier Division Bench, then it had no option but to refer the matter to a larger bench (Full Bench) to resolve the conflict, after setting out the reasons for their disagreement and the area of difference. The later Division Bench had no jurisdiction to decide the appeal on merits by taking contrary view except to follow the reasoning and the conclusion arrived at by the earlier Division Bench and if they formed an opinion to take a contrary view then it was obligatory on the Division Bench to make a reference to the larger Bench and if they formed an opinion to take a contrary view then it was obligatory on the Division Bench to make a reference to the larger Bench to resolve the conflict. The jurisdiction to take a contrary view or/and to declare the decision “per incuriam” was with the Full Bench on a reference made by the later Division Bench and lastly: since no one brought the earlier decision to the notice of later Divison bench, a situation had arisen where a judgment came to be passed, which is in conflict with the earlier Division Bench judgment. Therefore, it has to be held as per incuriam.

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A. P. (DIR Series) Circular No. 25 dated 3rd September, 2014

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External Commercial Borrowings (ECB) in Indian Rupees

This circular permits eligible lenders of ECB to lend in Indian Rupees, subject to the following terms and conditions: –

a. The lender must mobilise Indian Rupees through swaps undertaken with a bank in India.

b. The ECB contract must comply with all other conditions applicable to the automatic and approval routes, as the case may be.

c. The all-in-cost of such ECB must be commensurate with prevailing market conditions.

The recognised lender, for the purpose of executing swaps for ECB denominated in Indian Rupees, can set up a representative office in India and also hedging their rupee exposures.

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A. P. (DIR Series) Circular No. 23 dated 2nd September, 2014

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Three divisions of Foreign Exchange Department shifted to FED CO Cell at New Delhi

This circular states that, with effect from 15th July, 2014, the following three divisions of Foreign Investment Division (FID): –

a. Liaison/Branch/Project Office (LO/BO/PO) Division,
b. N on Resident Foreign Account Division (NRFAD ), and
c. Immovable Property (IP) Division

have been shifted to New Delhi. The address for correspondence for the three divisions is FED, CO Cell, Foreign Exchange Department, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi – 110 001, India.

This circular states that all applications, returns, etc. pertaining to the above three divisions (including extension or closure of LO/BO) must be sent to the FED CO Cell at New Delhi. Online reports for NRFAD can continue to be emailed at the same email address as earlier.

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A. P. (DIR Series) Circular No. 22 dated 28th August, 2014

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Notification No. FEMA. 313/2014-RB dated 2nd July, 2014

Purchase and sale of securities other than shares or convertible debentures of an Indian company by a person resident outside India

Presently, eligible investors registered with SEBI, can purchase eligible government securities directly from the issuer of such securities or through registered stock broker on a recognised Stock Exchange in India within the limits prescribed by RBI and SEBI from time to time.

This circular has removed the restrictions on the persons from whom eligible investors can purchase eligible government securities. As a result, eligible investors can acquire eligible government securities in any manner as per the prevalent/approved market practice.

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A. P. (DIR Series) Circular No. 21 dated 27th August, 2014

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Refinancing of ECB at lower all-in-cost – Simplification of procedure

Presently, refinancing of existing ECB by raising fresh ECB at lower all-in-cost is permitted under the Automatic Route if the outstanding maturity of the original loan is maintained. However, case where the Average Maturity Period (AMP) of the fresh ECB is more than the residual maturity of existing ECB need prior approval of RBI under the approval route.

This circular gives power to Banks to approve, under the Automatic Route, refinancing of existing ECB by raising fresh ECB at lower all-in-cost even if the Average Maturity Period (AMP) of the fresh ECB is more than the residual maturity of existing ECB, subject to the following conditions: –

i. Both the existing and fresh ECB must be in compliance with the applicable guidelines;
ii. A ll-in-cost of fresh ECB must be less than that of the all-in-cost of existing ECB;
iii. Consent of the existing lender must be obtained;
iv. Refinancing must to be undertaken before the maturity of the existing ECB;
v. Borrower must not be in the default/Caution List of RBI and must not be under the investigation of the Directorate of Enforcement (DoE);
vi. O verseas branches/subsidiaries of Indian banks are not be permitted to extend ECB for refinancing an existing ECB; and
vii. All requirements in respect of reporting arrangements like filing of revised Form 83, etc. must be followed.

This facility is available even in those cases where existing ECB was raised under the approval route if the amount of new ECB raised is eligible to be raised under the automatic route.

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Is It Fair to ignore prepaid taxes for penalty u/s. 271(1)(c) on escaped income?

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Synopsis
Penalty under section 271(1)(c)
has been a bone of contention between tax payers and Income-tax
Department. In this Article, the author has tried to bring out an
anomaly wherein a person who has not furnished a return of Income at all
may receive a more favorable treatment than someone who has actually
furnished a return but has failed to include a particular income
therein. He has explained this with a simple and lucid live example.

Introduction
Penalty
u/s. 271(1)(c) of the Income-tax Act, 1961 is for concealment of
particulars of income or furnishing inaccurate particulars of income.
The Income-tax Department treats the relevant income as ‘concealed’ or
‘escaping assessment’. For brevity, it will be referred to as ‘escaped
income’ in this article. Penalty is equivalent to 100% to 300% of the
‘tax sought to be avoided.’

Relevant provision
Explanation 4 to section 271(1)(c) defines the expression ‘Amount of Tax Sought to be Avoided’ (ATSA) as follows:

“(a)
in any case where the amount of income in respect of which particulars
have been concealed or inaccurate particulars have been furnished has
the effect of reducing the loss declared in the return or converting
that loss into income, means the tax that would have been chargeable on
the income in respect of which particulars have been concealed or
inaccurate particulars have been furnished had such income been the
total income;

(b) in any case to which Explanation 3 applies,
means the tax on the total income assessed [as reduced by the amount of
advance tax, tax deducted at source, tax collected at source and
self-assessment tax paid before the issue of notice u/s. 148];

(c)
in any other case, means the difference between the tax on the total
income assessed and the tax that would have been chargeable had such
total income been reduced by the amount of income in respect of which
particulars have been concealed or inaccurate particulars have been
furnished.”

Clause (a) deals with a situation of loss vis-à-vis escaped income.

Clause
(b) is relevant for this article – It refers to Explanation 3 which
deals with a situation where no return has been filed.

Explanation 3 —
“Where
any person fails, without reasonable cause, to furnish within the
period specified in sub-section. (1) of section 153 a return of his
income which he is required to furnish u/s. 139 in respect of any
assessment year commencing on or after the 1st day of April, 1989, and
until the expiry of the period aforesaid, no notice has been issued to
him under Clause (i) of sub-section (1) of section 142 or section 148
and the Assessing Officer or the Commissioner (Appeals) is satisfied
that in respect of such assessment year such person has taxable income,
then such person shall, for the purposes of Clause (c) of this s/s., be
deemed to have concealed the particulars of his income in respect of
such assessment year, notwithstanding that such person furnishes a
return of his income at any time after the expiry of the period
aforesaid in pursuance of a notice u/s. 148.”

The unfairness
In
terms of Explanation 3 – where the assessee has not filed or furnished
the IT return and any escaped income is detected then the prepaid taxes
like TDS, advance tax, tax collected at source and self assessment tax
are to be deducted from the tax on the total income for the purposes of
calculating ATSA. This is logical and fair. However, Clause (b) does not
deal with a situation where the return was duly furnished but a
particular item remained to be included in the income. This is a more
common situation particularly if the income is in the nature of only
accrual and not actually received. Sometimes there could be TDS on the
said escaped income which also remains to be claimed. It is grossly
unjust and unfair not to consider this TDS while calculating ATSA on
escaped income.

It is a different story if such inadvertent
escapement is accepted by the income tax department as non concealment.
Otherwise, it leads to an anomaly that a person who has not furnished a
return at all receives more favourable treatment than the one who
actually furnishes the return but fails to include a particular item.

Needless
to state that the particulars in Form 26AS are not necessarily complete
and reliable. Otherwise, an assessee would get a hint that some income
has remained to be included.

Live Example
An
individual’s services were transferred from Company A to Company B
within the same group. Company A credited ESOPs to his demat account and
duly deducted tax on the perquisite value. Since, it was only a
notional income, it did not occur to the assessee to obtain salary
certificate from Company A, hence purely out of oversight and ignorance,
the income remained to be included. It was revealed in the course of
assessment from Form 26AS. Therefore, although full tax @ 30% was
deducted on the perquisite value – escaped income – the definition of
ATSA does not permit the deduction of this TDS for penalty u/s.
271(1)(c).

Suggestion
The scope of Clause (b) of
Explanation 4 should be enlarged so as to cover both the situations
namely non furnishing of return as well as non inclusion of particular
income in the return filed.

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Is levy of penalty mandatory and inevitable? – is the reliance on the decision of the supreme court correct?

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Synopsis
The Supreme court decision in the case of Shriram Mutual Fund observed that penalty is attracted the moment contravention is established and the intention of the parties involved becomes irrelevant. In this article, the author discusses the application of this ratio by SEBI in levying penalty and various arguments against this approach

Sebi relies on supreme court decision and holds levy of penalty to be mandatory
Almost each and every SEBI order levying penalty relies on a Supreme Court decision in Shriram’s case (SEBI vs. Shri Ram Mutual Fund (2006) 68 SCL 216). The interpretation of SEBI is that since there is a violation, then penalty has to follow. Not only is mens rea (guilty intent) irrelevant, it is stated, but the penalty has to mandatorily follow any violation. Further, mitigating factors are irrelevant. In short, it is put forth that according to the Supreme Court decision, in case of proceedings for levy of penalty, penalty is mandatory and the Adjudicating Officer has no discretion in the matter. Is this the ratio of the decision? Should a person who has not filed a document late, or made some errors in some filings, etc. resign himself to a penalty in all circumstances?

As stated, for this purpose, SEBI almost always cites a single sentence from the Shri Ram case as if by mindless rote. Here is one example from a recent SEBI Order (in matter of M/s. Vizwise Commerce Private Limited, Order No. JJ/AM/AO-117/2014, dated 28th August 2014).

“In the matter of SEBI vs. Shri Ram Mutual Fund (2006) 68 SCL 216 (SC), the Hon’ble Supreme Court of India has held that “In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant.” (emphasis supplied)

With such words, it would appear inevitable that even in cases of mere clerical violations, liability is strict and absolute and there is no escape to levy penalty. However, the matter does not end there. Next cited are the powers of SEBI to levy huge penalties. Most provisions allow levy of penalty of upto Rs. 25 crore or a Rs. 1 lakh per day. Citing the decision and such penal provisions, large penalties running into several lakhs are levied, which, if one compares with huge and absolute powers SEBI has, would sound almost lenient.

The mitigating factors, even if pleaded by the party, are usually brushed aside, as if the hands of SEBI are tied in view of the clear mandate of the Supreme Court.

The alleged defaulter, in the face of such words of the Supreme Court, is demoralised and believes that there is no point in filing an appeal before the Securities Appellate Tribunal (SAT). It also so happens that the SAT in recent times rarely reduces or reverses such penalty. Thus, it is common to see scores of orders passed every week with large amount of penalties.

Is penalty inevitable? What did THE Supreme Court really say?
However, is levy of penalty so inevitable? Has the Supreme Court made the issue so absolute? Or are the words of the Court cited out of context? It is submitted that Supreme Court has really held something different. Moreover, it has itself considered mitigating factors and has not wholly ruled out bonafide intention. The Court has also not relieved SEBI/Adjudicating Officer from exercising judicial discretion and stated that he may choose not to levy penalty in appropriate cases.

Let us review very briefly the reported facts of Shriram’s case. Shriram was a mutual fund. Provisions made by SEBI prohibited a mutual fund from dealing with stock brokers beyond 5% of its aggregate sales/purchases. It was an admitted fact that in 12 instances Shriram violated this limit. Penalty was levied. Shriram pleaded before the SAT (the appellant did not appear before the Supreme Court) that the violation was not intentional and there were certain genuine circumstances that required them to deal with such brokers beyond the maximum limits. The SAT set aside the order of penalty “on the purported ground that the penalty to be imposed for failure to perform a statutory obligation is a matter of discretion. The Tribunal has held that the penalty is warranted by the quantum which has to be decided by taking into consideration the factors stated in section 15J.”

Question of law
The Supreme Court phrased the “question of law” before it in the following words:-

“The important question of law which arises for consideration in the present appeal is whether the Tribunal was justified in allowing the appeals of the respondent herein and that whether once it is conclusively established that the Mutual Fund has violated the terms of the Certificate of Registration and the Statutory Regulations, i.e., the SEBI (Mutual Funds) Regulation, 1996, the imposition of penalty becomes a sine qua non of the violation. In other words, the breach of a civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the regulations would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not.” (emphasis supplied).

Thus, as will seen later, the question before the Court was whether, once a violation is established, does penalty have to follow or would also have to be established that the defaulter had a guilty intention?

What The Supreme Court held
It is in this light that the Court reviewed the framework of the Act. It pointed out that broadly there were two sets of proceedings under the Act – one under which penalty is levied in civil proceedings and others which are criminal proceedings. For imposing penalty in civil proceedings, proof of a guilty intention is not required, while it is mandatory in case of criminal proceedings. Since in the present case, the proceedings were for levy of penalty under civil proceedings, there was no need to prove that Shriram had a guilty intention. It was sufficient to show that the violation was established.

Since this was done, penalty was leviable. However, is this the end of the matter? Is “intention” wholly irrelevant? Are other factors including mitigating factors wholly irrelevant? It is submitted this is not so and not only does the Act provide otherwise, but even the Supreme Court does not say so.

Factors to be considered for deciding quantum of penalty or waiving it

That penalty is not inevitable is apparent from the SEBI Act itself. Section 15J makes it clear that, in adjudication proceedings, the Officer shall have due regard to certain factors. The section reads as under (emphasis supplied):-

While adjudging quantum of penalty under section 15-I, the Adjudicating Officer shall have the due regard to the following factors, namely :-

(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default.”

Thus, the Act itself mandates the Adjudicating Officer to consider these three factors. This was recognised in Shriram’s case as well.

It is also submitted that in appropriate cases levy of zero penalty is also permissible. It is also submitted that other factors, apart from these three statutory factors, would also be relevant, depending on facts of each case. This is also evident from decision of Supreme Court.

For example, the Supreme Court noted that “there has been a clear violation of the statutory regulations and provisions repetitively, covering a period of 6 quarters”. In other words, the fact that the violations were repetitive over six quarters was highlighted.

The Supreme Court also reviewed the circumstances in the case to show that there were no extraordinary circumstances mitigating the violation. the Court observed, “the facts and circumstances of the present case in no way indicate the existence of special circumstances so as to waive the penalty imposed by the adjudicating officer”. Again, this shows two things. Had there been special facts/circumstances shown, then firstly, they would have to be considered. Secondly, appropriate circumstances would justify waiver of the penalty too. Indeed the Court went ahead and observed that the Officer had considered all the circumstances before levy of penalty which too was below the maximum amount.

Curiously, the Court even noted that the violation was wilful. the Court observed, “hence, we hold that the respondents have wilfully violated statutory provisions with impunity and, hence, the imposition of penalty was fully justified.” One wonders, if it was so clear that wilful intent is totally irrelevant, why was such a factor considered? if it can be clearly established in a particular case that there was no wilful violation, would penalty not be leviable? or at least penalty would be reduced? in other words, absence of mens rea is not wholly irrelevant, as SEBI orders suggest.

In light of this, it is submitted that the consistent stand of SEBI that violation has to result in penalty is an erroneous interpretation and its reliance on Shriram, far from being correct, is actually wrong and goes against what the Court held in that case. It is submitted that SEBI has to consider all mitigating factors before levy of penalty. If the appellant demonstrates that he did not have guilty intention, that too has to be judicially considered. Further, SEBI has full discretion to levy a nominal penalty or even waive penalty altogether. SEBI also has to consider the three factors that section 15J prescribes. The defaulter would also be right in questioning an order of penalty on grounds that there were mitigating circumstances or that such circumstances were not appreciated by SEBI. It is thus high time that the ghost of Shriram that haunts adjudication proceedings is exorcised, either by SEBI itself, or through a strong appeal before SAT/Supreme Court. And justice, sense of fair play and absence of arbitrariness be restored in adjudication proceedings.

It is worth drawing attention to a recent amendment to penalty provisions made by the Securities Laws Amendment Act, 2014, notified on 25th August, 2014. By the amendment, most provisions relating to penalties now provide  that  a  minimum  penalty  of  Rs.  1  lakh  would be leviable. It is submitted that despite such provision, the ratio of Shriram continues to be valid. SEBI has to consider all circumstances even for levy of minimum penalty. SEBI continues to have a power to waive penalty altogether.

Tenancy – Statutory Tenancy – Can be bequeathed by Will – Unless it is specifically barred by some provision – Powers of Appellate Court – Subsequent Events – Mould relief accordingly: Section 96 of CPC:

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Gaiv Dinshaw Irani & Ors. vs. Tehmtan Irani & Ors. AIR 2014 SC 2326

One Bomanji Irani, who was the predecessor of Appellants herein, acquired tenancy rights in respect of the premises. The premises comprised of residential Bungalow. Bomanji executed a Will dated 15th October, 1934 in favour of his children and wife Daulatbai, appointing Daulatbai as a residuary legatee of the Will. Bomanji Irani died on 27th September, 1946 leaving behind his wife Daulatbai; five sons, and three daughters. The Will was probated with consent of all the legal heirs and Daulatbai had rights over the suit premises and the tenancy rights which, as claimed, could be bequeathed as per law. Daulatbai executed a Will on 2nd January, 1949 in favour of her son Dinshaw who was the original Defendant No. 2. However, the said Will was not probated.

The then Bombay Municipal Corporation (‘BMC’) acquired ownership rights in respect of the suit premises and issued eviction notices to the heirs and legal representatives of Bomanji, comprising Daulatbai and five sons. In response to the eviction notices, the legal heirs and representatives of Bomanji objected to the same but they consented to the tenancy being transferred in the name of Dinshaw Irani (original Defendant No. 2).

Daulatbai addressed a letter to the BMC requesting for transfer of rent bills in the name of her son Dinshaw. The BMC passed an eviction order against the heirs and legal representatives of Bomanji. Against the said eviction order passed by the BMC, the heirs and legal representatives of Bomanji jointly filed a suit as joint tenants,. Daulatbai died during the pendency of this suit. On 11th July 1977, the said suit was decreed in favour of the Plaintiffs and the order passed by the BMC terminating the tenancy was set aside. By letter dated 18th September, 1981, BMC transferred the tenancies in favour of Dinshaw, subject to certain conditions. Respondent No. 1 (son and legal heir) and Respondent No. 5 (son of the legal heirs) objected to the transfer of tenancy in the name of Dinshaw Irani.

The Respondents (legal heirs of Homi and Ardeshir Irani) on coming to know about the transfer of tenancy of the suit premises, issued a notice and subsequently filed Long Cause Suit challenging transfer of tenancy before the City Civil Court at Bombay. The City Civil Court dismissed both the suits by two separate judgments.

On further Appeal, the Court observed that divesting of tenancy rights by means of a Will is a highly debated topic and is subject to the tenancy laws of the concerned State. In the present matter, the tenancies being the suit premises are owned by the local authority of Mumbai and are subject to the State Act being the Bombay Rents, Hotel And Lodging House Rates Control Act, 1947. The said Act, since repealed, exempts the present tenancy from its purview as per section 4(1). The BMC Act is also silent on this aspect.

In the case of Gian Devi Anand vs. Jeevan Kumar and Ors. (1985) 2 SCC 683, four Judges of a five-Judge Constitution Bench held that the rule of heritability extends to statutory tenancy of commercial as well as residential premises in States where there is no explicit provision to the contrary and tenancy rights are to devolve according to the ordinary law of succession unless otherwise provided in the statute.

The Court observed held that, in general, tenancies are to be regulated by the governing legislation, which favour that tenancy be transferred only to family members of the deceased original tenant. However, in the light of the majority decision of the Constitution Bench in Gian Devi vs. Jeevan Kumar (supra), the position which emerges is that in absence of any specific provisions, general laws of succession to apply.

The BMC by means of a letter dated 19th September, 1961 treated all the heirs of Bomanji as joint tenants; and the heirs of Bomanji by means of letter dated 25th October, 1961 also claimed themselves to be joint tenants; Daulatbai in her letter dated 3rd February, 1962 also claimed joint tenancy along with her sons and sought transfer of the rent receipts only in the name of her son Dinshaw.

The High Court taking note of the subsequent events moulded the relief in the appeal u/s. 96 of the Code of Civil Procedure and the same has been challenged by the Appellants. In ordinary course of litigation, the rights of parties are crystallised on the date the suit is instituted and only the same set of facts must be considered. However, in the interest of justice, a court including a court of appeal u/s. 96 of the Code of Civil Procedure is not precluded from taking note of developments subsequent to the commencement of the litigation, when such events have a direct bearing on the relief claimed by a party. The entire purpose of the suit the Courts taking note of the same should mould the relief accordingly. This rule is one of ancient vintage adopted by the Supreme Court of America in Patterson vs. State of Alabama 294 US 600 followed in Lachmeshwar Prasad Shukul vs. Keshwar Lal Choudhury AIR 1941 FC 5. The abovementioned principle has been recognised in a catena of decisions.

The normal rule is that in any litigation the rights and obligations of the parties are adjudicated upon as they obtain at the commencement of the lis. But this is subject to an exception. Wherever subsequent events of fact or law which have a material bearing on the entitlement of the parties to relief or on aspects which bear on the moulding of the relief occur, the court is not precluded from taking a ‘cautious cognisance’ of the subsequent changes of fact and law to mould the relief.

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Precedent – Manner of citing – Whenever any issue is decided by the Supreme Court or/and High Court, it is to be first referred to by the Authorities/ Tribunals and then decision should be rendered on the issue involved in the case:

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Commr. of Customs and Central Excise vs. Advani Oerlikon Ltd (2014) (306) ELT 66 (Chhattisgarh)

The Tribunal dismissed the appeal filed by the Revenue and upheld the order passed by the Commissioner of appeals.

The short question that arises for consideration in the reference application before the Hon’ble Court is whether any referable legal question arises out of the order passed by the Tribunal for being answered by this Court in its reference jurisdiction.

The Hon’ble Court observed that though while deciding the issue, the Tribunal did not refer to any case law on the subject, yet the view taken by the Tribunal was in accordance with the law laid down by the Supreme Court. In fact, it would have been better if the Tribunal had taken note of the law on the subject laid down by the Supreme Court and then would have expressed its view.

The Court further observed that whenever, any issue is decided by the Supreme Court or/High Court then it has to be first referred to by the Authorities/Tribunals and then decision should be rendered on the issue involved in the case keeping in view the law laid down in decided cases.

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Coparcenary property – Right of daughter – No partition affected prior to enforcement of Amendment Act – Death of father (co-parcener) – Daughter will have right at par with son. Hindu Succession Act, 1956, Section 6 (as amended in 2005)

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Jamanbhai Maganbhai Mavani & Another vs. Bhanuben Maganbhai Mavani & Others AIR 2014 Gujarat 185

The short facts of the case are that the respondent Nos. 1 and 2 were the original plaintiffs [‘Sisters’] who had filed the suit for partition of the coparcenary property of their father’s family contending inter alia that they were daughters of the deceased Maganbhai Mohanbhai Mavani and the defendants were the brothers, in possession of the family property and they were entitled to the share in the family property.

The appellant together with respondent No. 3 – the defendants resisted the suit contending inter alia that the Will was executed by the father during his lifetime in favour of the mother, original defendant No. 1 and it was contended that the partition had taken place and further, after marriage of the original plaintiffs, they were not entitled to get any share in the property.

The court observed that the Will was not proved. Apart from the said aspect, if the property was a coparacenary property, the right would accrue to the members of the coparcenary from the very beginning.

Once the partition was not proved or there was no partition, coparcenary property would continue to have same character and it cannot be said that since the right accrued on the date when the father had expired. Such right is saved by amendment made in provision of section 6 of the Hindu Succession Act. As such on the date of death of the father, if the property remained as coparcenary property and no division or partition is made prior to the amendment, the right cannot be extinguished of Hindu female in coparcenary property. There was no satisfactory evidence, produced before the trial Court nor before the High Court to show that the property was partitioned prior to the amendment. If the property was not partitioned prior to the amendment, merely, because the father, one of the coparceners of the property had expired, such right cannot be said to have extinguished nor could be it said that the right of partition had accrued only on the death of the father. If on the date of amendment, the property has continued as coparcenary property, Hindu female will have right at par with the son.

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Coparcenery property – Karta – When male member is available, female in such circumstances would not be eligible to become a karta of family–Section 6–Hindu Succession Act, 1956.

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Jagannath Rangnath Chavan vs. Suman Sahebrao Ghawte & Ors AIR 2014 (NOC) 491 (Bom)

One Mr. Nana had three children – one son by name Tukaram and two daughters Suman (Plaintiff No.1) and Shanti aka Vimal (Plaintiff No.2). The two daughters had filed a suit against the present appellant, who was defendant no.1 and another defendant, challenging the sale deed dated 28-03-1968 executed by their brother Tukaram in favour of the present appellant/defendant no.1 and, in the alternative, for partition and separate possession.

Nana had died on 19-07-1967. The plaintiff no.1, Suman was already married and had gone to reside with her husband at her matrimonial place; whereas plaintiff no.2 Shanti aka Vimal was a minor, who resided with Tukaram. Tukaram had the responsibility of marrying plaintiff no.2 Shanti aka Vimal, since there was no other male member in the family except him. Tukaram vide sale deed on 29- 12-1967 sold the suit land on 28-03-1968 to defendant no.1. As there was no other source of livelihood/income to Tukaram, he applied the sale proceeds for performing rituals, maintenance of the family and for performing marriage of Shanti aka Vimal (Plaintiff No.2). Tukaram died on 03-12-1971. After his death, both the sisters had filed the suit on 29-09-1973.

The appellant (defendant no.1) filed his written statement and contested the claim made by the plaintiffs, principally on the ground that Tukaram, after the death of Nana, became the Karta of the family, being the eldest son remaining in the family due to marriage of plaintiff no. 1 and for legal necessity, he was compelled to sell the suit land and the said transaction of sale was binding on the plaintiffs who could not have questioned the sale deed. On one of the issues, the trial Court held that Tukaram was the Karta of the family and the legal necessity was duly proved and, therefore, the sale deed was binding and could not be questioned.

The court observed that it will be revolutionary of all accepted principles of Hindu law to suppose that the seniormost female member of a joint Hindu family, even though she has adult sons who are entitled as coparceners to the absolute ownership of the property, could be the manager of the family. She would be the guardian of her minor sons till the eldest of them becomes a major, but she would not be manager of the joint family for she is not a coparcener.

Thus, the court held that a female, in normal circumstances and particularly as in the instant case when a male is available is not eligible to become a manager or Karta of the family, he being the son and, as such, it was only Tukaram the major son who was left Karta sui juris in the family. Hence, Tukaram was the only eligible and competent person of the family after the death of Nana to act as Karta/manager.

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Coparcenary property – Hindu Law – Partition – Wife cannot demand partition of joint family property – She would get a share only if partition is demanded by her husband or sons and property is actually partitioned.

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Jayamati Narendra Shah (deceased by L.Rs) and Others vs. Narendra Amritlal Shah. AIR 2014 Bombay 119.

The plaintiff was the son of the defendant (Father). The defendant’s wife, the plaintiff’s mother, expired on 10th June, 2013 leaving behind a registered will dated 2nd July 2011. The plaintiff sought administration of her estate. The plaintiff also sought disclosure of the remainder of the estate which the plaintiff had no knowledge of. The plaintiff was the sole beneficiary under the will of the deceased (Mother) which had been sought to be probated. The plaintiff claimed to be the owner of the properties bequeathed by the deceased (Mother) to him. In the suit, the plaintiff claimed partition of immovable properties that had been bequeathed to him and mandatory injunction directing the defendant to handover those properties to the plaintiff and the permanent injunctions against alienation.

The plaintiff claimed 1/2 undivided share which the deceased had in a flat. The defendant resides in that flat. The plaintiff had left that premises upon certain disputes between the parties prior to the death of the deceased.

The title of the deceased to give her a right to bequeath the property would have to be seen in the context of a HUF of her husband, the defendant herein. The husband was alive on the date of the Will as also on the date of her death. The deceased was not a widow.

In a HUF, only sons (vertically) and brothers (laterally) would constitute a coparcenary in a Joint Hindu Family. Their wives may be members of the joint Hindu family but are not coparceners. The proprietary rights are of a coparcener if the joint Hindu family owns any joint property. The wives of coparceners do not get any interest in joint property owned and held by coparceners who are co owners. The wives of the co-owners do not get any interest by virtue of their birth. It is only a Hindu widow who gets the interest of her husband in the coparcenary or 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. Consequently a wife has no share, right, title or interest in the HUF in which her husband is a coparcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act in 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 property which that family owns. A wife cannot demand partitition unlike a daughter. She would get a share only if partitition is demanded by her husband or sons and the property is actually partitioned. The claim by a wife during the life time of the husband in the share and interest which he has as a coparcener in his HUF is wholly premature and completely misconceived.

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Potato Salad and the Funny World of Finance

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If you were to do a Google search for “Potato Salad” what do you think will be the very first result?

A recipe…
An update on the nutritional value of potato salad…

A list of places that serve the ‘best’ potato salad…

You will be surprised that it is none of this. Instead, what you may find is a link to a Kickstarter fundraising project initiated by Zach Danger Brown, wanting to raise US $ 10 for his project, which he describes very simply as:

I’m making potato salad.
Basically, I’m just making potato salad. I haven’t decided what kind yet.

Zach put up this very simple project on the crowdfunding platform ‘Kickstarter’ to raise a modest US $ 10 …. And he has already got a commitment of over US $ 50,000 till date! What is even more interesting is the speed at which he has managed to raise the funds and the number of people who have chosen to contribute to the project – at the point when I am writing this article (1st August, 2014) there are 6,730 backers who have pledged a whopping US $ 54,030 against the goal of just US $ 10! Surely, Zach would not be short of US $ 10, and may be, he didn’t even want to make Potato salad… but a creative thought, the promised reward of “…you will get a ‘thank you’ posted on your website and I will say your name out loud while making the potato salad…” was enough to set the crowdfunding community amused enough to make a commitment to the project.

Well, when you ask for US $ 10 and get US $ 50000 instead, it is surely newsworthy. No wonder that the story made its way in to the Forbes e-magazine, with the title “What Potato Salad Teaches Us About Crowdfunding”. The article goes on to explain that, there are many projects that aim at alleviating poverty or making healthcare available to the needy, or making that breakthrough invention…. But every once in a while, it will happen that the project that manages to raise funds has nothing to do with charity, social relevance or technology; the project that catches the fancy of the invisible contributing community is the one that makes no lofty promises but just tickles their funny bone, or amuses them after a tiring day at work!

This brings us to crowdfunding, and what’s new in this funny world of finance.

Kickstarter is a crowd-funding platform with the stated objective of ‘bringing creative projects to life’. It allows individuals with creative ideas to conceptualise the idea, convert it to a project and seek funding for a specific amount through the website www.kickstarter.com.

The project is then hosted on the website for making commitments for contributing to the project. If the project is able to raise the requisite funding within the timeline defined by the project creator, the project goes ahead, the funds committed are collected and given to the project creator – all this for a small fee of 5% retained by Kickstarter. If the project fails to obtain full commitment for funding, it does not go ahead – it is all or none principle for fundraising.

Kickstarter has been successful is raising funds for many projects. The website claims that 6.7 million people have backed a kickstarter project till date, and many of them have backed multiple projects.

Kickstarter is just one of the many crowdfunding platforms – these platforms provide a unique option of raising funds for projects that may not be able to access the traditional banking channels or may not have the requisite commercially viable revenue model that is required under the traditional financing options. Each platform defines the elibility criteria, who can post a project and who can contribute – the rules may vary, but the underlying principle remains the same: using an internet-based platform for seeking funds from a wide and vibrant variety of internet users for ideas, projects, causes, whims and fancies. These platforms give a chance to the contributor to feel a sense of belonging to the underlying cause and feel connected with the community of contributors.

Crowdfunding has made it possible for people to fund projects in the arena of art, design, movie making, theatre, publishing, photography and more. This means of funding is equally popular for raising funds for socially relevant projects, charity, angle investing, developing technology or undertaking some extra-ordinary travel. So, if you have a great art project, an idea about an App that you are convinced will serve a useful purpose, a sculpture that you want to create, a book that you want to write, a movie that is running in your mind…..you know that there could be an eager set of contributors waiting to give you the funds to make that project happen.

I know that many of the readers would be wondering as to how the funds in the hands of the project owner would be taxed, if at all, or how will the Crowdfunding Platform accrue its income, or how do the platform creators prevent abuse and frauds…. As for me, I will stick to telling stories about people who made history in the world of finance by asking for $ 10 to make potato salad!

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New Theory of Relativity for Corporate India

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Synopsis
Compliance for Related Party Transactions has been given a new dimension by the Companies Act, 2013 and the Listing Agreement. The Governance model has been turned inside out. This article examines the requirements under these two key statutes and also highlights the other compliances which companies need to bear in mind for related party transactions. Recent relaxations under both these Laws have also been covered.

Introduction
One of the definitions of relativity is the quality or state of being relative. Albert Einstein has made relativity famous by his Theory of Relativity (E= mc2)which is now a fundamental principle of Physics.

However, Corporate India is now grappling with a new Theory of Relativity – the one propounded by the Ministry of Corporate Affairs (via the Companies Act, 2013)and the SEBI (via the Listing Agreement), i.e., the Related Party conundrum!

A host of new regulations have revolutionised the concept of related party transactions. While the intention of these new regulations is very clear, i.e., safeguarding minority interest, some of the original provisions were rather harsh and may have lead to stifling the normal business operations. Accordingly, the provisions of the Companies Act, 2013 were diluted to some extent. Recently (on 15th September, 2014), SEBI also amended the original provisions of Clause 49 of the Listing Agreement. Let us, through this Article, look at these new provisions under the Companies Act as well as the Listing Agreement.

New Theory
We may rephrase Einstein’s famous theory as follows for Corporate India’s related party transactions:

R = S.2(76) + S.188 + Cl. 49 + S.40A(2)(a) + AS 18

Where the Variables of this Equation are:

R = Related Party Transactions;

Section 2(76) and S.188 of the Companies Act, 2013, both of which are effective from 1st April, 2014 for all companies;

Clause 49 of the Listing Agreement, which is effective from 1st October, 2014 for listed companies;

Section 40A(2)(a) of the Income-tax Act, 1961 and

AS 18 = Accounting Standard 18 issued by the ICAI

Let us look at these variables in detail.

Who is a Related Party?
The compliances for related party transactions (“RPTs”) are to be done under two laws – section 188 of the Companies Act, 2013 and Cl. 49 of the Listing Agreement. In effect, for listed companies, the higher (stricter) of the two laws would apply. The definition of a related party in relation to a listed company u/s. 2(76) of the Companies Act, 2013 and Clause 49 of the Listing Agreement is given in Table-1.

* U nder the Companies Act, a relative for an individual means his HUF, spouse, parents, children, siblings and spouses of children. Stepfather, step-mother, step-son, step-brother and step-sister are also relatives. However, a stepdaughter is not a relative. Further, unlike the earlier list u/s. 6 of the Companies Act, 1956, several relatives have been omitted from the definition, these include, grandparents, grand children, spouse of grand children, spouses of siblings.

Under the earlier provisions of Clause 49 of the Listing Agreement (prior to the amendment carried out on 15th September, 2014), several other entities were considered to be a related party. However, all those entities have now been replaced with one single statement – Related Parties under an Accounting Standard. A person who is not a related party under the Companies Act but is covered under an Accounting Standard would now be so even under Clause 49. Thus, listed companies have to consider the definition under the Companies Act and also the definition under the applicable Accounting Standards.

What is a RPT?
Now that we have considered who is a related party, let us also understand what constitutes a Related Party Transaction (RPT) for a listed company. Clause 49 defines the same in a very wide manner to mean a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged. Hence, even a free service would be a related party transaction. Further, a RPT includes a single transaction or a group of transactions in a contract.

Section 188 on the other hand gives a specified list of contracts or arrangements with a related party which constitute a related party transaction. Hence, the scope of section 188 is much narrower and would only apply to the transactions specified therein. While what constitutes a contract is easy to understand, what constitutes an arrangement could be a moot point? Further, the Rules treat certain RPTs as prescribed RPTs for which a special resolution of the shareholders is required. Both these lists are given in Table-2.

Turnover. Using a consolidated turnover is a good move for Holding Companies which have little or no operations of their own.

What compliances are required?
The compliances required for RPTs under both the laws are illustrated below.

(A) If the RPT is in the Ordinary Course of Business and on an arms’ length pricing, the compliances are given in Table-3.

ALP = Arms’ Length Pricing basis, i.e., an RPT conducted as if it were between unrelated parties so that there is no conflict of interest. To demonstrate that the RPT is on an ALP, the Company may consider comparable uncontrolled prices or such other available illustrations which would demonstrate that the transaction has been carried out on an arms’ length price. The concept of ALP is relevant only qua the Companies Act since Cl. 49 makes no distinction between an RPT at ALP or otherwise.

* What is an ordinary course of business has not been defined and would have to be ascertained on a case-by-case basis. The Memorandum of Association, Financial Statements, Board Minutes, history of past transactions, etc., could be some of the indicators of what is ordinary for a company. For instance, purchase of shares of the promoter’s private company would not be in the ordinary course of business even though it may be on an arms’ length pricing.

* The twin conditions or ALP and ordinary course of business need to be satisfied for a company to get out of the provisions of section 188(1) of the Act. Compliance with any one is not enough.

(B) If the RPT is not in the Ordinary Course of Business and/or not on an arms’ length pricing, the compliances are given in Table-4.


The  rules  earlier  prescribed  that  a  company  having  a paid-up capital of rs. 10 crore or more shall not enter into any RPT which is not on an ALP and not in the ordinary course of business without a special resolution. thus, for such companies the requirement of checking whether the RPT was a prescribed RPT was not relevant. However, by virtue of an amendment dated 14th august 2014, the MCA has removed this clause. Hence, as the law stands currently, the threshold requirement of Rs.10 crore of capital stands removed to determine whether an RPT requires a special resolution.

Thus,  the  standards  prescribed  under  Clause  49  are more stringent than those u/s. 188. While section188 provides a gateway in the form of ordinary course of business which is at an arms’ length price, there is no such gateway under Clause 49.

How is the Voting for RPTS to be carried out?

We have seen that shareholders’ approval is required either  under  the  Companies  act  or  under  the  listing agreement  or  both.  This  gives  rise  to  several  issues, some of which are enumerated below.

All for One and One for All?

Section188 provides that no member of the company shall vote on any special resolution, to approve any RPT which may be entered into by the company, if such member is a related party.

A question which arises is that in a transaction between two related parties would all other related parties also be disentitled from voting or would only the ones affected by the transaction be disentitled? for instance, would a director who is a shareholder be disentitled merely because he is a director even though he has no special interest in a transaction? Thus, does the Three Musketeers’ slogan apply – all related parties would be clubbed together even if they have no interest in the transaction?

The MCA issued a clarification in this respect that related party has to be construed with reference to/in the context of the contract or arrangement for which the special resolution  is  being  passed.  this  is  a  very  important clarification that was eagerly awaited. The impact of the same may be illustrated as follows:

Illustration 1
a holding company is entering into a transaction with its substantially owned subsidiary, which is now treated as a related party. the managing director and other directors of the holding company are also treated as related parties u/s. 2(76) of the act. however, if they are shareholders they can vote on this transaction since they are not related parties in the context of the contract being considered.

Illustration 2
A company proposes to enter into a contract with the MD’s wife. here, the md would have to abstain from voting as a shareholder since he is a related party in the context of the contract being considered. however, other directors of the holding company can vote on this transaction if they are shareholders.

To add more spice to the flavour, SEBI has come out with an interesting amendment. It states that for RPTs all entities falling under the definition of related parties shall abstain from voting, irrespective of whether the entity is a party to the   particular transaction or not. this sets at naught the exemption given by the mCa! a classic case of “What the Left Hand Giveth, the Right Hand Taketh  Away.”  thus,  under  the  illustration-1  explained above, the directors of the holding company would have to abstain from voting even though they are not related to the transaction in question. A very strange and harsh requirement.

Father-Son Transactions
In the case of an RPT with a wholly owned subsidiary, the MCA has clarified that special resolution passed by the holding company would suffice under the Act for entering into transactions between the wholly owned subsidiary and the holding company.

Taking a cue from the MCA, the SEBI has also issued a relaxation. neither prior approval of the audit Committee nor shareholders’ special resolution is required for a transaction between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval. however, this exemption is only for a 100% subsidiary.

Past Life Benefit?
The MCA has also clarified that related party contracts entered into by companies, after making necessary compliances u/s. 297 of the Companies act, 1956, which contracts came into effect before the commencement of section 188 of the Act, will not require fresh approval u/s. 188 of the act till the expiry of the term of original contract. However, if a modification in such contract is made on or after 1st April 2014, then the requirements u/s. 188 will have to be complied with.

Blanket Exemption?
Further, section 188 does not apply to transactions arising out of compromises, amalgamations, arrangements, etc., dealt with under specific provisions of the Companies Act, 1956 or Companies act, 2013. Clause 49 does not carry a similar exemption.

Before or After?
Should the consent of the Board be obtained prior to     or after entering into the RPT? For prescribed RPTs, shareholders’ resolution is required to be passed prior  to the transaction but in other cases, no such express provision is made. Further, the section 188 provides that in case of a contract or arrangement entered into by a director or any employee without approval of the Board/Company, such contract may be ratified by post-facto consent within 3 months.

The   provisions   of   Clause   49   are   applicable   to   all prospective RPTs entered into after 1st October 2014. All existing material related party contracts or arrangements as on the date of this circular which are likely to continue beyond 31st march, 2015 must be placed for approval of the shareholders in the first General Meeting subsequent to 1st october, 2014. However, a company may choose to get such contracts approved by the shareholders even before 1st october, 2014. In case of a listed company, the shareholders’ resolution would also require an e-voting facility.   The   amended   Clause   49   permits   the  audit Committee to grant an omnibus approval for RPTs subject to certain conditions.

Consequences     of Non-Compliance The Act provides that any RPT which is not in compliance with section 188 may be  voidable  at  the  option  of  the Board.  The  director  or the employee concerned who authorised such contract or arrangement with the related party will be liable to indemnify the company for any loss incurred by it. Further, the company can proceed against such  director or employee for recovery of any loss it sustains due to such RPT.

The   punishment   for   non-compliance   of   section   188 on a director/employee in case of a listed company is imprisonment for a term of up to 1 year and/or fine of Rs. 25,000 to rs. 5 lakh. in case of an unlisted company the punishment is a fine of Rs. 25,000 to Rs. 5 lakh. Further, a person who has been convicted of an offence u/s.   188 at any time during the last 5 years is not eligible for appointment as a director of a company. the  punishment  for  non-compliance  with  the  listing Agreement has been laid down under the Securities Contract (regulation) act, 1956 and can extend up to a term of a maximum of 10 years and/or a fine of up to a maximum of Rs. 25 crore.

Reporting and Accounting requirements
Disclosures about RPTs are to be given under 3 Regulations – Section 188, Clause 49 and AS 18:

Section 188
of the Companies Act

clause 49 of
the listing agreement

Accounting
Standard 18 on Related

Party disclosures

Every
RPT (other than one at ALP and in the ordinary course of business) must be
referred to in the Board of Directors’ Report along with justifications.

Details
of all materials RPTs shall be disclosed quarterly along with the compliance
report on corporate governance

Accounting
for transactions with those related parties as defined in AS 18 are to be
given in the Financial Statements.

The Explanatory Statement to the Notice
calling a General Meeting (if any)
for passing a Special Resolution must mention the prescribed particulars.

The
Related Party Policy should be disclosed on the company’s website and also in
its Annual Report. The url to the web page should also be provided in the
Annual Report.

The
manner and nature of accounting is also given under AS 18.

A
Register of Contracts or Arrangements in which Directors are interested must
be maintained in the prescribed form.

The  Standard  on  Auditing  (SA)  550  Revised-  related Parties lays down the auditor’s responsibilities with respect to related party relationships and transactions while auditing financial statements.

Specified Domestic Transactions
How can there be any major development in india without the income-tax act having its share of the pie? the last piece of this jigsaw puzzle is s. 40a(2)(a)of the income-tax act which has introduced the concept of Specified Domestic Transactions. Any payments made by an assessee to related parties as specified under the income-tax act which are excessive or unreasonable may be disallowed to the extent of such excess. Further, certain related party transactions need to comply with the prescribed documentation, reporting and audit requirements in a manner similar to international transactions under the Transfer Pricing Regime. A  recent  delhi  tribunal  decision  in  the  case  of  Jai Surgicals Ltd vs. ACIT, reported at 534(2014) 46-A, BCAJ has held that payments made to a related party without obtaining approval under the erstwhile section 297 of the Companies act, 1956 cannot be treated as an offence or being prohibited by law. hence, such payment would not be disallowed u/s. 37(1) of the income-tax act.

Conclusion
SEBI has clearly thrown down the gauntlet to listed companies to carry out related party transactions both in letter and in spirit of the law. A plethora of regulations would force companies to have a relook at such transactions and ensure better minority protection. However, while we welcome better governance, let us not lose sight of the difference  between  governance  and  regulation.  these regulations  should  not  end  up  leading  to  more  law, but no order!!

A. P. (DIR Series) Circular No. 1 dated 3rd July, 2014

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Financial Commitment (FC) by Indian Party under Overseas Direct Investments (ODI ) – Restoration of Limit

Presently,
the limit for Overseas Direct Investments (ODI) /Financial Commitment
(FC) to be undertaken by an Indian Party under the automatic route is
100% of the net worth of the Indian Party as per its last audited
balance sheet.

This circular has restored the said limit to the
one that existed prior to 14th August, 2013. Hence now the limit for
Overseas Direct Investments (ODI)/Financial Commitment (FC) to be
undertaken by an Indian Party under the automatic route is 400% of the
net worth of the Indian Party as per its last audited balance sheet.
However, where the financial commitment of the Indian Party exceeds US$ 1
billion (or its equivalent) in a financial year prior permission of RBI
will need to be obtained even if the total FC of the Indian Party is
within the limit of 400% of its net worth as per the last audited
balance sheet.

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A. P. (DIR Series) Circular No. 8 dated 18th July, 2014

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Money Transfer Service Scheme – Delegation of work to Regional Offices

This circular has amended the guidelines with respect to Money Transfer Service Scheme. Henceforth, any person who wants to act as an Indian Agent under MTSS is required to make an application for permission to the respective Regional Office of the Foreign Exchange Department of the RBI under whose jurisdiction its registered office falls.

DIPP time schedule

DIPP has put the following Time schedule for processing proposals under NRI/EOU/RT schemes

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A. P. (DIR Series) Circular No. 7 dated 18th July, 2014

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Rupee Drawing Arrangement – Delegation of work to Regional Offices

This circular has amended the guidelines with respect to Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses as under: –

1. Banks entering into Rupee/Foreign Currency Drawing Arrangements with Exchange Houses for the first time now have to submit the application, in the prescribed format, to the respective Regional Office of the Foreign Exchange Department of the RBI under whose jurisdiction their registered office falls.

2. Banks now have to submit the Annual Review note, by 30th June every year, to the respective Regional Office of the Foreign Exchange Department of RBI under whose jurisdiction their registered office falls.

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A. P. (DIR Series) Circular No. 6 dated 18th July, 2014

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Press Note 4 (2014 Series) issued by DI PP dated 26th June, 2014

 Foreign Direct Investment – Reporting under FDI Scheme
This circular states that henceforth:-

1. Indian companies while submitting Form FCGPR & Form FCTRS must use the NIC codes as mentioned in the National Industrial Classification, 2008 (NIC 2008) and not the old NIC codes as mentioned in NIC 1987.

2. Indian companies must use the uniform State and District code list (available on the RBI website) while submitting Form FCGPR.

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A. P. (DIR Series) Circular No. 5 dated 17th July, 2014

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Notification No. FEMA 311/2014-RB dated 24th June, 2014

Liberalised Remittance Scheme (LRS) for resident individuals-Increase in the limit from USD 75,000 to USD 125,000

This circular now permits individuals resident in India to remit up to US $ 125,000 per financial year, under the Liberalised Remittance Scheme for acquisition of immovable property outside India.

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A. P. (DIR Series) Circular No. 4 dated July 15, 2014 Notification No. FEMA.306/2014-RB dated May 23, 2014

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Foreign Direct Investment (FDI ) in India – Issue/ Transfer of Shares or Convertible Debentures – Revised pricing guidelines
This circular contains the revised pricing guidelines with respect to issue/transfer of shares in/convertible debentures of an Indian Company to Non-Resident investors by the Company/Residents investors and vice versa.

The pricing guidelines (existing & revised) are as under: –


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A. P. (DIR Series) Circular No. 3 dated 14th July, 2014

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Notification No. FEMA. 308 /2014-RB dated 30th June, 2014

Issue of Partly Paid Shares and Warrants by Indian Company to Foreign Investors

Presently, the following instruments are recognised as Foreign Direct Investment (FDI) compliant instruments – equity shares, compulsorily and mandatorily convertible preference shares/debentures as well as equity shares or compulsorily and mandatorily convertible preference shares/debentures containing an optionality clause but without any option/right to exit at an assured price.

This circular has expanded the list of FDI compliant instruments by including therein partly paid equity shares and warrants issued by an Indian company in accordance with the provision of the Companies Act, 2013 and/or SEBI guidelines, as applicable. These partly paid equity shares and warrants will be eligible instruments for the purpose of both FDI and Foreign Portfolio Investment (FPI) schemes.

Non-Resident Indians (NRI) can also invest in the partlypaid shares and warrants on non-repatriation basis in terms of the provisions contained in Schedule 4 to Notification No. FEMA. 20/2000-RB, dated 3rd May, 2000, as amended from time to time.

Detailed guidelines in respect of the same are contained in this circular.

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A. P. (DIR Series) Circular No. 2 dated 7th July, 2014

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Foreign Exchange Management Act, 1999 – Import of Rough, Cut and Polished Diamonds

This circular states that with immediate effect, importers of Rough, Cut and Polished Diamonds can import the same on Clean Credit basis (i.e., credit given by a foreign supplier to its Indian customer/buyer, without any Letter of Credit (Suppliers’ Credit)/Letter of Undertaking (Buyers’ Credit)/Fixed Deposits from any Indian financial institution) for a period not exceeding 180 days from the date of shipment.

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Master Circulars dated 1st July, 2014

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RBI has issued 15 Master Circulars. These Master Circulars consolidate the existing instructions on the subject at one place. These Master Circulars will be updated from time to time as and when the fresh instructions are issued. These Master Circulars may be referred to for general guidance and concerned persons may refer to respective circulars/notifications for detailed information, if so needed.

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A. P. (DIR Series) Circular No. 151 dated 30th June, 2014

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Remittances to non-residents – Deduction of Tax at Source

This circular states that henceforth the RBI will not issue any instructions under the FEMA with respect to deduction of tax at source at the time of making remittances to the non-residents. Banks are, as a result, now required to comply with the requirement of the applicable tax laws in this regards.

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A. P. (DIR Series) Circular No. 149 dated 25th June, 2014

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Know 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 – Money Changing Activities – Change in period of maintenance and preservation of records

This circular provides that Authorised Persons are now required to maintain and preserve records for a period of at least five years as against the present requirement of to maintaining and preserving records for a period of at least ten years.

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A. P. (DIR Series) Circular No. 148 dated 20th June, 2014

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Notification No. FEMA 303/2014-RB dated 21st May, 2014)

Risk
Management and Inter-bank Dealings: Guidelines relating to
participation of Foreign Portfolio Investors (FPIs) in the Exchange
Traded Currency Derivatives (ETCD) market

Presently, persons
resident outside India are not allowed to participate in the currency
futures and exchange traded currency options market in India

This
circular now permits eligible foreign portfolio investors (FPI) to
enter into currency futures or exchange traded currency options
contracts subject to the following terms and conditions: –
a. F PI
can access to the currency futures or exchange traded currency options
for the purpose of hedging the currency risk arising out of the market
value of their exposure to Indian debt and equity securities.
b. F
PI are permitted to participate in the currency futures/exchange traded
options market through any registered/recognised trading member of the
exchange concerned.
c. F PI are permitted to take position – both
long (bought) as well as short (sold) – in foreign currency up to US $
10 million or equivalent per exchange without having to establish
existence of any underlying exposure. This limit will be both day-end as
well as intra-day.
d. FPI cannot take a short position beyond US $ 10 million at any time.
e.
F PI can take a long position beyond US $ 10 million in any exchange if
it has an underlying exposure. The onus of ensuring the existence of an
underlying exposure is on the FPI concerned.
f. E xchanges are free
to impose additional restrictions as prescribed by SEBI for the purpose
of risk management and fair trading.
g. E xchange/clearing
corporation has to provide FPI wise information on day end open position
as well as intra-day highest position to the respective custodian
banks. The custodian banks will aggregate the position of each FPI on
the exchanges as well as the OTC contracts booked with them (i.e., the
custodian banks) and other banks. If the total value of the contracts
exceeds the market value of the holdings on any day, the concerned FPI
will be liable to such penal action as may be laid down by the SEBI and
RBI.

RBI has issued the Notifications No.FED.1/ED (GP) – 2014
dated 10th June, 2014 (Currency Futures (Reserve Bank) Amendment
Directions, 2014) and No. FED. 2/ED (GP) – 2014 dated 10th June, 2014
(Exchange Traded Currency Options (Reserve Bank) Amendment Directions,
2014) to give effect to the above.

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A. P. (DIR Series) Circular No. 147 dated 20th June, 2014

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Risk Management and Inter-bank Dealings: Guidelines relating to participation of Residents in the Exchange Traded Currency Derivatives (ETCD) market

Presently:
1. D omestic participants in the currency futures and exchange traded options markets are not required to have any underlying exposure. While domestic participants in the over-the-counter (OTC) derivatives markets are compulsorily required to have underlying exposure.
2. Banks are not allowed to offset their positions in the ETCD market against the positions in the OTC derivatives market and are also not allowed to carry out any proprietary trading in the ETCD market.

This circular provides that: –
1. Domestic participants in the currency futures and exchange traded currency options will have to comply with the following terms and conditions:
a. Domestic participants are allowed to take a long (bought) as well as short (sold) position up to US $ 10 million per exchange without having to establish the existence of any underlying exposure.
b. D omestic participants who want to take a position exceeding US $ 10 million in the ETCD market will have to establish the existence of an underlying exposure. The procedure to be followed for the same is given in the circular.

2. Banks can:
a. U ndertake proprietary trading in the ETCD market within their Net Open Position Limit (NOPL)/limit imposed by the exchanges for the purpose of risk management and preserving market integrity.
b. N et/offset their positions in the ETCD market against the positions in the OTC derivatives markets.

There will be no upper limit on the position that can be taken by any participant, resident or non-resident, in the ETCD market, except limits that are imposed by SEBI for risk management and preserving market integrity.

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A. P. (DIR Series) Circular No. 146 dated 19th June, 2014

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Notification No. FEMA. 309/2014-RB dated 4th June, 2014

Export and Import of Currency: Enhanced facilities for residents and non-residents

Presently,
a person resident in India can take outside India or having gone out of
India on a temporary visit, can bring into India (other than to and
from Nepal and Bhutan) Indian currency notes up to an amount not
exceeding Rs.10,000. This circular has raised the said limit of Rs.
10,000 to Rs. 25,000 and provides that: 1. A ny person resident in India
can take outside India (other than to Nepal and Bhutan) or having gone
out of India on a temporary visit, can bring into India (other than from
Nepal and Bhutan) Indian currency notes up to an amount not exceeding
Rs.25,000.
2. A ny person resident outside India, who is not a
citizen of Pakistan and Bangladesh and who is also not a traveller
coming from and going to Pakistan and Bangladesh, and visiting India,
can take outside India/ bring into India Indian currency notes up to an
amount not exceeding Rs.25,000. This facility is available only the
person is exiting India/entering India only through an airport. Thus,
this facility of bringing into India or taking out of India, Indian
currency notes up to Rs. 25,000 is not available to persons’ resident
outside India who are coming into India/going out of India via land/sea
borders.

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Can consent orders be appealed against? — can rejection of consent application be appealed against?

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Background
SAT has recently held on 30th
June, 2013 in the case of Reliance Industries Limited (Appeal No. 1 of
2013) that consent orders cannot be appealed against. Further, even
rejection of application for settlement by consent cannot be appealed
against. The bar on appeal is absolute and total. This, as SAT explains,
has arisen on account of a retrospective amendment to the provisions
relating to settlement by consent. It is almost certain that this order
of SAT would be appealed against, to the Supreme Court. It also adds a
fresh layer of complexity to the process of settlement by consent
orders. This article reviews this order of SAT and in the context of an
existing earlier controversy.

As readers are aware, violations
of securities laws can not only result in serious penal consequences but
the process of investigation and punishment itself is long and costly
for both sides. The stigma of having violated securities laws and having
suffered penal consequences also tarnishes the record of a person. In
the United States, the system of plea bargaining is said to result in
90% of cases being settled through that route. A similar scheme was
introduced in India by SEBI in April, 2007. A person who has been
alleged to have violated securities laws or even if he expected that he
would be so charged, could approach SEBI and offer terms of settlement.
An independent committee (called “High Powered Advisory Committee”) was
set up, headed by a retired Judge of the High Court. The time to settle
the matter (or for rejection of such application) was usually very
short, often only a few months. Importantly, the person charged with
violations did not have to plead guilty.

SEBI’s power to settle questioned
Numerous
matters have already been settled by this process. These Guidelines
were further revised substantially in 2012. In the meantime, a petition
was filed before the Delhi High Court questioning power of SEBI to
settle violations through the consent mechanism. It appears that this
petition is still pending disposal.

Retrospective amendment of the law
Seemingly
to pre-empt the issue whether SEBI has such powers, an Ordinance has
been passed amending the SEBI Act and related statutes. The Ordinance
has made several provisions. Firstly, it gave explicit powers to SEBI to
settle such matters by consent. Secondly, it provided that such matters
shall be settled in accordance with Regulations. Formalising the
process of settlement by Regulations instead of Guidelines was perhaps
intended to give additional legal sanctity. Thirdly, and most
importantly, the amendments were given retrospective effect. This was
clearly intended to overcome any concern that SEBI did not have any
authority. Now, this Ordinance has been put to a test and we have a
pronouncement on one aspect of these provisions.

Decision of SAT
The
Securities Appellate Tribunal (“SAT ”), in Reliance’s case, has now
considered an issue arising out of the amendments made by that
Ordinance, and Regulations issued pursuant thereto. The essential
question was whether an appeal can lie against an order of SEBI
rejecting an application for Consent Order. SAT has held that, under the
amended law, such applicant has absolutely no right of appeal.

Allegations in the case
The
allegations in the case under consideration were as follows. Reliance
was accused to have carried out certain transactions in the stock market
in connivance with certain other persons. Illegal profits of Rs. 513.12
crore were alleged to have thereby been made. In a preceding show cause
notice, allegations of insider trading were also made. However, these
were later dropped.

The matter took several turns before it came
before SAT . A show cause notice was issued for which an application
for settlement by consent was made. This application was rejected. A
fresh show cause notice was issued. Reliance asked for documents in
connection with the show cause notice which were refused by SEBI. An
appeal was filed. Application for consent was also filed. In the
meantime, though SEBI had consistently maintained that the demand for
documents by Reliance was unjustified, it provided copies of the
requirement documents. However, shortly after providing such documents
and though Reliance sought time to examine the voluminous documents,
SEBI rejected the application for consent on the ground that the matter
could not be settled through consent. This was on the ground that the
matter fell into the category specified in the Guidelines of serious
fraudulent/unfair trade practices that could not be settled.

While
this was going on, and the appeal before the SAT was pending, the
Ordinance, as discussed earlier, was passed and the law was changed
retrospectively. In the background of all this, SAT passed the order as
discussed earlier.

SAT holds that amended law absolutely bars appeals
The
distinction between the earlier law and the law amended by the
Ordinance as explained by SAT is worth emphasising. The earlier section
relating to consent orders was contained in section 15T(2) of the SEBI
Act. It barred appeal against an order made “with the consent of the
parties.” This would have left orders rejecting application for consent
appealable. The Ordinance omitted Section 15T(2) with retrospective
effect from 20th April, 2007 and inserted section 15JB from same date.
Section 15JB barred appeal “against any order” under that section
dealing with application for consent orders. SAT thus held that, in view
of such retrospective amendment, even the SEBI’s order rejecting the
consent application was not appealable.

Adverse observations by SAT
Though
the SAT dismissed the appeal, it made several adverse observations
while giving the ruling. The following few important ones are worth
noting.

a) It said that SEBI was wrong in delaying matter for
years not giving documents required by the applicant on various grounds,
and thereafter providing the documents to the applicant.

b) It
also said that SEBI was wrong in denying adequate opportunity to the
applicant to present its case. SEBI gave, after a long delay, voluminous
documents desired by the applicant. However, without giving time to
examine such documents as desired by applicant, it passed an ex-parte
order rejecting the application.

c) SEBI’s argument that the
consent application was not maintainable because it fell within a
restricted category was also not accepted by SAT , since this ought to
have been known to SEBI from inception. Even more so since SEBI still
had discretion to consider, on facts, cases falling in such categories.

Despite
these observations, SAT effectively said that its hands were tied by
the amendments which had retrospective effect and barred appeal against
any order.

Possible future Scenario
It appears almost
certain, particularly considering the stakes involved (as mentioned
earlier, the allegation is that illegal gains of Rs. 513.12 crores were
made), that the Order of SAT would be appealed against before the
Supreme Court. Many more grounds may also be raised before the Supreme
Court including the vires of the amendments, whether they give unbridled
powers to SEBI, whether SEBI need not observe rules of natural justice
while considering such applications, etc. In particular, it is also
possible that the retrospective amendment itself could be questioned,
particularly since it takes away right of appeal even in existing cases.
The adverse observations of SAT most certainly would come to aid of the
applicant.

Hopefully, assuming the appeal is made, the supreme Court will also resolve other issues relating to mechanism of consent orders and those arising out of the retrospective amendments.  the  Court  may  decide  once  and  for  all whether seBi has powers, under the earlier law and the amended  law,  of  passing  Consent  orders.  this  ruling may also thus clear the air on whether Consent orders passed till now are valid in law. it may be particularly recollected that the earlier law did  not  have  specific and clear provisions empowering SEBI to pass consent orders. the amended law, though it did give such powers, had raised fresh concerns as discussed in earlier posts.

Apart from such basic issues, it is submitted that even otherwise the  ruling  of  sat  that  the  orders  relating  to consent application are wholly non-appealable is questionable. the law provides for several pre-conditions and procedures subject to which the consent order may be passed. further, the principles of natural justice would in any case have to be followed. such order would also have  to  be  in  accordance  with  regulations  made.  the order of seBi would, it is respectfully submitted, thus    be questionable on several grounds. it is submitted that sat’s  blanket  denial  of  such  grounds  of  questioning  in appeal of such orders is not correct.

Thus,  it  would  be  interesting  to  watch  the  progress  of this  case. the  journey  would  surely  be  long. assuming the order of sat is appealed against, the matter could be restored back to SEBI for fresh consideration of the application for consent. the outcome of such proceedings themselves could be matter of appeal.

Even if the appeal is rejected (or not made), the matter would go back to SEBI for considering the allegations on merits, which could go into a fresh round of appeals.

Conclusion – Whether Consent Settlement Mechanism will lose its Meaning?
An observation in passing is worth making. Consent orders can be compared with arbitration. Like arbitration, Consent orders too are meant for speeding up and even substituting litigation. as in arbitration, appeals are barred in Consent orders too. however, if even Consent orders end up in prolonged litigation instead of speeding it up, then the purpose is defeated. and thus, the classic and oftquoted words of lament of the supreme Court (in Guru Nanak Foundation vs. Rattan Singh & Sons) could apply to consent orders too:-

“Interminable, time consuming, complex and expensive court procedures impelled jurists to search for an alternative forum, less formal, more effective and speedy for resolution of disputes avoiding procedure claptrap and this lead them to arbitration act 1940. the way in which the proceedings under the act are conducted and without exception challenged in courts has made lawyers laugh and legal philosophers weep. experience shows  and law reports bear testimony that the proceedings under the act have become highly technical, accompanied by unending prolixity at every stage, providing a legal trap to the unwary. an informal forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the courts been clothed with legalese of unforeseen complexity.”

Partnership – Dissolution of Firm – Expiry of tenure of firm – Dissolution is automatic: Section 42, 59 and 63: Partnership Act, 1932.

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Kuriachan Chacko and Ors vs. The Registrar of Firms, Office of Inspector General of Registration, AIR 2014 Kerala 109

The Registrar of firm rejected the request of the petitioners to record the amendment brought about to Clause No. 12 of Partnership Deed dated 12-11-2002, whereby the specified tenure of ‘five years’ was sought to be amended as ’30 years’ with some other modifications, which was refused to be registered on the ground that the tenure of the firm was already over in 2007. The petitioners constituted a firm in the name and style as “M/s. LIS Ernakulam.”

Admittedly, the tenure of the firm was stipulated as ‘five years’. But according to the petitioners, as per Resolution 3 dated 30-10-2006, the members of the firm, had amended Clause No. 12 of the partnership deed, stipulating that the duration of the firm shall be for a minimum period of ’30 (thirty) years’; and that the firm shall not stand dissolved on the death of any of the partners and shall continue the business of the firm with the legal representatives of such deceased partner’s. The petitioners contend that, even though the resolution was taken as early as in the year 2006, it was unfortunately omitted to be brought to the notice of the respondent, for being incorporated in the Register. The lapse was noticed only in September, 2013 and immediately thereupon, the first petitioner who is described as the Managing Trustee/Partner as per Partnership Deed, preferred representation before the respondent, also forwarding a copy of the Minutes dated 30-10-2006 and an affidavit to that effect, seeking to have the modifications incorporated in the relevant Register. After considering the request, it was rejected by the respondent as mentioned hereinbefore, which in turn is under challenge in the Writ Petition.

The Hon’ble Court observed that the point to be considered is whether resolution stated as taken on 30-10-2006, amending Clause 12 of Deed of Partnership, modifying the tenure of the firm from five years to 30 years could be directed to be incorporated in the Register, for the reason that sub-Rule (2) of Rule 4 of the Partnership (Registration of Firms) Rules 1959 has been declared as illegal and ultra vires and struck off from the relevant Rules.

Evidently, sub-Rule (2) of Rule 4 of the Rules prescribes a time limit of 15 days from the occurrence of the event with reference to statement/notice in relation to the firm under s/s. 60, 61, 62, 63(1) and 63(2). Section 60 deals with recording of alteration in firm name and principal place of business. Section 61 is in respect of noting of closing and opening of branches. Coming to Section 62, it is in respect of noting of changes in names and addresses of the partners. Section 63 deals with recording of changes in and dissolution of the firm. Even a plain or casual reading is enough to hold that the situations contemplated under s/s. 60, 61 and 62 are not attracted to the situation of the case in hand.

On expiry of tenure of firm, dissolution is automatic. Amendment of tenure from five years to 30 years was not brought to notice of Registrar nor incorporated in Register at time firm was in existence. Amendment sought to be incorporated subsequent to dissolution cannot be allowed as the firm stood automatically dissolved and lost colour and characteristics of a registered firm. Therefore, refusal to incorporate amendment was proper.

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Co-operative Society – Membership – Discretion to refuse Membership to person not duly qualified – Not violative:Of Art 19(1)(c) Constitution of India and section 24(1): Gujarat Co-op Soc. Act, 1962

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Laxmi Niwas Co-op Housing Soc. Ltd. vs. District Registrar & Ors AIR 2014 Gujarat 159 (Full Bench) The appellant is a Co-op Society registered under the Gujarat Co-op Society Act.

A Society validly constituted under the provisions of the Act has the right to admit any new member provided such member is duly qualified for admission under the provisions of the Act. Rules and the Bye laws of such society. Subsection (1) of section 24 however, gives a discretion to the Society to refuse admission to a new member who has applied and has requisite qualifications, subject however, that sufficient cause exists for refusing such membership. What is `sufficient cause,’ although, has not been defined under the Act, sub-section (3) of section 24 makes it mandatory for the society to give reasons in writing within a specified period and in terms of the scheme provided in sub-section (4) to sub-section (6), such reason is subject to challenge before the Registrar by way of an appeal. Although sub-section (6) of section 24 states that decision of the Registrar under sub-section (4) shall be final and shall not be called in question in any court, it is well settled that such provision does not stand in the way of the High Court for exercising judicial review. Decision of the Society being subject to appeal before a statutory authority and being subject to further judicial review before the concerned High Court under Article 226 of the Constitution of India, none of the aforesaid provisions of section 24 can be said to be ultra vires any of the provisions of the Constitution of India.

Further, providing for the deemed membership to a person, who is not communicated the decision of the society to which he is seeking the membership within a period of three months, as provided in section 22(2) of the Act, does not violate Article 19(1)(c) of the Constitution of India. There are several such deeming provisions in various statutes and it is a consistent view of the courts that such provision is valid provided the applicant has the requisite qualifications. Thus, the provisions of section 24 or section 22(2) of the Act do not violate any of the provisions of the Constitution.

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Appellate Tribunal – Rectification of Mistake –Issue of limitation of demand raised but not considered – Rectification justified – Section 35C(2) of Central Excise Act, 1944.

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Commissioner of C. Ex. Mumbai III vs. N.T.B. International Pvt. Ltd. 2014 (302) ELT 481 (Bom.)

The
question that arose in the appeal was whether or not the exercise of
jurisdiction u/s. 35C (2) of the Act by the Tribunal to rectify an error
is justified .

By a final order dated 1st September, 2004
passed u/s. 35C of the Act, the Tribunal inter alia, upheld the duty
demand of Rs. 42.07 lakh. On 27th December 2004, the Respondent-Assessee
filed an application for rectification of mistake u/s. 35C(2) of the
Act seeking to rectify the order dated 1st September 2004. In its
rectification application, the Respondent-Assessee pointed out that
though the issue of limitation was raised before the Tribunal and also
urged at the hearing, the order did not deal with the same, thus leading
to an error apparent from the record warranting rectification of the
final order dated 1st September, 2004 of the Tribunal.

On 20th
December, 2005, the Tribunal after hearing the parties, allowed the
application for rectification of the mistake and held that the longer
period of limitation was not invocable in the present facts.
Consequently, the duty demand was reduced on appeal by revenue.

The
Hon’ble Court observed that the jurisdiction of the Tribunal u/s.
35C(2) of the Act is to rectify mistakes apparent from the record i.e.,
the mistake must be obvious and selfevident. The discovery of mistakes
must not require a long process of reasoning. The question whether there
is a mistake in the order sought to be rectified or not should not be a
subject of debate. Once a mistake is brought to the notice of the
Tribunal, it is duty bound to correct the mistake in its order, where an
issue has been argued and/ or submission made on the issue and the same
is not recorded and/or considered in the order, it follows that there
is a mistake apparent from the record.

Thus, non-consideration
of an issue urged before the Tribunal but not dealt with by it would
give rise to a mistake apparent from the record.

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Advocate appearing as litigant in person – Is not practicing his profession – Cannot be permitted to argue with his robes: Section 30: Advocates, 1961.

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R. Muthukrishnan vs. UOI & Ors.AIR 2014 Madras 133.

The petitioner in the writ petition is an Advocate and the writ petition has been designed as a Public Interest Litigation with a prayer to issue a writ of Declaration, declaring that the Direct Benefit Transfer Scheme for Liquefied Petroleum Gas announced by the Union of India is inconsistent with public law and constitutional requirements. When the case was posted for admission, the petitioner appeared in person with his robes. The petitioner was asked as to whether he being the petitioner in this writ petition would be entitled to argue with his robes. The petitioner insisted that he is an Advocate enrolled with the Bar Council of Tamil Nadu and in terms of the Rules framed under the Advocates Act, in particular the Rules governing Advocates given in Appendix I of the Rules, is duty bound to wear Bands and Gown while appearing, failing which he would be contravening the statutory provisions and therefore, was entitled to represent the matter with his robes. On such insistence, this Court framed the following preliminary question for consideration:-

Whether an Advocate is entitled to argue in a PIL, with his robes, on the ground that he is appearing as an advocate, or is entitled to argue with his robes when he is a petitioner in person in a Public Interest Litigation.

The Hon’ble Court observed that the contention raised by the petitioner is thoroughly misconceived. In the present case, the petitioner is appearing before the Court not as an Advocate of an any party, but on behalf of himself as he is the sole writ petitioner in the writ petition. Though the prayer in the writ petition is designed as a Public Interest Litigation, it is the specific case of the petitioner that he is also aggrieved and like him there are several others and therefore, he has filed this writ petition. If such is the case, we have no hesitation in holding that the petitioner himself is the litigant and he shall not be entitled to any rights and privileges as an Advocate while appearing in person for his own cause.

The Court further observed that a person cannot appear or plead before a Court of law in dual capacity, one as party and other as an Advocate and if an Advocate is appearing as party-in-person, he should in order to maintain the norms and decorum of the legal profession, appear before the Court of law as party in person putting off the band and robes prescribed for legal practitioner.

The Petitioner pleading his own cause though under the guise of a Public Interest Litigation, cannot seek recourse to any of the provisions of the Advocates Act, more particularly section 30 of the Act, inasmuch as no question has arisen as regards the right of the petitioner under the provisions of the Advocates Act and no rights conferred on him under the Act has been denied to him, while he is appearing in person. The word “practise” connotes exercise of a profession and when the petitioner an Advocate is a litigant in person, he does not practise his profession and therefore, he is not entitled to argue his case with his robes.

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IS PRIVACY SACRED?

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“Gentlemen do not read other gentlemen’s mail” –
this sentence of the then Secretary of State of US, Henry Stimson
(1929-1933), is the most famous sentence uttered about codes and
ciphers.

Secretary Stimson disbanded the “Black Chamber” which
was founded in 1919 following World War I. The mission of this Chamber
was to break into the communication of other nations, with the
overarching objective of breaking into diplomatic communication.

Circa
2013. Edward Snowden, a US citizen, who worked as a National Security
Agency (NSA) contractor through Booz Allen Hamilton, leaked the details
of top-secret U.S. and British government mass surveillance programmes,
including the interception of US and European telephone metadata and the
PRISM and Tempora Internet surveillance programmes. With his US
passport being revoked, he travelled from Hong Kong to Russia, where he
was given asylum.

It’s been a year since his exile in Moscow and
he continues to be an enigma for many people across the world. In fact,
the celebrated Hollywood director, Oliver Stone, is working on a film
about Snowden.

There are many others who believe in individual privacy.

•
Aaron Swartz was a computer programmer, writer, political organiser and
Internet activist. In January, 2011, Swartz was arrested by police on
state breaking-andentering charges, after downloading academic journal
articles from JSTOR . Charged with violations of the Computer Fraud and
Abuse Act, Aaron was found dead on 11th January, 2013 in his Brooklyn
apartment, where he had hanged himself. He was quoted as having said,
“there is no justice in following unjust laws.”

• Bradley
Manning, a US Army soldier, was arrested in May 2010 in Iraq on
suspicion of having passed classified material to the website,
WikiLeaks, which was the largest set of restricted documents ever leaked
to the public. He has been recently sentenced to 35 years in prison.
Manning has famously said, “I want people to see the truth, because
without information, you cannot make informed decisions as a public.”

•
Julian Assange is an Australian editor, activist, publisher and
journalist. He is known as the editor-in-chief and founder of WikiLeaks,
which publishes secret information, news leaks and classified media
from anonymous news sources and whistleblowers. Since November 2010,
subject to a European arrest warrant in response to a Swedish police
request for questioning in relation to a sexual assault investigation.

In
June 2012, following the final dismissal by the Supreme Court of the
United Kingdom, Assange failed to surrender to his bail and sought
refuge in the Ecuadorian embassy in London, where he has since been
granted diplomatic asylum. Assange has made a telling statement. “I give
private information on corporations to you for free and I’m a villain.
Zuckerberg gives your private information to corporations for money and
he’s Man of the Year.”

This new breed of “hacktivist” (hackers
who are activists) fundamentally believe that surveillance means tyranny
and they revolt against such tyranny. The rise of these hacktivists
across the world has raised an important question on data privacy —
should governments be allowed to snoop on all private data?

As
recent disclosures by Snowden have revealed, every email and
communication was being monitored and it did not spare even heads of
State.

In fact, the Brazilian President, Dilma Rousseff,
launched a blistering attack on the US in a speech at the UN general
assembly on 24th September, 2013.

She protested against the
indiscriminate interception of a private citizen by the US, stating that
it is a breach of international law. In a telling comment, she said:

“A
sovereign nation can never establish itself to the detriment of another
sovereign nation. The right to safety of citizens of one country can
never be guaranteed by violating fundamental human rights of citizens of
another country.”

There has been a chorus of protests from the
European heads of State protesting spying on emails and communication.
Finland’s Prime Minister, Jyrki Katainen has said, “According to our
fundamental rights, all the citizens, including politicians, have
similar rights and illegal monitoring of cellphones isn’t acceptable.”

Governments
justify surveillance of data based on their need for intelligence
gathering, data mining and prevention of security threats. Hacktivists
believe that personal privacy is a fundamental right.

Governments
argue that collecting haystacks of data is essential to look for
potential security and other threats to the State. Hacktivists argue
that the records of all intimate moments of individuals are captured by
the Governments from private communication network and sites, without
specific authorisation and need and hence, it is a violation of the
citizen’s rights. Security agencies seize digital material from
citizens, who store it on their computers or send it to their
acquaintances by emails or social networking sites. These agencies could
not have possibly entered their houses and walked off with diaries and
other physical material, without proper authorisation. If such stuff
cannot be captured from the analogue or physical world, how is it right
that it is captured from the digital world? Such broad information
capture and interception of communication is justified on the grounds of
“national security.” But, as revealed by Snowden, it is done routinely
without any suspicion, warrant or probable cause. Hacktivists argue that
this is violation of human rights and such private and intimate
information should not be in the government database.

So, is privacy sacred?
The debate has just begun…

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“Fraud” Implications under Companies Act 2013

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Introduction
Deceiving any person by fraudulent or dishonest inducement to deliver any property amounts to offence of cheating punishable u/s. 415 to 424 of the Indian Penal Code. Apart from the IPC other laws dealing with taxation and commercial activities also deal with fraudulent acts and their consequences.

Section 447 of the Companies Act, 2013 prescribes a separate punishment for fraud, in relation to affairs of any company which is, imprisonment for a term which shall not be less than six months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud but which may extend to three times the amount involved in fraud. The explanation to section 447 defines ‘fraud’ as under:

“Explanation.- For the purposes of this section-

(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled.

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.”

It is clear from the above provisions that any act or omission, concealment of any fact or abuse of position committed by any person with intent to deceive, to gain undue advantage from or injure the interest of any company or its shareholders or its creditors or any other person, is guilty of fraud. Various provisions of the Companies Act, 2013, list out different acts, omissions or other conduct which shall amount to fraud punishable u/s. 447 of the Act and the same are as under:

U/s. 212(6) all the above offences are cognisable offences and no person accused of any offence under above sections can be released on bail without giving opportunity to be heard to the Public Prosecutor.

The Companies Act 2013, provides for establishment of Special Courts to try the offences under the Act and pending such establishment the offences are to be tried by a Court of Session exercising jurisdiction over the area (section 440 of the Companies Act, 2013).

Serious Fraud Investigation Office
The Act also provides for establishment of Serious Fraud Investigation Office (SFIO) and till it is established u/s. 211(1), the present SFIO established under administrative orders, referred to in the Proviso to section 211(1) shall be deemed to be SFIO for the purpose of section 211. The Central Government can assign investigation into affairs of any company to SFIO and if there is any offence under investigation by SFIO no other investigation authority including the State Police, can continue or commence investigation under the Companies Act, 2013. Under the provision of the new law the SFIO has been given a statutory status and powers of investigation under the Code of Criminal Procedure, 1973 have been vested in SFIO. S/s. (17) of section 212 makes a specific provision for sharing of any information or documents available with any other investigating authority or income-tax authorities with SFIO and likewise SFIO can share information or documents available with it with any other investigating authority or income-tax authorities.

It is seen from the definition of fraud contained in the explanation to section 447 that a person will be guilty of offence of fraud under the Act if committed with intent to deceive or gain undue advantage from or injure the interests of –

• the company;
• its shareholders;
• its creditors; or
• any other person

Since offence of fraud under the Companies Act, 2013 is in relation to affairs of a company, fraudulent acts committed by “any other person” amount to fraud under the Act if such acts are in relation to the affairs of the company.

Fraud as a civil wrong
Fraud is defined in the Indian Contract Act, 1872. Section 14 of the Contract Act defines free consent inter alia as consent not caused by fraud as defined in section 17 of the Contract Act. Section 17 provides that:

“17. “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:-

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other fact fitted to deceive;
(5) any such actor omission as the law specially declares to be fraudulent.

Explanation.- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.”

Section 19 further provides that when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is avoidable at the option of the party whose consent was so caused. The Indian Contract Act therefore provides that a victim of fraud can avoid the agreement entered into acting on fraudulent acts but there are no provisions making fraud an offence punishable with imprisonment or fine.

CHEATING IS CRIME UDNER IPC:
The Indian Penal Code, 1860 is the law of crimes applicable in India and section 415 of the said Code defines the offence of cheating, as under:

“415. Cheating.- Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to “cheat”.

Explanation.- A dishonest concealment of facts is a deception within the meaning of this section.”

Fraud is not an offence under the law of crimes.

Offence of cheating under the IPC requires:
“(1) deception of any person; (2)(a) fraudulently or dishonestly inducing that person; (i) to deliver any property to any person; or (ii) to consent that any person shall retain any property; or (b) intentionally inducing that person to do or omit to do anything which he would not do or do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property (Hridaya Ranjan Prasad Verma vs. State of Bihar AIR 2000 SC 2341: (2000) 4 SCC 168: 2000 SCC (Cri) 786: 2000 Cr LJ 298).”

Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain and is a civil wrong. fraud in criminal form is cheating or theft by false pretence, intentional deception of victim by  false  representation or pretense. it needs to be noted that abuse of position with intent to deceive or gain undue advantage does not amount to cheating u/s. 415 iPC. if one compares the words of section 447 of the Companies act, 2013 with the provisions in section 17 of the Contract act and section 415 of iPC, it is clear that offence of fraud under   the Companies act is based on the Contract act, which treats fraud as a civil wrong. it is therefore possible that a person guilty of fraud under the Company Law may not necessarily be guilty of cheating under the indian Penal Code. new provisions contained the Companies act, 2013 defining fraud and establishing the Serious Fraud Investigation Office conferring powers of investigation under the Code of Criminal Procedure are intended to ensure that the directors and other persons managing the affairs of a Company act honestly and diligently to protect the interest of the company they represent and the interests of shareholders and creditors of the Company. any act or omission or concealment or abuse of position to gain advantage for themselves or other persons, on the part of persons managing the company will amount to a fraud punishable u/s. 447. it is an accepted fact that there are successful businessmen in the corporate world who possess positive qualities and survive and prosper by doing business honestly in accordance with the rules and regulations and do not derive any benefits for themselves or others except those which are legitimately due to them. But there are many who achieve success and appear to be playing according to rules but are experts in adopting various tactics to deceive and gain undue advantage for themselves and others. it is for dealing with such unscrupulous persons that the law has been amended and the new provisions are intended to ensure compliance and observance of principles of corporate governance by all companies.

Fraud Under The Companies act, 2013 and English law
new provisions in the Companies act, 2013, are comparable to the definition of fraud under English law. In Eng- land, the provisions contained in the theft act, 1968 were replaced by the fraud act, 2006 which provides that any person by making a false representation or failing to disclose information or by abuse of his position makes any gain for himself or anyone else or inflicting a loss on another shall be guilty of fraud. Provisions in english law are more comprehensive defining false representations, concealment or non-disclosure of information and abuse of position. the other major difference between section 447  of the Companies act 2013 and the fraud act, 2006 in england is that the english law is criminal law applicable to any victim of fraud unlike indian law which restrict the law to the victims who are companies or their shareholders or creditors or other persons like investors who are victims of fraudulent acts. Considering the wide ramifications of frauds in the capital market, insurance & banking sector, non-banking entities like chit funds, ponzi schemes for marketing goods and other money circulation schemes, there is a need to amend our criminal law on the lines of the fraud act, 2006 enacted in england. in other words the provisions relating to fraud in the Com- panies act, 2013 need to be converted into general law having universal application like the indian Penal Code.

Widening The Ambit of Fraud
One other significant provision in the definition of fraud is treatment of abuse of position with intent to gain undue advantage from any person as fraud. such a provision in effect amounts to providing punishment for bribery and corruption in the private sector. to illustrate, if a Purchase Officer of a company takes a kickback from a supplier of raw-material to the company, or a director sells his personal property to the Company at inflated price, such persons will be guilty of abusing their position as Purchase Officer or Director for undue advantage for themselves. The general law of Prevention of Corruption act, 1988, is applicable to Public Servants as defined in the said Act which is not applicable to Directors and Officers of Companies in the private sector because they are not public servants. now with enactment of section 447 in the Companies Act, 2013, Directors and Officers of private sector companies abusing their position for personal gain or to give advantage to any other person can be prosecuted and punished for fraud.

The efficacy of the new provisions creating offence of fraud  ultimately  depends  on  establishment  of  special Courts as contemplated under chapter XXViii of the new act for the purpose of trial of offence under the Companies act, 2013, and expeditious trial and punishment of persons guilty of fraud. speedy trial of fraudsters is the key for improved levels of protection of interests of investors and other stakeholders of corporates, as well as observance of principles of corporate governance by the corporates.

Considering the wide spread incidence of frauds in all sectors of the economy there is a need to examine whether indian Penal Code needs to be amended on the lines of the fraud act, 2006 enacted in england.

Fraud and the Auditor
In terms of section 143(12), an obligation has been cast on the auditor of a company to report to the Central government of fraud which has been committed, or is being committed against the company by officers or employees of the company. the manner of reporting has been prescribed in the rule 13, of the Companies (audit and auditors ) rules 2014 .

The responsibility cast on the auditor, is onerous. To what extent auditors are able to discharge this onus remains to be seen.

Conclusion
the  enactment  of  section  447  in  the  Companies  act 2013, is an indicator of the thinking of the authorities. economic frauds have increased a great deal of the recent past. on account of a lacuna in the law and the lengthy legal process, persons committing such frauds have been able to avoid punishment. one hopes that the provisions in the Companies act 2013, will help to bring to book such fraudsters.

A. P. (DIR Series) Circular No. 81 dated 24th December, 2013

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Notification No. FEMA.287/2013-RB dated 17th September, 2013, vide G.S.R. No. 645(E) dated 20th September, 2013, read with Corrigendum dated 24th October, 2013 vide G.S.R.No.741(E) dated 19th November, 2013

Borrowing and Lending in Rupees – Investments by persons resident outside India in the tax free, secured, redeemable, non-convertible bonds

Presently, a person resident in India who has borrowed in Rupees from a person resident outside India cannot use the said funds for any investment, whether by way of capital or otherwise, in any company or partnership firm or proprietorship concern or any entity, whether incorporated or not, or for relending.

This circular now permits resident entities/companies in India who are authorised to issue tax-free, secured, redeemable, non-convertible bonds in Rupees to persons resident outside India to use such borrowed funds for lending & investment as under: –

(a) For on lending/re-lending to the infrastructure sector; and

(b) For keeping in fixed deposits with banks in India pending utilisation by them for permissible end-uses.

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A. P. (DIR Series) Circular No. 78 dated December 3, 2013

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External Commercial Borrowings (ECB) by Holding Companies/Core Investment Companies for the project use in Special Purpose Vehicles (SPVs)

This circular permit Holding Companies/Core Investment Companies (CIC) to raise ECB under the automatic route/approval route, as the case may be, for project use in SPV subject to the following terms and conditions:

i. The business activity of the SPV should be in the infrastructure sector as defined in the extant ECB guidelines.

ii. The infrastructure project must be implemented by the SPV established exclusively for implementing the project.

iii. ECB proceeds must be utilized either for fresh capital expenditure or for refinancing of existing Rupee loans (under the approval route) availed of from the domestic banking system for capital expenditure.

iv. ECB for SPV can be raised for up to 3 years after the Commercial Operations Date of the SPV.

v. The SPV has to give an undertaking that no other method of funding, such as, trade credit (if for import of capital goods), etc. will be used for the portion of fresh capital expenditure that is financed through ECB.

vi. ECB proceeds must be kept in a separate escrow account pending utilization for permissible end-uses and use of such proceeds must be strictly monitored by the bank for permissible uses.

vii. Holding Companies that come under the Core Investment Company (CIC) regulatory framework have to comply with the following additional terms and conditions: –

a) ECB availed is within the ceiling of leverage stipulated for CIC, i.e., their outside liabilities including ECB must not be more than 2.5 times of their adjusted net worth as on the date of the last audited balance sheet; and

b) In case of CIC with asset size below Rs. 100 crore, ECB availed of must be on fully hedged basis.

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A. P. (DIR Series) Circular No. 77 dated November 22, 2013

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Overseas Foreign Currency Borrowings by Authorised Dealer Banks

Presently, banks can borrow funds from international/ multilateral financial institutions up to a limit of 100% of their unimpaired Tier I capital as at the close of the previous quarter or $ 10 million (or its equivalent), whichever is higher (excluding borrowings for financing of export credit in foreign currency and capital instruments) for the purpose of general banking business (but not for capital augmentation) and also swap the same at a concessional rate with RBI. This facility is available up to 30th November, 2013.

This circular provides that where any bank is being sanctioned any loan from any international/ multilateral financial institutions and is receiving a firm commitment in this regard on or before 30th November, 2013, it will be allowed to enter into a forward-forward swap under the first leg of which the bank can sell forward the contracted amount of foreign currency corresponding to the loan amount for delivery up to 31st December, 2013. However, if the bank is not able to deliver the contracted amount of foreign currency on the contracted date, it will have to pay the difference between concessional swap rate contracted and the market swap rate plus one hundred basis points.

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A. P. (DIR Series) Circular No. 121 dated 10th April, 2014

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Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 30th June, 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.

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A. P. (DIR Series) Circular No. 120 dated 10th April, 2014

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Rupee Drawing Arrangement – ‘Direct to Account’ Facility

This circular, subject to certain terms and conditions, now permits banks (called Partner Banks) in India to credit the proceeds of foreign inward remittances received under Rupee Drawing Arrangement (RDA) directly to the KYC compliant beneficiary bank accounts through electronic mode, such as, NEFT, IMPS, etc.

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A. P. (DIR Series) Circular No. 119 dated 7th April, 2014

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Foreign investment in India in Government Securities

Presently, resident individuals are allowed to book foreign exchange forward contracts, without production of underlying documents, up to a limit of US $ 100,000 on self-declaration basis, to hedge/ manage their actual/anticipated foreign exchange exposures.

This circular now permits all resident individuals, firms and companies, to book foreign exchange forward contracts, up to US $ 250,000 on the basis of a simple declaration (as per format annexed to this Circular) without any requirement of further documentation, to hedge/manage their actual or anticipated foreign exchange exposures.

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A. P. (DIR Series) Circular No. 118 dated 7th April, 2014

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Foreign investment in India in Government Securities

Presently, FII, QFI, long term investors and FPI, registered with SEBI, can invest in Government securities including T-Bills (sub-limit of US $ 5.50 billion) and dated Government Securities (sub-limit of US $ 10 billion) within the overall limit of US $ 30 billion.

This circular provides that FII, QFI, long term investors and FPI, registered with SEBI, can now invest in Government dated securities having residual maturity of 1 year and above and existing investments in T-bills and Government dated securities of less than 1 year residual maturity will be allowed to taper off on maturity/sale.

The revised position is as under: –

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A. P. (DIR Series) Circular No. 117 dated 4th April, 2014

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Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999 This circular has expanded the list of offences that can be compounded by Regional Offices of RBI. The expanded list is as under: –

 

The Regional offices at Panaji and Kochi can compound the above offences provided the amount involved is less than Rs. 10,000,000. All other Regional Offices can compound the above offences without any monetary limit.

For compounding of any other offence application will have to be made, as is the present procedure, to Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, 5th floor, Amar Building, Sir P. M. Road, Fort, Mumbai 400001.

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A. P. (DIR Series) Circular No. 115 dated 28th March, 2014

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Merchanting Trade Transactions – Revised guidelines

This circular contains the revised guidelines with respect to Merchanting Trade Transactions. These guidelines will apply to merchanting trade transactions initiated after 17th January, 2014.

Merchanting traders must be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. Handling bank must satisfy themselves about the capabilities of the merchanting trader to perform the obligations under the order. The overall merchanting trade must result in reasonable profits to the merchanting trader.

The highlights of the said guidelines are as under: –

i) For a trade to be classified as merchanting trade the following conditions must be satisfied: –

a. Goods acquired must not enter the Domestic Tariff Area; and

b. The state of the goods must not undergo any transformation.

ii) Goods involved in the merchanting trade transactions (transaction) must be those that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively.

iii) The bank handling the transaction must be satisfied with the bonafides of the transactions.

iv) Both the legs of the transaction must be routed through the same bank.

v) The entire transaction must be completed within an overall period of nine months and there must not be any foreign exchange outlay beyond four months.

vi) The commencement date would be the date of shipment/export leg receipt/import leg payment, whichever is first. The completion date would be the date of shipment/export leg receipt/import leg payment, whichever is the last.

vii) Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting trade transactions, to the extent not backed by advance remittance for the export lag, including the discounting of export leg LC by a bank, as in the case of import transactions.

viii) In case advance against the export leg is received by the merchanting trader, the bank must ensure that the same is earmarked for making payment for the respective import leg.

ix) Merchanting traders can make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, the bank can provide credit facility based on commercial judgement. However, where the advance payment for the import leg is more than US $ 200,000 per transaction, than advance must be given against bank guarantee/LC from an international bank of repute except in cases and to the extent where payment for export leg has been received in advance.

x) Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay involved and provided the completion of the transaction will happen within nine months.

xi) Payment for the import leg can also be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader.

xii) The handling bank must ensure one-to-one matching in case of each transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis in the format as annexed to the circular, within 15 days from the close of each half year, i.e. June and December.

xiii) The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, will be caution-listed.

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A. P. (DIR Series) Circular No. 114 dated 27th March, 2014

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Risk Management and Inter Bank Dealings

Presently, exporters are allowed to hedge currency risk on the basis of a declaration of exposure up to an eligible limit which is the average of the last 3 financial years’ (April to March) actual export turnover or last year’s actual export turnover, whichever is higher. Similarly, importers are allowed to hedge up to an eligible limit which is 25% of the average of the last three financial years’ actual import turnover or last year’s actual import turnover, whichever is higher. All forward contracts booked under this facility by both exporters and importers have to be on fully deliverable basis. In case of cancellation, exchange gain, if any, cannot be passed on to the exporter/importer by the bank.

This circular provides that, exporters/importers will now be entitled to the gains/losses resulting from the cancellation of up to 75% of the contracts booked within the eligible limit (as mentioned above). Contracts booked in excess of 75% of the eligible limit will be on deliverable basis and cannot be cancelled. Hence, in the event of cancellation the exporter/ importer will have to bear the loss but will not be entitled to receive the gain.

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A. P. (DIR Series) Circular No. 113 dated 26th March, 2014

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External Commercial Borrowings (ECB) for Civil Aviation Sector

Presently, airlines Companies, subject to certain terms and conditions, could avail ECB for working capital up to 31st December, 2013. This circular now permits airlines Companies to raise ECB for working capital up to 31st March, 2015.

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A. P. (DIR Series) Circular No. 112 dated 25th March, 2014

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Notification No. FEMA.297/2014-RB dated 13th March 2014 – G.S.R. No. 189(E) dated 19th March 19, 2014

Foreign Portfolio Investor – investment under Portfolio Investment Scheme, Government and Corporate debt

The present scheme in respect of Portfolio Investment in India by FII & QFI has been replaced by a new scheme called the Foreign Portfolio Investment Scheme.

Important features of the said new scheme are as under: –

a. Portfolio investor registered in accordance with SEBI guidelines will now be called ‘Registered Foreign Portfolio Investor (RFPI)’. All existing portfolio investor classes, namely, FII and QFI registered with SEBI will be subsumed under RFPI. b. RFPI may purchase and sell shares and convertible debentures of Indian company through registered broker on recognized stock exchanges in India as well as purchases shares and convertible debentures which are offered to public in terms of relevant SEBI guidelines / regulations.

c. RFPI may sell shares or convertible debentures so acquired:

a) In open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or

b) In an open offer in accordance with the SEBI (Delisting of Equity shares) Regulations, 2009; or

c) Through buyback of shares by a listed Indian company in accordance with the SEBI (Buyback of securities) Regulations, 1998. d. RFPI may also acquire shares or convertible debentures: –

a) In any bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the Central Government or any State Government; or

b) In any transaction in securities pursuant to an agreement entered into with merchant banker in the process of market making or subscribing to unsubscribed portion of the issue in accordance with Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

e. Subject to applicable composite sectoral cap under FDI policy, RFPI investment will as under: –

a) The individual investment limits for RFPI will be below 10% of the total paid-up equity capital or 10% of the paid-up value of each series of convertible debentures issued by an Indian company; and

b) The aggregate investment limits for RFPI will be below 24% of the total paid-up equity capital or 24% of the paid-up value of each series of convertible debentures issued by an Indian company.

f. RFPI can open a Special Non-Resident Rupee (SNRR) account and a foreign currency account with a bank in India to transfer amounts from foreign currency account to SNRR account at the prevailing market rate for making genuine investments in securities. The bank can transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to foreign currency account.

g. RFPI can invest in government securities and corporate debt subject to limits specified by the RBI and SEBI from time to time.

h. All investments by RFPI will be subject to the SEBI (FPI) Regulations 2014, as modified by SEBI /Government of India from time to time.

i. RFPI can trade in all exchange traded derivative contracts on the stock exchanges in India subject to the position limits as specified by SEBI from time to time.

j. RFPI can offer cash or foreign sovereign securities with AAA rating or corporate bonds or domestic Government Securities, as collateral to the recognized Stock Exchanges for their transactions in the cash as well as derivative segment of the market.

Any FII that holds a valid certificate of registration from SEBI will be deemed to be a RFPI till the expiry of the block of three years for which fees have been paid as per the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995.

A QFI can continue to buy, sell or otherwise deal in securities subject to the SEBI (FPI) Regulations, 2014 for a period of one year from the date of commencement of these regulations, or until he obtains a certificate of registration as foreign portfolio investor, whichever is earlier.

All investments made by a FII/QFI in accordance with the regulations prior to registration as RFPI shall continue to be valid and taken into account for computation of aggregate limit.

A RFPI is required to report transactions to RBI as is presently being reported by FII in LEC Form.

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Is It Fair Not To Exclude Personal Payments By Individuals/Hindu Undivided Families (for Any of Its Members) from TDS?

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Introduction:

Provisions of Tax
Deduction at Source (TDS) contained in Chapter XVII-A of Income-tax Act,
1961 (“the Act”) impose a heavy burden on tax payers, especially
businessmen. Readers are aware of highly damaging consequences of
defaults in respect of contraventions of these provisions – viz. section
201, 40(a)(i), 40a(ia), 271-C, 272A, 276 B and so on. Having regard to
the complications in implementation and the harsh consequences of
default, law-makers in their wisdom have generally kept the common man
viz. individuals and Hindu Undivided Families (HUF) out of the
obligation to deduct tax. However, under certain circumstances, even
individuals and HUF’s are required to comply with these provisions.
These situations are:-

(a) payments of salaries

(b) payment to non-residents ; and

(c) if the individual/HUF’s business or profession was subject to tax audit u/s. 44AB under turnover criterion.

The unfairness:

Obligation
in respect of payment to non-residents is to some extent reasonable
since it entails the outflow of money from the country.

The Act
in certain sections also provides exception so that an individual/HUF,
though otherwise liable to deduct tax is not required to do so on
payments for personal purposes. Thus, s/s. (4) of section 194.C (payment
to contractors) exempts payments made exclusively for personal purpose.
(e.g., repairs/painting of the businessman’s residential house). So
also, the 3rd proviso to s/s. (1) of section 194.J (payments to
professionals) grants similar exemption. Hence, payments to lawyers,
architects, doctors for personal purposes by businessman will not
attract TDS provisions.

As against this, no such exemption is provided in respect of the following payments:-

Section 192 – Salaries (say salary payable to personal attendant for a patient/disabled person)

Section 194A- Interest other than interest on securities (say interest on housing loan taken from friends, relatives, etc.).

Section 194H- Commission or brokerage (say brokerage on sale/purchase of house/car/other assets) Section

194I – Rent for residential house, or rent for personal car/other assets.

There
appears to be no logical reason for such discrimination. Due to such
inconsistencies, the study and implementation of law also becomes
difficult.

Suggestion:

Similar exceptions should be provided in aforesaid sections as well.

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Political Contributions by Companies-Delhi High Court Reminds Us of the Wide Prohibitory Law

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Contributions from companies with more than 50% “foreign” holding prohibited

The Delhi High Court decision in the case of Association for Democratic Reforms vs. UOI ([2014] 43 Taxmann.com 443 (Del.)) is both a reminder and an eye opener, of certain very widely framed provisions of law originally of FERA times that continue to have impact. It is very timely too in this election season when many companies have given electoral contributions. Even more so considering the fact that the new section 182 of the Companies Act, 2013, has permitted a higher electoral contribution of 7.50% of profits as compared to 5% under the 1956 Act.

The Court has held that political parties/election candidates cannot accept foreign contributions – i.e., electoral contributions from an Indian company with more than 50% foreign holding, as so defined. The definition of what constitutes “foreign contribution” is so wide that it may bring numerous Indian listed and unlisted companies in its net. In short, acceptance of political contributions from certain Indian companies, whose number could be quite large, has been confirmed to be in violation of the law.

The decision deals with several issues, some of which arise out of defense offered by the political parties/Central Government who were the respondents. However, this article focusses on the core and important issue, which is, whether electoral contributions can be accepted by political parties from companies registered and operating in India but which have more than 50% foreign holding.

Misleading reports about the nature of decision and contribution from “foreign sources”

It is important to go into some details of certain facts of this case because several newspaper reports gave either incorrect facts or were misleading. The impression created was that contributions from “foreign sources” were received and these were held to be prohibited, without explaining how wide the term foreign sources was under the law. Foreign sources, as will be seen later, is defined in a wider manner than the literal meaning of the term suggests.

Some reports even said that a foreign company – Vedanta – gave the contributions. This, apart from being factually incorrect, again conveys that the decision has limited application. The impression conveyed is that it applies only to the rare situation when a political party accepts contributions from a foreign company.

Facts of the case

Here are, summarised and simplified, the facts as stated and the law as per the decision. Vedanta Resources plc is a company incorporated in England and Wales. It held majority/controlling stake in two companies registered in India – Sterlite Industries Limited and Sesa Goa Limited. Sterlite and Sesa Goa made electoral contributions to certain political parties. The question before the Court was whether the parties that accepted contributions violated the Foreign Contribution (Regulation) Act, 1976 (FCRA).

FCRA 1976 vs. FCRA 2010

At this juncture, it is important to note the law that the Court was concerned with was the FCRA 1976. The Court emphasised this and noted that the FCRA 1976 was replaced by the FCRA 2010. However, it can be seen that, on this aspect, the FCRA 2010 provisions are substantially similar to the FCRA 1976. Hence, I submit that the ratio of the Court’s decision ought to apply for the FCRA 2010 too.

What is “foreign contributions”?

The FCRA prohibits acceptance of “foreign contributions” by political parties/candidates. However, as was common with the laws introduced in the late 60s and mid 70s, they were very broadly framed and this led to a fairly complex definition, with one definition leading one to refer to another. The term “foreign contribution” is defined to mean receipt of certain things such as money, etc. from a “foreign source”. The term “foreign source” is defined to mean several entities including a “foreign company” and certain specified Indian companies. It is the definition of these two terms and, for the purposes of this article, the latter one with which we are concerned.

Contributions received from the following companies are also treated as contribution from “foreign sources”:-

“(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely,

(a) the government of a foreign country or territory,

(b) the citizens of a foreign country or territory,

(c) the corporations incorporated in a foreign country or territory,

(d) the trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory,”

It can be seen from the definition given above that the foreign sources includes a company registered in India in which more than 50% shares are held by certain specified foreign parties such as foreign corporations, foreign citizens, foreign trusts/societies, etc.

It was an undisputed fact that Sterlite and Sesa Goa were both (i) companies under the Companies Act, 1956 and (ii) more than one-half of their capital was held by Vedanta, a corporation incorporated in a foreign country. Hence, the inevitable conclusion was that the contributions received from Sterlite/ Sesa Goa was a contribution from a foreign source. The FCRA specifically prohibited the acceptance of foreign contributions.

Curiously, it was also noted that Anil Aggarwal, an Indian citizen, held more than 50% capital in Vedanta. Thus, in a sense, the ultimate holder was an Indian citizen. However, since the FCRA did not make any relaxation for such companies, the Court held that the FCRA prohibition applied.

Decision of court

The Court held that there was a violation of the FCRA. It finally observed, summarising the facts, law and ratio:

“72. It is not disputed by the respondents that more than one-half of the nominal value of the share-capital of Sterlite and Sesa is held by Vedanta. It has already been held by us in the preceding paragraph that Vedanta is a corporation incorporated in a foreign country or territory within the meaning of Section 2(e) (vi)(c) of the Foreign Contribution (Regulation) Act, 1976. Therefore, this leads to the irresistible conclusion that the present case is also squarely covered under Section 2(e)(vi)(c) of the Foreign Contribution (Regulation) Act, 1976.

73. For the reasons extensively highlighted in the preceding paragraphs, we have no hesitation in arriving at the view that prima-facie the acts of the respondents inter-se, as highlighted in the present petition, clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act, 1976 as the donations accepted by the political parties from Sterlite and Sesa accrue from “Foreign Sources” within the meaning of law.”

The Court also directed the Central Government to inquire whether contributions from other similar placed companies have been received and take necessary action within six months. It stated:

“The second direction would concern the donations made to political parties by not only Sterlite and Sesa but other similarly situated companies/corporations. Respondents No.1 and 2 would relook and re- appraise the receipts of the political parties and would identify foreign contributions received by foreign sources as per law declared by us hereinabove and would take action as contemplated by law. The two directions shall be complied within a period of six months from date of receipt of certified copy of the present decision.”

FCRA 2010

The  provisions  of  the  FCRA  2010  are  substantially similar to those of the FCRA 1976, even though the phrasing  and  structure  is  a  little  different.  Political parties  continue  to  face  total  prohibition  from  ac- cepting “foreign contribution”. Foreign contribution continues to mean receipt of specified things from “foreign sources”. And, “foreign sources” continue to include companies in which the specified foreign entities  hold  more  than  50%  of  the  capital.  These specified  foreign  entities  include  foreign  corporations, foreign citizens, foreign trusts, etc. Thus, acceptance of such foreign contributions by political parties/candidates will continue to be a violation of law, as  the Delhi High Court has  confirmed.

Companies in which specified foreign persons hold more than  50%

The  implications  of  these  provisions/decisions  are very wide. There are numerous companies in India that  have  such  foreign  holding  of  more  than  50% of  their  capital.  There  are  subsidiaries  of  foreign companies in India. There are also companies that have  more  than  50%  FDI.  So  are  companies  that have more than 50% holdings by FII/PE/non-citizens. All such companies, private, public as well as listed companies  with  a  wide  public  shareholding  would be thus covered.  The contributions accepted from them in the past and future would be under a cloud.

Contribution through Electoral Trusts

A recent variant of making electoral contribution   is through Electoral Trusts. One advantage of such trusts is that such Trusts can pool donations from various sources/entities. Thereafter, the Electoral Trust, run usually by public spirited individuals, decide which party/candidate should get and how much of the amount collected. In such a case, the receiving political party may not know who is the ultimate donor from the pool and whether it is a foreign source or not. It is submitted that the wide definitions of terms used will result in the law being still violated if the contributors are such companies. In such a situation, the responsibility would lie on the Electoral Trust to ensure that the contributions received by it are not from a foreign source.

Responsibility of the contributing Company

The  FCRA  places  the  primary  responsibility  of complying  with  the  law  on  the  receiving  political party/election candidate. As is apparent, it may be difficult  for  it  to  verify  whether  the  contributing company  has  more  than  50%  foreign  holding  and they may ask the company to confirm/certify. Even otherwise, the question is whether the contributing company  would  be  violating  the  law  if  they  gave such contributions. While the law principally applies to  the  receiving  entity  and  certain  intermediaries in  the  process,  the  way  the  law  has  been  broadly framed, it is possible that depending on the facts, the officers of the company may be held liable. For example,  the  law  also  holds  that  anyone  “assisting”  any  political  party  in  accepting  such  foreign contribution as  liable  to  punishment.

Conclusion
The fear of the foreign hand – the driving force behind this law as originally framed – is relevant today too. However, in these changed times, con- tinuing such a blanket prohibition does not seem  to make sense.

Sexual Harassment Act-II

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Synopsis

With the increasing number in women employment, their security is of paramount importance. The codification of the Sexual Harassment Act – II (‘The Act’) is a much-awaited development and a significant step towards creating awareness on the issue of workplace sexual harassment and ensuring women a safe and healthy work environment.

The author in this article has explained the key provisions of the Act, like applicability for employers to constitute an Internal Complaints Committee (ICC) to address sexual harassment complaints made by women workers, applicability of the Legal Compliance Committee where the ICC is not required, the manner in which the inquiry process is to be carried out by the ICC, etc.

Internal Complaints Committee

Every employer of a workplace, employing 10 or more workers must constitute an Internal Complaints Committee (ICC) to which aggrieved women employees can complain. Thus, if a workplace has less than 10 workers then it need not have an ICC. Note that it refers to 10 workers not 10 female workers. Hence, even if only 1 employee is a lady and the other 9 are males, an ICC is required. Further, the reference is to “workers” and not “employees”. The term workers has not been defined under the Act but one may presume it to be at par with the term “employee”. The Act is silent as to what happens when a workplace employs no women.

The constitution of the ICC should be as follows:

(a) A workplace must have an ICC for each office if the offices/administrative units are located at different places or at a divisional level.

(b) The ICC must have a minimum of 4 members of which at least half should be women.

• The Presiding Officer must always be a women employed at a Senior Level at the workplace. Hence, she must always be an internal senior employee. In case there is no senior level women employee then she can be nominated from any other workplace belonging to the same employer.

What happens if the employer has only 1 workplace and that has only 1 female employee who is not a senior level employee? Who then would be the Presiding Officer? Take a case of an office which has a receptionist as its only lady employee. Would she be the Presiding Officer even though she may be a junior level employee?

• Minimum 2 employees preferably committed to the cause of women/experience in social work or who have legal knowledge. Thus, these 2 members could be male or female.

• One external member from an NGO committed to the cause of women/familiar with issues relating to sexual harassment. Such person must have an expertise on issues relating to sexual harassment and may include a social worker with minimum 5 years’ experience with these issues or a person familiar with labour, service, civil or criminal law. Several organisations have nominated a Lady Lawyer or a Lady NGO worker with experience in this field. This person must always be an external person, i.e., not employed by the workplace. She could be a Consultant/Lawyer to the organisation also but not on its payroll.

• The employee members of the ICC should be replaced by new faces every 3 years.

Local Complaints Committee

For every District, a District Officer would be appointed under the Act. The District Magistrate/ Collector/Deputy Collector could act as such District Officer. Such District Officer would constitute a Local Complaints Committee (LCC) under the Act. The LCC would act as the redressal forum for all organisations not required to constitute an ICC, e.g., those which have less than 10 workers.

Complaint by Aggrieved Woman

Any aggrieved woman can lodge a written complaint of sexual harassment at a workplace with the ICC or the LCC as the case may be. The complaint must be lodged within 3 months from the incident or within 3 months from the last incident in case of a series of incidents. Hence, a stop gap has been provided for lodging the complaint. The Committee can provide a further 3 months’ extension for special cases. The complaint must be filed in 6 copies along with supporting documents and details of the witnesses, if any. The woman may chose to file a complaint under the IPC or any such Law with a Police Station. The Act does not take away this right of a lady.

The first response of the ICC/LCC before initiating an inquiry can be to propose a settlement between the respondent and the aggrieved woman through a conciliation process. However, the offer for such settlement must come from the aggrieved woman alone. Further, a monetary settlement cannot be made as the basis for the conciliation. A settlement would conclude the inquiry process under the Act.

One question which begs attention is must the respondent be a male only? If one reads the Act and the Rules, the definition of the respondent is only a person against whom a complaint is lodged. However, at several places the Rules refer to the preposition “he” for the respondent which tends to suggest that it must be a male alone. But there is no conclusive answer to this question. A similar position exists under the IPC. Recently, the Bombay High Court has raised a question “Can a woman be accused of outraging the modesty of another woman ..?”

Inquiry Process

If a settlement has not been reached/proposed, the Committee would make a thorough inquiry into the complaint against the respondent in the following manner:

(a) Forward a copy of the complaint to the respondent within 7 working days.

(b) Respondent to file his reply within 10 working days of the receipt of complaint by him.

(c) Committee to make a detailed inquiry as per the principles of natural justice. The inquiry must consider all facets. At least 3 members, including the Presiding Officer of the Committee must be present. It must complete its inquiry within 90 days.

(d) Where the Committee feels that there is a prima facie case for a criminal complaint, then it shall forward the same to the police for action under the IPC. Section 354 of the IPC deals with punishment for assault on a woman with an intent to outrage her modesty.

(e) No lawyer can represent either party before the Committee.

(f) During the inquiry the Committee may recommend that the employer transfers the aggrieved women, grants her leave up to 3 months or grants her any other relief. Other relief may include recommendations on restraining the respondent from reporting on the work performance of the aggrieved woman or supervising her academic activity in the case of an educational institution. Thus, the idea is to prevent victimisation as a result of the complaint.

(g) Based on its inquiry, the Committee must arrive at a finding whether or not the respondent is guilty. Accordingly, in cases where they feel that the allegation has been proved, the Committee must recommend to the employer or the District Officer to take action for sexual misconduct. The actions prescribed include:

• Writing a written apology
• Warning/reprimand/censure
• Withholding of promotion/increments • Termination of Service
• Undergoing Counseling sessions
• Carrying out community service – this is probably the first time that we are seeing community service as a means of reprimand. This is very common in the USA.

The Committee may also recommend to deduct such sum from his remuneration to be paid to the aggrieved woman. While determining the sum they will consider the mental suffering of the woman, loss in her career due to the incident, medical expenses incurred on physical/psychiatric treatment; respondent’s financial status.

(h)    The entire process from complaint to action, in- cluding the names and identity of the aggrieved woman, respondent, witnesses, are to be kept confidential from the public, press, media, etc. Even an RTI Query cannot be filed in respect of the same since the Act overrides the Right to Information Act, 2005. The penalty for making such information public is Rs. 5,000. However, justice meted out can be disclosed without revealing the names and identity of the aggrieved woman, respondent, witnesses, etc.

(i)    Either party may prefer an Appeal against the Committee’s Order before the Appellate Authority notified under the Industrial Employment (Standing Orders) Act, 1946.

Annual Report by ICC

Every ICC must prepare an Annual Report on their committee’s functioning and submit the same to the employer and the District Officer. It must be prepared every calendar year and should include the following:

(a)    Number of complaints received in that year

(b)    Number of complaints disposed off during that
year

(c)    Number of cases pending for more than 90 days

(d)    Number of workshops/awareness programmes
organised

(e)    Nature of action taken by the employer/District Officer.

Duties of Employer

Every employer has been given certain duties and obligations under the Act:

(a)    provide a safe working environment at the workplace and safety from the persons coming into contact at the workplace;

(b)    display at any prominent place in the workplace, the penal consequences of sexual harassments and the order constituting, the ICC;

(c)    organise workshops and awareness programmes at regular intervals for sensitising the employees with the provisions of the Act and orientation programmes for the members of the ICC- this   is an important role which employers can play. They must educate the employees as to what constitutes harassment and the consequences of the same. A standard operating policy or a manual would be very helpful and each and every employee (whether junior or senior) should be educated on the same. External help from Lawyers/NGOs may also be taken for this purpose.  It would be useful to lay down illustrations of real life situations which may be construed as harassment. Some organisations are implementing etiquette/gender sensitisation workshops/role play situations. HR Heads have a very important role to play in this respect.

(d)    provide necessary facilities to the ICC/LCC for dealing with the complaint and conducting an inquiry;

(e)    assist in securing the attendance of the respondent and the witnesses before the Committee;

(f)    make available such information to the Committee as it may require for a complaint;

(g)    provide assistance to the woman if she so chooses to file a complaint in relation to the offence under the IPC;

(h)    cause to initiate action, under the IPC against the perpetrator, or if the aggrieved woman so desires, where the perpetrator is not an em- ployee, in the workplace at which the incident of sexual harassment took place;

(i)    treat sexual harassment as a misconduct under the service rules and initiate action for such misconduct;

(j)    monitor the timely submission of the Annual Reports by the ICC and include in the same the number of case filed and their disposal. If no report is to be filed by an ICC then he must intimate this number to the District Officer.

Penalty on Employer

The employer would be penalised for his failing to comply with the provisions of the Act:

(a)    If he does not constitute an ICC although re- quired to do so;

(b)    Does not take action against a respondent on the basis of the recommendation of the ICC’s inquiry;

(c)    Contravenes any provisions of the Act.

The  first  penalty  is  a  fine  of  up  to  Rs.  50,000.  For a  second  conviction  of  the  same  offence,  he  shall be liable to twice the punishment meted out during the  first  offence.  Further,  it  could  also  lead  to  the cancellation  of  his  trade  licence/approval/registration  required  for  carrying  on  his  business.  Thus,  a repeat offence carries a very serious consequence.

Dwelling Place / House

The Act has one more interesting facet. It even applies to a dwelling place or a house. The definition of a workplace includes a dwelling place or a house. The employer is defined to include a person or a household who employs or benefits from the employment of a domestic worker. The worker could be for any time, for any nature of work, etc. Further, a domestic worker has been defined as a woman who is employed to do household work for remuneration (in cash/kind) whether directly or through a placement agency. She could  be temporary or permanent, part-time or full-time but excludes any member of the employer’s family. Interestingly, an employee is defined to include one who works without remuneration but a domestic worker must be one who works for a remuneration. In relation to a house, an aggrieved woman must be one who is employed at such house. Thus, in case of a workplace (which is not a house), any lady can allege harassment whether or not she is an employee. However, in case of a dwelling house, she must be an employee of that house. Hence, there are two major differences between a house as compared to a workplace other than a house.

All the provisions discussed above would apply even to a dwelling place/house which means that if a house employs 10 or more domestic workers/ servants (male or female) then it would have to constitute an ICC headed by a senior level lady servant and include one external NGO worker/ lawyer. So, if a household has a maid servant and 9 other male servants, drivers, cooks, gardeners, etc., it would have to form an ICC. One wonders whether domestic workers would be in a position to head and handle such an ICC? Is it feasible to ask them to conduct an inquiry, prepare reports and follow principles of natural justice?

Where the ICC/LCC feels that there is a prima facie case of sexual harassment against a domestic worker, then it shall forward the same to the police for action under the IPC.

False Complaints

One fear of this Act is that it could be misused and could go way of section 498A of the IPC (anti-dowry law which has been misused in some cases). Harsh penal provisions have been laid down as a deterrent for false complaints. In case of a false/malicious complaint by a lady, the ICC/LCC can take action against such complainant. The punishment could be on the same lines as that on the respondent    in case of a sexual harassment.

Conclusion

Let us hope that this Act achieves the true objectives for which it was enacted and does not end up becoming just another tick-the-box/compliance list. Men would be well advised to remember Shake- speare’s Henry IV, Part I: “The better part of Valour, is Discretion; in the which better part, I have saved my life”. Think before you act or repent in leisure.

PART D: GOOD GOVERNANCE

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Quote from Shashi Tharoor, Minister of State for Human Resources Development:

“The RTI ACT has changed Governance in the country, yet UPA is given no credit for it.”

Quote From Arindam Chaudhari:

“Good governance is Narendra Modi’s promise. Good governance is surety not about pointing fingers randomly at others! It is about walking the talk. And here is a man who has walked the talk for 12 years and more, and shown how to win hearts and make a progressive State with good governance.”

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Right to Information – School run by Society– Society covered under the Act. : Right to Information Act, 2005.

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Shahada Taluka Co-op. Education Society vs. Kalyan Sajan Patil 2014 (301) E.L.T. 234 (Bom.)(HC)

It is the case of the petitioner, Shahada Taluka Co-operative Education Society Limited, that the said society has been registered under the provisions of the Cooperative Societies Act in the year 1952 i.e., prior to coming into existence in the Maharashtra Cooperative Societies Act and the said registration is continued inadvertently and later on in the year 1955, it came to be registered under the provisions of the Bombay Public Trust Act, 1950.

It is the case of the petitioner society that on 16.03.2011, the respondent No.1 herein submitted an application seeking information under the Right to Information Act, 2005 before the petitioner society in the capacity of Chairman of the Shahada Taluka Co-operative Education Society.

It is the contention of the petitioner society that, as the petitioner society is registered under the Societies Registration Act and under the Bombay Public Trust Act, as per the Right to Information Act the petitioner society does not fall under the definition of “public authority”, and hence the petitioner society is not duty bound to supply information sought by the respondent No.1.

The Court observed that it was not in dispute that the schools run by the petitioner society are receiving grant in aid from the State Government. The distinction which is sought to be made by the counsel for the petitioner is that the petitioner is the Chairman of the Shahada Taluka Cooperative Education Society and the information sought is in respect of the affairs of the society and not about the school which is receiving grant in aid directly in the account of the Head Master, and therefore, the petitioner is not obliged to give information sought for. It clearly appears that the Shahada Taluka Cooperative Education Society is established for imparting education. The sole purpose of forming such society is for establishing school and imparting education.

Therefore, the distinction which is tried to be made by the petitioner, as aforementioned, needs no consideration. Though the Information Officer is appointed, the petitioner, when called upon to furnish the information, is bound to supply the same to the respondent No.1.

By way of impugned order, only direction is issued to the petitioner to furnish the information as sought by the respondent no.1 within 15 days. Acceptance of the interpretation of the arguments of the petitioner that information sought is in respect of affairs of the society and not in respect of the school receiving grant in aid, would defeat the object of introducing the Right to Information Act, 2005. The Right to Information Act, 2005 has been introduced with laudable object and said cannot be defeated by accepting narrow interpretation as canvassed by the petitioner.

In that view of the matter, the contention of the petitioner was not accepted.

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Registration – Document not compulsorily registrable: Registration Act, 1908.

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Brahaman Swarnkar Samaj, Pali & Others vs. Medh Kshatriya, Swarnkar Samaj Vikas Samiti, Pali & Another AIR 2014 Raj. 37

The respondent No.1 – plaintiff filed a suit for cancellation of a trust deed, getting it declared void and for permanent injunction against the petitioner-defendants, inter alia, seeking relief for cancellation of the trust deed registered on 31- 05-1997 by the defendant Samaj and permanent injunction in the nature of non-interference in the right of the plaintiff to worship in the temples, which were subject matter of the trust deed. The suit was, inter alia, founded on an agreement dated 15-07-1968 said to have been executed qua the temples between the parties.

The said document dated 15-07-1968 was filed and the same was sought to be exhibited in evidence; petitioner No.1 filed the application, inter alia, with the averments that as in the document dated 15-07-1968, there is a version relating to the property being joint, the same is undervalued and requires registration u/s. 17 of the Registration Act, 1908 and as the document has been undervalued and is unregistered, the same cannot be led in evidence and cannot be marked as an exhibit; it was prayed that it be held that the document was inadmissible.

The Court observed that a bare reading of the document dated 15-07-1968 reveals that the parties therein have termed the same as writing between two temples and further goes on to state that the said both temples have been joint from the beginning and the same would remain so in future also.

The contents of said document, which start with an indication that both the temples are joint merely indicate the existing state of affairs, as on the date of executing the document, recites the status from before the execution of the document and as to what was to continue in future. As per the said document, the property i.e., the temples in question were joint from the beginning and would continue to remain so, does not bring into existence any new state of affairs different from what was existing. The document thereafter merely goes on to indicate that none of the two Samaj would claim exclusive possession and both would be entitled to spend money on the said temples, but would not claim reimbursement of the same.

For a document to be compulsorily registrable u/s. 17(1)(b) of the Act of 1908, it is necessary that the same should purport or operate to create, declare, assign, limit or extinguish whether in present or in future, any right, title or interest to or in the immovable property. So far as the creation of any right, title or interest as submitted by learned counsel for the petitioners is concerned, in view of the clear language of the document, which indicates a pre-existing right, it cannot be said that any right was ‘created’ by the said document in favour of any of the parties.

In so far as the ‘declaration’ as envisaged by section 17(1)(b) of the Act of 1908 is concerned, as the word ‘declare’ has been placed alongwith create, limit or extinguish and the said words imply a definite change of legal relation to the property by an expression of will embodied in the document referred to, the said word ‘declare’ has to be read ejusdem generis with the words create, assign or limit. For a document to fall within the ambit of 17(1)(b) of the Act of 1908 on its declaration, it must imply a declaration of will and not a mere statement of fact, as there is a clear distinction between a mere recital of a fact and something which in itself create a title.

Therefore, the document in question is not compulsorily registrable under provisions of section 17(1)(b) of the Act of 1908.

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Negligence-Torts–Medical Practitioner– Liability to pay damages-It does not Transcend into criminal liability as to make him liable – Section 338 of the Indian Penal Code, (1860).

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Dr. P.B. Desai vs. State of Maharashtra & Anr. AIR 2014 SC 795

In the instant case, a patient suffering from cancer was examined by the appellant, a renowned surgeon who advised an ‘Exploratory Laparotomy (Surgery)’, in order to ascertain whether the patient’s uterus could be removed in order to stop vaginal bleeding. The main allegation against the appellant was that he did not take personal care and attention by performing the operation himself. On the contrary, he did not ever bother to even remain present when another doctor started the surgical procedure and opened the abdomen. Moreover, when the other doctor, on opening of the abdomen, found that cancer was at a very advanced stage and it would not be possible to proceed because there was fluid and intestines were plastered, he called the appellant for advice. Even then the appellant did not examine the patient minutely. Instead, after seeing her from the entrance of the operating room, he advised him to close the abdomen. So such so, even after the formation of the fistula and the pathetic condition of the patient, the appellant never bothered to examine or look after her. It was thus alleged that the aforesaid acts of omission and commission amounted to professional misconduct as well as an offence punishable u/s. 338 of the I.P.C. Since there was no overt act on the part of the appellant, as the surgical procedure was performed by another doctor, the charge of abetment u/s. 109 of I.P.C. was also leveled against the appellant. Held, the decision of the appellant advising Exploratory Laparotomy was not an act of negligence, much less wanton negligence, and under the circumstances it was a plausible view which an expert like the appellant could have taken, keeping in view the deteriorating and worsening health of the patient. As a consequence, opening of the abdomen and performing the surgery cannot be treated as causing grievous hurt. It could have been only if the doctors would have faltered and acted in a rash and gross negligent manner in performing that procedure. At the same time, his act of omission, in not doing the surgery himself and remaining absent from the scene and neglecting the patient, even thereafter, when she was suffering the consequences of fistula, is an act of negligence and is definitely worthy of blame (though that is not the part of criminal charge). However, the omission is not of a kind which will give rise to criminal liability. No doubt, he did not do it himself, but it is not the case of the prosecution that another doctor did not do it deftly either. It is because of the condition of the patient, the surgery could not be completed, as on the opening of the abdomen, other complications were revealed. This would have happened in any case, irrespective of whether the abdomen was opened by another doctor or by the appellant himself. The appellant’s omission in not rendering complete and undivided legally owed duty to the patient and not performing the procedure himself has not made any difference. It was not the cause of the patient’s death which was undoubtedly because of the acute chronic cancer condition. The negligent conduct in the nature of omission of the appellant is not so gross as to entail criminal liability on the appellant u/s. 338 of the I.P.C. Thus, though the conduct of the appellant constituted not only professional misconduct for which adequate penalty has been meted out to him by the Medical Council, and the negligence on his part also amounts to actionable wrong in tort, it does not transcend into a criminal liability, and in no case makes him liable for offence u/s. 338, I.P.C. as the ingredients of that provision have not been satisfied.

If the patient has suffered because of negligent act/omission of the doctor, it undoubtedly gives the right to the patient to sue the doctor for damages. This would be a civil liability of the doctor under the law of tort/contract.

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Market Value – Sale Deed-Stamp Duty-Circle rate by itself does not provide true market value of property: Stamp Act, 1899.

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Amit Kumar Tyagi & Another vs. State of U.P. & Others AIR 2014 All 40

The issue raised in the petition was that the authorities have determined market value of the property by enhancing it by 25% without giving any reason.

The instrument was executed and registered on 13-08-2010 in respect of the house’s total area of 252.42 sq. mtrs. The proceedings u/s. 47-A(iv) of Indian Stamp Act, 1899 were initiated pursuant to a spot inspection made by the Additional District Magistrate, Finance and Revenue, Ghaziabad and his report dated 20-10-2010, stated that the value set forth in the instrument appears to be less than the minimum residential circle rate prescribed by the Collector and, therefore, the proceedings for determining market value should be initiated.

The same officer, who submitted the inspection report dated 20-10-2010 and at whose instance the proceedings were initiated, took upon himself to consider the matter finally u/s. 47-A(4) and passed order dated 23-02-2011. He held that 25% should be added to the circle rate prescribed at the relevant point of time and accordingly thereto, the market value of the property comes to Rs. 68,47,060/-, whereupon the the stamp duty payable is Rs. 4,79,300/- and since only Rs. 3,91,000/- has been paid, therefore, there was a deficiency of stamp of Rs. 88,300/-.

It is contended that on the one hand, the Assistant Collector suggested that the stamp duty was to be paid according to the prescribed circle rate/ market value of the commercial land, but while passing the impugned order he has increased the value by 25% from the circle rate for which no reason has been assigned at all. On this ground, the petitioners challenged the order.

The Hon’ble Court observed that it goes without saying that proceedings u/s. 47-A(4) can be initiated only when there exists a ground that the correct market value has not been set forth in the instrument. The determination of market value does not depend on the fancy, imagination and conjectures of the Collector or any other competent authority.

The Court further observed that under the provisions of the Act, 1899 stamp duty is payable on the market value of the property in transacted by the sale deed. It is also true that the market value does not mean the circle rate itself but it is only a guiding factor. The Collector has to determine the market value taking into account various factors. In the case in hand, the Additional Collector has simply referred to the circle rate and in a mechanical way, passed the impugned order enhancing the circle rate by 25%.

U/s. 47-A of the Act, the obligation is on the Collector to find out the correct market value of the property which is alleged to have not been mentioned in the instrument. For the purpose of determining the market value, no machinery is provided in statutory provisions. However, a procedure has now been provided vide U.P. Stamp (Valuation of Property) Rules, 1997 (hereinafter referred to as the “1997 Rules”) in accordance whereto the Collector would determine the market value.

The term “market value” has not been defined under the Act. However, there are some precedents laying down certain guidelines as to how and in what manner a market value would be determined. The consensus is that the market value of any property is the price which the property would fetch or would have fetched if sold in the open market, if sold by a willing seller, unaffected by the special need of a particular purchaser. It is interesting to note that the Act provides first for the determination of minimum value of the property and further says that if the market value of the property set forth in the instrument is less than the minimum value determined under the Act, then before registering the instrument the registering authority shall refer the instrument to Collector for determination of the market value of the property and the proper duty payable thereon. Therefore, a market value of the property in all cases cannot be said to be higher than the minimum value determined under the rules by the concerned authority, inasmuch as, it is only a kind of guideline provided to the authorities for the purpose of considering as to whether the proper stamp duty is being paid by setting forth the true market value of the property in question in the instrument. The entire object of legislature in the various provisions of the Act is to require the parties concerned to set forth the correct market value of the property at which the transaction has taken place so that appropriate duty in accordance with the Act is paid by them. The various provisions with respect to the minimum value etc. are only in aid and assistance of the authorities to find out the true amount of consideration on which the parties have entered into transaction so that the correct duty is collected therefrom.

It is thus clear that the circle rate by itself does not provide a true market value of the property, which is the subject matter of the instrument. It is only a guiding factor. In the present case, interestingly, the proceedings were initiated on the assumption that the stamp duty has not been paid according to the prevailing circle rate/market value treating the market value at par with the circle rate, but when the impugned order has been passed instead of confining to the circle rate, the Additional Collector has gone on to increase the value by 25% further to the prescribed circle rate and in doing so he has not given any reason. The proceedings in question show a complete nonapplication of mind on the part of the authorities. Such proceedings are nothing but amounting to a sheer harassment of public at large and in particular, the person who actually suffers due to such whimsical order passed by the authorities. A serious statutory duty has been cast upon the respondents but instead of doing justice with their statutory requirement, the authorities are passing unmindful, arbitrary orders, whereby not only the large public is being harassed but it also results in burdening the Courts though such litigation otherwise could have been avoided. The petition was allowed.

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A. P. (DIR Series) Circular No. 106 dated 18th February, 2014

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Facilities to NRIs/PIOs and Foreign Nationals – Liberalisation – Reporting Requirement

Presently, banks are required to report on a quarterly basis to RBI details of remittances (number of applicants and total amount remitted) made by NRI, PIO and Foreign Nationals from their NRO accounts.

This circular has changed the reporting period from quarterly to monthly. As a result banks will have to report to RBI, in the revised format Annexed to the circular, details of remittances out of NRO accounts, including transfers from NRO account to NRE account made by NRI, PIO and Foreign Nationals within 7 days of the end of the reporting month.

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A. P. (DIR Series) Circular No. 75 dated November 19, 2013

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Trade Credit for imports into India-Online submission of data on issuance of Guarantee/Letter of Undertaking (LoU) /Letter of Comfort (LoC) by ADs

This circular states that for the quarter ended September 30, 2013 reporting of data by banks to RBI on issuance of guarantees/LOU/LOC has to be done by way of a consolidated statement, at quarterly intervals using the eXtensible Business Reporting Language (XBRL) platform and not by way of manual submission (followed MS-Excel file through email). For this purpose banks may login to the site https:// secweb.rbi.org.in/orfsxbrl/ using their User name, Password and Bank code.

Banks who have already submitted the manual statement (and MS-Excel file) for the quarter ended 30th September, 2013 are also required to report the same data online using the XBRL platform. From the quarter ending 31st December, 2013 onwards, the data must be submitted in soft form on XBRL platform only by 10th of the following month.

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Corporate Social Responsibility – Companies Act, 2013:

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A Paradigm Shift in Corporate Moral Responsibility (or Inner Transformation for Corporates)

Since the time provisions relating to Corporate Social Responsibility (CSR) have been announced, it is the most heated topics under discussion in the corporate world. It is, however not a totally new concept in India as the Securities and Exchange Board of India (SEBI) had ordered 100 largest companies listed on BSE and NSE to disclose their CSR activities and the amount spent on CSR. It is also to be noted that in parliament also, CSR was one of the most debated issues. The reasons for this may be political, but the fact that the issue caught the attention of our elected members indicates its significance.

Despite the problems that will be discussed in the following paragraphs the, initiative taken by the government is to be appreciated and we hope that the proper implementation of the same benefits the public at large. As the name suggests, CSR is a corporate’s responsibility and initiative towards upliftment of society and social welfare. In India, we look to the government and public authorities when it comes to spending towards social welfare. Internationally it is an accepted practice, but India is the first country to introduce statutory provisions with respect to CSR.

The Ministry of Corporate Affairs through the Companies Act 2013 (‘the Act’) has prescribed the provisions of CSR. Section 135 of the Act prescribes the basic provisions for the applicability and other requirements. CSR Rules 2014 contain the procedural part. Schedule VII to the Act prescribes list of activities on which amount can be spent to comply with the provisions of CSR. :

• Effective date

On 27th February 2014, the Ministry of Corporate Affairs (MCA) has notified section 135, Schedule VII of the Act and Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘Rules’). As per the notification, CSR provisions will be effective from 1st April 2014.

• Applicability

Every company including its holding or subsidiary, and a foreign company having branch/project office in India, which fulfills any of the following criteria in any of the financial years will have to comply with the provisions of CSR.

Further, every company which does not meet the criteria for three consecutive financial years is not required to (a) constitute a CSR Committee and (b) comply with the CSR provisions till such time it meets the below criteria. Criteria are as under:

1. Net worth of Rs. 500 crore or more, or
2. Turnover of Rs. 1,000 crore or more, or
3. Net profit of Rs. 5 crore or more

‘Net profit’ is defined in the CSR Rules as tabulated below

B – For a Foreign company

‘Net profit’ for a foreign company means the net profit as per profit and loss account prepared in terms of Clause (a) of s/s. (1) of section 381 read with section 198 of the Companies Act, 2013.

Issues which may have to be clarified by MCA

• For the purpose of deciding the applicability of CSR provision, the net profit after tax would be considered. Net profit as per financials would normally be understood as profit after tax.

• Since only profit of overseas branch is mentioned, in our view, loss of overseas branch will not be added for determining net profit criteria.

• According to Section 135, the criteria for applicability of CSR are to be applied to each company. However, as per CSR Rules, it could be interpreted that if CSR is applicable to parent company then it would automatically apply to its subsidiary or vice versa even though those entities do not meet the criteria.

• For reducing the dividend received from Indian companies from Net profit, practical difficulty will arise in determining whether such companies are complying with the provisions of section 135 or not.

• CSR Contribution

Company covered under the CSR provisions will have to spend, in every financial year, at least 2% of ‘average net profits’ of last 3 financial years on CSR activities. In the event such a company fails to spend such amounts in pursuance to its CSR Policy, the Board is required to provide reasons for not spending the specified amounts in the Board’s annual report. The ‘average net profit’ shall be calculated in accordance with section 198 [i.e., calculation of net profit prescribed for the purpose of determining the maximum managerial remuneration]

Issue which may have to be clarified by MCA

Since ‘average net profit’ is to be computed as per section 198, the definition of ‘net profit’ as given in the CSR rules will not apply i.e., profit of overseas branch and dividend from other companies in India complying with CSR provisions will not be reduced for calculation of ‘average net profit’.

• Schedule VII of the Companies Act, 2013

CSR policy relates to activities to be undertaken by the Company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of the Company. Following CSR activities are specified in Schedule VII.

1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

2. Promotion of education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources & maintaining quality of soil, air & water;

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6. Measures for the benefit of armed forces veterans, war widows and their dependents;

7. Training to promote sports [rural, nationally recognised sports, Paralympic & Olympic sports];

8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedule Castes, the Schedule Tribes, other backward classes, minorities and women;

9. Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

10. Rural development projects.

• CSR Committee and the Board of Directors

1. The companies shall constitute a CSR Committee consisting of 3 or more directors including at least 1 independent director. However, unlisted public company or a private company or foreign company shall have its CSR Committee without independent director. A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

2. The key role of the CSR Committee is to formulate and recommend CSR policy to the Board of Directors, recommend the amount of expenditure to be incurred on the CSR and monitor the Corporate Social Responsibility Policy of the company.

3.    The Board of Directors shall approve the CSR policy after considering recommendations from CSR Committee and disclose contents in Directors Report forming part of the annual report and also place it on the company’s website. Further, the Board shall ensure that the activities as are included in CSR Policy of the company are under- taken by the company.

4.    The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR.

5.    The format for the annual report on CSR activi- ties to be included in the Board’s report is also given. This has to be certified by the Director and Chairman of CSR Committee. In case of foreign company, the authorised representative resident in India shall also certify.

•    Other key points as per the CSR Rules

1.    CSR expenditure includes all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity with Schedule VII of the Act.

2.    A company may carry out CSR activities, through registered trust or society or a company estab- lished by the company or its holding or subsidiary or associate company. The following 2 CONditions are prescribed

a.    If trust, society, or company is not established by the company, etc., it shall have an established track record of 3 years in undertaking CSR activities.

b.    Company has specified the project or programmes to be undertaken through these entities, the mo- dalities of utilisation of funds on such projects and programmes and the monitoring and reporting mechanism.

3.    A company may also collaborate with other companies for undertaking CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such activities.

4.    The CSR expenditure has to be only on projects/ programmes undertaken in India only.

5.    CSR projects or programmes that benefit only employees of the company or their families is not considered as CSR activities.

6.    Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

7.    Contribution to any political parties directly or indirectly is not considered as CSR activity.

8.    The CSR policy of the company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the com- pany.

•    Substantial changes compared to draft rules:

Significant changes in final rules/schedule has been made as compared to the draft CSR rules and Schedule VII. Notably amongst them are as under:

(i)    removal of 3 year block period concept,

(ii)    hitherto programs integrating business models with social and environmental priorities and processes in order to create shared value was covered,

(iii)    restricting expenses on personnel engaged in CSR to not more than 5% of CSR spend,

(iv)    removing contribution to fund set up by State Government for socio economic development and relief and welfare of the SC/ST/BC, minorities and women,

(v)    restricting the health care initiative to prevention

(vi)    expanding the applicability of Section 135 to Foreign Companies having branch/project office in India (though section 135 only refers to Companies (which as per definition will include companies incorporated in India only),

(vii)    removing the enabling clause in Schedule VII for notifying any other activities as part of CSR and substituting business social projects with rural social project.

•    Conclusion

There is no clarity on tax treatment of amount spent on CSR. In the draft CSR rules it was specified that tax treatment will be in accordance with the Income Tax Act as may be notified by CBDT. However in the Rules notified, this para is removed. Clarity is also required in respect of accounting treatment for the unspent amount on CSR especially in view of expert advisory  opinion  issued  by  ICAI  in  June  2013  which opined  that  provision  may  not  be  required  where there is no present obligation.

Key challenges for corporates would be where they are already spending money on the general welfare of the employees per se like housing, education, medical facilities etc. and now they will also have to spend on CSR as spending on employee welfare is not covered. So for such corporates this will be an additional financial outflow. To conclude, in India CSR would be successful only if it is implemented   in its true spirit. It should be noted that there are  no penal consequences for not spending on CSR in a particular year, however there is an indirect pressure on corporates to spend on CSR. We hope that CSR results in overall development of the society and general public at large and CSR becomes the game changer in terms of transforming India from  a developing country to a developed nation.

ACCEPTANCE OF DEPOSITS BY COMPANIES

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1. Companies Act, 2013

The Companies Act, 2013 (Act) has been in vogue since August, 2013. Out of 470 sections, 98 sections have been notified since 12th September, 2013. Recently, vide notification dated 26th March,2014, 183 sections have been notified and they are in force from April 01,2014. Thus in all today 281 sections are in operation. The Ministry of Corporate Affairs have notified the Rules in matters covered by the sections which are in force and these Rules have come into force on 01-04-2014. This Act and Rules replace the Companies Act, 1956 (old Act) and the Rules made there under.

2. Acceptance of Deposits:
Chapter V of the Act, deals with Acceptance of Deposits by companies. It contains four sections viz. sections 73 to 76. Of which, section 73, 74(1) and 76 are operative from1st April,2014. The Companies (Acceptance of Deposits) Rules, 2014 (Rules) have also been notified and they have come into force on 01-04-2014. These Rules are framed in consultation with RBI. It may be noted that these sections and the Rules apply to Public and Private Companies.

3. Deposit:
Section 2(31) of the Act, defines “deposit” which includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount received as provided in Rule 2(1)(c).

4. Exempted Deposits:
As per Rule 2(1)(c) the following amounts received by a company are not to be considered as Deposits under the above provisions.

(i) Receipt from the Central Government, or a State Government, (including from any other source whose repayment is guaranteed by the Central Government or a State Government), from a local authority , or from a statutory authority constituted under an Act of Parliament or a State Legislature;

(ii) Receipt from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA Act and rules and regulations made there under;

(iii) Any loan or facility from any banking company, from a banking institution notified by the Central Government u/s. 51 of the Banking Regulation Act, 1949, or a notified Co-operative Bank.

(iv) Any loan or financial assistance from any Public Financial Institutions notified by the Central Government;

(v) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by RBI;

(vi) Intercorporate Deposits;

(vii) Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. It is also provided that such allotment should be made within 60 days of receipt or refunded within 15 days on the expiry of 60 days. Adjustment for any other purpose shall not be considered as refund. It may be noted that there was no such time limit for allotment of securities under the old Companies Act or Rules. The above time limit will apply to amounts received before 01-04-2014 and outstanding as on that date;

(viii) Receipt from a person who, at the time of the receipt of the amount, was a director of the company. He should give a declaration that he has deposited the amount out of his own funds. It may be noted that under the Old Act in the case of Private Companies, exemption was given to relative of a Director and to a Member of the Company. This exemption is now withdrawn;

(ix) Any amount raised by issue of secured bonds or debentures or bonds or debentures compulsorily convertible into shares of the company within five years. It may be noted that under the Old Act there was no such time limit for conversion of debentures within 5 years;

(x) Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposits. Under the Old Act there was no limit about the amount of Security Deposit;

(xi) Any non-interest bearing amount received or held in trust;

(xii) Any amount received in the course of, or for the purposes of, the business of the company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of 365 five days. There was no such limit of 365 days under the Old Act.

(b) as advance, against consideration for sale of any property;

(c) as security deposit for the performance of the contract for supply of goods or provision of services;

(d) as advance received under long term projects for supply of capital goods.

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to specified conditions.

5. Prohibition on Acceptance of Deposits from Public

(i) Section 73(1) provides that no company shall invite, accept or renew any deposit under this Act from the public except in the manner provided under this chapter.

(ii) Section 73(2) provides that a company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the following conditions:

(a) Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in form DPT-1 pursuant to Rule 4.

(b) Filing a copy of the circular alongwith such statement with the ROC within 30 days before the date of issue of the circular.

(c) Depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a financial year and the financial year next following and kept in a scheduled bank in a separate bank account to be called as “Deposit Repayment Reserve Account”. This reserve can be used for repayment of deposits only u/s. 73(5).

(d) providing such Deposit Insurance in such manner and to such extent as stated in Rule 5.

(e) Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits ; and

(f) In the case of secured Deposits, the company should provide for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company. The manner in which the security is to be created is stated in Rule 6. In the case of secured deposits, the company will have to appoint Trustees for Depositors as provided in Rule 7.

If in any case a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related in invitation or acceptance of deposits.

(iii)    Section 73(3) provides that every deposit ac- cepted by a company shall be repaid with interest in accordance with the terms and conditions of the agreement with the depositors.

(iv)    Section 73 (4) provides that if a  company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal as provided in that section.

6.    Acceptance of Deposit from public by certain companies (eligible companies)

(i)    Section 76(1) provides that, a public company, having networth of Rs. 100/- crore or more or turn over of Rs. 500/- crore or more may accept deposits from public on the condition that the prior consent of the company in general meeting by a special resolution has been obtained and the said resolution has been filed with the ROC before making any invitation to the public for acceptance of deposit. Such company is defined as an ‘eligible company’ as per Rule 2 (1)(e) of  the  Rules. The said rule provides that an ‘eligible company’ which is accepting deposits u/s. 180 (1)( (c ) may accept deposits by means of an ordinary resolution, if the amount to be borrowed together with amount already borrowed does not exceed aggregate of paid up capital plus free reserve.

(ii)    Every such company accepting deposit shall be required to obtain rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency and the company should inform the public, the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits;

(iii)    Further, in the case of a company accepting secured deposits from the public it shall, within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with the Rule 6 of the Rules.

(iv)    Such eligible Company has also to comply with procedure listed in Para 5(II) above.

7.    Repayment of deposits, accepted before com- mencement of 2013 Act

(i)    Section 74(1) provides that in the case of any deposit accepted by a company before 01-04-2014, if the amount of such deposit or part thereof or any interest due thereon remains unpaid on the above date or becomes due at any time thereafter the company shall

(a)    file, within a period of 3 months from 01- 04-2014 or from the date on which such pay- ments are due, with the ROC a statement of all the deposits accepted by the company and sums remaining unpaid on the above date with the interest payable thereon alongwith the arrangement made for such repayment in form DPT-4, pursuant to Rule 20 of the Rules.

(b)    repay within 1 year i.e., by 31-03-2015 or from the date on which such repayments are due, whichever is earlier.

8.    Manner and extent of deposit insurance:

As stated above, Rule 5(1) provides that every com- pany  referred  to  in  Para  5  and  6  above  shall  enter into  a  contract  for  providing  deposit  insurance  at least  thirty  days  before  the  issue  of  circular  or  advertisement or   at least thirty days before the date of renewal, as the case may be. Further, it clarifies that  amount  as  specified  in  the  deposit  insurance contract  shall  be  deemed  to  be  amount  in  respect of both principal amount and interest due thereon.

Rule  5(2)  provides  that  the  deposit  insurance  contract shall specifically  provide that in case the company defaults  in repayment of  principal amount  and interest thereon,   the depositor shall be entitled to the repayment of principal amount of deposits and interest thereon by the insurer upto the aggregate monetary  ceiling  as  specified  in  the  contract.  In case of   any deposit and interest not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of   the full amount of the deposit and in case  of any deposit and interest thereon in excess of  Rs.  20,000,  the  deposit  insurance  contract  shall provide  for payment of an amount not less than Rs. 20,000  for  each  depositor.  Rule  5(3)  provides  that the insurance premium for such deposit insurance shall be paid by the company.

9.    Limit & Terms and  Conditions of acceptance of deposits by companies:

Rule 3 of the Rules provides for limits and other terms of deposits as under:

(i)    No company referred to in section 73(2) and eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit:

However, that company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal subject to the conditions that-

(a)    such deposit shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and

(b)    such deposits are repayable not earlier than  3 months from the date of such deposits or renewal thereof.

(ii)    No company referred to in section 73(2) shall accept or  renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid up share capital and free reserves of the company. For this purpose paid up share capital shall include preference share capital also.

(iii)    No eligible company shall accept or renew-

(a)    any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital  and free reserves  of the company;

(b)    In the case of deposits from others, if the amount of such deposit together with the amount  of  such  other  deposits,   other  than the  deposit referred to Clause (a),  outstanding  on  the  date  of  acceptance   or  renewal exceed 25% of aggregate  of the paid-up share capital and  free  reserves  of  the  company.

(c)    In other words, an eligible company can accept deposits upto 35% of paid up share capital (including preference share capital) and free reserves subject to the sub-limit of 10% from members.

(iv)    No Government company eligible to accept deposit u/s. 76 shall accept or renew any deposit if the amount of such deposit together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid-up share capital and free reserves of the company.

(v)    No company referred to in section 73(2) or any eligible company shall invite or accept or renew any deposit in any form carrying a rate of interest or pay brokerage thereon at the rate exceeding the maximum rate of interest or brokerage as prescribed by RBI for acceptance of deposits by NBFC.

For this purpose, it is provided that the person who is  authorised,  in  writing,  by  a   company  to  solicit deposits on its behalf and through whom deposits are  procured  shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of this rule. It may be noted that Para 4 (7) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, that no NBFC shall pay more than 12.5%P.A. interest on public deposits.  Similarly,  Para 4(8) provides that the rate of Brokerage/Commission to brokers shall not exceed 2% of the deposit collected. Brokers  can  be  paid  actual  expenses  incurred  for this purpose but the same shall not exceed 0.5% of the  deposit so collected.

(vi)    The company shall not reserve to itself either directly or indirectly right to alter, to prejudice or disadvantage of the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted.

(vii)    Deposits may be accepted in joint names, not exceeding 3, with or without any of the Clauses viz.“jointly”  “Either or Survivor” “Anyone or Survivor”.

10.    Application mandatory

As per Rule 10 of the Rules , no company shall accept, or renew any deposit, whether  secured or unsecured, unless an application, in such form   as specified by the company, is submitted by the intending depositor for the acceptance of such deposit. The form of application referred to above shall contain a declaration by the intending de- positor to the effect that the deposit is not being made out of any money borrowed by him from any other person.

11.    Furnishing of deposit receipts to depositors:

Rule  12  of  the  Rules  mandate  that  every  company shall,  on  the  acceptance  or  renewal  of  a  deposit, furnish  to  the  depositor  or  his  agent,  a  receipt for the amount received by the company, within a period of 21   days from the date of receipt of money or  realisation of  cheque or  date of  renewal.

The receipt referred to above shall be signed by  an officer of the company duly authorised by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

12.    Maintenance of liquid assets and creation of deposit repayment reserve account:

As per Rule 13 of the Rules, every company referred to in section 73(2) and every eligible company shall, on  or  before  30th  April  of  each  year,  deposit  the sum  not  less  than  15%  as  specified  in  Para  5  (ii)  (c) above  with  any  scheduled  bank  and  the  amount so deposited shall not   be utilised for any purpose other  than   for  the  repayment of  deposits:

Further, it also mandates that the amount remaining deposited  shall  not  at  any  time  fall  below  15  %   of the  amount  of  deposits  maturing,  until  the  end  of the current financial year and the next financial year.

13.    Registers of deposits:

As per Rule 14 of the Rules, every company accepting deposits shall maintain at its registered office one or more separate registers for deposits accepted  or renewed, in which there shall be entered separately in the case of each depositor the particulars as listed in Rule 14.

The entries specified in this Rule shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorised by the Board for this purpose. The register referred to above shall be preserved in good order for a period of not less than eight years from the financial year in which the latest entry is made in the register.

14.    Premature repayment of deposits:

(i)    Rule 15 of the Rules provides that, if a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1 % from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced:

(ii)    However, nothing contained in this rule shall apply to the repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of (a) complying with the provisions of Rule 3; or (b) providing  war risk  or other related benefits to the personnel of the naval, military or air forces or to their families, on  an application made by the associations or societies formed by such personnel, during the period of emergency declared under Article 352 of the Constitution:

(iii)    If a company referred to in section 73(2) or any eligible company permits a depositor to renew his deposit, before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.

(iv)    Further, the Rule provides, where the period for which the   deposit had run contains any part   of a year then, if such part is less than 6 months,     it shall be excluded and if such part is 6 months or more, it shall be reckoned as 1 year.

15.    Return of deposits to be filed with the Registrar:

Rule 16 of the Rules requires that the company shall on or before 30th June, every year, file with the ROC a return in Form DPT-3 along with the prescribed fee and furnish the information contained therein as on 31st March, of that year duly audited by the auditor of the company.

16.    Penal rate of interest:

Rule 17 of the Rules provides that every company shall pay a penal rate of interest of 18 % per annum for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

17.    Penalty of Default

Sections 74(2), 74(3) and 75 of the Act, which have not yet been brought into force, provide as under.

(i)    If the company fail to repay any existing deposit or interest due to depositors within the time allowed u/s. 74, the following penalties can be levied.

(a)    The company shall be punishable with minimum fine of Rs. 1 crore which may be extend to Rs. 10 crore. This will be over and above the amount of Deposit and interest in respect which default is made for repayment.

(b)    Every defaulting Officer shall be punishable with imprisonment which may extent to 7 years or with minimum fine of Rs. 25 lakh which may extend to Rs. 2 Crore or with both.

(ii)    It may be noted that in both the above cases, the amount of minimum fine has no relationship with the amount in respect of which the  default  in repayment of deposit or interest is made. It may so happen that the default may be in respect of deposit of Rs. 25 lakh, against which minimum fine payable by the company is Rs. 1 crore. To this extent, the above provision is very harsh.

(iii)    If it is found that there is default in repayment of outstanding Deposit or  interest u/s. 74  and it  is proved that such Deposit was accepted by the Company with intent to defraud the depositors or that the same was accepted for fraudulent purpose, every defaulting officer shall be personally responsible for any loss or damage that is incurred by the depositor. It may be noted that this penal action is without prejudice to the penalty leviable u/s. 74(3) as stated in (i) above. Further, the defaulting Officer will also be punishable u/s. 447 which provides for the following penalties.

(a)    Imprisonment for minimum period of 6 months which may extend to 10 years.

(b)    If the fraud involves Public interest, the mini- mum imprisonment can be for 3 years.

(c)    Minimum fine will be of amount involved in the fraud which may extend to 3 times the amount involved in the fraud.

(iv)    Rule 21 of the Rules provides that if any com- pany referred to in section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 25,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 500 for every day after the first day during which the contravention continues.

18.    To Sum Up:

The above provisions for acceptance of deposits by Companies are very stringent as compared to the provisions under the Old Act. Considering these requirements, it will be difficult for some companies to comply with these provisions and will have to find alternate source of funds. In particular these provisions are very harsh for private companies as exemption for deposits or loans taken from members has now been withdrawn. The exemption is now given to deposits or loans from directors only. Under the Old Act exemption was given to deposits or loans from relatives of directors of private companies. This is not given under the New Act.

It is true that these provisions are made in the New Act in view of the fact that the Government has noticed in recent years that some Companies are defaulting in refunding the amount of deposits and interest on the due dates. Hence, such stringent provisions can be justified in the interest of persons who invest their hard earned monies in such public deposits. The provisions for Deposit Insurance, Credit Rating, Creation of Deposit Repayment Reserve Account, Creation of Security, appointment of Trustees for secured deposits etc. are provisions made to safeguard the interest of small depositors. However, it appears that there is no justification to rope in Private Companies which get deposit or loan from their members or their relatives.

Moreover, the penal provisions under which minimum fine can be levied for  default in  repayment of deposits or interest on due date are very harsh. The said fine can be levied on the Company and defaulting officer irrespective of the amount of the deposit and interest in respect of which default may occur.

New SEBI Corporate Governance Requirements – vis-à-vis New Companies Act – Overlap and Contradictions

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Synopsis
Recently, after the Companies Act, 2013 came into force, the SEBI has substantially revised its existing requirements for corporate governance of the listed companies by replacing the earlier Clause 49 of the Listing Agreement with a new one and also by inserting a new Clause 35B.

Against this backdrop of the Companies Act, 2013 and the new SEBI provisions – the overlapping and at times contradictory new requirements, the hurdles of complying with them, the problem of separate penal provisions in the cases of non-compliance of the said two directives calls for a detailed discussion. The Author analyses in depth the new requirements…

SEBI’s new requirements from 1st October, 2014
SEBI has brought into effect the comprehensively revised requirements for corporate governance for listed companies. The earlier Clause 49 of the Listing Agreement is now replaced with the new one. Further, a fresh new Clause 35B has also been put into effect that requires companies to provide e-voting for all shareholders.

To give a brief background recently, several provisions of the Companies Act, 2013, (‘the 2013 Act’) relating to corporate governance were notified to come into effect from 1st April, 2014. At the time when the Bill was close to being passed, SEBI had issued a Concept Paper proposing revised corporate governance requirements based on this Bill. The objective was to comprehensively revise its existing requirements taking into account provisions in the Bill and to initiate debate on the proposed requirements. Thereafter, recently, shortly after the provisions of the 2013 Act were notified, SEBI too brought into effect the new Clauses 49/35B. However, unlike the provisions in the 2013 Act, the SEBI requirements will come into force from 1st October, 2014.

Importance/implications of the new requirements
The new requirements of the two provisions need discussion for several reasons. Firstly, the changes made are substantial. Secondly, for reasons best known to legislators, two sets of overlapping and at times contradictory requirements have been brought into force. Thirdly, the consequences of non-compliance of these two norms will be dealt with in different ways. The penal and other consequences of violations under the 2013 Act are different from those under the Listing Agreement.

The penal consequences under the 2013 Act vs. the Listing Agreement
The consequences of violating the Listing Agreement are generally stated, in the form of a penalty upto Rs. 25 crore. (Note: As I write this article, SEBI has circulated draft provisions that could provide stricter punishments for violations, if brought into effect). This would be levied on the Company. However, SEBI often takes a fairly strong action against other persons like Independent Directors, Audit Committee members, etc. who fail in their duties by debarring them or, as a recent case showed, requiring them to compensate the company for huge losses allegedly caused by their acts/omissions. Even otherwise, SEBI has exercised its powers over the Board, directors, officers and even the Auditors and Courts have upheld these powers in several cases. The action taken may be in a variety of ways including debarment, requirement to compensate, etc.

In comparison, the consequences of violating the provisions of the 2013 Act are usually a fine on the Company and a fine or imprisonment for the officers in default. In some cases, it is possible that there may be class actions too, which can result in compensation to those who suffered loss. Another important difference is that considering that the requirements are contained in different provisions and there are generally different types of penal consequences provided, violation of different provisions of the 2013 Act can have different consequences.

Overlapping provisions
As will be seen later on, there is overlapping and an element of duplication. However, the provisions are often different too. In such a case, the logical recourse for a company seeking scrupulous compliance would be to, where possible and to the extent possible, comply with the stricter or narrower of the two provisions. For example, the 2013 Act provides for a lower number of independent directors while SEBI provides a higher number for certain companies. Thus, those companies would have to comply with the SEBI requirements which would automatically ensure that the provisions of the 2013 Act are also complied with.

Let us now consider a few important requirements.

Applicability
The SEBI requirements apply to all listed companies and certain other specified entities. The requirements under the 2013 Act apply in a varied manner. Generally, they apply to all listed companies. In addition, they apply to certain other companies too. For example, the requirement to have one woman director applies to public companies having a paid up share capital of Rs. 100 crore or more or having a turnover of Rs. 300 crore or more. The requirement relating to Independent Directors applies to public companies having (i) paid up share capital of Rs. 10 crore or more (ii) turnover of Rs. 100 crore or more (iii) having total outstanding loans/debentures/deposits exceeding Rs. 50 crore. And so on.

Woman/Independent directors
SEBI companies require to have at least one woman director. It does not matter whether such director is part of the Promoter Group, an Independent Director, an executive or a non-executive director. The 2013 Act also has similar provisions.

SEBI requires at least one-third of the total number of directors to be Independent Directors. If the Chairman is an Executive Director or is a Promoter or related to the Promoter Group, then the Company 50% of the Board should constitute of Independent Directors. The 2013 Act requires companies to have at least one-third of the total number of directors to be Independent Directors. Any fraction would be rounded off to one. For specified nonlisted companies, there should be minimum two independent directors, irrespective of the size of the Board.

The definition of Independent Director under the two sets of provisions are substantially similar.

Tenure of Independent Director
This is one of the several contradictions between the requirements of SEBI Clause/the 2013 Act. The 2013 Act states that an Independent Director shall hold office for term of five consecutive years at a time and this term can be renewed, by a special resolution, for another period of five years. The SEBI Clause has substantially similar requirements.

The 2013 Act says that the tenure held as on 1st April, 2014 would not be counted. SEBI Clause, however, states that if an Independent Director has held tenure of five years or more as on 1st October, 2014, he shall be eligible for another tenure of five years only.

Audit Committee
The requirements under the 2013 Act and SEBI Clause are broadly similar. However, there are a few differences.

The 2013 Act requires that a majority of the Audit Committee should consist of Independent Directors, while SEBI has a higher requirement of two-thirds. SEBI, in addition, also requires that the Chairman of the Audit Committee should be an Independent Director.

The requirement under the 2013 Act is that a majority of the members of the Audit Committee should be “financially literate,” as defined. SEBI has extended this requirement to all the members. Thus, to ensure due compliance, the stricter requirement in such a case would apply and all the members of the Audit Committee of a listed company should be financially literate.

The  role  and  functions  of  the audit  Committee  as  prescribed by SEBI are far more elaborate and detailed. Considering the nature of the obligations, though, a listed company will have to ensure due compliance of both the sets of provisions.

Material    subsidiary    companies SEBI Clause has certain requirements relating to material, non-listed indian subsidiary companies and other subsidiaries. material subsidiaries are those subsidiaries incorporated in india,that are unlistedand whose income or net worth is more than 20% of the consolidated income or consolidated net worth respectively of the listed parent   company.   for   such   companies,   there   are certain at least one independent director of the parent company shall be a director of such subsidiary.

A statement of significant transactions and arrangements by an unlisted subsidiary shall be periodically brought to the attention of the Board of directors of the parent. “Significant,” in this context, means a transaction or arrangement that exceeds, or is likely to exceed 10% of total revenues/expenses/assets/liabilities of such subsidiary.

Selling, disposal or leasing of more than 20% of the assets of a material subsidiary shall require the approval of the shareholders by way of a special resolution. it is not clear whether such requirement would be attracted if such sale, disposal or lease, is in one transaction or in one financial year or cumulative.

further, to reduce the holding or control of the parent to less than 50% in a material subsidiary, the approval of the shareholders by way of a special resolution would be required.

The 2013 Act contains no corresponding requirements.

Related party transactions
SEBI Clause and the 2013 Act both have fairly detailed requirements relating to related party transactions. analy- sis of this topic even for one of the two sets would require a separate article by itself. however, there are some important features of difference between the two.

What constitutes a related party is defined in different manner under the two provisions. While the 2013 Act seeks to be specific and provides a defined set of relationship that would make a party a related party, the SEBI definition is qualitative. It includes all parties treated as related party under the 2013 Act and adds more.

As regards approval, the 2013 Act requires that the Board shall approve the specified related party transactions. Companies having paid up capital of at least rs. 10 crore, shall obtain the prior approval of the shareholders by way of a special resolution. further, transactions beyond the specified amount as per specified formula would also be covered. at such meeting, members who are related parties  cannot  vote.  the  provisions  do  not  apply  to  trans- actions in the ordinary course of business and at arm’s length, as defined.

SEBI however requires that the audit Committee should approve all related party transactions. however, in case of “material” related party transactions, special resolution shall be passed to take approval where the related parties should not vote. a transaction with a related party would be treated as “material” if such transaction individually  or taken together with previous transactions during the financial year exceed 5% of the annual turnover or 20% of the net worth, whichever is higher, of the company.

Further,  though  SEBI Clause  will  come  into  force  generally from 1st october, 2014, all those material related party transactions that are likely to extend beyond 31st march, 2015 are required to be placed for approval of the shareholders at the first meeting of shareholders after 1st october, 2014. a Company may even get such approval at a meeting prior to 1st october, 2014.

E-Voting
SEBI has introduced a new Clause 35B to make e-voting mandatory by listed companies for shareholder resolutions. all shareholder resolutions including resolutions to be passed by postal ballot should be capable of being voted  through  e-voting.  The  e-voting  would  be  through an agency that provides such platform and complies with conditions as prescribed by the ministry of Corporate affairs.

The 2013 Act/Rules framed thereunder require all listed companies and companies having at least one thousand shareholders to provide facility of e-voting.

Conclusion
these  are  just  some  of  the  new  requirements  relating to corporate governance in the 2013 Act/SEBI Clauses. While the 2013 Act does not give much of a transition period, SEBI has given some time to implement. however, considering the overlapping requirements, significant provisions have become applicable. Considering the punitive and other consequences of non-compliance, the first full year of 2014-15 will require serious efforts to be compliant. at the same time, considering the manner in which they are introduced, there are likely to be several unintended violations. this will only get worse considering poor/loose drafting particularly in the 2013 Act. The fact that the requirements create substantial new requirements and even hurdles, make it even more difficult. One hopes that SEBI and the MCA takes a liberal approach during the year, gives relaxations where possible and takes a lenient view of unintended violations during the first full year of applicability.

Interpretation – Three months – Does not mean 90 days – Bar of Limitation – Application filed on next day after limitation period due to holiday on the said date – Not barred by limitation.

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Subodh Chandra Dash vs. M/s. B. Engineers & Builders Ltd., Bhubaneswar AIR 2014 Orissa 50

An agreement was executed between the parties. The bills were submitted by the petitioner, but they were not settled. The Arbitrator was appointed and the award was passed by the Arbitrator in favour of the petitioner. On 28- 01-2008, the opposite party obtained copy of the award. On 29-04-2008, Arbitration Petition was filed by the opposite party before the learned District Judge, Bhubaneswar u/s. 34 of the Arbitration and Conciliation Act, 1996. The opposite party filed objection to the said petition. The impugned order was passed on 18-08-2011 holding that the application filed u/s. 34 of the Act is within time.

The sole question that arose for consideration in the application is, whether the limitation of three months as provided in section 34 proviso to s/s. (3) of the Act should be calculated as ninety days.

The Court observed that in the case of State of H.P. and another vs. Himachal Techno Engineers and another,: 2010 SAR (Civil) 711, wherein the Supreme Court held that to equate 90 days to the expression of “three months” mentioned in section 34(3)of the Act is erroneous. The Supreme Court further held that a ‘month’ does not refer to a period of 30 days, but refers to the actual period of a calendar month. If the month is April, June, September or November, the period of the month will be thirty days. If the month is January, March, May, July, August, October or December, the period of the month will be thirty-one days. The Supreme Court further held that if the month is February, the period will be twenty-nine days or twentyeight days depending upon whether it is a leap year or not. In the aforesaid case, the Supreme Court further held that section 12 of the Limitation Act, 1963 provides for exclusion of time in legal proceedings.

The Court further held that section 9 of General Clauses Act, 1897 provides that in any Central Act, when the word ‘from’ is used to refer to commencement of time, the first of the days in the period of time shall be excluded. Therefore, to apply the said principle to the present case, while calculating the date of limitation, the date on which the copy of the award has been received by the opposite party i.e., on 28-01-2008 shall be excluded from computation of the limitation.

Therefore, computing the period of limitation from 29-01-2008, 3 days of January, 29 days of February (as 2008 was a leap year), 31 days of March and 28 days of April shall be included in the limitation. Thus, a total period of 91 days is the period of limitation for the present opposite party to prefer an application u/s. 34 of the Act. However, it was not disputed that the period of limitation ended on 28-04-2008. However, the application was filed on 29-08-2008. Therefore, it is seen that there is delay of one day in preferring the application u/s. 34 of the Act. However, it is not disputed that 28-01-2008 was a holiday, because the same was Lawyer’s Day, it is a holiday observed in the State of Odisha. Therefore, the application was filed on 29-01-2008 and is not barred by limitation.

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Hindu Succession-Co-parcenary property – Rights of daughter – Section 6, Hindu Succession Act 1956

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Pratibha Rani Tripathy and Anr vs. Binod Bihari Tripathy & Ors. AIR 2014 Orissa 74

The Appellants had filed an appeal for partition of the immovable & movable properties as described in Schedules-‘ A’ & ‘B’ of the plaint and for recovery of possession of the Schedule-‘C’ properties.

The late Shri Durga Charan Tripathy was the son of the Defendants 1 & 2. He was married to Plaintiff No. 1 as per the Hindu rites and customs and the Plaintiff No. 2 was born out of their wedlock on 16-12-2000. Durga Charan Tripathy expired on 29-06-2002. The suit land, which was the ancestral property of the Defendant No. 1 & his deceased son, was never partitioned between them at any point of time. After the death of Durga Charan Tripathy, the Plaintiffs & Defendant No. 2 succeeded to the interest of Durga Charan Tripathy over the Schedule ‘A’ property i.e., the land.

During the course of the hearing of the appeal, the Defendant Nos. 5 & 6, who are daughters of Defendant Nos. 1 & 2 & sisters of late Durga Charan Tripathy, have filed a cross objection, inter alia, claiming that they have equal share in Schedule ‘A’ property with their late brother Durga Charan Tripathy to which they are entitled to in view of the amendment of the Hindu Succession Act, 1956 by the Hindu Succession (Amendment) Act 2005. Admittedly, the said amendment came into force with effect from 09- 09-2005 i.e., during pendency of the suit.

The moot question, therefore, arose as to whether after amendment of the Hindu Succession Act in the year 2005, the Court below should have held that the Defendant Nos. 5 & 6 (daughters) have equal share with their brother late Durga Charan Tripathy in the property along with their mother Defendant No. 2.

The Hon’ble Court observed that, by the date the suit was disposed of i.e., in the year 2007, the amendment had come into force. Hence, the amended provisions of section 6 of the Hindu Succession Act with regard to right of the daughter will operate in the instant case as there has been no partition effected prior to 20-12-2004 as per s/s. (5) of the said section. Thus, the Trial Court, while determining the share of the parties over the joint family property described in Scheduled ‘A’, should have considered the amendment brought into the Hindu Succession Act by the commencement of the Hindu Succession (Amendment) Act 2005. Applying the aforesaid provision of section 6 as well as the amendment to section 23 of the Act, it would be seen that late Durga Charan Tripathy along with Defendant Nos. 1 & 2 & Defendant Nos. 5 & 6 would have been entitled to equal share in Schedule ‘A’ property & therefore, each of them would have got 1/5th share. 1/5th Share of late Durga Charan Tripathy is succeeded by the Plaintiffs as well as Defendant No. 2.

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Evidence – Printout generated from computer seized not admissible for non fulfillment of statutory conditions: Section 138C customs Act:

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Agarvanshi Aluminium Ltd vs. Commr. Of Cus. (I) NHAVA Sheva; 2014 (299) ELT 83 (Tri. Mum)

The brief facts of the case are that the importer imported aluminium scrap during the period July, 2004 to June, 2006 through various ports. The total quantity of aluminium scrap imported was 3889.998 MTs and the value declared was Rs. 23,84,81,992/-. The DRI, which investigated the imports, came to the conclusion that the appellant had misdeclared the value of imports and the actual value of imports amounted to Rs. 28,40,85,648/- and accordingly issued a show cause notice dated 31-12-2007 demanding differential duty of Rs.1,40,76,571/-.

This demand of duty was based on the evidence unearthed from the indenting agents premises involving differential duty of Rs. 48,80,774/- contemporaneous value of imports involving duty of Rs. 42,06,213/- and on the basis of LME prices minus permissible discount involving a duty of Rs. 49,89,584/-.

The appellant submitted that the demands towards differential duty is based on computer printouts recovered from the premises of the indenting agent (Shri Purshottam Parolia) cannot be relied upon as per section 138C of the Customs Act, 1962. As per the said provisions, the computer printouts can be taken as evidence only subject to fulfilling the terms and condition specified in the section and same have not been complied with in the instant case. The Hon’ble Tribunal observed that in this case, demands have been confirmed against the importer on three counts:

(a) On the basis of computer printout and statement of the indenter and the partner of the importer.
(b) On the basis of contemporaneous imports and
(c) On the basis of LME price,

As per the panchnama, in the list of the documents seized, initially the list of document typed was till Sr. No. 99, thereafter five items were added in handwritten form and Sr. No. 103, it is mentioned that four computer units without any mouse, keyboard, monitor and other accessories i.e., peripherals is mentioned. In the panchanama, the description of the item i.e., make, model, serial no. of the CPU were not mentioned. Moreover, they are handwritten and other 99 items are typed. Further, it was found that as per the panchanama, 4 CPU were seized, but as per the report of Directorate of Forensic Science, computers are found to be five in number and printouts are taken from these five CPUs which has been relied on in the impugned order. Therefore, the veracity of the panchanama is doubtful.

From the above provisions, it was clear that for admissibility of computer printout there are certain conditions which have been imposed in section 138C. Admittedly, the condition of the said section has not been complied with.

The Tribunal relied on the decision in case of Premier Instruments & Control Ltd. (2005) 183 ELT 65 (Trib.) wherein it was held that “computer printout were relied on by the adjudicating authority for recording a finding of clandestine manufacture and clearance of excisable goods. It was found by the Tribunal that printouts were neither authenticated nor recovered under Mahazar. It was also found that the assessee in that case had disowned the printout and he was not even confronted. The Tribunal rejected the printouts and the revenues finding of clandestine manufacture and clearance. Thereafter, it was found that there is a strong parallel between the instant case and the case cited. Nothing contained in the printout generated by the PC can be admitted as evidence for non- fulfillment of the statutory condition”.

Therefore, the printout generated from the PC seized cannot be admitted into evidence for non-fulfillment of statutory condition of section 138C of the Customs Act, 1962.

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Development Agreement – Conditional sale – Suit by developer for specific performance – maintainable: Contract Act section 202 and 204, Transfer of property Act 1882, section 54

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Ashok Kumar Jaiswal vs. Ashim Kumar Kar AIR 2014 Calcutta 92 (FB)

A development agreement is in the nature of an agreement for sale subject to certain conditions. It is an agreement for a conditional sale. A suit at the instance of a developer (where the developer is the non-owner party to a development agreement) is not prohibited by section 14(3) (c) of the Specific Relief Act, 1963.

A contract between a developer and an owner would also consist of reciprocal rights and obligations. It would be preposterous to say that only the owner can maintain a suit against the developer for enforcing his rights and not vice versa. If the developer has a right under the contract, he must have a remedy in the form of approaching a forum for grievance redressal. This is not to say that the developer will necessarily succeed in such a legal action. A question of maintainability of a suit is completely different from the question of whether the suit will succeed or not on the facts of the case and in the light of the applicable law. Section 14(3)(c) of the Specific Relief Act can in no manner be interpreted as debarring a developer from approaching the legal forum for redressal of his grievance. To that extent, a suit at the instance of a developer is maintainable and not barred by section 14(3) (c) of the Specific Relief Act.

Ordinarily, a Power of Attorney executed by an owner in favour of the developer for effectuating the terms and conditions of the development agreement does not give a bare agency to the developer but it gives the developer an interest in the property which forms the subject-matter of the agency. However, merely because such a power of attorney gives the developer such an interest, it cannot be said that the agency cannot be revoked or terminated. Further, merely because such a power of attorney may be revoked, it would not imply that the development agreement can otherwise not be specifically enforced if the facts in a particular case so warrant

Section 53A of the Transfer of Property Act would suggest, if a proposed transferee of an immovable property under an agreement for sale is put in possession and continues in possession in part performance of the contract and does some act in furtherance of the contract and is willing to perform the balance part, his possession would be protected and the transferor would be debarred from dispossessing him other than under a right expressly provided by the terms of the contract. If a developer files a suit for specific performance of a contract and the owner files a suit for recovery of possession, one may have to dismiss both on different logic. A court of law is duty-bound to resolve the controversy that is brought before it, as far as practicable. The Court of law is not entitled to complicate the issue by making the controversy more complicated.

Section 202 of the Indian Contract Act 1872, provides that when the agent had interest in the property under the agency agreement in the absence of an express provision, the contract could not be terminated to the prejudice of such interest. Section 203 permits the principal to revoke the authority of his agent. However, when the agent partly exercised his authority, such revocation would not be permissible u/s. 204. If one reads these three provisions together, one would find that the Power of Attorney so revoked by the owner should not be looked at in an isolated manner. The Power of Attorney generally issued to the developer, is in continuation of the original agreement for development of the property, meaning thereby, that the developer who was entrusted to develop the property would be given authority to further act, as per the contract, including dealing with the property to the extent permissible under the contract. Hence, the Power of Attorney was nothing but an agency agreement executed in furtherance of the original contract.

If the original contract creates an interest in favour of the developer even if the Power of Attorney is revoked such interest would not evaporate.

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Intercorporate Investments: Changes Galore

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Synopsis
The 2nd phase of the provisions of the Companies Act, 2013 has been made operative w.e.f. 1st April, 2014. This includes provisions dealing with intercorporate investments. Substantial changes have been made in the law in this respect. It is time for Corporate India to unlearn and relearn all they know in this respect. This article examines the salient features of the new provisions on intercorporate investments.

Introduction
Part-II of the Companies Act, 2013 (“the Act”) has made about 183 further sections (after the initial 98) effective from 1st April, 2014 and a Part-III is pending. The Rules in respect of Part-II sections have also been notified. One of the sections notified in Part-II is section 186 which deals with “Loans and investments by a company”. Section 186 coupled with section 185 has caused maximum heartburn amongst corporate India. This section 186 is a modern day avatar of section 372A of the Companies Act, 1956 (which in itself was a modern day avatar of the erstwhile section 372 of the same Act), but it has undergone a transmutation as compared to the original section. As the heading of the section suggests, it deals with two legs ~ loans by a company and investments by a company. In addition, there are certain other sections of the Companies Act, 2013 which deal with intercorporate investments. Through this article, let us examine the provisions relating to investments by a company in another body corporate, i.e., intercorporate investments.

Applicability
One of the most distressing features of section 186 is that it even applies to private limited companies which are not subsidiaries of public limited companies. Section 372/372A had a blanket exemption for private limited companies. A similar exemption is not found u/s. 186. Thus, all private companies would now have to comply with the provisions of this section.

Limit on Investments
The overall limit for a company to invest in the securities of another body corporate u/s. 186(2) is the higher of the following two limits:
(a) 60% of paid-up share capital + free reserves + securities premium; or
(b) 100% of free reserves + securities premium

This limit applies to investment by way of fresh acquisition or purchase or otherwise of securities of another body corporate.

The term ‘Securities’ has been defined u/s. 2(81) of the Act to mean securities as defined u/s. 2(h) of the Securities Contract (Regulation) Act, 1956. Thus, they would include shares (equity, preference, convertible preference, non-voting rights shares), debentures, bonds, derivatives in securities, warrants, other marketable securities of a body corporate. The limit would apply to investment by a company in the securities of both listed as well as unlisted companies.

Next let us examine the definition of the term ‘body corporate’. Section 2(11) of the Act defines it as including a company incorporated outside India. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. The most important aspect of a body corporate is that it is an independent legal entity with a distinct identity which is separate from its partners/shareholders/members and has a perpetual succession. It can own property on its own accord and in its own name. Hence, investing in the securities of a foreign subsidiary/joint venture would also fall within the purview of these limits. However, a mutual fund structured as a trust is not a body corporate and hence, investment in the units issued by a mutual fund (structured as a trust) would not be within the purview of section 186.

Let us next look at the composition of the limits for considering the 100% or 60%:

(a) Section 2(64) of the Act defines the phrase ‘paid-up share capital’ to mean such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paidup in respect of shares of the company but does not include any other amount received in respect of such shares, by whatever name called.

(b) The phrase ‘free reserves’ is defined by section 2(43) to mean such reserves which are available for distribution as dividend. These reserves are to be reckoned as per the last audited balance sheet of a company. The following are however, not treated as free reserves:

(i) any amount representing unrealised gains, notional gains or revaluation reserve, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(c) T he last component of the limits is ‘securities premium’ which is governed by section 52 of the Act and it states that where shares are issued at a premium, the amount of the premium received on those shares shall be transferred to a “securities premium account”.

What if Limits are to be exceeded?


In case the investment in another body corporate is to be in excess of the limits specified above, then the investor company must obtain a prior special resolution of its shareholders passed at a general meeting. The Rules notified u/s. 186 provide that this would not be required where a holding company proposes to invest (by way of subscription or acquisition) in shares of its wholly owned subsidiary. However, the resolution would be required if the subsidiary is not a 100% subsidiary. Thus, if any, only if, the entire share capital is held by the investor and/or its nominees, would a special resolution not be required. The resolution must specify the total amount up to which the Board is authorised to make such acquisition. Section 110(1) of the Act and the Rules notified therein specify the items which must be transacted through postal ballot. While giving of loans/guarantees/security in excess of limits u/s. 186 have been specified, investment in excess of the limits u/s. 186 has not been specified. Hence, such a resolution is not mandatorily to be passed via a postal ballot.

In addition, the requirements of the Companies (Management and Administration) Rules, 2014 as well as the revised Clause 35B of the Listing Agreement should be complied with by all listed companies. This requires that for all resolutions to be passed at General Meetings, evoting facility must be provided by the listed company.

Layers of Investment Companies


S/s. (1) of section 186 introduces a novel concept, i.e., any company can make an investment through not more than two layers of investment companies. Companies in India are accustomed to having a web of investment companies. This has often been criticised on the grounds that it gives rise to opacity and proves difficult for regulators to ascertain the ultimate owner of an investee company. Thus, any company desiring to make an investment, after the coming into force of section 186, can do so either directly or through an investment company or through one investment company followed by a 2nd layer of investment company. However, it cannot have a 3rd layer of investment company under the 2nd layer of investment company. This s/s. prohibits making any investment, unlike the limits u/s. 186(2)(c) (which apply only for investment in a body corporate) and this does not restrict the scope to investment in a body corporate. Hence, any investment by a company through more than 2 layers of investment companies is not allowed. Thus, investment in a company, LLP, body corporate, partnership firm, etc., would all be covered. Considering the way the s/s. is worded, one wonders whether this prohibition would also apply to investment by a company in other asset classes, such as, land. However, a harmonious reading with the other sub-sections does not seem to indicate so.

The restriction is on routing any investment through more than 2 vertical layers of investment companies as illustrated by the following diagram (illustration-1) which violates section 186:

Thus,  since aBC  has  routed  its  investment  in  XYZ  via 3 layers of investment companies, the prohibition u/s.
186(1) would apply.

It may be noted that the prohibition is on having more than 2 layers of investment companies and hence, we need to ascertain what constitutes an investment company? the section defines an ‘investment company’ to mean a com- pany whose principal business is acquisition of shares, debentures or securities. at the outset, it is very clear that the definition only applies to a company and not to any other body corporate or entity. A company is defined to mean a company incorporated under the act or under any previous company law. Hence, if an LLP is used as an investment vehicle then this prohibition u/s. 186 would not apply. Whether you can incorporate an investment LLP is another story altogether.

Secondly, it must be a company whose principal business is acquisition of securities. What is principal business has not been defined. In this context, the principal business tests  laid  down  by  the  reserve  Bank  of  india  to  determine what constitutes an nBfC (non-banking financial Company) may be helpful. according to these tests, a company will be treated as an NBFC if it satisfies both the following conditions as per its audited accounts:

(i)    Its financial assets as per the last audited Balance Sheet should be more than 50% of its total assets (netted off by intangible assets) and

(ii)    Its income from financial assets as per the last audited Profit & Loss Account should be more than 50% of its gross income.

It should be noted that both these tests should be sat- isfied in order to treat a company as an NBFC. A company whose principal business is acquisition of securities may generally also qualify as an NBFC unless it can be treated as a Core investment Company or a CiC or if it is a company exempted from nBfC provisions, e.g., stock brokers. in this respect, the decision of the madras high Court u/s. 372 of the Companies Act,1956 in HC Kothari, 75 Comp. Cases 688 (mad) may be referred to. this decision held that it is clear that the income derived from the business is not the criteria. the test would rather be, as to what is the principal business of the company? a balance- sheet should show as to what is the principal business of the company.

The  department  of  Company  affairs’  views  (dated  1st July, 1963) under the erstwhile section 372 may also be considered:

“In the Department’s opinion whether a company is or is not an investment company and the business which it should or should not transact to fall within the provision of the definition of an “Investment company” within the meaning of section 372(10) is actually a question of fact. The words used in the section are “whose principal business is the acquisition of shares.  ” These words imply that the company concerned is expected to hold the shares, etc., acquired by it for a reasonable time.”

The Department’s views (dated 23rd February, 1961 and 4th October, 1961) under the erstwhile section 372, in relation to a share trading company, were as follows:

“The question as to whether a particular share trading company which deploys its funds for short-term transaction in buying and selling shares is an investment company or not, is one of fact which has to be determined in relation to the actual business transacted by it. The Department is inclined to the opinion that a company should be treated as an investment company if the whole or substantially the whole of its business relates to shares, securities, stock and debentures, etc. A share trading company may take advantage of these provisions of section 372 if it can be classed as an investment company.”

The act expressly provides that the restriction on two layers of investment companies even applies to an NBFC whose principal business is acquisition of securities. CiCs are a class of NBFCs which invest 90% of their net assets in group companies’ securities and at least 60% of 90% of their net assets in group companies’ equity shares. thus, even NBFCs and CiCs are restricted from having only two layers of investment companies.

The investor company could be an investment or an operating company but it cannot route its investment via more than 2 layers of investment companies. if the investment is routed through an operating company or one whose principal business is not acquisition of securities, then the restriction u/s. 186 on 2 layers would not apply. The following diagram (illustration-2) would amplify this statement:

Thus, since PQR has routed its investment in XYZ via a mix of 2 layers of operating companies and 2 layers of investment companies, the prohibition u/s. 186(1) does not apply. as explained the prohibition is only on more than 2 layers of ‘investment’ companies. one additional factor to be borne in mind in structuring an investment through an investment company is the NBFC directions. it is quite possible that the investment company, i.e., one whose principal business is acquisition of securities may constitute either an NBFC or a CIC. if it is an NBFC-ND-SI/Systemically Important Non-deposit taking NBFC, i.e., one which has total assets of rs. 100 cr. and above, then the NBFC directions impose a restriction that it cannot lend and invest more than 40% of its owned funds to a single group of parties and more than 25% of its owned funds to a single party. thus, in such a case, the twin restrictions of the act as well as of the directions would have to be borne in mind.

Exemption:
The  prohibition  on  making  investments  only  through   a maximum of two layers of investment companies will not affect the following two cases:
(i)    a company from acquiring any other company incorporated in a country outside india if such other company has investment subsidiaries beyond two layers as per the laws of such country; or
(ii)    a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Further, section 186(1) gives power to the Government to prescribe such companies which can invest via more than 2 layers of investment companies.

Thus, exceptions presently available are if the indian in- vestor company has acquired a foreign company which, in turn, has more than two layers as per the laws of its country or if the subsidiary of an investor company, in turn, has any investment subsidiary for meeting the requirements of any law.

When indian companies make overseas investments, several times they consider routing such overseas investments through an intermediate holding Company (IHC), regional holding Company (RHC), etc. it is a moot point whether the prohibition u/s. 186 can apply to an investment made in a foreign company via more than 2 layers of IHCs/RHCs? This is because a company is defined under the act to mean a company incorporated under the act or under any previous company law and an ihC or a RHC incorporated abroad is a body corporate but not a company within the meaning of the act. interestingly, under the fema regulations, the RBI is also known to frown upon the use of multi-layered SPVs for making an overseas direct investment.

   Other compliances
in addition to the above substantive provisions, section 186 also lays down several compliances for the investor company, such as, holding investments in its own name, board resolution to be passed by unanimous consent of all directors present at the meeting, maintaining a register of investments, obtaining prior approval of financial institutions in certain cases, etc.

except the provisions relating to two layers of investment companies, none of the other provisions of section 186 are applicable to the following cases of investments:

(a)    to any acquisition made by a registered NBFC whose principal business is acquisition of securities in respect of its investment activities. it may be noted that the exemption is only available to an nBfC which is registered with the rBi. under the CIC directions, a CiC is also a class of nBfCs. hence, this exemption should be available even to registered CICs. however, only CIC-nd-Si, i.e., those which have an aggregate asset size in excess of rs.100 crore need to be registered with the rBi. other CiCs are exempted from  registration  both  as  a  CiC  and  as  an  nBfC. hence, will such exempted CiCs be eligible for the exemption u/s. 186 is a moot point?
(b)    to  any  acquisition  made  by  a  company  whose  principal business is the acquisition of securities. Such companies could be NBFCs, CICs, stock/subbroking companies, Venture Capital Companies, alternative investment funds structured as companies, etc.
(c)    to any acquisition of shares allotted in pursuance of clause (a) of s/s. (1) of section 62, i.e., allotment under a rights issue.

A related compliance is laid down u/s. 187 of the Act which requires all investments made or held by a company to be held in its own name. however, it may hold shares in its subsidiary company in the name of its nominees if it’s required to ensure minimum number of members. unlike the earlier section 49 of the 1956 act, section 187 even applies to a company whose principal business consists of buying and selling of securities.

An  additional  compliance  is  incorporated  in  the  report of the Board of directors. it requires to give particulars   of investments u/s. 186. Further, the Audit Committee’s terms of reference includes scrutiny of intercorporate investments.

Further, section 179(3) states that the power to invest the funds of the company can be exercised by the Board of directors only at a meeting of the Board. hence, a Circu- lar resolution is not possible.

    Exemptions u/s. 372a Dropped

Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

details

Section 372a of the 1956 act

Section 186 of the 2013 act

Applicability
to Private Companies

Entire
Section did not apply to Private Limited Companies

Entire
Section applies to Private Limited Companies. This is a major change

Companies
whose

Entire
Section did not

Restriction
on invest-

principal business

apply to a company

ment through 2 layers

is acquiring securi-

whose principal busi-

of investment com-

ties

ness was acquisition

panies even applies

 

of securities

to a company whose

 

 

principal business is

 

 

acquisition of securi-

 

 

ties. The remaining

 

 

s/s.s of section 186

 

 

do not apply to such a

 

 

company.

NBFCs

No
exemptions for

Restriction
on invest-

 

NBFCs

ment through 2 layers

 

 

of investment com-

 

 

panies even applies

 

 

to an NBFC but the

 

 

remaining sub-sections

 

 

of section 186 do not

 

 

apply to an NBFC.

Acquisition
by

Entire
Section did

Now the
exemption is

Holding Company

not apply to subscrip-

only available qua the

 

tion or purchase of

passing of a special

 

securities by a Holding

resolution by the Hold-

 

Company in its wholly

ing Company if the

 

owned subsidiary

limits u/s. 186 would

 

 

be exceeded by virtue

 

 

of such acquisition.

 

 

However, the other

 

 

s/s.s of section 186

 

 

continue to apply.

    Penalty
Section 186 imposes a heavy penalty for the violation of the provisions of this section. if a company contravenes the provisions of this section, the company shall be pun- ishable with fine which ranging from Rs. 25,000 to Rs. 5 lakh. Every officer who is in default shall be punishable with a term which may extend to 2 years and with fine ranging from rs. 25,000 to rs. 1 lakh.

  Layers of Subsidiaries
in addition to the restriction on layers of investment companies u/s. 186, there is also a restriction u/s. 2(87) of the act on the number of layers of subsidiaries which certain prescribed class of holding companies can have. a subsidiary includes a company as well as a body corporate, such as an LLP. Thus, in respect of prescribed holding companies they cannot have more than certain number of layers of subsidiaries. it may be noted that unlike the restriction on layers of investment companies, this restriction applies both to operating as well as investment subsidiaries and to subsidiaries which are companies or body corporates. Currently, no class of holding companies or number of layers have been prescribed.

one may compare the restrictions contained in section 186 vs. section 2(87) as follows:

 Compilance for The Investee company
The  investee  company  needs  to  pay  special  attention as to whether the issue of fresh securities to the investor company would constitute a private placement u/s. 42 read with the Rules notified thereunder and/or a preferential issue u/s. 62(1)(c) read with the Rules notified thereunder? Several substantive and procedural conditions have been laid down in this respect for the investee company.

Conclusion
The  law  relating  to  intercorporate  investments  is  one area which has witnessed a sea change under the Companies Act, 2013 as compared to the Companies Act, 1956! Corporate india is going to have to grapple with several intended and unintended consequences of these new  provisions  but  then,  who  said  law  and  logic  go together?

A. P. (DIR Series) Circular No. 107 dated 20th February, 2014

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Notification No. FEMA. 230/2012-RB dated 29th May, 2012, notified vide G.S.R. No. 797(E) dated 30th October, 2012 read with Corrigendum dated 10th September, 2013 notified vide G.S.R. No. 624(E) dated 12th September, 2013

Foreign Direct Investment (FDI) into a Small Scale Industrial Undertakings (SSI)/Micro & Small Enterprises (MSE) and in Industrial Undertaking manufacturing items reserved for SSI/MSE

Presently, an India Company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annex A, can issue shares or convertible debentures to a person resident outside India, to the extent of 24% of its paid-up capital. The said Company can issue shares in excess of 24% of its capital if:

(a) It has given up its small scale status.

(b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector.

(c) It complies with the ceilings specified in Annex B to Schedule I.

This circular has aligned the policy on FDI with respect to investment in Small Scale Industrial unit and in a company which has de-registered its small scale industry status and is not engaged or does not propose to engage in manufacture of items reserved for small scale sector in lines with provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. As a result:

(i) A company which is reckoned as Micro and Small Enterprises (MSE) (earlier Small Scale Industries) in terms of MSMED Act, 2006 and not engaged in any activity/sector mentioned in Annex A to schedule 1 can issue shares or convertible debentures to a person resident outside India, subject to the limits prescribed in Annex B to schedule 1, in accordance with the entry routes specified therein and the provision of FDI Policy, as notified from time to time.

(ii) Any Industrial undertaking, with or without FDI, which is not an MSE, having an Industrial License under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for manufacture in the MSE sector can issue shares in excess of 24% of its paid up capital with prior approval from FIPB.

In terms of the provisions of MSMED Act: –

(i) In the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951: –

(a) A micro enterprise means where the investment in plant and machinery does not exceed Rs. 25 lakh.

(b) A small enterprise means where the invest ment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.

(ii) In the case of the enterprises engaged in providing or rendering services: –

(a) A micro enterprise means where the investment in equipment does not exceed Rs. 10 lakh.

(b) A small enterprise means where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

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Settlement Deed – Cancellation – Registered Settlement deed cannot be cancelled by executing cancellation deed: Transfer of Property Act, 1882, section 9:

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V. Ethiraj vs. S. Sridevi & Ors.; AIR 2014 Karnataka 58

Once, the settlement deed was executed by mother in favour of her daughter, mother lost her right, title and interest in the schedule property. Subsequently, on the day mother executed cancellation deed, she had no right in the property. The registered settlement deed cannot be cancelled by executing a cancellation deed. If at all the said document is to be canceled, it had to be done under the provisions of Specific Relief Act, by approaching a competent civil Court for cancellation of such document. If the fact of fraud, undue influence, mistake or any other ground which is alleged for cancellation of the said documents is proved, the Court may order for cancellation. That is the only mode known to law to cancel the registered settlement deed. Otherwise, the parties by consent have to annul the settlement by executing the document of reconveyance. Therefore, by execution of the cancellation deed, the registered settlement deed did not stand cancelled. Unilaterally, the settler cannot execute a cancellation deed of settlement.

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Hindu Undivided Family – Not in existence prior to the coming into force of Hindu Succession Act, 1956 – Suit for Partition – Suit not maintainable

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Sushant vs. Sunder Shyam Singh AIR 2014 (NOC) 90 (Del.)

A Hindu Undivided Family was not in existence prior to the Hindu Succession Act coming into force. The Properties in question, inherited by the deceased owner on the demise of his father, would become his persona properties. The son of the deceased owner would not acquire any coparcenary share in the properties till the owner was alive. The suit property would devolve on the son of the deceased in his individual capacity on the death of the owner. Therefore, the claim of the grandson of the deceased for partition of suit properties on the grounds that the same were ancestral, was held not maintainable.

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Instrument – Chargeability to stamp duty – Document executed before Notary – Creating rights in land – Stamp Act, 1899, section 17, 2(14)

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Om Prakash Umar vs. State of U.P. through Secretary Fund & Revenue Dept. U.P. Shashan, Lucknow & Ors ARI 2013 Allahabad 209

A document before the Notary was executed on 14-12- 2009 by one Mr. Mahadeo and others by which they withdrew their rights on the abadi land admeasuring 80 ft. x 70 ft. and transferred them in favour of the petitioner for a consideration of Rs. 50,000/- only. The aforesaid document was written on a stamp paper of Rs. 150/- only. The Additional Commissioner (Stamp) vide order dated 18-04-011 held the above document to be an instrument of conveyance and assessing its market value determined the deficiency in stamp duty and imposed a penalty. The appellate authority affirmed the aforesaid order vide its order dated 25-11-2011.

The above two order dated 25-11-2011 and 18-04-2011 were under challenge by way of writ petition before the Allahabad High Court. The Hon’ble Court observed that section 17 of the Indian Stamp Act, 1899 provides that all instruments chargeable with duty and executed by any person in the India shall be stamped before or at the time of execution. Therefore, stamp duty on an instrument is payable at the time of execution of the instrument. The moment an instrument is executed stamp duty is payable on it. The validity of its execution or its non-registration has nothing to do with its execution and consequently the payment of stamp duty.

An instrument as defined u/s. 2(14) of the Act includes every document and record by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. The above document executed before the Notary, with whatever name it may be called, creates rights in the land in favour of the petitioners, after extinguishing those of Mr. Mahadeo and others therein. It is, therefore, undoubtedly, an instrument as defined u/s. 2(14) of the Act.

In view of the aforesaid facts the aforesaid document dated 14.12.2009 is an ‘instrument’ within the meaning of Section 2(14) of the Act and its execution is not denied, it is chargeable to stamp duty.

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Evidence – Commission of Enquiry – Statements made before commissioner cannot be used as evidence before civil or criminal court – Conclusions based on such statements cannot be used as Evidence:

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SBI through General Manager vs. National Housing Bank & Ors(2013) 180 Comp. Cas 15 (SC)

The National Housing Bank drew a cheque on 3rd January, 1992, for an amount of Rs. 95.39 crore approximately on the Reserve Bank of India in favour of the State Bank of Saurashtra, a subsidiary of the appellant, which later merged with the appellant. Towards the end of April, 1992, the National Housing Bank found that it did not possess any bank receipts or supporting documents or any securities in respect of such transaction and addressed letters to the State Bank of Saurashtra requesting it to make delivery of bank receipts/securities or for return of the amount. The state bank of Saurashtra denied the existence of any “outstanding transaction”. The National Housing Bank filed a suit before the Special Court established under the Special Court (Trial of Offences Relating to Transactions in securities) Act, 1992 against (i) the State Bank of Saurashtra, (ii) HM, (iii) 2 employees of HM and (iv) the Custodian appointed u/s. 3(1) of the 1992 Act for recovery of an amount of Rs. 95.39 crore with interest alleging conspiracy, collusion and fraud between the defendants in the suit thereby causing loss to the National Housing Bank. The Special Court passed a decree in favour of the National Housing Bank and against the state bank of Saurashtra. The State Bank of Saurashtra challenged that part of the decree which was against, it and the National Housing Bank challenged that part of the decree of the Special Court directing it to deliver certain amounts to the Custodian:

The Hon’ble Court observed that u/s. 9A(1) of the Act, the Special Court has jurisdiction to adjudicate any matter or claim arising out of a transaction in securities entered into during the period specified in the section in which a notified person is involved in whatever capacity. Therefore, the Special Court was authorised by law to adjudicate the claim of the defendant, HM, without being shackled by the procedural fetters imposed under the code.

Further that though the 1992 Act declares that the Special Court is not bound by the Code of Civil procedure, 1908, it does not relieve the Special Court from the obligation to follow the Indian Evidence Act, 1872. The findings of even a statutory commission appointed under the Commissions of Inquiry Act, 1952, are not enforceable proprio vigore and the statements made before such commission are expressly made inadmissible in any subsequent proceedings civil or criminal. Therefore, courts are not bound by the conclusions and findings rendered by such commissions. The statements made before such commission cannot be used as evidence before any civil or criminal court. It should logically follow that even the conclusions based on such statements can also not be used as evidence in any court.

The Special Court had based its conclusions on Janakiraman Committee Report and the correspondence between the various parties (whose details are not even specified in the judgment).

The Court observed that the course adopted by the learned Judge of the Special Court of looking into the correspondence between the parties, which even according to the learned Judge had not been proved is not permissible in law. The Special Court Act though declares that the Court is not bound by the Code of Civil Procedure, it does not relieve the Special Court from the obligation to follow the Evidence Act. Further, the learned Judge extensively relied upon the second interim report of the Jankiraman Committee on the ground that the same was tendered by the 1st Defendant.

It is well settled by a long line of judicial authority that the findings of even a statutory Commission appointed under the Commissions of Inquiry Act, 1952 are not enforceable proprio vigore as held in Ram Krishna Dalmia vs. Justice S.R. Tendolkar and Ors.: AIR 1958 SC 538 and the statements made before such Commission are expressly made inadmissible in any subsequent proceedings civil or criminal.

In our view, the courts, civil or criminal, are not bound by the report or findings of the Commission of Inquiry as they have to arrive at their own decision on the evidence placed before them in accordance with law.

Therefore, Courts are not bound by the conclusions and findings rendered by such Commissions. The statements made before such Commission cannot be used as evidence before any civil or criminal court. It should logically follow that even the conclusions based on such statements can also not be used as evidence in any Court. Janakiraman Committee is not even a statutory body authorised to collect evidence in the legal sense. It is a body set up by the Governor of Reserve Bank of India obviously in exercise of its administrative functions, The Governor, RBI set up a Committee on 30th April, 1992 to investigate into the possible irregularities in funds management by commercial banks and financial institutions, and in particular, in relation to their dealings in Government securities, public sector bonds and similar instruments. The Committee was required to investigate various aspects of the transactions of SBI and other commercial banks as well as financial institutions in this regard.

The Court dismissed the suit.

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Doctrine of merger – Appeal to Appellate Tribunal – Not applicable when appeal rejected on limitation.

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Raja Mechanical Co.(P) Ltd vs. Commissioner of C. Ex, Delhi – I 2012 (279) ELT 481 (SC)

The facts in nutshell are that the assessee is a manufacturer of dutiable excisable goods. The assessee availed a MODVAT Credit of Rs. 1,47,000/- by filing a declaration dated 30-06-1995 under Rule 57T(1), whereby it declared the receipt of the goods from M/s. DGP Windsor India Ltd. vide invoice dated 18- 06-1995, alongwith the application for condonation of delay, before the adjudicating authority/assessing authority. Accordingly, the adjudicating authority had issued a show cause notice.

As there was a delay in filing the prescribed forms before the assessing authority. Therefore, the assessing authority had rejected the claim of the assessee and accordingly, had directed him for payment of the Excise duty credit availed by the assessee. Aggrieved by that order, the assessee had belatedly filed an appeal before the proper appellate authority. Since there was delay in filing the appeal and since the same was not within the time that the appellate authority could have condoned the delay, accordingly had dismissed the same. It is that order which was questioned before the Tribunal. Before the Tribunal, as we have already noticed, the assessee had requested the Tribunal to first condone the delay and next to decide the appeal on merits, i.e. to decide whether the adjudicating authority was justified in disallowing the benefit of the Modvat credit that was availed by the assessee. The Tribunal had not conceded to the second request made by the assessee and only accepted the findings and conclusions reached by the Commissioner of Appeals, who had rejected the appeal. The assessee’s stand before the Tribunal and before this Court is that the orders passed by the adjudicating authority would merge with the orders passed by the first appellate authority and the Tribunal ought to have considered the appeal filed by the assessee on merits also. In our opinion, the same cannot be accepted. In view of the plethora of decisions of this court, wherein this court has, categorically, observed that if for any reason an appeal is dismissed on the ground of limitation and not on merits, that order would not merge with the orders passed by the first appellate authority.

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Contract of guarantee and contract of indemnity – Difference – section 124 and 126, Contract Act, 1872:

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Punjab National Bank vs. Ram Dutt Sharma & Ors AIR 2013 Allahabad 198

Plaintiffs Sri Ram Dutt Sharma and his wife Smt. Saroj, instituted a Suit, impleading New Bank of India, Sri Chhote Lal Sharma, son of Sri Khacheru Singh and Smt. Saroj, wife of Sri Shiv Charan as defendants. The relief sought in the aforesaid suit was a mandatory injunction directing defendant No. 1 to auction Truck No. UHN 1077, belong to defendant Nos. 2 and 3, and in possession of defendant-Bank towards security/ guarantee against the amount of loan, advanced to defendant Nos. 2 and 3, and realise outstanding dues, before encashing Fixed Deposit Receipts of plaintiffs, lying with defendant-Bank.

The plaintiff’s case was that defendant Nos. 2 and 3 were running a transport business. They purchased a new Truck in 1985. The financial assistance in the aforesaid transaction was tendered by the Bank, advancing a loan of Rs. 1,50,000/-, against which Truck itself was hypothecated. Besides, the plaintiffs’ FDRs of Rs. 10,000/- and Rs. 70,000/- were pledged in security for a period of three years or till repayment of loan amount, whichever is earlier. There appears to be some default towards repayment of loan amount, on the part of defendant Nos. 2 and 3, but defendant No: 1, instead of realising defaulted amount from defendant Nos. 2 and 3, by sale/auction of mortgaged vehicle, proceeded to encash FDRs of plaintiffs lying in security with the bank, hence the suit.

The Hon’ble Court observed that it would be necessary to determine the nature of contract between the plaintiffs and the Bank. The contract between the Bank and respondents 3 and 4 was admittedly that of loaner and loanee. A “contract of guarantee” is defined in Section 126 of I.C. Act, 1872. It says that a “contract of guarantee” is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called “surety”, person in respect of whose default the guarantee is given is called the “principal debtor” and the person to whom the guarantee is given is called the “creditor”. In case this Court found that the plaintiffs entered into a contract of guarantee with the Bank in terms of Section 126 of I.C. Act, 1872 the plaintiffs would be “surety”, respondents 3 and 4 would be the “principal debtor”, and the Bank would be “the creditor”. A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail.

The distinction between the “contract of guarantee” and “contract of indemnity” comes out from the definitions of two. The phrase “contract of indemnity” is defined in Section 124 of I.C. Act, 1872 which states that a contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person is called “contract of indemnity”. One of the apparent distinctions between two is that a “contract of guarantee” requires concurrence of 3 persons, namely, the principal debtor, surety and the creditor, while “contract of indemnity” is a contract between two parties and promisor enters into such contract with other party. In other words, a person who is party to a contract, if he executes a promise to other party to save him from loss on account of promiser’s conduct or by the conduct of any other person, it, is a “contract of indemnity”, while for the purpose of “contract of guarantee”, it requires presence of three parties at least.

“Surety” is always liable to the extent of precise terms of his commitment and not beyond that. In the case of “contract of guarantee”, section 128 of I.C. Act, 1872 says that the liability of surety is co-extensive with that of principal debtor, unless it is provided otherwise by the contract.

The initial term of guarantee/surety was alleged to be three years or earlier thereto till the entire loan money is paid. The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs surety as a collateral guarantee against the loan amount. Lower Appellate Court, had rightly read the averments contained in the plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if matured before payment, were referable to a period prior to 3 years from the date of such contract and not to the extent of period of contract beyond 3 years. To that extent, there was a clear averment that contract was only for three years or earlier thereto when the entire loan amount was paid. The word “earlier” rules out any possibility of a continuing contract of guarantee beyond 3 years.

Collateral security of FDRs was, therefore, available to the bank for a period of 3 years only and not beyond that, unless consented by surety, i.e. plaintiffs. Admittedly, no such consent was obtained by plaintiffs-surety and, on the contrary, the Bank on its own gave extension to the principal debtor in the matter of re-payment of loan amount. The appeal was allowed.

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The Ministry of Corporate Affairs has vide General circular 19/2013 dated 10.12.2013 issued clarification on disclosures to be made with regard to applicability of Section 182(3) of Companies Act 2013 pertaining to Prohibition and restriction regarding political contributions

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As per the circular with the coming into force of the scheme relating to ‘Electoral Trust Companies’ in terms of section (24AA) of the Income Tax Act, 1961 read with Ministry of Finance Notification No. S.O.309(E) dated 31st January, 2013 pertaining to Electoral Trust Scheme 2013, it will be expedient to explain the requirements of disclosure on part of a Company of any amount or amounts contributed by it to any political parties u/s. 182(3) of the Companies Act, 2013. It is clarified that;

(i) Companies contributing any amount or amounts to an ‘Electoral Trust Company’ for contributing to a political party or parties are not required to make disclosures required u/s. 182(3) of Companies Act 2013. It will suffice if the Accounts of the company disclose the amount released to an Electoral Trust Company.

(ii) Companies contributing any amount or amounts directly to a political party or parties will be required to make the disclosures laid down in section 182(3) of the Companies Act, 2013.

(iii) Electoral Trust Companies will be required to disclose all amounts received by them from other companies/sources in their Books of Accounts and also disclose the amount or amounts contributed by them to a political party or parties as required by section 182(3) of Companies Act, 2013.

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A. P. (DIR Series) Circular No. 111 dated 13th March, 2014

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Rupee Drawing Arrangement – Increase in trade related remittance limit

At present, the limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA), as mentioned in the Memorandum of Instructions for Opening and Maintenance of Rupee/ Foreign Currency Vostro Accounts of Non-resident Exchange Houses, is Rs. 2,00,000.

This circular has, with immediate effect, increased the said limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA) from Rs. 2,00,000 to Rs. 5,00,000. Press Note No. 2 (2014 Series) D/O IPP File No: 12/10/2011-FC.1 dated 4th February, 2014

Policy on Foreign Investment in the Insurance Sector – Amendment of Paragraph 6.2.17.7 of ‘Circular 1 of 2013 – Consolidated FDI Policy’

This Press Note has, with effect from 5th April, 2013, replaced Paragraph 6.2.17.7 with respect to FDI in the Insurance Sector as under:

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A. P. (DIR Series) Circular No. 110 dated 4th March, 2014

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Money Transfer Service Scheme – ‘Direct to Account’ facility

This circular permits recipient banks to credit foreign inward remittances received under MTSS directly to the bank accounts of beneficiaries that are KYC compliant, subject to certain terms and conditions, through electronic mode, such as NEFT, IMPS, etc. The partner bank must clearly mark the direct-toaccount remittances to indicate to the Recipient Bank that it is a foreign inward remittance.

In cases where the bank accounts of the beneficiaries are not KYC compliant, the Recipient Bank has to carry out KYC/CDD before the remittance can be credited the bank account or allowed to be withdrawn.

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A. P. (DIR Series) Circular No. 109 dated 28th February, 2014

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Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

This circular states that new EDPMS has been operationalised with effect from 28th February, 2014 and the same will be available to banks from 1st March, 2014. Accordingly, banks must use the web link https://edpms.rbi.org.in/edpms for accessing the system. The user credentials for accessing the system have already been given to the banks.

As a result, entire shipping documents have to be reported in the new system. However, the old shipping documents will continue to be reported in the old system till the completion of the cycle. Both, the old and new systems will run parallel to each other for some time and the date of discontinuance of the old system will be communicated to the banks.

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SAT Discusses the Concept of “Due Diligence” – Decision Relevant to Merchant Bankers, Intermediaries, Directors and Other Professionals

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Background
A recent decision of the Securities Appellate Tribunal (SAT) discusses in detail as to what constitutes “due diligence” (Keynote Corporate Services Ltd. vs. Securities and Exchange Board of India, Appeal No. 84 of 2012, dated 19th February 2014). Intermediaries, including merchant bankers, are required to be diligent in the performance of their duties and this decision is of relevance to them. For Chartered Accountants in general and Auditors in particular too, this decision has relevance for at least two reasons. Firstly, professionals like CAs are required to carry out their duties exercising care of a level higher than the “due diligence” test. Hence, what constitutes “due diligence” should be of use. Secondly, CAs connected with listed companies and the SEBI registered intermediaries, though are not being regulated directly by the SEBI, do find their work reviewed by the SEBI. Hence, generally the standards laid down in this decision have relevance to intermediaries registered with SEBI.

Brief facts
In this case, to summarise the facts as reported, a merchant banker managed a public issue. As the readers would know, the manager to a public issue (“IPO”) has the highest and broadest of responsibilities, not only in managing the issue generally but coordinating with other intermediaries. In particular, it is his prime responsibility as regards the quantity and quality of information of disclosures made in the prospectus. It was found that in an issue managed by it, certain material disclosures were not made. The Company had, immediately before the IPO, borrowed monies from certain entities and used the same for advances for capital assets and other matters. The genuineness of such outgoing/ expenditure was not accepted by Securities and Exchange Board of India. The Company, after the IPO, repaid such loans from the IPO proceeds. The SEBI alleged that this amounted to siphoning off of funds. Further, it seems that the SEBI believed that the fact that the IPO proceeds were really meant to pay off such existing liabilities would have been a material consideration for the investors. Thus, disclosure of such facts would have affected their decision in investing.

The basic facts that the amounts were borrowed, then used for certain purposes and then the IPO proceeds were utilised for repayment of such borrowings do not seem to be in dispute. Also, nondisclosure of such pre-existing borrowings was also not in dispute. The issue in question was whether the merchant banker had carried out his duty with diligence that was expected of him.

Decision and principles laid down

The SAT laid down the law relating to the duties of the merchant banker as regards due diligence. Clause 64 of the SEBI (ICDR) Regulations 2009, reads as under:

“Due diligence.

64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents…..”

The SAT relied on the decision of the Supreme Court in the matter of Chander Kanta Bansal vs. Rajinder Singh Anand [(2008) 5 SCC 117] where due diligence was explained in the following words:

“The words “due diligence” have not been defined in the Code of Civil Procedure, 1908. According to Oxford Dictionary (Edn. 2006), the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort.”

The SAT then reviewed the Memorandum of Understanding between the merchant banker and the Company and the rights of the merchant banker stated in the following clause was highlighted:

“The BRLM shall have the right to call for any reports, documents or information necessary from the Company to enable them to verify that the statements made in the Draft Red Herring Prospectus or the final Prospectus are true and correct and not misleading, and do not contain any omissions required to make them true and correct and not misleading.”

The statement in the prospectus that was found to be incorrect read as under:

“Bridge Loan: We have not entered into any bridge loan facility that will be repaid from the Net Proceeds.”

The merchant banker raised several pleas in its defence, all of which (except one, which is not relevant for this discussion) were rejected.

Firstly, the merchant banker stated that it was not informed by the company about the borrowings and that such information was indeed withheld from them. The SAT did not accept this as a valid defense. It said that the merchant banker could not expect the company to provide its information on its own with the merchant banker not taking any initiative. The SAT observed, :-

“Appellant’s plea that the information regarding ICDs was withheld from Appellant by ESL cannot be accepted. BRLM, in carrying out its functions is generally expected to act in an independent and professional manner and should not rely only on issuer company to provide them with updates, if any. Due diligence on part of Merchant Banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out.”

The merchant banker said that it had obtained undertakings from the directors of the Company that the statements made in the prospectus are true. This too was rejected as being an insufficient defense. The SAT stated that accepting statements from the Company was no substitute for proper due diligence.

Then the merchant banker explained the manner in which he carried out his duties. He said that “when he handles IPO, he carries out random checks to verify authenticity of entities mentioned in the prospectus and has submitted documents in support of same”. In particular, the verification is “with reference to objects of issue and quotations, and in respect of IPO of ESL such checks were made in respect of major quotations submitted by ESL and, in support, Appellant submitted copies of few quotations along with nothings from concerned executive at its end, confirming veracity of offer document.”.

However, the SAT did not accept this and found that the manner in which such checks were carried out was insufficient. The Investigation had revealed that a sum of Rs. 4.75 crore from the IPO proceeds was allegedly siphoned off.

The SAT also explained the manner in which an intermediary such as a merchant banker in the present case should act while carrying out its duties with due diligence:-

“It is about making an active effort to find out material developments that would affect interest of investors. It is on faith that intermediary has conducted due diligence with utmost sincerity that investing public goes forward and decides to invest in a particular company. In present case Appellant had failed to exercise due diligence in carrying out its duties as BRLM in IPO of ESL.”

The SAT observed that the merchant banker had merely relied on certain statements provided by the Company and others. Moreover, even some of such statements were misleading or not in context of the issue before it. In any case, the SAT observed that this approach did not amount to carrying out its duties with due diligence. The SAT observed, :-

“Reliance of such documents, which in effect do not convey anything material or are misleading, infact, strengthens the case of Respondent that Appellant has done nothing to carry out due diligence and has been a passive actor, waiting for documents/information to come to him, whereas he should have been active in looking into various aspects of functioning of ESL, scrutiny of functioning of ESL, scrutiny of all relevant documents- including bank statements and order book position etc., before certifying correctnes of various statements in prospectus and issue of due diligence certificate at various stages of IPO”.


Curiously, the merchant banker pleaded that he had
a wide experience, knowledge and recognition in
the field. It had 35 years of experience in the field
and had managed more than 100 IPOs. He was a
regular speaker at various forums on the field. It
appears that this defence was raised to imply that
the merchant banker was well versed with his duties
and thus he would not have committed any
violation. However, this was actually went against
him. It was held that this past experience actually
raised the benchmark with which he ought to have
performed its duties and the facts did not evidence
‘due care’. The SAT observed,:-

“Appellant’s pleadings in Memorandum of Appeal
that the is highly experienced, and is a regular
speaker on subject of capital markets at various
forums and that he had carried out due diligence at
every stage, of issue of IPO and that he had fulfilled
all requirements of his responsibilities as BRLM/
Merchant Banker and some material disclosures
were not in issue documents, since these were done
at his back and not brought to his notice by ESL,
come to nothing, when he himself is not serious or
vigilant and is awaiting relevant information coming
to him and he then taking action on same, this
Tribunal has no hesitation is stating that Appellant
has failed in his duty to carry out due diligence, at
any stage of IPO of ESL and had failed not only the
investors in this issue but has done considerable
harm to security markets, at large.”

“….a professional person having wide knowledge
and experience in bringing out 125 IPOs during
its existence, is expected to show better professionalism
than was shown by Appellant. In the circumstances,
this Tribunal expects better standards
of performance from professionals, who charge
reasonably good fee from clients and who bring
out documents (prospectus in this case), which are
relied on by investors, at large, to take informed
decisions regarding investments in scrips/IPO and
this standard of professionalism should be higher
than a reasonable man with ordinary prudence will
demonstrate in the matter of due diligence but in
present case no mark of professionalism can be
seen from Appellant, who was merely a certificate
issue machine on dates when it was due, without
undertaking any due diligence whatsoever.”

The SAT, thus upheld the penalty levied on the
merchant banker. 

Other aspects/laws/developments



The original SEBI order, that levied the penalty
on the merchant banker, is also worth reviewing.
The SEBI reviewed several other past cases where
it was alleged that an intermediary did not carry
out its duties with due diligence. A review of such
decisions is useful to understand this concept better.
The Auditors of a listed company, apart from
of course carry out statutory audit, also carries out
limited review of financial results for disclosure. The
manner in which such limited review is carried out
can be considered by the SEBI.

“All the directors of the company
(including
independent directors) shall exercise their duties with
due and reasonable care, skill and diligence;”.

The implications of this decision thus is wide and
the principles laid down by the SAT will be useful
for intermediaries including merchant bankers,
chartered accountants and others associated with

 The SEBI also expects a common and high standard
of diligence from intermediaries generally. Clause 1.3
of the Code of Conduct, which is part of the SEBI
(Intermediaries) Regulations, 2008, reads as under:- 

“1.3 Exercise of Due Diligence and no Collusion
An
intermediary shall at all times render high standards
of service, exercise due skill and diligence over persons
employed or appointed by it, ensure proper care and
exercise independent professional judgment and shall
not at any time act in collusion with other intermediaries
in a manner that is detrimental to the investor(s).” 

Further, while the SEBI (Intermediaries) Regulations
do provide for a common duty of due diligence by
intermediaries generally as stated above, individual
regulations too, provide make specific or general
requirements of performance of duties by the
respective intermediaries with due diligence. The
SEBI (Debenture Trustees) Regulations, for example,
require that the Trustees shall exercise due diligence
to ensure compliance of various laws, the Trust
Deed, etc.
The SEBI (SAST) Regulations 2011 require
that the manager to the open offer “shall exercise
diligence, care and professional judgment to ensure
compliance with these regulations”.

The Companies Act 2013 also provides in section
149(12) that an Independent Director, a non-executive
director or a key managerial personnel would be
held liable only “where he had not acted
diligently”.
Not carrying out his role with diligence would thus
subject him to severe adverse consequences under
the Act. Schedule IV of that Act further lays down
the Code for Independent Directors and a fairly
high standard of performance of duties is expected
from the Independent Directors. The explanation
of the duties in this decision of the SAT would be
of guidance.

Clause 49 of the Listing Agreement which lays
down requirements of corporate governance also prescribes duties of the directors in general and of
the Independent Directors and the members of the
Audit Committee in particular. Here too, though not
stated explicitly, similar standards may be applied.
Indeed, SEBI’s concept paper which proposes to
substantially expand the standards of corporate
governance specifically states as follows:-

“All the directors of the company (including independent directors) shall exercise their duties with due and reasonable care, skill and diligence;”. The implications of this decision thus is wide and the principles laid down by the SAT will be useful for intermediaries including merchant bankers, chartered accountants and others associated with listed companies.

Sexual Harassment Law-I

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Synopsis

The Law for prevention of sexual harassment of women at workplace has now become an Act. Up until now it was in the form of Guidelines laid down by the Apex Court. The Act is very important since it applies to all organisations, public or private, small or big and even applies to houses in certain cases. What constitutes sexual harassment is also very widely worded. Business entities should choose to ignore this Law at their own peril! We will examine this Act through a two-part Feature.

Introduction
A major landmark was achieved when the Indian Government notified, on 9th December, 2013, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“the Act”). The Act’s preamble states that it is to provide protection against sexual harassment of women at the workplace and for the prevention and redressal of complaints relating to sexual harassment. The Constitution of India guarantees every citizen a right to life and dignity and freedom to practice any profession/business. These are fundamental rights which are available equally to men and women. A safe working environment for women is one such fundamental right. Gender equality includes protection from sexual harassment and right to work with dignity. This Act seeks to achieve the same. Recent infamous events in corporate India have highlighted the urgent need for a Legislation such as this.

The roots of this Act may be traced to the pathbreaking judgment of the Supreme Court in Vishaka vs. State of Rajasthan (1997) 6 SCC 241 which was followed up by an equally important decision in Medha Kotwal Lele vs. Union of India, (2013) 1 SCC 297. Inspite of clear directions to the Government by the Apex Court to pass a Law on this subject, the Act saw the light of the day 16 years after Vishaka’s case. Let us examine this important piece of Law which, as we will see, impacts not only workplaces but also some households.

Vishaka’s Case
Vishaka’s judgment, for the first time, dealt with the hitherto untouched subject to women’s safety at work. In an unusual judgment, in the absence of any enacted law, the 3 Member Bench took it upon themselves to frame Guidelines to prevent sexual harassment of women at workplaces. The Court held that these Guidelines should be strictly observed in all working places by treating them as the Law of the land under Article 141 of the Constitution. It further held that the Court’s Guidelines and norms would be binding and enforceable in law until suitable legislation is enacted to occupy the field.

Inspite of the Court’s clear directions, some States were not complying with Vishaka’s Directions. Hence, the Supreme Court in Medha Kotwal Lele’s case, again issued further directions. It held that the Guidelines should be implemented in its true spirit. The Court passed a speaking Order wherein it directed all Government Organisations, Bar Associations, Medical Clinics/Hospitals, Offices of Engineers/Architects, etc., which employed women, to implement the Guidelines. It also instructed the Medical Council, Council of Architecture, our ICAI, ICSI, and other statutory institutes to ensure that organisations, bodies, persons, affiliated with them follow the Vishaka Directions. Further, for any noncompliance with Vishaka’s Guidelines, the aggrieved persons should approach respective High Courts.

It is in the light of this judicial activism that the Act has been passed. Now that this Act has been passed, Vishaka’s Directions would no longer apply. Let us now examine the Act’s salient features.

Application
The Act applies to the whole of India. It applies to every workplace owned by an employer where an employee, who is a lady, is employed and who is sexually harassed. The meaning of each of these four terms is very crucial since it forms the heart of the Act. This Act provides for civil remedy for sexual harassment of a lady.

Section 354 of the Indian Penal Code, 1860 (IPC) provides punishment for a harassment which is criminal in nature, i.e., if it is an assault or criminal force on the woman with intent to outrage her modesty.

Workplace
The Act applies to harassment at the Workplace and hence, it is very important to understand what constitutes a workplace? The term is defined in an inclusive manner and Table-1, given below, enlists the inclusions referred to in the definition:

Employee
Next let us understand who is an employee under the Act. The persons covered under the definition of the term employee are given below in Table-2:

It may be noted that although there is a definition of the term employee, it is not necessary that the complainant lady should be an employee of the workplace where the incident occurred. She could be any lady who was harassed at that workplace as would be evident when we see the definition of the term “aggrieved woman” given below.

Aggrieved Woman
It is important to understand who is an aggrieved woman under the Act. In relation to a workplace, it means any woman of any age, whether employed or not, who alleges to have been sexually harassed by a respondent. A respondent is a person against whom a complaint is lodged. Thus, any lady who comes to a workplace (e.g., a client, a consultant, an auditor, a patient, a student, etc.,) could allege harassment at that workplace by a respondent working there. She need not be an employee of that workplace.

However, there is some disconnect when viewed along with the definition of the term workplace. Considering again the example of the auditor-auditee, in relation to an articled clerk who alleges harassment at the auditee’s workplace by the auditee’s employee, the aggrieved woman definition is wide enough to cover an auditor who has come into an organisation. However, the definition of the auditor’s workplace includes any workplace visited by his employee. The correct forum to complain should be the ICC of the auditee since that is the workplace where the alleged incident occurred. How can the auditor’s ICC have any control over an employee of the auditee? A better clarity on this very important issue is desirable.

Employer
The obligations under the Act are cast upon the Employer. In case of a private/NGO sector, it is defined to mean one responsible for the management, supervision and control of the workplace. The term management includes the person or the Board or the Committee responsible for the formation and administration of policies for such organisation. Thus, the Board of Directors in the case of a Company, Designated Partners in case of an LLP, Partners in case of a Firm, etc., would be treated as Employers.

Sexual Harassment This brings us to the all important question, what constitutes a sexual harassment under the Act? The term “sexual harassment” is defined in a very wide and all-encompassing manner. Several people who may be under an impression that a particular act of theirs cannot constitute harassment would be in for a rude shock. It is defined to include any one or more of the following unwelcome acts or behaviour, whether directly or by implication:

a) Physical contact and advances;
b) Demand or request for sexual favours;
c) Making sexually coloured remarks;
d) Showing pornography;
e) Any other unwelcome physical, verbal or nonverbal conduct of sexual nature.


While, for some of the above acts, it is quite apparent
that they constitute sexual harassment, it
is important to fully understand the meaning of
“making sexually
coloured remarks” and “any
other
unwelcome verbal or non-verbal conduct of sexual
nature”. Circulating
lewd text/WhatsApp messages
to female colleagues,, reading aloud vulgar jokes
to female colleagues, passing abusive remarks in
the presence of women, offensive screensavers on
laptops, commenting on women, staring, stalking,

etc., may all be
covered. Even something like asking
a lady colleague out for a drink may be covered
within this definition. The list cannot be exhaustive
and needs to be considered based on the facts and
circumstances, but one important parameter for an
act/behaviour to constitute harassment is that it
must be unwelcome.


In addition, the Act also states that one or more
of the following circumstances, if they occur or
are present in relation to or connected with any
act of sexual harassment, may amount to sexual
harassment:
• Implied/explicit promise of preferential or detrimental
treatment in her employment
• Implied/explicit threat of her employment status
• Interfering with her work

• Creating a hostile/offensive work environment
for her
• Humiliating treatment likely to affect her health/
safety

(…. to be continued)

PART A: ORDERS OF CIC

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Section 8(1) (j) of the RTI Act 2005:

Information sought-

The certified true copies of the original application filed by Mr. Pradeep Kumar (Director Postal Services, Mumbai Region) at the time of seeking a job at the Department of Post along with all the necessary documents attached to the original application. The information sought was from the date of appointment till date.

Decision notice-
It is fairly obvious that the information which the appellant has sought after in respect of the officer (viz. the application/documents on the basis of which he has been appointed) is in the nature of ‘personal information about third party.’ The employee might have filed these documents before the appointing authority for the purpose of seeking employment, but that is no reason enough for this information to be brought into the public domain to which anybody could have access.

It is also seen that the Hon’ble Supreme Court in its decision dated 13-12-2012 [Civil Appeal No. 9052 of 2012, Bihar Public Service Commission vs. Saiyad Hussain Abbas Rizvi & Anrs, [RTIT IV (2012) 307 (SC)]] has, inter alia, held as under:

“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”.

“The appellant has not established any public purpose which the disclosure of this information would serve. Hence, we concur with the submissions of the CPIO that the information is exempt.”

[Pradeep Ambadas Ingole vs. CPIO & Director Postal Services, Mumbai Region, decided on 26-12-2013: RTIR I (2014) 42 (CIC)]

Section 2(f)of the RTI Act,2005 “Information”:

1. Appellant submitted RTI application dated 8th November, 2012 before the CPIO, Govt., Medical College & Hospital, Sector 32, Chandigarh; seeking information relating to break up of the class IV staff (Ward Staff) with each officer and each branch of the GMCH-32 through multiple points.

2. Vide CPIO Order dated 7th December, 2012, CPIO denied the requisite information on the ground that the requisite information is not covered u/s. 2 (f) of the RTI Act, 2005 which provides the definition of information. However, he wrote that the Applicant may get the requisite documents after inspecting the record on any working day.

Decision Notice:
“Both parties have been heard. Commission observes that the CPIO has not applied his mind while disposing the RTI application and in no way it can be construed that the information sought by the appellant is not covered under the definition of information given u/s. 2(f) of the Act. Simultaneously, CPIO has also stated that the appellant can inspect the requisite documents holding the information. Both these statements are contradictory and reflect the intention of the CPIO to avoid providing the requested information to the appellant. At the hearing also, Commission observed the reluctance of the CPIO in imparting the information which is held on record and is squarely disclosable as per the provisions of the Act. Now, CPIO is directed to provide points-wise information to the appellant within two weeks of receipt of order. Through this order, ‘Show Cause Notice’ is issued to the CPIO for attempting to obstruct the disclosure of the requested information. Date for personal hearing will be provided to him through separate notice.”

[Harmeet singh vs. Government Medical College & Hospital, UT Chandigarh: Decided on 11-12-2013: RTIR I (2014) 47(CIC)]

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Release Deed – Chargeability : Stamp Act, 1899:

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M. Suseelamma & Ors vs. The Chief Controlling Revenue Authority Chennai and Anr. AIR 2014 Madras 43.

The Late M. Krishnaiah Chetty had purchased the subject property from one, Sheela Devi. Subsequently, after the demise of M. Krishnaiah Chetty, who died intestate on 16-04-2000, leaving behind the appellants 1 to 7, wife, sons and daughters, as his class I legal heirs, a document, dated 09-10-2003, has been presented and numbered as 50 of 2003, on the file of the sub registrar (District Registrar Cadre), captioned as Deed of Release.

Where the husband of the appellant had purchased the subject property from its original owner by virtue of registered sale deed and husband died intestate leaving behind wife (appellant), sons and daughter as Class I heirs, then the wife, sons and daughter would inherit the property as Class I heirs in terms of the Hindu Succession Act. However, since the parties do not belong to HUF, the grandsons, when their father is alive would have no pre-existing right over property. Therefore, the release deed by appellant alongwith her sons, daughters and grandson in favour of another son was rightly treated as conveyance under Article 23 of Schedule.

In the light of section 8 of the Hindu Succession Act, the releasees 2 to 4 do not have any preexisting right over the subject property. They have not inherited any property, as per section 8 of the Hindu Succession Act. The value of the property shown in the document is Rs. 2 lakh. As per section 5 of the Indian Stamp Act, any instrument comprising, or relating to several distinct matters shall be chargeable with the aggregate amount of the duties, with which separate instruments, each comprising or relating to one of such matters, would be chargeable under the Indian Stamp Act.

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Precedent – Ratio decidendi – Must be understood in the background of the facts of the case – Judgements are not to be read as a statute: Constitution of India.

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Arasmeta Captive Power Company P. Ltd. & Anr vs. Lafarge India Pvt. Ltd. AIR 2014 SC 525

The judgments rendered by a court are not to be read as statutes. In Union of India vs. Amrit Lal Manchanda and another (2004) 3 SCC 75, it has been stated that observations of courts are neither to be read as Euclid’s Theorems nor as provisions of a statute. The observations must be read in the context in which they appear to have been stated. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes.

Words used in a judgment should be read and understood contextually and are not intended to be read literally. Many a time a judge uses a phrase or expression with the intention of emphasising a point or accentuating a principle or even by way of writing style. Ratio decidendi of a judgment is not to be discerned from a stray word or phrase read in isolation.

In this context the following words of Lord Denning are significant.

“Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.”

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Partnership firm – Unregistered – Not be barred from enforcing their rights under Transfer of Property Act: Partnership Act 1932 Section 69(2):

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Sandhya Anthraper & Anr vs. Manju Kathuria & Ors AIR 2014 Karnataka 21

Appellants who are plaintiffs/partners of an unregistered firm of M/s. Windsor Wings Developers, filed a suit against the defendants , for the relief of declaration that the registered Sale deed dated 26.04.2003 executed by defendant No. 1 is invalid, illegal and not binding on the plaintiffs, for cancellation of the sale deed and for permanent injunction restraining the defendants 2 to 5 from selling, leasing, mortgaging or otherwise alienating and interfering with their peaceful possession of the property. It is the case of the plaintiffs that the suit property was purchased in the name of the Firm. The plaintiffs suspected the conduct of the 1st defendant and they made enquiries about the suit property in the Office of the Sub-Registrar and discovered that the 1st defendant, who had no authority to sell the immovable property belonging to the Firm, without their consent had executed a sale deed dated 26-04-2003 on behalf of the Firm, in favour of the 2nd defendant for a consideration of Rs. 16,66,620/- though the property was worth more than Rs. 30,00,000/-. It is contended that the sale deed is invalid, void, fraudulent and the same is executed clandestinely with an intention of cheating the plaintiffs.

The defendants contented that the Suit is barred u/s. 69(2) of the Partnership Act. The trial Court, after hearing on the preliminary issue, answered the same in the affirmative in favour of the defendants and dismissed the Suit as not maintainable u/s. 69(2) of the Act.

Sum and substance of s/s. (1) of section 69 of the Act is that no suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court and the person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

The defendants have not pleaded that the suit is barred under s/s. (1) of section 69, but it is contended that the suit is not maintainable both under s/s. (1) and (2) of Section 69 of the Act.

The Hon’ble Court observed that the plaintiffs who are partners of the unregistered firm are neither enforcing their right arising from a contract nor the right conferred by the Act. The plaintiffs are enforcing their right under the contract of partnership deed dated 29-12-1995 and specifically Clause 25(d) which says that no partner of the firm shall, without the consent in writing of the other partners, be entitled to transfer immovable property belonging to the Firm, but the defendant No.1, as a partner of the partnership firm, has sold the suit land in favour of defendants 2 to 5. Though it is stated in sub-Clause (d) of Clause 25 of the partnership deed that no partner of the firm shall without the consent in writing of the other partner, be entitled to transfer immovable property belonging to the firm, the appellants/ plaintiffs seek to enforce their right conferred upon them under the Transfer of Property Act. It is well settled principle that a ‘partnership firm’ has ‘no separate legal entity’. It is always understood that ‘firm’ means ‘partners’, ‘partners’ means collectively a ‘firm’. Thus the property belonging to a partnership firm is the property of the partners of the firm.

In view of the above, under the Transfer of Property Act, each of the partner is entitled to claim his right to the immovable property of the firm, as co-owner. Under such circumstances, the contention that the suit filed by the plaintiffs enforcing their right under the contract of partnership deed, holds no water

As regards to s/s. (2) of section 69 no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as the partners in the firm. In the instant case, there is no contract between the plaintiffs on one side and defendants 2 to 5 on the other and thus, there is no question of plaintiffs enforcing a right arising from a contract and thus the Suit is not hit under s/s. (2) of section 69 of the Act.

As per section 69(1) of the Act, an unregistered partnership firm or partners are prohibited from enforcing a right arising from a contract or the right conferred by the Partnership Act, 1932, but the provision does not take away the right of the partners of an unregistered firm to enforce their right under other enactments. According to Article 300-A of the Constitution of India, no person shall be deprived of his property save by authority of law. The property of the partnership firm, was purchased under three registered Sale deeds dated 20-01-1996 by the partnership firm, viz., M/s.Windsor Wings Developers, out of the funds of the firm. Thus, the property becomes the property of the partners and they are co-owners. Therefore, the plaintiffs are entitled for the relief sought for. Defendant No.1 has committed breach of trust, which is an offence under the Indian Penal Code. The plaintiffs are enforcing their right as co-owners of the suit property conferred under the Transfer of Property Act and the Partnership Act does not bar the partners of an unregistered firm from enforcing their right conferred under the other enactments. In other words, at the cost of repetition, it must be mentioned that what is prohibited u/s. 69 of the Act is enforcement of contract of partnership, provisions of the Partnership Act, 1932 and enforcement of right arising from a contract (between the firm and third party) and not the rights conferred under the other enactments. Therefore, the trial Court erred in dismissing the suit as barred by s/s. (2) of section 69 of the Partnership Act, 1932.

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Lease – Amount of security deposit – No stamp duty on security deposit. Stamp Act 1899, Article 35(c):

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Moideen Koya vs. K. Girish Kumar & Anr. AIR 2014 Kerala 30

A lease agreement was executed between the landlord and the tenant on 29-09-2010, in which the monthly rent payable was fixed as Rs.3,500/. An amount of Rs. 50,000/- was given by the tenant as security deposit which was refundable on termination of the lease. The Rent Control Court refused to mark the lease agreement for the reason that the same was under stamped and the court ordered payment of the stamp duty alongwith penalty for security and the rent payable as per the lease agreement.

The legal question therefore arose as to whether Article 33(c) will cover a refundable security provided in a lease agreement, even though the same is adjustable towards the rent in arrears.

The Government letter dated 24-02-1983 addressed to the Inspector General of Registration reads as follows:

“In supersession of the instruction issued in Govt. letter No. 18769/E2/75/TD, dated 15-12-1975 and in accordance with the decision of the Delhi High Court in AIR 1980 Delhi 249, the following principles may be observed while classifying lease deeds.

(1) Duty is not chargeable under Article 35(c) of Schedule IA of the Indian Stamp Act, 1899 on the amounts of security/deposit/advance, which is refundable on determination of the lease, in addition to the duty paid on the rent reserved under Article 35(a) of the Schedule.

(2) It will not make any difference in the changeability of duty, if such deposit/advance is adjustable in rent/other charges dues payable under the lease.

(3) The amount of security deposit paid for the due performance of the contract of lease is chargeable under Article 57 of the Schedule read with section 5 of the Act.

Amount of security deposit – cannot be treated as “money advanced” in terms of Article 33(c) – Fact that it is adjustable to – wards unpaid rent – Immaterial – since it paid for due performance of obligations of lease and on termination of lease, it is refundable, such an amount which is refundable will not get character of `money advanced’ – Lessor consequently not bound to pay stamp duty on security deposit.”

A reading of Article 33(a), will show that it covers cases where the rent is fixed and no premium is paid or delivered. Going by Article 33(c), the provision is attracted where the lease is granted for a premium or for money advanced and the same will be in addition to rent reserved. Apparently, the Rent Control Court has treated the security deposit as money advanced for attracting section 33(c) in addition to the rent.

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Circulars – Binding nature – Circulars cannot override statutory provisions: Administrative Law:

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Glaxo Smithkline Pharmaceuticals Ltd vs. UOI & Others, AIR 2014 SC 410

The following principles emante out of this decision of the Supreme Court in relation to the Circulars issued by the Government under the fiscal laws (Income-tax Act and Central Excise Act):

1. Although a circular is not binding on a court or an assessee, it is not open to the Revenue to raise a contention that is contrary to a binding Circular by the Board. While a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that is not valid nor that it is contrary to the terms of the statute.

2. A show cause notice and demand contrary to the existing Circulars of the Board are ab initio bad.

3. It is not open to the Revenue to advance an argument or file an appeal contrary to the Circulars.

The above legal position is re-emphasised in Commissioner of Customs vs. Indian Oil Corporation (AIR 2004 SC 2799: 2004 AIR SCW 1310) has been followed in UOI vs. Arviva Inds. (I) Ltd.: (2007) 209 ELT 5 (SC)

4. It is well settled that if the departmental Circular provides an interpretation which runs contrary to the provisions of law, such interpretation will not bind the Court.

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