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This circular reiterates that RBI will not issue any instructions under the FEMA, 1999 with respect to submition of certificates on tax payments. Banks will have to comply with the instructions issued by CBDT with respect to requirements under the tax laws, as applicable.
Import of Gold (under 20: 80 Scheme) by Nominated Banks/Agencies/Entities
This circular states that the 80 : 20 scheme for import of gold and all instuctions/restrictions pertaining thereto stand withdrawn with immediate effect.
This
circular states that when funds raised overseas by overseas
holding/associate/subsidiary/group companies of Indian Companies are
routed back to the Indian companies: –
1. Indian
companies/their banks must not issue any direct or indirect guarantee or
create any contingent liability or offer any security in any form for
such borrowings by their overseas holding/associate/subsidiary/ group
companies except for the purposes explicitly permitted in the relevant
Regulations.
2. Funds raised abroad by overseas
holding/associate /subsidiary/group companies of Indian companies with
support of the Indian companies/their banks, as mentioned above, cannot
be used in India unless it conforms to the general or specific
permission granted under the relevant Regulations.
3. Indian
companies/their banks using or establishing structures which contravene
the above will be liable for penal action as prescribed under FEMA,
1999.
1. Facility available to an employee of a company under Regulation 7(8) of Notification No. FEMA 10 will also be available to an employee who is deputed to a group company in India.
2. The term ‘company’ referred to in the said regulation will include ‘Limited Liability Partnership’ as defined in the LLP Act, 2008.
Notification No. FEMA.330/2014-RB dated December 15, 2014 Depository Receipts Scheme
This circular brings out the salient features of the new ‘Depository Receipts Scheme, 2014’ (DR Scheme, 2014) for investments under ADR/GDR which has come into effect from December 15, 2014. With the coming into effect of this new DR Scheme 2014 the present guidelines for Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, except to the extent relating to foreign currency convertible bonds, stand repealed.
The following amendments have been made in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000, (Notification No. FEMA 20/2000-RB, dated 3rd May, 2000): –
1. Two new definitions ((iicc) & (iidd)) have been introduced in Regulation 2.
2. Regulation 13 has been substituted.
3. Schedule 1 has been amended.
4. A new Schedule 10 has been introduced.
The salient features of the new DR Scheme 2014 are as under: –
1. Securities in which a person resident outside India is allowed to invest under Schedule 1, 2, 2A, 3, 5 and 8 of Notification No. FEMA. 20/2000-RB dated 3rd May 2000 will be the eligible securities for issue of Depository Receipts in terms of DR Scheme 2014.
2. A person will be eligible to issue or transfer eligible securities to a foreign depository for the purpose of issuance of depository receipts as provided in DR Scheme 2014.
3. The aggregate of eligible securities which can be issued or transferred to foreign depositories, along with eligible securities already held by persons resident outside India, cannot exceed the limit on foreign holding of such eligible securities under FEMA.
4. Eeligible securities cannot be issued to a foreign depository for the purpose of issuing depository receipts at a price less than the price applicable to a corresponding mode of issue of such securities to domestic investors.
5. If the issuance of the depository receipts adds to the capital of a company, the issue of shares and utilisation of the proceeds will have to comply with the relevant conditions laid down in the Regulations framed and Directions issued under FEMA.
6. The domestic custodian will report the issue/transfer of sponsored/unsponsored depository receipts as per DR Scheme 2014 in ‘Form DRR’ as Annexxed to this circular within 30 days of close of the issue/program.
This circular states that 100% FDI under Automatic route will be permitted in construction development sector with effect from December 3, 2014 provided the investment complies with the terms and conditions mentioned in the Press Note 10 (2014 Series) dated December 3, 2014.
As a result, in the existing Annex B of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, (Notification No. FEMA 20/2000-RB dated 3rd May 2000) entry 11, 11.1 and 11.2, the following shall be substituted as under: –
This circular provides that RBI while granting permission under the Approval Route to proprietorship concern/ unregistered partnership firm in India for investing outside India will take into account/consider the following: –
1. The proprietorship concern/unregistered partnership firm in India is classified as ‘Status Holder’ as per the Foreign Trade Policy issued by the Ministry of Commerce and Industry, Govt. of India from time to time.
2. The proprietorship concern/unregistered partnership firm in India has a proven track record, i.e. the export outstanding does not exceed 10% of the average export realisation of the preceding three years and it has a consistently high export performance.
3. The Bank with whom the proprietorship concern / unregistered partnership firm in India deals with is satisified that it is KYC (Know Your Customer) compliant, engaged in the proposed business and has turnover as indicated;
4. The proprietorship concern/unregistered partnership firm in India has not come under the adverse notice of any Government agency like the Directorate of Enforcement, Central Bureau of Investigation, Income Tax Department, etc. and does not appear in the exporters’ caution list of the Reserve Bank or in the list of defaulters to the banking system in India.
5. The proposed investment outside India does not exceed 10% of the average of last three years’ export realisation or 200% of the net owned funds of the proprietorship concern/unregistered partnership firm in India, whichever is lower.
This circular has revised the documentation process for hedging of probable exposures by exporters and importers based on past performanceas under: –
1. Present position – importers and exporters are required to furnish to their banks a quarterly declaration, in the specified format, duly certified by their Statutory Auditor stating the amounts booked with other banks under this facility.
Change – importers and exporters have to furnish a quarterly declaration stating the amounts booked with other banks under this facility as per the format in Annex I to this circular. The declaration has to be signed by the Chief Financial Officer (CFO) and the Company Secretary (CS). In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) has to co-sign the undertaking along with the CFO.
2. Present position – banks can permit importers and exporters to enter into derivative contracts in excess of 50% of the eligible limit if they are satisfied that the requirements of their customers is genuine and the customer submits the following: –
a. Certificate from their Statutory Auditor that all guidelines have been adhered to while utilising this facility.
b. Certificate of import/export turnover during the past three years duly certified by their Statutory Auditor in the specified format.
Change – banks can permit importers and exporters to enter into derivative contracts in excess of 50% of the eligible limit if they are satisfied that the requirements of their customers is genuine and the customer submits the following certificates as per the format in Annex II to this circular, duely signed by the the CFO and CS (in the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) has to co-sign the undertaking along with the CFO): –
a. Declaration that all guidelines have been adhered to while utilising this facility.
b. Certificate of import/export turnover of the customer during the past three years.
3. The statutory auditor, as part of the annual audit exercise, has to certify the following: –
a. The amounts booked with all banks under this facility.
b. All guidelines have been adhered to while utilising this facility over the past financial year.
This article discusses some of the important features of the revamped Regulations. In particular, implications for Chartered Accountants are highlighted.
Broad overview and important conceptual changes
As stated, the Regulations are substantially revamped though the broad scheme remains the same. Insiders and unpublished price sensitive information (“UPSI”) remain core concepts albeit with some changes. Simply stated, insiders are prohibited from communicating UPSI and dealing in shares based on UPSI. A host of related provisions are there mainly to ensure that this does not happen.
There are certain important concepts that are new and discussed here:
a. ‘Trading Plans’ that are meant to allow Insiders to trade by intimating well in advance.
b. Secondly the exceptions to receiving UPSI under certain circumstances which otherwise would constitute a violation of the prohibition on communication/receipt of UPSI.
c. T he third and most innovative concept is the use of “Notes” to explain what the intention of each of the Regulation is. This gives a background of the provision and considering that it is part of the Regulations itself should have greater weight than other external aids to interpretation.
What are prohibitions/ restrictions/requirements?
The Regulations aim at prohibiting insider trading. However, this is achieved not just by making specific prohibitions but also by means of control over UPSI, disclosure of trades, etc. Thus, broadly, the following are the prohibitions/restrictions/requirements:-
1. An Insider shall not deal on the basis of UPSI. 2. A n Insider shall not communicate UPSI.
3. No one shall procure UPSI.
4. There shall be regular disclosures of holdings/dealings by certain persons (Promoters, specified employees, etc.)
5. Manner of communicating UPSI, restrictions over dealings by specified employees, etc.
6. Formulation of Code of Conduct for disclosure and for trading by insiders.
Basic concepts – Insider and UPSI
Insider
The Regulations focus mainly on Insiders. The term Insider is defined quite widely and, as in the 1992 Regulations, complex to some extent. The term “Insider” includes certain “connected persons”. The term “connected persons” in turn is defined by including certain specified persons who are close to the company and have or can be expected to have access to UPSI. By virtue of the new inclusion those persons who have had “frequent communications” with the officers of the company are “connected persons”.
Certain persons are deemed to be connected. If such persons deny that they are connected, then the onus is on them to prove how they are not so connected. Importantly, any person who possesses UPSI is also deemed to be an Insider. Thus, to summarise those close persons who have access or are expected to have access to UPSI and those who actually possess UPSI are insiders.
Unpublished price-sensitive information
“Unpublished price-sensitive information” is yet another important term, which is essentially the opposite of the other term – “generally available information”. Its definition remains broadly the same as in the earlier Regulations. All that is “information”, that is “price-sensitive” and that is not “published” in the prescribed manner is UPSI. There is prohibition on sharing of UPSI (except in specified ways) and dealing in securities on basis of UPSI. There are detailed provisions on how to ensure that UPSI is not disclosed accidentally as also the correct minimum way of sharing UPSI in such a manner that is widely shared or deemed to be so. Thus, for example, sharing (of information) with the stock exchanges who display it on their website is deemed to mean that it is no more UPSI.
Defenses to insider trading
The new Regulations provide for certain defenses/exceptions to acts or omissions that would otherwise be deemed to be insider trading or communication of UPSI. Communication of UPSI is permitted under certain circumstances to a potential acquirer who would be required to make an open offer. In other cases of proposed transactions, such disclosure is permitted provided, inter alia, the UPSI is disclosed to the public at least two days in advance.
There are other prescribed exceptions to what would otherwise constitute inside trading.
Trading Plan
A totally new concept has been introduced in these Regulations with reference to Trading plan. An Insider who deals in the shares of the company may have reason to worry that his trades would be scrutinised for trades based on UPSI. He is obviously close to the company and would be expected to know of developments. However, it is apparent that he often would also need to deal in shares. A Promoter may want to consolidate his holding. A senior executive may want to plan for an important event for which he may want to sell shares. The Regulations have provided for a way for planning for such events or needs. An “Insider” may disclose well in advance his desire to deal in the shares of the company. If such disclosure is made in the prescribed manner, he can deal in the shares without worrying for any inquiry or consequences. However, there are some conditions such as:
a. The sale should be after at least six months.
b. T he Trading Plan should also extend to at least twelve months.
c. T here should not be overlapping trading plans.
d. T he insider should not be in possession of UPSI at time of such disclosure which continues to remain UPSI at the time of sale/purchase.
e. T he insider should also not carry out any form of market abuse through the trades. The disclosure has to be specific and not generic.
f. A bove all, the insider should actually implement the Plan.
The “Trading Plan” also serves the public so that they can anticipate the trades and decide accordingly. Hence, it is made imperative that the plan is actually implemented.
“Notes” to Regulations
The revamped Regulation has created a precedent in securities laws by providing for inbuilt “Notes” that explain the intent of the Regulations. They help in understanding the Regulations and their intent better. Most of the important Regulations contain such a Note. This is following the suggestions of the Supreme Court in M/s. Daiichi Sankyo Company Ltd., Appellant vs. Jayaram Chigurupati & Ors ((2010) 7 SCC 449). The Court there acknowledged the expert committee reports on the SEBI Takeover Regulations which helped it interpret the Regulations. Noting that such background was absent in other Regulations, it suggested:-
“Now that we have more and more of the regulatory regime where highly important and complex and specialised spheres of human activity are governed by regulatory mechanisms framed under delegated legislation it is high time to change the old practice and to add at the beginning the “object and purpose” clause to the delegated legislations as in the case of the primary legislations.”.
The Sodhi Committee which wrote the report on which the new Regulations are based specifically adopted this suggestion and we can thus see the notes in the Regulations as notified. However, it will have to be seen the level of prominence that is given to the notes in interpretation of the regulations. Concerns may also arise if the Notes conflict with the principal part of the regulations.
Relevance For Chartered Accountants
Chartered Accountants (CAs) have direct and serious concern with insider trading regulations for several reasons. They are experts in finance and can be expected to understand the potential implications of price-sensitive information over market prices. Even more importantly, the role they perform in relation to a company brings them very close to price-sensitive information. They may be auditors who have close access to records of accounts and operations. They maybe CFOs who compile the information on accounts and financial plans which are again by definition price-sensitive. They may be directors, advisors, etc. which again put them in similar positions.
The Regulations thus rightly provide specifically for such positions. as auditors, CFos, directors, etc. they are almost always deemed insiders. They would also find it difficult to rebut the allegation that, if there was UPSI, they did not have access to it. Thus, they would have to be very careful in their dealing in the shares of the company with which they are associated. Perhaps a good thumb rule for Cas is not to deal at all in the shares of the company they are associated with!
Auditors, advisers, etc. are also required to frame such a Code of Conduct under specified circumstances.
Code of Conduct
The Regulations provide for a detailed set of requirements. however, as in the earlier regulations, some matters are sought to be self-regulated to the Company or other entities to which the Regulations apply. The object is that the company/entity itself should also have some self- regulation whereby insider trading is prevented and if it still happens it is punished. The entity is thus required to set up a Code of Conduct containing at least the minimum set of prescribed provisions.
The Code should, thus, ensure that uPSi is handled on a need to know basis and there are adequate mechanisms to prevent its leaking. Importantly, designated employees would be required to make disclosure of their holdings and of changes therein as specified to the company. There will have to be periods during which dealing in the shares of the company would be prohibited (e.g., just before and after the declaration of trading results). Further, in case the designated employees propose to deal in the shares of the company when the trading window is not closed, they would still have to obtain clearance in advance and then carry out the transaction within the prescribed time.
Disclosure requirements
The 1992 regulations and the present regulations too provide for disclosure of holdings by specified persons (e.g., Promoters, persons holding significant holdings, etc.). The disclosure is required initially at the time when the regulations come into force, at the time when such persons become the specified persons and at the time when certain persons have significant dealings as prescribed in the securities of the company. This will help monitor the movement in the holdings of such persons. Needless to emphasise, such movements may often indicate the faith (or lack thereof) in the performance and future of the company.
Consequences of violations there are numerous consequences of violations of the regulations. Generally, under Section 15G of the SEBI act, the penalty for certain violations relating to insider trading is Rs. 25 crore or three times the profits made, whichever is higher and with or without prosecution. In case of violation of Code of Conduct, the company can take disciplinary action, in addition to the penal consequences that SEBI may initiate.
Non-disclosure or delayed disclosure of information can result in stiff penalties.
Summary
the new regulations have seen a substantial rewriting. the original structure has been retained too but several new concepts and provisions have been introduced. The requirements of compliance on the Company/entity, insiders, etc. have also increased. Concerns have been raised as to whether the requirements are too detailed and cumbersome.
It is often said that insider trading is rampant in indian markets. more than having strict provisions there is a need to detect actual cases of insider trading. The regulations do not take a big leap in this regard. However, additional powers of investigation provided in the SEBI act and more vigorous mechanism to monitor trades and investigation by SEBI may result in such cases of insider trading being detected. The future will reveal how effective this mechanism works.
Introduction Fable time – “Give me only that much wheat as is equal to the squares in a chess board, just one grain for the first square but double the grains for each subsequent square. Thus, there would be 2 for the second square, 4 for the third and so on until the sixty fourth square.” How many grains of wheat do you think there would be at the end? If you think it would be a small number then think again, the answer is a mind boggling figure of 263 i.e., 2 x 2 sixty three times and if all this wheat were to be stocked in a pile it would reach the moon! This is the power of exponential compounding.
What is an example on Maths doing in a legal subject? It illustrates the concept of Pyramid Schemes and why they are often considered illegal. Several of these schemes are of such a nature that for the last level to make money it would need to rope in all the people in the world and yet there may be a loss! These pyramids are the opposite of the popular management phrase “Fortune at the Bottom of the Pyramid” – here it is only the top which makes money while the bottom is often left high and dry and banging on the doors of courts/police stations.
To curb such schemes, the Centre has enacted the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) declaring them illegal. Let us examine the important features of this Act.
Scheme of the Act
The Preamble to this Act states that it is enacted to ban the promotion or conduct of prize chits and money circulation. Thus, it aims to curb two schemes, the first being prize chits and the second being money circulation schemes. The second type, i.e., money circulation scheme is relevant for this discussion.
Section 3 of the Act bans money circulation schemes and even bans enrolment as members or participation therein. It provides that no person shall:
(a) promote or conduct any money circulation scheme;
(b) enroll as a member to any such scheme;
(c) participate in it otherwise; or
(d) receive or remit any money in pursuance of such or scheme.
Thus, there is a four-pronged ban on promotion/ conducting, enrolling, participating or receiving/remitting money in a money circulation scheme. The penalty for violating this section is imprisonment of a term of up to 3 years and /or a fine of Rs. 5,000. Further, unless there are special and adequate mitigating reasons, the minimum fine is Rs. 1,000 and minimum imprisonment term is 1 year. Hence, it becomes very important to understand what is and is not a money circulation scheme.
Money Circulation Scheme
This brings us to the most important definition contained in section 2(c) of the Act, i.e., money circulation scheme. The Act defines this in an exhaustive manner to mean: “any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;”
The definition is worded in a not-too happy manner and can get a bit ambiguous at times. To simplify matters, the Supreme Court in State of West Bengal vs. Swapan Kumar Guha, 1982 (1) SCC 561 has paraphrased and simplified the definition as follows:
“Money circulation scheme means any scheme, by whatever name called,
(I) for the making of quick or easy money, or
(II) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”
Let us analyse the above definition to bring out its essential elements:
(a) There must be a scheme but its nomenclature is not material. A scheme may be defined as a systematic choice of action;
(b) It must be for the making of quick or easy money (these two terms carry the maximum significance);
(c) A lternatively, it must be for the receipt of any money or valuable thing as consideration for a promise to pay money;
(d) Both of which are contingent or dependent upon the enrolment of more members into such scheme; and
(e) The payment of the money or valuable thing may be derived from the entrance money or recurring subscriptions of the members of the scheme.
Hence, if one were to strip down the definition to bare bones, it would mean a quick or easy money scheme where earnings are contingent or dependent upon getting more and more members. This is the essence or the core of a multi level marketing or a pyramid scheme. If there is no contingency or dependency on an external event of garnering more subscriptions then it cannot be termed as a money circulation scheme. Even in a case where the returns promised are so ludicrous as long as the return is not contingent, it does not fall foul of the Act. For instance, in the above-mentioned Supreme Court case, a scheme was floated in which the investors were getting returns @ 48% – 12% officially and 36% unofficially / in a clandestine manner. The Apex Court held that such a scheme was not a quick or easy money scheme. It makes no difference whether the transactions are in black money or not. While that would violate the Tax Laws, it certainly would not fall within the mischief of this Act.
The Court also gave some interesting analogies to highlight its views – a lawyer who charges a hefty sum for an SLP lasting 5 minutes, a doctor who charges likewise for a tonsil operation lasting 10 minutes and Chartered Accountants (wonder where the Hon’ble Court got that one from)/Engineers/Architects who charge likewise, all make quick and easy money. Similarly, builders and brokers are notorious for making quick money. Obviously all of these cannot be covered within the purview of the Act since the contingency element is absent.
Hence, the Court denied any prosecution under the Act since there was no mutual arrangement which was dependent on an event or contingent on enrolment of members.
Others Considerations
Another decision of the Supreme Court in Kuriachan Chacko vs. State of Kerala, 2008 (8) SCC 708 examined what were relevant and irrelevant considerations when it came to deciding whether or not a scheme was a money circulation scheme? The Court laid down the following guidelines in addition to those laid down in Guha’s case mentioned above:
(a) In the scheme under question, a member would be entitled to double the amount only if after his enrolment, additional 14 members were enrolled in the scheme. The second ingredient, namely, such payment of money was dependent on the “event or contingency relative or applicable to the enrolment of members into the scheme” was thus very much present.
(b) The definition nowhere provided that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the act would apply. the section does not provide for positive or dominant role to be played by a member of the scheme. the requirement of law is “an event or contingency relative or applicable to the enrolment of members into the scheme” and nothing more. It is immaterial by whom such members are enrolled. it may be by members, by promoters or their agents or by gullible sections of the society suo moto (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrolment of more persons into the scheme, nothing more, though nothing less.
(c) The scheme in question was a ‘mathematical impossibility’. the promoters of the scheme very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter, but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money.’
(d) It must be evident for any discerning mind that this scheme cannot work unless more and more subscribers join and the amount paid by them as unit price is made use of to pay the previous subscribers. The system is an inherently fragile system which is unworkable.
(e) Foolish, gullible and stupid persons alone may fall for the scheme without carefully analysing the stipulations of the scheme. it would be totally erroneous to assume that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons.
(f) The Court rejected the argument that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders
Gift Schemes
It is trite nowadays to see advertisements proclaiming “Free Gifts” (the issue of Gifts being Free we will deal with on another day). Do such schemes fall foul of the act? the decision of the Bombay high Court in State of Maharashtra vs. Shivji Kesra Patel, 1988 Mh.LJ 488 dealt with one such issue. A dealer in motor cycles sponsored a gift scheme under which a group of 200 members had to deposit certain monthly instalments for 30 months. Lucky draws were to be held from time to time and the winners would receive a free motor cycle. At the end of 30 months the balance members would have to buy the motor cycles by paying the prevailing market price less instalments contributed. The high Court observed that this was a money circulation scheme. Predominant in the scheme was the element of chance for a very small number of 30 out of 200 members. For the larger remaining 170 members there was nothing but loss of interest for 30 months. Hence, prosecution of the partners of the dealer firm was upheld.
Thus, all schemes providing gifts under a pyramid scheme would be well advised to check the applicability of this act.
However, so far the Courts have not bought their argument on the grounds that the major money comes not from selling products but from making more members. According to some press reports, the economic offences Wing of the Police is probing over 60 multi-level marketing schemes in mumbai alone which have allegedly duped investors of over Rs. 3,000 crore. Some of these schemes were promising returns as high as 500% to investors!
The need of the hour is specific regulation dealing with multi-level marketers or direct selling and not cover them within the omnibus provisions of the act. taking a cue, Kerala and Rajasthan have enacted Guidelines for direct selling. For instance, the Kerala Guidelines provide as follows:
(a) They define Direct Selling to mean the marketing of consumer products/services directly to the consumers away from the permanent retail locations, usually through explanation or demonstration of the products by a direct seller or by mail order sales.
(b) Pyramid Schemes are defined as a scheme or arrangement which also includes any money circulation scheme involving sale of goods and services, where a person for a consideration acquires the opportunity to receive a pecuniary benefit which is not dependent on the volume of goods or services sold or distributed but is based wholly or partly upon the inducement of additional persons to participate in such a scheme or arrangement.
(c) Some of the conditions laid down for a valid direct selling are as follows and those sale activities not following these would not be considered as direct selling and would be dealt appropriately under relevant provisions:
on the quantum of sale of goods and services.
Interestingly, these Guidelines have not been issued under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (“the Act”) ??
Conclusion
There is no limit to human ingenuity and human greed! Ponzi schemes, Pyramid schemes, etc., would continue to thrive on account on these two factors. What is needed is a clear cut law and a dedicated regulator dealing with such schemes. Also, the law must clearly spell out the exclusion conditions for direct selling so that genuine entities are not unduly harassed. The State would have to balance its objectives of protecting innocent investors but at the same time providing a conducive environment for doing business through innovative channels. At the same time, is it not the duty of the investors to do their homework before blindly jumping for get rich quick schemes? doesn’t a 500% return promise sound utopian? after all something which sounds too good to be true, is normally so. Investors would do well if they were to remember and adopt the words from the title of jane austen’s famous novel “Sense and Sensibility”!!
In an excise duty matter, the Appellant argued before the Hon’ble Court that there was no proper application of mind to the controversy, by the Tribunal, in dealing with the submissions canvassed orally and in writing and by a reasoned order either uphold or reject them.
The Hon’ble Court from reading of the impugned order observed that the assessee had raised several contentions before the Tribunal. The order contains several references worksheets and manner of calculations. The findings at internal page 5 of the order in original would denote that it considers the objections with regard to time bar, so also, on merits. With regard to imposition of penalty there were objections that were serious in nature raised by the Assessee. The Tribunal was required to consider the issues raised in the Appeal in-depth and render a complete finding. If a particular issue was pressed or was given up that should be indicated in the order of the Tribunal.
The Hon’ble Court remarked that it was expected from the Tribunal, which is manned by both judicial and technical experts, to be aware of the seriousness of the adjudication and not take up the assignment lightly and casually. There is no specific target which has to be achieved nor could the Tribunal be expected to decide particular number of appeals during a calendar year. Therefore, undue haste is not at all called for. That results in miscarriage of justice and in a given case would result in vital issues of both sides being concluded in the most unsatisfactory manner. The Court expected the Tribunal to guide the Adjudicating Authorities so that they would properly adjudicate the cases with reasoned orders and after considering the evidence on record. It is the duty of the Tribunal which has been repeatedly emphasised and to be performed to the best of its ability. The impugned order of the Tribunal was quashed and set aside and the Appeal was restored to the file of the Tribunal for decision afresh and in accordance with law.
The appeals raise the questions with respect to the validity of section 43 of Bombay Tenancy and Agricultural Lands Act, 1948 as applicable to the State of Gujarat, now known in the State of Gujarat as Gujarat Tenancy and Agricultural Lands Act, 1948. This section places certain restrictions on the transfer of land purchased or sold under the said Act. The appeal raises questions also with respect to the validity of the resolution dated 4-7-2008 passed by the Government of Gujarat to give effect to this section, and which resolution fixes the rates of premium to be paid to the State Government for converting, transferring, and for changing the use of land from agricultural to non-agricultural purposes.
The Hon’ble Court observed that the requirement of payment of premium by deemed purchaser for getting sanction to transfer his agricultural land for non-agricultural purpose is not invalid. The premium charged is neither tax nor fee. The tenant holds the land under State and the premium charged is for granting the sanction. This is because under this welfare statute these lands have been permitted to be purchased by the tenants at a much lesser price. The tenant is supposed to cultivate the land personally. It is not to be used for non-agricultural purpose. A benefit is acquired by the tenant under the scheme of the statute, and therefore, he must suffer the restrictions which are also imposed under the same statute. The idea in insisting upon the premium is also to make such transfers to non-agricultural purpose unattractive. The intention of the statute is reflected in section 43, and if that is the intention of the legislature there is no reason why it should be held otherwise. Plea that the premium charged is unconscionable and is expropriator not tenable in view of scheme of the Act.
The undisputed facts are that, the land appertaining to the plots was the ancestral land of one Krutibas Das and stood recorded in his name. After the death of Krutibas and his wife, the property devolved on his two sons, namely, Banamali and Ramakanta as joint owners thereof, both having 50% share each. Ramakanta being a minor was being looked after by his major brother Banamali, who was managing the joint family properties including the undivided interest of Ramakanta. By registered sale deed, Banamali sold the entire disputed land of 40 decimals on behalf of himself and also as brother guardian in favour of one Agani Dash. Agani in his turn sold the disputed land to one Sanatan and the present petitioner, Kanehei by registered sale deed.
During the consolidation operation, the disputed land was recorded in the name of Sanatan Dash and Petitioner Kanehei. Ramakanta, the present opposite party No.1, filed objection claiming to record his half share in the disputed land in his name on the ground that his brother Banamali had no right to alienate his share.
The Hon’ble Court observed that, where the de facto guardian of a minor is also the Karta or Manager or an adult member of the joint family including the minor himself, for sale by him of the joint family property including the undivided interest of the minor in such property, no permission of the court is necessary. Such sale shall be governed by the uncodified Mitakshara School of Hindu law, according to which sale by the Karta or Manager of the Hindu Joint Family Property without any legal necessity or benefit of estate shall be voidable at the option of the minor with regard to his undivided interest.
Thus, the sale of the minors’ property, in contravention of section 11 of the Hindu Minority and Guardianship Act, 1956 Act, is void and invalid must be applicable to all properties of the minor except where the sale is by a Karta or Manager of a joint Hindu Family of the undivided interest of the minor in the joint family property. The voidability of the sale transaction could only be decided by the Civil Court and not the consolidation Authorities.
The finding of the Consolidation Authorities in the impugned orders that the sale of Ramakanta’s undivided interest in the disputed joint family property by Banamali was void and invalid being in contravention of Section 11 of the Hindu Minority and Guardianship Act, 1956 cannot be sustained.
In the instant case, vendor was landlord and vendee was tenant.
The agreement for sale was arrived at in 1966, but it was oral. On account of failure on the part of the owner landlord, suit had to be filed in which compromise was arrived at and fresh agreement for sale was executed in October, 2010. Thereafter, sale deed was executed in November, 2010. It was pleaded by vendee that as vendor-landlord had only limited right to receive rent, market value should be determined on basis of that limited right on the date the sale deed was executed.
The Hon’ble Court observed that there are two sets of rights enjoyed by a person in respect of the property. One corporeal and the other incorporeal. The corporeal right is the right of ownership in material things whereas incorporeal right is any other proprietary right in rem. The owner of a material object is he who owns a right to the aggregate of its uses. Some of the rights of the owner might have been transferred by way of lease, the right of the user of those rights is as merely encumbrance and not as an owner. The ownership is of general use and not of absolute use. Once certain rights are transferred for a specific purpose, the landlord enjoys residuary rights in the said property. Even if any land may be mortgaged, leased, charged, bound by restrictive covenants and re so on, yet the residuary right remains with the owner. Though the residuary use, so left with the owner, may be of very small dimension and some encumbrancer may own rights over it that is much more valuable than owner, yet the ownership of it remains with the owner and not with the encumbrancer. No such right loses its identity because of an encumbrance vested in someone else. The right of ownership is essentially an inheritable right. It is capable of surviving its owner for the time being. It belongs to the class of rights which are divested by death but are not extinguished by it. The encumbrance does not become owner of the property despite the fact that he enjoys the property to the exclusion of the ownership.
For the aforesaid reason the plea by instrument of sale, the limited right to receive rent is transferred which is the basis for determination of the market value, cannot be accepted. The lessee who is encumbrancer has limited right of enjoyment of the property and nothing more than that. Even if the landlord had limited right of use of property, would not dilute his right of ownership. He continues to enjoy the residuary right in the said property. Once the property has been conveyed, the landlord by virtue of this transfer conveyes to the lessee the right of ownership which does not include only the right of enjoyment of the property, but all the residuary rights which the owner has in the said property.
The High Court concluded that after giving property in tenancy, pleas based on limited right are not tenable.
By virtue of a sale deed executed in favour of the petitioner, ownership has been transferred in his name. It cannot be said that by execution of the sale deed, limited rights have been transferred to the petitioner. As a result of the said sale deed, all the rights of the owner, described herein above, stand transferred in the name of the petitioner. While enjoying these rights, he cannot claim that a limited right of receipt of rent alone has been transferred, which would become the basis for determination of the market value.
One Lata was first married to Hrushi, who died prior to 1956 leaving behind his widow (Lata) and daughter Ratnamani (the plaintiff) as his successors. Ratnamani had only one daughter, namely, Banabasi.
After the death of Hrushi, his widow Lata married Kalakar, who also died prior to 1956 leaving behind Lata as his only successor-in interest. Kalakar had one brother, namely, Kantha. After the death of Kalakar, his widow Lata filed a suit and got the share of Kalakar allotted to her and, getting delivery of possession thereof, she continued to remain in possession of the same. During her life time, for her legal necessity she had sold land to different persons.
The plaintiff’s case that the scheduled land, which is also a part of the properties Lata had got in the partition, has been bequeathed by Lata under an unregistered Will executed in favour of Banabasi, who is Lata’s granddaughter and on the strength of that Will Banabasi, has been in possession and enjoyment of scheduled property.
After the death of Lata, it is claimed, the plaintiff has been in possession of the scheduled properties. It is alleged that D-2 to D-12, being agnates of Kalakar (Lata’s second husband), created disturbance in plaintiff’s possession over the suit land. Hence, the suit for declaration of her right, title and interest in respect of schedule properties. The plaintiff has also sought for declaration of her title over scheduled land in case no title is found to have been passed on to Banabasi under the aforestated Will.
The learned Courts below had recorded concurrent findings that by operation of section 14 of the Hindu Succession Act, 1956 (in short, the Act) Lata became full owner in respect of the property she got in suit and the plaintiff Ratnamani being Lata’s natural daughter through her first husband would succeed to all the properties in respect of which Lata died intestate, irrespective of the fact that the source of the property is Lata’s second husband, who is not the father of the plaintiff.
The Court relied on the case of Keshri Parmai Lodhi and another vs. Harprasad and others, reported in AIR 1971 MP 129, wherein their Lordship observed that from the language used in sub-section (1) and (2) of section 15 of the Act, it is clear that the intention of the Legislature is to allow succession of the property to the sons and daughters of the Hindu female and only in the absence of any such heirs the property would go to the husband’s heirs.
In the Text Book: Principles of Hindu Law by D.F. Mulla, it is commented on section 15(1)(a) of the Act that in case of a female intestate who had remarried after the death of her husband or after divorce her sons by different husbands would all be her natural sons and entitled to inherit the property left by the female Hindu regardless of the source of the property.
The Court observed that in the case at hand, if Lata’s daughter born to her first husband is considered to be her daughter coming within the expression ‘daughter’ appearing in section 15 of the Act, then sub-section (1) of section 15 of the Act would govern the situation. Therefore, the inevitable conclusion is that being a daughter born out of the womb of Lata by her first husband the plaintiff-respondent No.1 comes within the expression ‘daughters’ appearing in section 15(1)(a) of the Act and with the application of Rule-1 of section 16 of the Act, the Appellants, who are coming within the expression ‘heirs of the husband’, are to be kept from succeeding to the properties left behind by Lata even though she inherited the same from her second husband-Kalakar and he is not the father of plaintiff-respondent No.1.
Therefore, it was rightly held that plaintiff-Ratnamani succeeded to the suit properties consequent upon the death of her mother Lata and that the Appellantsdefendant Nos. 2 to 12 are not entitled to inherit the property of Lata.
This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till March 31, 2015: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.
Presently, an Indian company can, under the Automatic Route, issue shares/convertible debentures to a person resident outside India against lump-sum technical knowhow fee, royalty, External Commercial Borrowings (ECB) (other than import dues deemed as ECB or Trade Credit) and import payables of capital goods by units in Special Economic Zones subject to conditions like entry route, sectoral cap, pricing guidelines, etc. and compliance with applicable tax laws.
This circular permits an Indian company to issue equity shares against any other funds payable by the investee company, remittance of which does not require prior permission of the Government of India or RBI under FEMA, 1999 or any rules/regulations framed or directions issued thereunder, if:
1. The equity shares are issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines etc.;
2. A pplicable taxes have been deducted on the funds payable and the conversion to equity is net of applicable taxes.
However, issue of shares/convertible debentures that require Government approval in terms of paragraph 3 of Schedule 1 of FEMA 20 or import dues deemed as ECB or trade credit or payable against import of second hand machinery will continue to be dealt in accordance with extant guidelines.
This circular states that with effect from the first fortnight of September, 2014 banks are not required to submit ENC and Sch. 3 to 6 file under FETERS. Banks have to submit only BOP6 file and QE file under FETERS.
This
circular states that statement on import of Gold, both monthly and
half-yearly, now have to be filed in XBRL format from September, 2014.
However, the monthly and half-yearly statement for September has to be
filed both manually (format annexed to this circular) as well as in the
XBRL format. From October, 2014 only the XBRL statement needs to be
filed.
Presently, FPI are permitted to hedge their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date.
This circular permits FPI, holding securities under the Portfolio Investment Scheme (PIS) in terms of schedules 2, 2A, 5, and 8 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (Notification No. FEMA 20 /2000-RB dated 3rd May 2000), to now hedge the coupon receipts arising out of their investments in debt securities in India falling due during the next 12 months. The hedge contracts cannot be rebooked on cancellation, but they can be rolled over on maturity if the relative coupon amount is still to be received.
This Press Note, with immediate effect, permits FDI in the following sectors of the Railway Transport Sector: –
Construction, operation and maintenance of the following.
(i)Suburban corridor projects through PPP, (ii) Highspeed train projects, (iii) Dedicated freight lines, (iv) Rolling stock including train sets, and locomotives/ coaches manufacturing and maintenance facilities, (v) Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and connectivities to main railway line and (x) Mass Rapid Transport Systems.
FDI beyond 49% of the equity of the investee company in sensitive areas from security point of view, will be brought before the Cabinet Committee on Security (CCS) for consideration on a case to case basis. Paragraph 6.1 has been amended as under: – 6.1 Prohibited Sectors: FDI is prohibited in:
(a) Lottery Business, including Government/private
lottery, online lotteries etc.
(b) Gambling and Betting, including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) M anufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
(h) A ctivities/sectors not open to private sector investment: e.g: (l) Atomic energy and (ll) Railway operations ( other than permitted activities mentioned in para 6.2)
Foreign technology collaboration in any form, including licensing of franchise, trademark, brand name, management contract, is also prohibited for Lottery Business and Gambling and Betting activities.
Paragraph 6.1.12.1(ii) & 6.1.12.1(iii) are amended as under: –
(ii) “Infrastructure” refers to facilitiesrequired for functioning of units located in the Industrial Park and includes roads ( including approach roads), railway line/sidings including electrified railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment facility, telecom network, generation and distribution of power, air conditioning.
(iii) “Common Facilities” refer to the facilities available for all units loicated in the industrial park, and include facilities of power, roads (including approach roads), railway line/sidings including electrifies railway lines and connectivities to the main railway line, water supply and sewerage, common effluent treatment, common testing, telecom services, air conditioning, common facility building, industrial canteens, convention/conference halls, parking, travel desks, security service, first aid center, ambulance and other safety services, training facilities and such other facilities meant for common use of the units located in the Industrial Park.
A new Paragraph 6.2.16, as under, has been added: –
This Press Note has modified Paragraphs 4.1.3(v)(d) and 6.2.6 of ‘Consolidated FDI Policy Circular 2014’ relating to Defence Sector, with immediate effect.
This circular states that banks/FFMC selling pre-paid foreign currency cards for travel purposes are required to follow the same rigorous standards of due diligence and KYC that they follow while selling foreign currency notes / travellers cheques to their customers.
Export of Goods and Services – Project Exports
This circular has: –
1. Done away with the requirement of obtaining approval of the Working Group in case of project exports and deferred service exports proposals for contracts exceeding US $ 100 Million. Henceforth, banks/Exim Bank will consider awarding post-award approvals without any monetary limit and permit subsequent changes in the terms of post award approval within the relevant FEMA guidelines/regulations.
2. R emoved the time limit of 30 days for submission of form DPX1/PEX-1/TCS-1 to the Approving Authority (AA) by the exporters. Exporters now have to submit the appropriate form to their banks for approval.
The revised Memorandum of Instructions on Project and Service Exports (PEM) is annexed to this circular.
A. P. (DIR Series) Circular No. 13 dated 23rd July, 2014 Foreign investment in India by SEBI registered long-term investors in Government dated Securities
Presently, FII, QFI and long term investors can invest up to US $ 30 billion in Government securities. Out of the above limit, a sub-limit of US $ 10 billion is available for investment by long term investors in Government dated securities.
This circular has, while maintaining the overall limit at US $ 30 billion, made the following changes: –
1. T he limit for investment by FII/QFI/FPI in Government dated securities has been increased by US $ 5 billion to US $ 25 billion.
2. T he limit for investment by long term investors in Government dated securities has been reduced from US $ 10 billion to US $ 5 billion.
FII/QFI/FPI will have to invest the said additional sum of US $ 5 billion in government bonds with a minimum residual maturity of three years. Also, all future investments against the limit vacated when the current investment by an FII/QFI/FPI runs off either through sale or redemption will have to be made in government bonds with a minimum residual maturity of three years. However, there will be no lock-in period and FII/QFI/FPI can freely sell the securities (including that are presently held with less than three years of residual maturity) to the domestic investors.
This circular states that Indian Agents under MTSS can treat physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.
This circular states that Authorised Persons can treat either physical Aadhaar card/letter or Aadhaar letter download from the UIDAI under the e-KYC process as ‘Officially Valid Document’ under PML Rules. Further, if the address provided by the customer is same as that on the Aadhaar letter, Aadhaar letter may be accepted as a proof of identity as well as proof of address.
INTRODUCTION
The law to define and catch insider trading on unpublished price sensitive information is quite widely worded. Moreover, several terms contain legal fictions/deeming provisions. Appellate authorities too have adopted further legal fictions or rebuttable presumptions. The noose of the law has got one notch tighter with a recent decision (in the matter of KLG Capital Services Limited, order of SEBI dated 24th July, 2014). In this decision, SEBI, perhaps for the first time, applied the concept of “temporary professional relationship” of a person with a company that would make him an insider, and thus, held that his trades with unpublished price sensitive information (UPSI), is insider trading. Whether such trades were with such UPSI was also determined by applying deeming provisions. Moreover, two other deeming principles established by earlier cases have also been applied here. Finally, the case is especially noteworthy for the systematic manner in which information is collected, the relationships determined and the sequence of transactions analysed.
Background of law relating to insider trading
The law relating to insider trading is principally contained in detailed Regulations – the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“the Regulations”). The punishable act of insider trading is determined in a fairly complex manner wherein several legal fictions/deeming provisions are applied. Importantly, not all of deeming provisions are rebuttable presumptions, and hence they are presumed to be true with no choice to prove otherwise. Certain persons are deemed to be insiders if have certain specified types of close relationships with the Company. However, several categories of persons are deemed to be connected with the Company and hence insiders.
Insider trading takes place if such insiders trade while in possession of UPSI or if they share such UPSI. However, several types of information are deemed to be UPSI. Then, certain trades by insiders are also deemed to be insider trades in the sense that such trades are simply prohibited. And so on. However, it is ironical that even with such a widely framed law, the cases caught and punished are relatively very few. And even in cases detected and punished, a very detailed investigation is required to establish the violation.
Facts in the present case
In the present case, it was found that a certain company (“Acquirer”) acquired shares of a listed company (“the Company”) that resulted in the Acquirer being required to make an open offer. Certain persons (“the Traders”) were alleged to have acquired shares of the Company while in possession of the UPSI that such open offer would be made. The shares were thereafter sold at a substantially higher price, resulting in a large sum of gains to the Traders.
SEBI alleged that this was in violation of the insider trading Regulations. Let us see how SEBI went about establishing the necessary ingredients of insider trading in the facts of that case using several legal fictions.
Having information of open offer whether UPSI?
Does having information of an impending open offer by itself a UPSI? The answer is yes, though it appears that this was not disputed in this case. Hence, this was not required to be established in detail. A takeover is deemed to be UPSI as per the definition of that term.
Whether the traders in the present case were “insiders”?
The crucial question was whether the Traders were insiders. There were two aspects to this. One was that the fact that the Traders were not connected with the Company but they were connected with the Acquirer. Secondly, even with regard to their connection with the Acquirer, the Traders were not connected in any of the forms specified in the Regulations. The question was whether they could still be deemed to be connected with the Acquirer.
For the first aspect, the issue was whether the Traders need to be connected with the Company whose shares were dealt in, or whether they can be connected to any company. The common understanding is that the inside information usually emanates from the Company whose shares are traded in. A person is closely connected with such company as officer, consultant, director, etc. and becomes aware by virtue of such connection about UPSI. He then trades, based on such UPSI. Thus, a connection with any other company ought not meet the requirement. However, SEBI relied on an earlier decision of the Securities Appellate Tribunal (“SAT ”) which had held that the connection may be with any company. Since the Traders were shown, as is seen later, connected with the Acquirer company, it was held that this was sufficient.
The following words of the SAT in V.K. Kaul vs. Securities and Exchange Board of India (Appeal No. 55 of 2012) were relied on:-
“Regulation 2(e) defines ‘insider’ to mean any person who, (i) is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company or; (ii) has received or has had access to such unpublished price sensitive information. It needs to be appreciated that the clause makes a distinction between ‘the company’ and ‘a company’. When it refers to ‘the company, the references is to the company whose Board of Directors is taking a decision and when it refers to ‘a company’, the reference is to a company to which the decision pertains. This has been explained even by the adjudicating officer by way of an illustration in para 30 of his order dated January 4, 2012, in the case of Mr. V. K. Kaul as under:-
“30. To illustrate, if noticee’s submission is accepted then a situation will arise wherein a Director of the company X cannot be held guilty of insider trading if he trades in the scrip of company Y based on the UPSI, that company X is going to make a strategic investment / placing a huge purchase order for plant and machineries in company Y. Such a scenario will defeat the purpose of PIT Regulations.”
We are, therefore, of the view that the term price sensitive information used in regulation 2(HA) is wide enough to include information relating directly or indirectly to ‘a company.’ The solrex had decided to purchase shares of the target company. Here, solrex is ‘the company’ and target company is ‘a company.’ The decision of solrex to purchase shares of the target company is likely to materially affect the price of securities of the target company. Only the insiders of solrex are aware about this decision of the company. If the insiders of solrex are allowed to trade in the shares of the target company ahead of purchase of shares by solrex, surely the trading will be on the basis of insider information. the decision of solrex to purchase shares of the target company is, therefore, UPSI for the insiders of solrex and they are prohibited from dealing in the shares of the target company till such information becomes public. It is not obligatory under the regulations that the upsi must be in the possession or knowledge of ‘a company’ in whose securities an insider of ‘the company’ deals. As long as, an insider of ‘the company’ deals in the securities of ‘a company’ listed on any stock exchange while in possession of UPSI relating to that company, the provisions of regulation 3(i) of the regulations will get attracted.”
The next aspect was whether the traders were connected with the acquirer. the traders were not directors, advisors, etc. of the acquirer. however, the records showed that they had some connection with either the acquirer or companies connected with it. they were involved directly or indirectly with the acquirer in terms of carrying out of certain acts relating to the takeover or otherwise having other connections. the persons who actually traded in the shares were also shown connected and the flow of the UPSI to them was also shown. Based on such findings, SEBI held that the traders had a “temporary professional connection” with the acquirer and hence, were deemed to be connected.
This is relevant for any person connected with a Company, particularly professionals like Chartered accountants. even if they are not statutory auditors and have a one- time connection of any sort, they could be held to have a “temporary professional connection”, and thus deemed to be insiders.
Reliance on Phone/sms records it is interesting to note, how the records of phone/sms between the traders during the critical time when the transactions were carried out were obtained and placed on record. This helped support the case of SEBI.
How to Establish that Insiders Traded while in Possession of UPSI
A regular problem faced in cases of insider trading is how to establish that dealings by insiders were so, while being in possession of UPSI. Not all trades of insiders are automatically insider trading. An additional condition required to be proved is that they were, while in actual possession of inside information. An earlier decision of the sat helped introduce yet another fiction. At that time, the law was worded more strictly and it was required to be proved that the person dealt on the basis of UPSI. However, sat held that once an insider deals in securities, it will be presumed that he has done so on the basis of inside information. SEBI relied on the observation of hon’ble sat in the matter of Rajiv B. Gandhi and Others vs. SEBI (appeal no. 50 of 2007) that:
“We are of the considered opinion that if an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the unpublished price sensitive information in his possession unless he establishes to the contrary. Facts necessary to establish the contrary being especially within the knowledge of the insider, the burden of proving those facts is upon him. The presumption that arises is rebuttable and the onus would be on the insider to show that he did not trade on the basis of the unpublished price sensitive information and that he traded on some other basis. He shall have to furnish some reasonable or plausible explanation of the basis on which he traded. If he can do that, the onus shall stand discharged or else the charge shall stand established.”
Relying on this decision, SEBI held that the insider who trades would be presumed to have traded while in possession of UPSI.
This principle is also important for persons close to the Company which would include Chartered accountants acting as auditors, internal auditors, advisors, independent directors, etc. if they deal in the shares of such a Company, it is possible that they would be presumed to have done so while in possession of UPSI. And then it would be upto them to show how they did not. Thus, such persons may consider adopting a policy to never deal in the shares of a Company in which they are regularly or even temporarily connected.
Whether a Person merely Possessing is UPSI Deemed To be an Insider?
The decision of the sat in Dr. Anjali Beke’s case (Dr. An- jali Beke vs. SEBI (appeal no. 148 of 2005)) was relied on to support the argument that even a non-insider who receives UPSI would be deemed to be an insider person who could violate the regulations if he deals, etc. in the securities. Reliance on this decision explicitly was perhaps necessary since at the time of the alleged acts of insider trading, the law was ambiguous. It was only a few months later that the regulations were amended explicitly and clearly state that a person who merely receives UPSI is an insider.
Reliance on Circumstantial Evidence for Establishing offence of Insider Trading
The next concern arises out of the peculiar nature of insider trading. Many of the ingredients required to prove insider trading are difficult to establish directly. The US Court in rajratnam’s case had held that circumstantial evidence can be relied on in insider trading cases. This decision was applied on by the sat in V. K. Kaul’s case. SAT had observed:-
“…The adjudicating officer has rightly relied on the observations of u. s. Court in rajaratnam case (supra) on the relevance of circumstantial evidence in para 38 of the impugned order which reads as under :-
38. Regarding the issue of relevance of circumstan- tial evidence, the hon’ble district Court southern district of new york in the matter of united states of america V raj rajaratnam 09 Cr. 1184 (rjh) decided on 11.08.2011 has observed as follows: “…moreover, several other Courts of appeals have sustained insider trading convictions based on circumstantial evidence in considering such factors as “(1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.” United States vs. Larrabee, 240 f.3d 18, 21-22 (1st Cir. 2001)…”
The above principles are not in conflict with the regulatory framework prescribed by the Board and can be looked into while deciding case of insider trading under the indian regulatory framework.”
SEBI relied on this decision to rely on various circumstantial evidence in the present case.
Disgorgement of Gains with Interest the gains made by the traders were thus worked out. to that, simple interest @ 12% was added for six years. the traders were also debarred from dealing in the securities markets for specified period of time.
Conclusion
This decision reiterates and emphasises several aspects that need consideration by professionals and executives having any connection to the company. The wide definitions and numerous deeming provisions may result in their own trades, or of persons related/connected to them, being held to be insider trading. Apart from suffering disgorgement of the gains with interest, the person may also suffer penalties, prosecution, debarment and of course, loss of reputation.
There was a difference of opinion between the Judicial member and the Technical Member. The appeal before the Tribunal was therefore referred to a Third Member. The Third Member held against the appellant/assessee. Prior to the decision of the Third Member, there was a decision of the Tribunal which supported the appellant’s contention before the Tribunal. That decision was brought to the notice of the learned Third Member before passing the order. The Third Member was bound to consider the judgment of the Tribunal. He, however, did not do so.
Prima facie, at least, even before the Tribunal the position for law appears to be in favour of the appellant. Unfortunately, the third member did not consider the judgment of the Tribunal.
The court also observed that the order of Tribunal was referred not because it has any precedent value in this court but is a indication of what the impugned order of the third member may well have been, had the judgement been considered by the learned third member.
The learned single Judge of Karnataka High Court in a Writ Petition passed an order stating that earlier judgement of a Division Bench of the High Court requires reconsideration and in the absence of any statutory provision empowering him to refer the same to the larger Bench the relevant papers be placed before Chief Justice to examine the question and constitute a larger Bench.
The Hon’ble Court observed that according to Article 141 of the Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The expression “all courts” means Courts other than the Supreme Court. The decision of the Supreme Court is binding on all the High Courts. In other words, the High Court’s cannot hold the law laid down by the Apex Court is not binding on the ground that relevant provisions were not brought to the notice of the Supreme Court, or the Supreme Court laid down the legal position without considering all the points. The decision of the Apex Court binds as much the pending cases as the future ones. Even the directions issued by the Apex Court in a decision constitute binding law under Article 141. It is pertinent to state that the Supreme Court is not bound by its own decisions and may overrule its previous decisions. It is also pertinent to state that the Apex Court may overrule the previous decisions either by expressly saying so or impliedly by not following them in a subsequent case. Thus, in view of Article 141 of Constitution of India, when there is a decision of the Apex Court directly applicable on all fours to the case on hand, the Learned Single Judge could have decided the Writ Petitions following the decision of the Apex Court, holding that the decision of the Division Bench is contrary to the law laid down under Article 141 of the Constitution of India. Therefore the learned single Judge could decide the petitions in accordance with the law laid down by the Apex Court.
All the defendants attended the Himayatnagar branch of appellant Bank and deposited the title-deeds of their respective immovable properties, as detailed in the plaint. They had agreed by executing affidavits regarding the confirmation of the mortgage by deposit of title-deeds and had further agreed that the revival of the loan, if any by the borrower i.e. defendant No. 1 shall bind the mortgagor.
The Appellant Bank filed a suit for recovery of an amount of Rs. 27,76,137/- and for preliminary decree for sale of the mortgaged property for recovery of the said amount was decreed against the borrower-original defendant No. 1, but was dismissed against the guarantors i.e., defendants No. 2 to 6. Hence, the appeal was filed against the guarantors.
The Hon’ble Court noted the difference between “the agreement to mortgage” and “mortgage by deposit of title-deeds”. The mortgage by deposit of title-deeds is defined by section 58(f) of the Transfer of Property Act, 1882.
It is undisputed that the city of Hyderabad is a notified city where the delivery of the title-deeds of immovable property can be made with the intention to create a security thereon.
It is a settled position of law that the mortgage by deposit of title deeds requires no registration. However, if any document is executed, which would show that the mortgagee has, under the said document, mortgaged the property by deposit of title-deeds, then only the registration of the said document is required. However, the contemporaneous document fortifying the “intention to create the security” is neither an agreement to mortgage or a mortgage. The deposit of title-deeds itself with intention in the mind of the person that the said title-deeds are being deposited with intention to create a security thereon, is sufficient to culminate the transaction into a mortgage by deposit of title-deeds. This mortgage by deposit of title-deeds is sometimes called as equitable mortgage, as was prevalent in England. However, the ingredients of the equitable mortgage and the mortgage as defined u/s. 58(f) of the Transfer of Property Act are not identical.
The documents on record, coupled with the affidavits as admitted by the defendant and positively proved by the relevant witness of the plaintiff would show that the title-deeds were deposited with the plaintiff Bank, with an intention to create the security thereon.
The title-deeds of the respective respondents were admittedly put in the custody of the appellant Bank at that time. None of the relevant respondents at any time asked for return of those title-deeds, nor complained of keeping the same in the custody of the Bank.
The documents on record would show that the respondents No. 2 to 6 had intention to create the security for the repayment of the loan availed by the principal borrower. Therefore, they showed their readiness to deposit the title-deeds by various agreements and affidavits and also by placing all the title verification certificate by the Advocates, etc. and ultimately, they deposited the titledeeds with the appellant Bank at Hyderabad branch.
The above facts is sufficient to hold that the respondents No. 2 to 6 stood as guarantors and created mortgage of their property for repayment of the loan advanced to the principal borrower by depositing their title-deeds.
In the instant case, an amount of Rs. 8,724/- was to be paid to the Respondent employee as reimbursement of his medical claim. The Petitioner Haryana Dairy Development Cooperative Federation Limited filed SLP before Supreme Court. The Court frwoned upon such practice of the petitioner corporation as the corporation must have spent the amount already by filing this petition more than the total amount involved herein.
The Law Commission of India in its 155th report has observed that what is distressing is that the number of pending litigations relate to trivial matters or petty claims, some of which have been hanging for more than fifteen years. It hardly needs mention that in many such cases money spent on litigation is far in excess of the stakes involved, besides wasting valuable time and energy of the concerned parties as well as the Court.
The court directed that the expenses of the litigation shall be incurred by the Managing Director personally who has signed affidavit in support of the petition and it shall not be taken from the Federation.
The facts, in brief, are that the complainant booked a 2 BHK flat , the price whereof was Rs. 22,50,000/-. He paid a sum of Rs.1.00 lakh, as booking amount, to the builder. The allotment letter, dated 13-10-2011, was issued in favour of the complainant, in respect of the aforesaid flat. Totally, the complainant paid a sum of Rs. 21,50,000 towards the price of the flat, in question. The remaining amount of Rs.1.00 lakh was to be paid by the complainant, at the time of handing over possession of the flat, by the builder (Opposite Party). The Opposite Party, failed to deliver the possession in time. The complainant wrote a number of letters requesting the Opposite Party, to hand over physical possession of the flat. The opposite Party vide letter dated 06-12-2012 intimated the complainant that possession of the flat shall be delivered on or before 15-01-2013. Even on that date, the possession of the flat was not delivered. It was intended that the complainant suffered a lot of mental agony and physical harassment, on account of non-delivery of possession of the flat, in question, by the stipulated date, or non-refund of the amount deposited by him. It was further stated that the aforesaid acts of the Opposite Party, amounted to deficiency, in rendering service, as also indulgence into unfair trade practice. When the grievance of the complainant was not redressed, left with no alternative, a complaint u/s. 17 of the Consumer Protection Act, 1986 was filed claiming from the Opposite Party compensation for mental agony and physical harassment; refund of Rs. 21.50 with interest @18% p.a. from the date of deposit of the said amount; pay interest @10.75% p.a., which was being paid by him (complainant) to the Bank of India, for the loan facility, availed of by him to purchase the flat, in question; etc.
The state commission observed that as per the evidence produced, on record, it is evident that the complainant only booked one flat, bearing No. 498, in the project of the Opposite Party, for a sale consideration of Rs. 22.50 lakh. There is nothing, on record, that the complainant purchased this flat, for commercial purpose with the intention to resell the same as and when there was escalation in prices. Thus the complainant falls within the definition of a consumer, as defined by section 2(1)(d)(ii) of the Act.
The next question, that falls for consideration, is, as to within which period the possession of the flat was to be delivered. It is evident from this document, that the Opposite Party stated therein, that it would try to give possession of the flat by 15-01-2013. It means that possession of the flat was to be delivered, on or before this date. However, there is no document, on record, to prove that either on 15-01-2013 or immediately thereafter offer of possession of the flat, in question was made to the complainant, but he refused to accept the same. Had the construction of the flat, in question, been complete, in all respects, then certainly the Opposite Party would have sent offer of possession of the flat, after 15-01- 2013, to the complainant. Non-sending of such a letter, in itself, indicates that construction of the flat, in question, was not complete, and as such, the question of offer of possession thereof on or after 15-01-2013 did not at all arise. By making a false promise, that the possession shall be offered by 15-01-2013, and failure to abide by the commitment, the Opposite Party was not only deficient in rendering service but also indulged into unfair trade practice.
Even by the time the complaint was filed, the possession of the flat was not offered to the complainant. The Opposite Party utilised the amount, deposited by the complainant, for a sufficient long period. Neither the possession was offered to the complainant, nor refund of the amount, was made to him. Since the Opposite Party failed to deliver possession of the flat by the stipulated date or even by the time the complaint was filed, it was its bounden duty to refund Rs. 21.50 and Rs. 37,028/- (paid as service tax) to the complainant but it failed to do so. It was, therefore, held that the complainant was entitled to the refund of Rs. 21,50,000/- deposited by him towards the price of the flat and Rs. 37,028/- paid by him, towards service tax to the Opposite Party. By not refunding the amount aforesaid, the Opposite Party was deficient, in rendering service.
For the financial loss caused to the complainant on account of non-refund of the amount, deposited by him immediately after the expiry of the stipulated date for delivery of possession of the flat, the complainant was entitled to refund of the aforesaid amounts, with interest @12% interest p.a. from the respective dates of deposits.
As stated above, neither possession of the flat by the stipulated date, was given to the complainant, nor refund of the amounts paid by him, was made. One can really imagine the mental condition of a person, who deposited 95% of the price of the flat, but was neither delivered the possession thereof nor refund of the amounts deposited by him was made. The complainant, thus, suffered a lot of mental agony and physical harassment, on account of the acts of omission and commission of the Opposite Party. Not only this, the complainant shall also not be able to purchase a flat, at the same rate, on account of escalation in prices. Compensation for mental agony and physical harassment and on account of escalation, in prices to the tune of Rs. 1,50,000/- was granted Litigation cost of Rs.15,000/- also granted. (Dated 02-07-2014 complaint Case No. 41 of 2014).
One of the co-owners can relinquish his share in a co-owned property in favour of one or more of the coowners. The document executed by him in this regard would continue to be a relinquishment deed irrespective of whether the relinquishment is in favour of one or all the remaining co-owners of the property. There is no basis in law for the proposition that if the relinquishment deed is executed in favour of one of the co-owners, it would be treated as a Gift deed. The law of stamp duty (as applicable in Delhi) treats relinquishment deed and gift deed as separate documents, chargeable with different stamp duties. It is not necessary that in order to qualify as a relinquishment deed, the document must purport to relinquish the share of the relinquisher in favour of all the remaining co-owners of the property. Even if the relinquishment is in favour of one of the co-owners, it would qualify as a relinquishment deed.
The Civil Misc. Appeal had been filed against the judgement and decree dated 05-11-2011, passed by the District Judge, Alwar whereby a consent decree u/s.13B of the Act of 2005 had been passed dissolving the marriage between the appellant–wife and the respondent-husband.
It was contended that the appellant is an absolutely illiterate lady and was married to the respondent on 31- 01-2009. It is submitted that the judgment and decree dated 05-11-2011 purportedly by consent for dissolution of marriage has been obtained fraudulently and the appellant at no point of time signed an application u/s. 13B of the Act of 2005, nor even entered the witness box before the District Judge, Alwar nor make any statement as attributed to her before the learned trial court. It is submitted that the judgment and decree for dissolution of marriage on 05-11-2011 is absolutely fraudulent and in fact an outcome of criminal enterprise.
The Court observed that section 96(3) CPC categorically states that no appeal shall lie from a decree passed by the court with the consent of the parties. There is thus a clear statutory prohibition against filing of an appeal against a consent decree. Thus, the court held that u/s. 96(3) CPC, an appeal against a consent decree is not maintainable.
The Hon’ble Supreme Court in the case of Pushpa Devi Bhagar (D) by LR vs. Rajinder Singh & Ors. [AIR 2006 SC 2628 (1)] had the occasion to deal with a situation where a consent decree was sought to be impugned in appeal.
The Hon’ble Court observed that the position that emerges from the amended provisions of Order 23, can be summed up thus :
(i) No appeal is maintainable against a consent decree having regard to the specific bar contained in section 96(3) CPC.
(ii) No appeal is maintainable against the order of the court recording the compromise (or refusing to record a compromise) in view of the deletion of clause (m) Rule 1, Order 43.
iii) No independent suit can be filed for setting aside a compromise decree on the ground that the compromise was not lawful in view of the bar contained in Rule 3A.
(iv) A consent operates as an estoppel and is valid and binding unless it is set aside by the court which passed the consent decree, by an order on an application under the proviso to Rule 3 of Order 23.
Therefore, the only remedy available to a party to a consent decree to avoid such consent decree, is to approach the court which recorded the compromise and made a decree in terms of it, and establish that there was no compromise. In that event, the court which recorded the compromise will itself consider and decide the question as to whether there was a valid compromise or not. This is so because a consent decree, is nothing but contract between parties superimposed with the seal of approval of the court. The validity of a consent decree depends wholly on the validity of the agreement or compromise on which it is made.
Some of the questions that need to be soul searched are:
1. What is it that makes “running a firm” so difficult?
2. Why do we often hear that he is great tax professional, but a lousy leader of people?
3. Why do we often hear that he is a good people person, but lacks the technical skills to become a partner?
4. Why do talented professionals leave good firms?
Similarly, there are questions that abound within professionals that merit serious consideration.
The one word that seeks to address all of the above is “Leadership”.
When professionals have to run their firms…… how can you empower professionals to run their firms? Are they born with such talent? Can these abilities be imparted? Do these abilities need to be upgraded every few years? The answer is a resounding YES.
Almost everyone can be trained to be a good manager. And each good manager can develop himself to become a great leader.
A true professional will primarily concern himself with knowledge acquisition and upgradation, synthesis of facts and solution formulation for clients, and set a precedent for others to be inspired from and emulate. Additionally, he will be looking at market forces – competitors, new players, regulators, associates and other stakeholders, and constantly evaluate and reposition his firm’s strategy. He will be constantly mentoring his team and providing them valuable feedback on how they should be motivated to embrace the challenges of the profession. Professionals who excel at all of these are running their firms successfully.
In pursuit of the above goal of running a firm successfully, there are challenges galore:
? Analysis and interpretation of professional standards, law and regulations
? Human resources management
? Client servicing and delivery
? Risk Management and accountability
? Ethics and values
? Professional upgradation – Life Long Learning
ATTRIBUTES
One can look at the following attributes for a professional who is trying to lead his professional service firm (“PSF”) and the way to think about implementing and executing:
Focus:
Often when professionals are asked “what is the vision of your firm” and someone says to be the market leader or to be the best or to excel in so and so, it is often an empty rhetoric. There is no vision statement written nor do the other partners and/or the managers or even the associates are completely clueless on the founder/ partner’s vision for the firm. It is of paramount importance that there is laser focus (relentless) on the goals of the firm. The firm leadership in an inclusive manner defines the goals. It is the collective responsibility of each member of the firm to ensure that the goals are met. When there is an intent backed with adequate time and resources and coupled with “tone at the top”, goals will get executed. The quality of the execution is purely a derivative of passion and relentless focus.
Planning:
Planning comes naturally to professional service firms who manage projects, e.g., an audit firm is used to planning an audit engagement where there is deployment of resources (team members) and there is a time bound expectations of the final audit report. A well planned engagement is more likely than not going to result into a successful engagement. Conversely, professionals, especially sole practitioners and smaller firms who do not plan adequately often run into cost over runs due to delayed and inefficient completion of engagements. Project management principles always suggest efficient planning as the corner stone of any project.
Execution:
This brings us to execution. No professional service firm can grow or even sustain itself without quality execution and the resultant client satisfaction. Again, one has to remember the mathematical model of clients pay for lack of knowledge or ability. Execution drives the fair market value in the equation. At the end of the day what every client wants from a professional is a solution to their problem. Execution directly impacts the professionals’ perception in the eyes of the client. Professionals who deliver solutions to complex problems are considered premium professionals i.e., the high end intellectual class of professionals. Those who provide expertise and experience are the second category who command a relative premium over the general practitioner. This category primarily comprises of professionals with grey hair i.e. professionals with solid experience and a fair degree of expertise. The rhetoric is “trust us: we have been through this before”. The final category is out friendly neighborhood, general practitioner. He is the go to guy for all first level problems and for the bread and butter solutions.
Now, execution is laser focused in the first category of the premium expert as it is time which is very scarce and therefore commanding a very high premium for these professionals. Their processes are geared up to provide high quality focused execution. No wonder they are at the top of their game.
In the second category, execution is clinical and professional.
In the third category of the general practitioner, execution standards greatly differ from one professional service firm to another. Those firms that practice a high degree or high quality of execution focus will outshine the rest.
Solution:
Professional service firms have to learn to be solutions focused and not be perceived as problem creators or query raisers. Each business has its own dynamic of the professional problems and challenges. A professional service firm that believes in problem solving and thinking about solutions for its clients is a hands down winner. It is this solution centricity that brings us closer to client centricity: one of the key attributes of successful professional service firms. The culture of the firm has to encourage individuals into constantly thinking about client solutions. This again ties in to our model of clients pay for value.
Professionals get paid for the value they deliver. This is not just a clichéd statement. In the ever-growing complex environment, the larger organisations have in-house teams for all vital functions.
Example: It is not uncommon to have a separate M&A team that focuses on new acquisitions/inorganic growth opportunities. If insourcing is a given, why should a client pay to a consultant or a professional advisor? In a real world situation clients pay because either they do not know the solution or they do not know enough about the subject or even if they know, they may not have the ability to be sure about a final opinion – which is demanded by regulations or otherwise. Thus, when clients pay for value, what they are essentially doing is paying for the lack of knowledge and/or ability and/or time. Simply put,
Clients pay for value = Fair market value of lack of knowledge or ability or time
Value is what is perceived and what is delivered. A solution to a complex problem is value delivered, so also is out of the box thinking or innovative application of a tax position or a tax rule, such that it reiterates a client position or saves taxes for a client.
Often, clients are habituated to pay for what is not within their realms of expertise or functional subject matter area. Sometimes it is also to cover oneself from a potential risk of an adverse outcome.
Thus, when a professional demonstrates knowledge and ability to execute, if he delivers significant value, he can often command a premium on his normal charge out rates.
Dynamic Forces in Market Place:
Each country is constantly revisiting the relevance of accounting, tax and business rules and constantly looking at ways to keep them updated. Business transactions evolve constantly and the level of complexity keeps on growing. Demand and supply forces generate lot of incongruity between what is and what ought to be. In such a situation, the dynamic forces in the market place takeover and dictate how a particular profession will grow and respond to these forces. Businesses often reach out to the professional firms in terms of being the harbinger for change. It is upto the professional service firms to create systems that allow rapid response to these dynamic forces. A professional service firm has to be in alignment with the 7-S’ framework1 so as to seize the incongruency and the resultant opportunities that are thrown up.
Clients tend to expect real time responses to questions and day to day challenges. PSFs have to be organised and geared up to provide rapid responses to meet the client need and to answer “what is value to the client?”
III. Counseling vs. Advocacy
Advocacy by definition is all about articulating one’s professional ideals and channelizing the technical knowledge to a given client challenge and finally tying all of these together, to communicate the professional’s intent. It is of deep importance that a PSF leader wears a hat of an advisor when it comes to dealing with a client. It is often found that a deep dividing line can be created between completing a job versus providing professional advice/counseling. To meet this gap, if a professional wears the hat of an Advisor, it is far more permeable to further a client’s interest.
Counseling is all about conveying a point of view to a client. Thereafter, providing alternative scenarios of possible outcomes and associated results.
In contrast, advocacy is sheer representation of a client’s position before a target interest group (“TIG”). This TIG could be a regulatory authority, a court of law, an arbitration panel, a policy maker or even a client interest group. It is clear that when a client’s position is to be conveyed across this broad spectrum, it is the art of advocacy that helps remove all communication barriers and synthesises a technical argument in a manner that the TIG can see the underlying merit and accept the arguments.
Example: The eminent jurist, late Shri Nani Palkhivala, in the case of Kesavananda Bharati vs. the State of Kerala, articulated the matter before the Supreme Court and outlined the Basic Structure doctrine of the Constitution. The Basic Structure doctrine forms the basis of a limited power of the Indian judiciary to review, and strike down, amendments to the Constitution of India enacted by the Indian parliament which conflict with or seek to alter this basic structure of Constitution. Such was the power of his advocacy, that recalling Mr. Palkhivala’s performance during the hearing of the review petition, Justice Khanna remarked, “It was not Nani who spoke. It was divinity speaking through him.” Justice Khanna was speaking for an astounded and grateful nation.
It is therefore important for professionals to learn the art of advocacy as that will put them in good stead when providing representation and litigation advisory services to their clients.
Values, integrity, ethics
A professional is normally called upon for implementing any new policy or regulation. The members of the public trust a professional and inbuilt in that trust is integrity, values and ethics.
Integrity is a personal virtue, an uncompromising and predictably consistent commitment to honour moral, ethical, spiritual and artistic values and principles.
In ethics, integrity is regarded by many as honesty and truthfulness or accuracy of one’s actions.
Values can be defined as broad preference concerning appropriate courses of actions or outcomes. Values reflect a person’s sense of right and wrong or what “ought” to be. Types of values include ethical/moral values, ideological (religious, political) values, social values and aesthetic values. Values have been studied in various disciplines such as anthropology, behavioral economics, business ethics, corporate governance, political sciences, moral philosophy, social psychology, sociology and theology.
Nothing summarises this better than the phrase, “Doing the right things”..
Leadership is all about doing the right things….
management is doing things right, said Peter F. Drucker.
It is so important for the leader in a PSF to set the tone about doing the right things. This, by implication, clearly means that always a leader has to focus on the right path. This is often tough and full of obstacles. Pursuing the right path is never easy and is like traversing a road full of twists and turns. One can never know what to expect at the next juncture. One can expect several resistances on the way including from one’s own fraternity in the firm. It is during this gruesome journey when the mantle of leadership is tested to its core. At that point, a leader of the PSF should consider the right path.
It is normally easy to take a convenient way out, which is full of short cuts and is devoid of any long term substance or depth. To add to this, the temptation of short term positive results create an indiscretion in one’s mind and a leader is often tempted to follow this wrong path in pursuit of short term gains. It is here that a true leader amplifies the spirit of leadership by pursuing the right path and embodying the universally acclaimed principle of doing the right things. The result is often long lasting and sustained and helps creating a firm that lasts and endures generations.
Zero tolerance:
It is important for a PSF to set a culture of zero tolerance for inappropriate conduct, accepting delivery that is less than optimal and enduring professionals who show scant respect for the basic tenets of professional ethics. The survival of individuals within a PSF environment that is cultured with zero tolerance goes a long way in establishing the righteousness and forbearance of morality, ethics and values, integrated with the basic social fibre and the deep rooted belief in doing the right things for the PSF. Zero tolerance also sets a clear roadmap for growth and sustenance of a PSF. All the firms that have grown and sustained over decades have shown tremendous affinity to the concept of zero tolerance.
Fearless approach:
Absolute clarity in one’s technical abilities leads to conduct which is fearless. It is often said that when there is nothing to lose, there is nothing to fear. Once a professional accepts that the final results are not in one’s hands, and therefore one should not endlessly worry about the outcome of a particular matter. What is more relevant and important is that the professional has given his or her best to a particular client situation and there is no technical deficiency in the final product. Thereafter, if a different view is taken by a competent authority, it is not really a reflection of the professional’s quality of delivery. Thus, there cannot be a question of aspersing any doubt on the technical ability of the professional. At that stage, the professional can truly find a sense of equilibrium in his professional practice. His “Dharma” is to conduct himself fearlessly and the resultant outcome will always be optimum.
Client centricity:
Quality work is not equivalent to quality service. If a professional in a PSF can ensure that client service is accorded paramount importance alongside the quality of the client delivery, what he would have created is a culture of “Client centricity” in the firm. All teams of various practice areas would keep the client at the centre whilst rendering their professional services. The client should feel that his or her needs and sensitivities are being addressed contemporaneously by the client service team. Client centricity also deals with ensuring that we do a better job than our competitors at listening to our clients and working out at finding out what they like and don’t like about dealing with us. We also have thoughtful, well executed plans to invest our time and resources in growing relationships with key clients, thereby earning and deserving their trust and future business. Finally, it deals with laying a greater emphasis in the firm’s measurement and reward systems on growing existing client relationships, rather than just pursuing new accounts and “rain-making”.
In conclusion
When professionals have to lead and run their firms, a lot of the above needs to be implemented so as to sustain the firm. And to grow the firm, the leadership of the PSF has to connect the firm to the future and connect the professionals to the firm. Leaders will be expected to set direction, ensure execution, secure commitment and lead by example.
This circular states that banks are no longer required to report remittances under the Liberalised Remittance Scheme (LRS) for acquisition of immovable property outside India because as per A.P. (DIR Series) Circular No. 5 dated 17th July, 2014 facility under LRS can be used for acquisition of immovable property outside India.
This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 31st December, 2014: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.
This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 31st December, 2014: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses, if any.
This circular states that RBI has amended the FLA Return. The new return and FAQ for filling up the same have been uploaded on the RBI website – www.rbi.org.in.
This circular requires Authorised Persons, who are Indian Agents under MTSS, to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.
Transfer of assets of Liaison Office (LO)/Branch Office (BO)/Project Office (PO) of a foreign entity either to its Wholly Owned Subsidiary (WOS)/Joint Venture (JV)/Others in India–Delegation of powers to AD Banks
Presently, banks can, subject to submission of prescribed closure documents, allow closure of the accounts of LO/ BO and repatriate the surplus balances.
This circular now permits banks to allow transfer of assets of LO/BO/PO, subject to compliance with the following stipulations by the concerned LO/BO/PO: –
1. T he LO/BO must have complied with the operational guidelines such as (i) submission of AAC (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation), (ii) obtained PAN from IT Authorities and (iii) got registered with ROC under Companies Act 1956. The PO must have complied with the guidelines regarding initial reporting requirements and submission of CA certified annual report indicating project status.
2. They must submit a certificate from their Statutory Auditors furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV value and sale consideration to be obtained. The Statutory Auditor must also confirm that the assets were not re-valued after their initial acquisition. The sale consideration must not be more than the book value in each case.
3. T he assets must have been acquired by the LO/BO/ PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses must be included. Also, no revenue expenses must be capitalized and transferred to JV/WOS.
4. A ll applicable taxes must have been paid before the transfer of assets.
5. T ransfer of assets is permitted only when the foreign entity intends to close their LO/BO/PO operations in India.
6. A mounts received as a result of such transfer of assets can be credited to the bank account of the LO/ BO/PO as a permissible credit.
Banks have to submit the documents for scrutiny by their own auditors and RBI auditors. A. P. (DIR Series) Circular No. 143 dated 16th June, 2014Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act (PMLA), 2002 – Amendment to section 13(2) – Money Changing Activities
This circular requires Authorised Persons to nominate a Director on their Board as “designated Director” to ensure compliance with the obligations under the Prevention of Money Laundering (Amendment) Act, 2012.
Presently, a non-resident can pledge shares held by him in and Indian Company in favour of a bank in India to secure the credit facilities being extended to the Indian Company for bonafide business purposes.
This circular permits banks to allow pledge of equity shares of an Indian Company held by non-resident investor/s in favour of a NBFC – whether listed or not, to secure the credit facilities extended to the Indian Company for bonafide business purposes/operations, subject to compliance with the conditions indicated below: –
(a) Only the equity shares listed on a recognized stock exchange/s in India can be pledged in favour of the NBFC.
(b) In case of invocation of pledge, transfer of shares must be in accordance with the credit concentration norm.
(c) (i) Bank can obtain a board resolution ‘ex ante’, passed by the Board of Directors of the Indian Company, that the loan proceeds received consequent to pledge of shares will be utilised by it for the declared purpose. (ii) Bank can also obtain a certificate ‘ex post’, from the statutory auditor of Indian Company, that the loan proceeds received consequent to pledge of shares, have been utilised by the investee company for the declared purpose.
(d) Indian company has to follow the relevant SEBI disclosure norms, as applicable.
(e) Credit concentration norms cannot be breached by the NBFC under any circumstances. If there is a breach on invocation of pledge, the shares must be sold and the breach must be rectified within a period of 30 days from the date of invocation of pledge.
Foreign investment in India – participation by registered FPIs, SEBI registered long term investors and NRIs in non-convertible/redeemable preference shares or debentures of Indian companies
Presently, FII/FPI, QFI and long term investors registered with SEBI can invest in corporate debt up to $ 51 billion. Also, an Indian company can issue non-convertible/redeemable preference shares or debentures to non-resident shareholders, including the depositories that act as trustees for the ADR/GDR holders by way of distribution as bonus from its general reserves under a Scheme of Arrangement approved by a Court in India.
This circular permits: –
– FII, QFI, FPI and long term investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/Endowment Funds, foreign Central Banks to invest on repatriation basis; and
– NR I to invest both on repatriation and non-repatriation basis in non-convertible/redeemable preference shares or debentures issued by an Indian company in terms of A.P. (DIR Series) Circular No. 84 dated 6th January, 2014 and listed on recognised stock exchanges in India, within the overall limit of $ 51 billion earmarked for corporate debt.
Notification No. FEMA. 301/2014-RB dated 4th April, 2014
Foreign investment in the Insurance Sector – Amendment to the Foreign Direct Investment Scheme This circular states that in terms of and subject to the conditions mentioned in Press Note 2 (2014 Series) FII / FPI and NRI can invest within the overall limit of 26% permitted for FDI in Insurance sector under the Automatic Route.
The amended paragraph 6.2.17.7 of FDI policy is as under: – Paragraph 6.2.17.7 of the ‘Consolidated FD1 Policy, effective from 5th April, 2013’, is replaced by the following:
Presently, under the LRS an individual resident in India can remit up to $ 75,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both.
This circular has increased the said limit from $ 75,000 per financial year to $ 125,000 per financial year. As a result, an individual resident in India can remit up to $ 125,000 or its equivalent per financial year for any permitted current or capital account transaction or a combination of both. However, remittance under the scheme cannot be made for any prohibited or illegal activities such as margin trading, lottery, etc.
Crystallisation of Inoperative Foreign Currency Deposits
Notification No. 10A and this circular require banks to crystallize and convert credit balances in any inoperative foreign currency denominated deposit into Indian Rupee as under: –
1. In case a foreign currency denominated deposit with a fixed maturity date remains inoperative for a period of three years from the date of its maturity, than at the end of the 3rd year, the bank has to convert the balances lying in the foreign currency denominated deposit into Indian Rupee at the exchange rate prevailing as on that date. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.
2. In case of foreign currency denominated deposit with no fixed maturity period, if the deposit remains inoperative for a period of three years (debit of bank charges not to be reckoned as operation), the bank must, after giving three months’ notice to the depositor at his last known address as available with the bank, convert the deposit from the foreign currency in which it is denominated to Indian Rupee at the end of the notice period at the prevailing exchange rate. Thereafter, the depositor will be entitled to claim either the said Indian Rupee proceeds and interest thereon, if any, or the foreign currency equivalent (calculated at the rate prevalent as on the date of payment) of the Indian Rupee proceeds of the original deposit and interest, if any, on such Indian Rupee proceeds.
Presently, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 25% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.
This circular has increase the limit of 25% to 50%. As a result, resident importers can book contracts to hedge the currency risk of their probable exposures, based on past performance, for an amount which is higher of the following: –
a) U p to 50% of the average of the previous three financial years’ import turnover; or
b) Previous year’s actual import turnover.
This circular permits with immediate effect: –
A. Star Trading Houses/Premier Trading Houses (STH/ PTH) that are registered as nominated agencies by the Director General of Foreign Trade (DGFT) to import gold under 20:80 scheme. The conditions are: –
i) STH/PTH must have imported gold prior to the introduction of the 20:80 scheme. STH/PTH have to get this import verified by the Department of Customs at any port where they have imported gold consignment in the past.
ii) The first lot of gold under this scheme will be based on the highest monthly import during any of the last 24 months prior to the RBI’s notification dated 14th August, 2013, subject to a maximum of 2,000 kgs.
iii) STH/PTH can import the eligible quantity from any port.
iv) ATH /PTH must submit the import plan, port-wise and quantity-wise, to the concerned Customs office, where the verification of the figures of past performance was done.
v) STH/PTH importers will have to comply with the overall discipline of exporting 20% of each imported consignment before the next consignment is imported.
B. N ominated banks to give Gold Metal Loans (GML) to domestic jewellery manufacturers from the eligible domestic import quota of 80% to the extent of GML outstanding in their books as on 31st March, 2013.
Annexed to this circular is the revised working example of the operations of 20:80 scheme based on the changes announced in this circular.
Presently, an exporter has to obtain prior permission of RBI for receipt of advance where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment. Also, banks have been authorised to permit exporters to receive advance payment for export of goods which can take more than one year to manufacture and ship if the ‘export agreement’ provides for the same.
This circular authorises banks to permit exporters who have a minimum of 3 years satisfactory track record to receive long term export advance up to a maximum tenor of 10 years. This advance has to be utilised for execution of long term supply contracts for export of goods and is subject to the following conditions: –
a) Firm irrevocable supply orders should be in place. The contract with the overseas party / buyer must be vetted and it must clearly specify the nature, amount and delivery timelines of products over the years and penalty in case of nonperformance or contract cancellation. Also, product pricing must be in consonance with prevailing international prices.
b) The company should have the capacity, systems and processes in place to ensure that the orders over the duration of the said tenure can actually be executed.
c) The company must not have come under the adverse notice of Enforcement Directorate or any such regulatory agency or must not be caution listed.
d) Such advances must be adjusted through future exports.
e) The rate of interest payable on such advance, if any, must not exceed LlBOR plus 200 basis points.
f) Documents must be routed through one bank only.
g) Bank have to ensure compliance with AML/KYC guidelines and also undertake due diligence of the overseas buyer to ensure that it has good stand-in/soundtrack record.
h) Such export advances must not be used to liquidate Rupee loans, which are classified as NPA as per the RBI asset classification norms.
i) Double financing for working capital for execution of export orders must be avoided.
j) Receipt of advance of $ 100 million or more must be immediately reported to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI as per the format given in Annex – I to this circular.
Banks, if required, can issue bank guarantee (BG)/Stand by Letter of Credit (SBLC) for export performance, subject to the following guidelines:
a) Issuance of BG/SBLC, being a non-funded exposure, must be rigorously evaluated as any other credit proposal and such facility must be extended only for guaranteeing export performance.
b) BG/SBLC must be issued for a term not exceeding two years at a time and further rollover of not more than two years at a time is permitted, and is subject to satisfaction of relative export performance as per the contract.
c) BG/SBLC must cover only the advance on reducing balance basis.
d) BG/SBLC issued from India in favour of overseas buyer cannot be discounted by the overseas branch / subsidiary of bank in India.
e) Banks must duly evaluate and monitor the progress made by the exporter on utilisation of the advance and submit an Annual Progress Report to the Trade Division, Foreign Exchange Department, RBI, Central Office, 5th Floor, Amar Building, Mumbai under copy to the concerned Regional Office of RBI in format given in Annex – II to this circular within a month from the close of each financial year.
This circular states that a Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008 (6 of 2009), has been notified as an “Indian Party” under Clause (k) of Regulation 2 of Notification No. FEMA.120/RB-2004 dated 7th July, 2004. As a result, with effect from 7th May, 2014, an LLP is permitted to undertake financial commitment to / on behalf of a JV / WOS abroad.
Some related issues have also
been discussed by the Court. Some aspects have been ruled on, some
issues have been flagged for further information or debate and some
issues would be considered later for ruling.
The issues raised
relate to certain important measures under the law that help wider
shareholder participation in decision making, viz., postal ballot and
e-voting. Postal ballot has been in place for several years now and the
2013 Act has extended its reach and nature. Further, yet another similar
measure suited to the digital age, e-voting, has been mandated with
even wider scope. Indeed, e-voting is now required with immediate effect
and applies to all matters except a specified few. Before we go
further, let us recapitulate what these two concepts are.
Postal Ballot and e-voting
Postal
ballot was introduced by the Companies (Amendment) Act, 2000 through a
new section 192A. The section, along with Rules made pursuant thereto,
provided for voting by post in respect of specified matters. The Company
would send voting papers to shareholders by post. The ballots received
from shareholders would be reviewed by a scrutineer who would report on
the votes. The law mandated that certain specified matters should be
decided only by postal ballot. Further, the Company could also use, at
its option, the postal ballot method for any other matters except
certain specified matters (e.g., approval of accounts, etc.) that could
be approved only at a shareholders’ meeting. For matters approved by
postal ballot, a further shareholders meeting was not required.
The
2013 Act extended this concept further to e-voting. E-voting is
mandatory for listed companies and other companies having at least one
thousand shareholders. In e-voting, the shareholders can exercise their
votes electronically through internet in the prescribed manner. The
advantage was that, like postal ballot, the shareholder need not attend a
shareholders meeting but instead vote through the internet. However, in case of e-voting, unlike postal ballot, the meeting would still have to take place.
Thus, those who have not voted through e-voting could participate and
cast their votes at the meeting. As the law stands, those who have
already cast their votes through e-voting would not in the normal course
participate again at the meeting. Further, since the law provides that
the e-voting ends 3 days prior to the meeting, e-voting at the meeting
was not possible.
The law requires that all matters, except a
specified few, should require facility of e-voting. Since this provision
has come into force immediately, all forthcoming annual general
meetings in 2014 would have to provide for e-voting. Considering that
the court decision being discussed herein mandates certain changes to
the e-voting procedure, it has important and immediate relevance.
Court decision – context and issues
The
matter before the Court was a scheme of amalgamation. Such schemes
require meetings of shareholders/creditors in a manner as directed by
the Court. The counsel for the amalgamating companies prayed to the
court that the resolutions be allowed to be passed by postal ballot
instead of meetings being called for that purpose. Here, it may be added
that while this article focuses on the provisions of the 2013 Act, the
amended Clause 49 of the Listing Agreement providing for corporate
governance requirements also mandates for e-voting. Thus, this decision
will apply to such requirement too.
The Court examined the
concept of postal ballot, e-voting and related issues. In particular,
the Court examined the very concept and purpose of meetings and whether
postal ballot/e-voting that essentially eliminate or substantially
reduce the requirement of holding meetings went against the spirit of
shareholder democracy and participation. These and related issues were
discussed by the Court.
Whether new rules have come into force?
A
transitional issue raised by the Court was whether the new Rules
relating to e-voting etc. have come into force. The Court noted that
while the Rules were signed by the concerned authority and also posted
on the website, the prescribed and time tested procedure of publishing
them in the official gazette was not, as per the information available
to the Court, carried out. Hence, the question was whether the rules
were indeed in force. Since numerous rules were prescribed at the same
time, this concern applies to all.
However, it appears that the
department has duly released the gazetted notifications. Hence, this
issue raised by the Court ought not to remain a cause of concern for
current validity of the provisions.
Whether postal ballot/e-voting has benefits
The
Court explained the nature and purpose of such methods of voting. It
noted that considering the fact that many meetings were held at far off
places and for other reasons, shareholders could not attend, participate
and vote at such meetings. Thus, postal ballot and e-voting would help
shareholders at least participate in the voting. Hence, these methods
were laudable.
Whether postal ballot/e-voting can substitute shareholders’ meetings?
This
is the fundamental issue that the Court raised. It noted that voting by
such methods eliminated substantially the need of shareholders meetings
and interaction essential for shareholder democracy. Postal ballot
totally eliminated even the requirement of such meetings. E-voting would
result in lower shareholder participation since shareholders who have
already voted would not attend. The Court therefore expressed a view
that, firstly, that holding of shareholders’ meetings was a must. In the
matter before it, it had discretion whether or not to allow voting by
postal ballot that would eliminate the need of a meeting. The Court thus
rejected such request.
The Court observed, :-
“We must remember that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these, to my mind, is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. In other cases, he may hold strong views and may desire to convince others of his convictions. This may be in relation to matters that are not immediately obvious to the shareholder merely on receipt of written information or a notice. The right to persuade and the right to be persuaded are, as I see it, of vital importance. In an effort for greater inclusiveness, these rights cannot be altogether defenestrated. To say, therefore, that no meeting is required and that the shareholder must cast his vote only on the basis of the information that has been send to him by post or email seems to me to be completely contrary to the legislative intent and spirit to the express terms of the SEBI circular and amended Listing Agreement’s Clauses 35B and 49.” (emphasis here, and elsewhere in this article, is supplied)
The Court also noted that apart from merely deciding on whether to vote for and against, a meeting could even modify the agenda, if the discussion led to a conclusion that such changes are necessary.
WHETHER e-VOTING SHOULD BE ALLOWED AT THE MEETING ALSO ?
The Court then considered how to combine the advantage of remote voting such as through postal ballot/e-voting and the benefits of discussions at a meeting. The Court stated that e-voting was a good concept. However, it explained the nature and need of shareholder participation and stated that even those who had already cast their votes through e-voting should be allowed to participate in the meeting since they would be able to explain their views on the matters. Considering that they had already voted, the question of their voting again would not arise. The rest of the shareholders who are present at the meeting should be allowed to vote by e-voting. In view of this, the e-voting would have to be extended till the date of the meeting. Thus, the requirement under law to conclude the e-voting three days prior to the meeting would not hold good.It observed:
“Electronic voting is a method by which the votes cast by a large number of shareholders could be more accurately ascertained. That does not mean that electronic voting cannot be permitted at the meeting itself. A shareholder at a remote location and a shareholder at a meeting will both be required to use the same portal to cast their votes. This necessitates a single integrated electronic system for voting. This is technologically feasible and, indeed, essential. It cannot be that at the meeting that there be no voting or poll, and that electronic votes or postal ballots cast earlier would be determinative. Those who vote by postal ballot or by electronic voting cannot, of course, be permitted to vote again at a meeting. But they also cannot be restrained from attending that meeting. A shareholder may hold strong views. He may vote by postal ballot or electronic means and then attend the meeting to persuade others. Other shareholders may be undecided and may prefer to attend the meeting. Greater inclusiveness demands the provision of greater facilities, not less; and certainly not the apparent giving of one ‘facility’ while taking away a right. There is no reason why members attending a meeting should not be allowed to use a bank of computers to digitally cast their votes just as they might do if they were voting from a remote location.
20. There is also a question about the determination of electronic votes cast. The rules seem to indicate that electronic voting must stop three days before the meeting. The Chairman of the meeting is to be given a tally of the electronic votes cast and the decision on any item of business is supposed to have been passed or not passed only on the basis of these electronic votes. Ex-facie, this is an untenable mechanism. If, as I have said, electronic voting is not limited to voting from a remote location but must also include electronic voting at the meeting in addition to postal ballots received, then it is a sum total of all these votes that must be taken into account.
21. This means that while a meeting must be held, provision must also be made for electronic voting at the meeting by those shareholders who desire it. Every shareholder being given that option of exercising their votes by postal ballot or by electronic voting, the latter being either from a remote location or at the meeting itself.”
Thus, the Court held that in case of e-voting/postal ballot, a meeting must be held and at such meeting, the shareholders who have not voted should be given an opportunity to vote. Further, those who have voted could also be present and participate and persuade others.
WHETHER POSTAL BALLOT WITHOUT MEETINGS SHOULD BE ALLOWED?
The Court questioned the law which said that if a matter is decided by postal ballot, a meeting for considering such matter is not required. The Court felt that this interfered with a fundamental concept of having a meeting of the shareholders to discuss on an issue. It noted that apart from the matters mandatorily required to be decided by postal ballot, except a specified few, all the rest could also be at the option of the company be decided by postal ballot. It stated that this matter required further consideration before an appropriate bench of the Court and concerned parties may be given a hearing to express their views. It observed:
“On a prima facie view that the elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders’ rights, it is strongly recommended that till this issue is fully heard and decided, no authority or any company should insist upon such a postal-ballot-only meeting to the exclusion of an actual meeting. Since this is evidently a matter of some importance, the Company Registrar is directed to make a submission and obtain necessary directions on the administrative side to have the matter placed before an appropriate Bench.”
CONCLUSION
It may be emphasised that the decision arose out of a petition for approval of a Scheme of amalgamation and hence the observations arguably have a limited scope and context. In any case, except for limited matters, the Court has not given final decision. Nevertheless, the decision would need consideration for forthcoming shareholders meetings and e-voting. Further, one would have to note what are the further developments when this matter is finally heard and the larger issue of postal ballot and e-voting is decided.
Governance now comes with an adjective: stable. Non- BJP fronts have collapsed before construction. And when stand-alone Arvind Kejriwal threatens to send journalists to jail, and denies his remarks despite video evidence, then he has lost composure because he is losing support.
Petitioner
filed an application u/s. 6 of the RTI Act before the Administrative
Officer-cum-Assistant State Public Information Officer (respondent no.1)
seeking information to the queries mentioned therein. The said
application was rejected by the PIO. An appeal against the said order
was dismissed by the First Appellate Authority. Second Appeal against
the said order was also dismissed by the Andhra Pradesh State
Information Commission vide order dated 20-11-2007. The petitioner
challenged the said order before the High Court. The Writ Petition had
been dismissed by the High Court on the grounds that the information
sought by the petitioner cannot be asked for under the RT I Act. Thus,
the application was not maintainable. More so, the judicial officers are
protected by the Judicial Officers’ Protection Act, 1850 (hereinafter
called the “Act 1850”). Hence, this petition.
Mr. V. Kanagaraj
learned Senior Counsel appearing for the petitioner has submitted that
right to information is a fundamental right of every citizen. The RT I
Act does not provide for any special protection to udges. The petitioner
has the right to know the reasons as to how Respondent no. 4 (the
Appellate Court) has decided his appeal in a particular manner.
Therefore, the application filed by the petitioner was maintainable.
Rejection of the application by Respondent no. 1 and Appellate
Authorities rendered the petitioner remediless. Petitioner vide
application dated 15-11-2006 had asked as under what circumstances
Respondent no. 4 ignored the written arguments and additional written
arguments, as the ignorance of the same was tantamount to judicial
dishonesty.
It was noted that the petitioner has not challenged
the order passed by Respondent no. 4. Instead, he had filed the
application u/s. 6 of RT I Act to know why and for what reasons
Respondent no. 4 had come to a particular conclusion which was against
the petitioner. The nature of the questions posed in the application
were to the effect why and for what reason Respondent no. 4 omitted to
examine certain documents and why he came to such a conclusion.
The
definition of ‘information’ u/s. 2(f) of the RTI Act shows that an
applicant u/s. 6 of the RT I Act can get any information which is
already in existence and accessible to the public authority under law.
Of course, under the RT I Act an applicant is entitled to get a copy of
the opinions, advices, circulars, orders etc., but he cannot ask for any
information as to why such opinions, advices, circulars, orders etc.
have been passed especially in matters pertaining to judicial decisions.
A judge speaks through his judgments or orders passed by him. If any
party feels aggrieved by the order/judgment passed by a judge, the
remedy available to such a party is either to challenge the same by way
of appeal or by revision or any other legally permissible mode. No
litigant can be allowed to seek information as to why and for what
reasons the judge had come to a particular decision or conclusion. A
judge is not bound to explain later on for what reasons he had come to
such a conclusion.
Moreover, in the instant case, the petitioner
submitted his application u/s. 6 of the RT I Act before the
Administrative Officer-cum-Assistant State Public Information Officer
seeking information in respect of the questions raised in his
application. However, the Public Information officer is not suppose to
have any material which is not before him; or any information he could
have obtained under the law. Under section 6 of RT I Act, an applicant
is entitled to get only such information which can be accessed by the
“public authority” under any other law for the time being in force. The
answers sought by the petitioner in the application could not have been
with the public authority nor could he have had access to this
information and Respondent no. 4 was not obliged to give any reasons as
to why he had taken such a decision in the matter which was before him. A
judge cannot be expected to give reasons other than those that have
been enumerated in the judgment or order. The application filed by the
petitioner before public authority is per se illegal and unwarranted. A
judicial officer is entitled to get protection and the object of the
same is not to protect malicious or corrupt judges, but to protect the
public from the dangers to which the administration of justice would be
exposed if the concerned judicial officers were subject to inquiry as to
malice, or to litigation with those whom their decisions might offend.
If anything is done contrary to this, it would certainly affect the
independence of the judiciary. A judge should be free to make
independent decisions.
The Supreme Court held that as the
petitioner has misused the provisions of the RT I Act, the High Court
had rightly dismissed the writ petition.
[Khanapuram Gandaiah vs. Administrative Officer & Ors: SLP (civil) No. 34868 of 2009.]
Section 8 (1) (j)
Vide RT I dated 17-05-2012 the appellant had sought information on 7 points.
PIO vide letter dated 12-06-2012 denied information stating that the same is exempt u/s. 8 (1) (e) (g) and (j) of the RT I Act.
First
Appellate Authority (FAA) vide order dated 06- 08-2012 provided Place
of birth as per service records sought at query no. 4 and other details
as sought at query no 5 and 6.
Remaining information was denied stating that the same is personal information and exempted u/s. 8 (1) (j) of the RT I Act.
Aggrieved
with the decision of FAA, the appellant filed second appeal to Central
Information Commission on 21-08-2012 citing that Shri Ajit Kumar has
submitted fake caste certificate for seeking appointment.
CIC
vide order dated 27-12-2012 dismissed the appeal stating that personal
Information can be disclosed only in the larger public interest and
appellant has not established any such interest.
The appellant
filed Writ Petition No. W P 080 of 2013 in the High Court of Calcutta
(Circuit Bench at Port Blair). The Honorable High Court remitted the
matter to CIC with directions to decide the appeal afresh.
To
decide the matter under the application, the Chief Information
Commissioner constituted a 3 member bench of following Commissioners A)
Shri Rajiv Mathur B) Shri Basant Seth C ) Smt Manjula Prasher.
The
appellant submitted that Shri Ajit Kumar (third party) has obtained
appointment under reserve category by submitting false caste
certificate. On being asked by the Commission as to the evidence he has
to prove the same, he replied that he has information from official
sources.
Shri Ajit Kumar, the third party, submitted that he is
recruited under general category and had not submitted any caste
certificate to his employer. He also submitted that the appellant had
been harassing him and none of his personal information should not be
provided to him.
The CPIO submitted that Shri Ajit Kumar is
appointed under general category and no caste certificate has been
submitted by him. A notice was sent to Shri R. Ajit Kumar under
provisions of section 11(1) of RT I Act. In his response he objected to
furnishing any personal information related to him and also stated that
there is threat to him. PIO also stated that the appellant is habitual
information seeker and filed RTIs against many employees and
blackmailing them.
Ms. Tamali Biswas, advocate on behalf of
public authority, stated that the fact of employment of Shri R. Ajit
Kumar under unreserved category and non-availability of caste
certificate was brought to the notice of Hon’ble High Court also.
The appellant has submitted that decision may be taken on the basis of documents/records and justice be delivered in true spirit as per orders of the Hon’ble High Court of Calcutta (Circuit Bench At Port Blair).
Shri R. Ajit Kumar submitted that his appointment was under Unreserved Category and the appellant is seeking information to harass him .The appellant has a criminal background and is involved in a forgery case and the issue is sub judice. He has requested that his personal information should not be provided to the appellant.
The public authority has submitted that the appellant is a retired employee of their yard and was involved in two criminal cases for forgery. He is misusing the RTI Act against NSRY and its employees. Shri Ajit Kumar was appointed under Unreserved Category and copy of recruitment letter is enclosed with the submissions. A notice was sent to third party by them who responded stating that it is an unwarranted invasion of privacy and perpetuation of biased campaign of maligning his professional image as well as disturbing the personal peace and also seems to be an act of personal vendetta.
DECISION
• “The Commission observes that Shri R. Ajit Kumar has been appointed under unreserved category, hence the plea of getting employment by submitting forged caste certificate does not have any merit and the contention that disclosure sought is in public interest fails”.
• “In Stroud’s Judicial Dictionary, Volume 4 (IV Edition),‘Public Interest’ is defined as: “ a matter of public or general interest does not mean that which is interesting as gratifying curiosity or love of information or amusement but that in which a class of community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected.”
• “The appellant has made mere conjectures and surmises and not able to give any cogent and sound evidence to prove the element of ‘Public Interest.’
• Commission quoted the Hon’ble Supreme Court in its decision dated 13-12-2012 in the case of Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi & Anr:
23. The expression ‘public interest’ has to be understood in its true connotation so as to give complete meaning to the relevant provisions of the Act.
The expression ‘public interest’ must be viewed in its strict sense with all its exceptions so as to justify denial of a statutory exemption in terms of the Act. In its common parlance, the expression ‘public interest’, like ‘public purpose’, is not capable of any precise definition. It does not have a rigid meaning, is elastic and takes its colour from the statute in which it occurs, the concept varying with time and state of society and its needs. [State of Bihar vs. Kameshwar Singh (AIR 1952 SC 252)]. It also means the general welfare of the public that warrants recommendation and protection; something in which the public as a whole has a stake [Black’s Law Dictionary (Eighth Edition)].
24. The satisfaction has to be arrived at by the authorities objectively and the consequences of such disclosure have to be weighed with regard to circumstances of a given case. The decision has to be based on objective satisfaction recorded for ensuring that larger public interest outweighs unwarranted invasion of privacy or other factors stated in the provision.
Certain matters, particularly in relation to appointment, are required to be dealt with great confidentiality. The information may come to knowledge of the authority as a result of disclosure by others who give that information in confidence and with complete faith, integrity and fidelity. Secrecy of such information shall be maintained, thus, bringing it within the ambit of fiduciary capacity. Similarly, there may be cases where the disclosure has no relation- ship to any public activity or interest or it may even cause unwarranted invasion of privacy of the individual. All these protections have to be given their due implementation as they spring from statutory exemptions. It is not a decision simpliciter between private interest and public interest. It is a matter where a constitutional protection is available to a person with regard to the right to privacy. Thus, the public interest has to be construed while keeping in mind the balance factor between right to privacy and right to information with the purpose sought to be achieved and the purpose that would be served in the larger public interest, particularly when both these rights emerge from the constitutional values under the Constitution of India.”
• The Hon’ble High Court of Delhi in its judgement dated 05-02-2014 (Shail Sahni vs. Sanjeev Kumar & Others ) have observed:
“… This Court is also of the view that misuse of the RTI Act has to be appropriately dealt with, otherwise the public would lose faith and confidence in this “Sunshine Act”. A beneficial Statute, when made a tool for mischief and abuse must be checked in accordance with law…”
• Keeping in view above, the Commission held that the information sought by the appellant is personal information of Shri R Ajit Kumar and protected from disclosure U/S 8 (1) (j) of RTI Act as no larger public interest is established.
[Ch. Rama Krishna Rao vs. Naval Ship Yard, Port Blair, (Third Party: Shri R. Ajit Kumar) Decided by the full bench on 05-05-2014. File No. CIC/LS/A/2012/002430/RM.]
Introduction
Trade is often said to be one of key drivers of an economy. The importance of trade can be gauged from the fact that the western world was constantly asking India to open its doors to foreign investment in retail trading. When trade is such a vital constituent of a country’s economy it is essential that we understand the laws governing trade. The sale of goods in India is governed by the Sale of Goods Act, 1930 (“the Act”). While the Transfer of Property Act, 1882 applies to the transfer of immovable property, the Sale of Goods Act applies to the sale of certain movable property, being goods. This Act was earlier a part of the Indian Contract Act, 1872. However, in 1930 it was felt that there is a need for a separate dedicated legislation and hence, a separate Act was carved out. Let us examine some of the key facets of this Act.
Goods
The pivot of the Act is the definition of the term “goods”. If a particular property cannot be termed as goods then the Act does not apply to the same. This definition is also relevant since certain other Acts also refer to this definition, since what constitutes goods is often relevant for several issues.
Goods are defined under the Act to mean every kind of movable property. It includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. However, actionable claims and money are not goods. Thus, the definition is very wide to include all types of movable property other than what is expressly excluded. According to the General Clauses Act, 1897, things attached to or forming part of the land are treated as immovable property. However, the Sale of Goods Act states if they have been agreed to be severed before or under the Contract of sale, then they become goods. Since the definition revolves around movable property it also becomes essential to understand what constitutes movable and what is immovable property. Sale of immovable property is governed by the Transfer of Property Act, 1882 and this Act applies to the sale of movable property.
The following three landmark decisions of the Supreme Court dealing with what is immovable property are very relevant:
(A) T he Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.
(B) Further, the decision of the Supreme Court in the case of Duncan’s Industries Limited vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished the Sirpur’s case and held that whether a machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent ? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertilizer plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. It was held that it could be said that the plant and machinery could have been transferred by delivery of possession on any date prior to the date of conveyance of the title to the land.
(C) In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Court held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.
The Central Board of Excise and Customs has, under the Central Excise Act 1944, after considering several Supreme Court decisions (including those mentioned above), clarified that:
(A) if items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.
(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.
In the context of sales tax, the Supreme Court in the case of Tata Consultancy Services Ltd vs. State of AP (2005) 1 SCC 308, has held that software, even though intangible, is goods.
Shares and stock are expressly included in the definition of goods. The Companies Act also states that shares in a company shall be movable property. However, a debenture does not constitute movable property as held by the Supreme Court in the case of RD Goyal vs. Reliance Industries Ltd, (2003) 1 SCC 81.
Actionable claims are governed by section 130 of the Transfer of Property Act and are hence, outside the purview of this Act.
The goods may be existing or future goods which would come into the seller’s possession. If however, the goods are specific, i.e., are identified when the agreement is made and they perish thereafter, the agreement becomes void. However, they must perish due to no fault of the seller or buyer.
Sale
The next vital cog in the wheel is the definition of “sale”. Section 4 of the Act defines a contract of sale of goods as:
(a) A contract. Thus, all the elements of a valid contract as laid down in the Indian Contract Act, 1872 must be fulfilled.
(b) In which there is a seller, i.e., a person who sells or agrees to sell goods;
(b) H e transfers or agrees to transfer property in goods;
(c) The transfer is to a buyer, i.e., a person who sells or agrees to buy goods; and
(d) The transfer is for a price.
Thus, the pre-requisite of a sale is the transfer of movable property being goods. This view has also been expressed in State of Madras vs. Gannon Dunkerley & Co., (1959) SCR 379 – “sale of goods …. is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.” Halsbury defines a sale as “the transfer by mutual consent of the ownership of a thing from one person to another for a money price.”
The contract may be absolute or conditional. If property in goods is transferred from seller to buyer, then such a contract becomes a sale. However, if property is transferred in future or is conditional, then such a contract is termed as an agreement to sell. Eventually, when the conditions are fulfilled or the time period elapses, an agreement to sell becomes a sale. The principles of a sale have been succinctly summed up by the Apex Court in the case of State of Tamil Nadu vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648 as follows:
“…in order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title to the goods and that such agreement should be supported by money consideration and as a result of the transactions the goods. article or the property must actually pass to the purchaser. It is settled law that the expression “sale” under the Sales Tax Act has to be understood with reference to the definition of “sale of goods” under the Sale of Goods Act. But if the title of the goods passes without any contract between the parties, express or implied, there is no sale. Similarly if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not a sale in the strict sense of the law..”
The most vital part of the definition is that the title of goods must pass from the seller to the buyer.
PRICE
A sale of goods under the Act is always for a price, i.e., for a money consideration. A price is an essential element of a contract of sale of goods. If there is no price there is no contract. This is also an essential ingredient under the Contract Law. Hence, a sale of goods as understood under the Act cannot be for a barter or for any non- monetary consideration. Such a transaction would be an exchange and not a sale. This is a very important fundamental distinction which is relevant even for several fiscal statutes. The Transfer of Property Act defines an exchange on the other hand, to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act, CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC); CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC); CIT vs. B. M. Kharwar 72 ITR 603 (SC). Recently, the Bombay High Court in Bharat Bijlee Ltd. [TS-270-HC-2014(BOM)], distinguished a slump exchange from a slump sale and held that a slump exchange does not entail capital gains tax.
The price may be either fixed by the contract or left to the negotiation of the parties or may be fixed as agreed upon. However, in the absence of the above, the buyer must pay a reasonable price. What is a reasonable price depends upon the facts of each case. In some cases, the price determination is to be decided by the valuation of a third party. If such third party cannot fix the value, then agreement is avoided.
TRANSFER OF PROPERTY IN GOODS
When the property in the goods is transferred from the seller to the buyer is the most important effect of a contract for sale of goods.
Unascertained Goods: If the goods are unascertained, then property passes only when they are ascertained. E.g., the seller agrees to sell 50 kgs. of rice but at that time he has 250 kgs. in his warehouse. No property passes to buyer until the seller identifies and appropriates 50 kgs. of rice towards this agreement. Thus, there must be a clear-cut identification as to which goods out of the generic mass are towards satisfaction of the contract.
Where there is a contract for the sale of unascertained / future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract the property in the goods passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made. Thus, an appropriation must be made by the seller or the buyer and only then would the property in such unascertained goods pass to the buyer. Further, the appropriation of unascertained goods must be unconditional. Till property passes there is no sale.
E.g., in Emperor vs. Kuverji Kavasji, 1941 43 BLR 95, a merchant agreed to sell 20 litres of liquor out of a cask containing 100 litres. It was held that until the 20 litres are separated or bottled, the property does not pass to the buyer.
The Supreme Court in the cases of New India Sugar Mills Ltd vs. CST, 1963 AIR 1207, CST vs. Husenali Adamji & Co., 1959 AIR 887, M/s. Carona Sahu Ltd vs. State, 1966 AIR SC 1153 has held that in case of sale of unascertained goods, no property is transferred to the buyer unless and until the goods are ascertained and there is unconditional appropriation of the goods in a deliverable state.
Ascertained Goods: However, if they are ascertained / specific, then property passes in accordance with the contract, i.e., when the parties want it to pass. In this respect, section 2(2) of the Act is also relevant. It defines the term delivery to mean a “voluntary transfer of possession from one person to another”. Thus, delivery of goods is one of the ways in which possession can be transferred.
Section 30 of the Act provides that a seller need not have actual physical possession of the goods sold. It is enough that he has control over the goods by making over a document of title to the goods. Possession of documents of title enable the holder of document to transfer the goods. Section 30 does not require the seller to be in actual physical possession of goods – Pramatha Nath Talukdar vs. Maharaja P M Tagore, AIR 1966 Cal 405. This view has also been laid down in Halsbury’s Laws of England, 3rd Edition Vol. 34 @ p.84 and in the English case of Nicholson vs. Harper, (1895) 2 Ch. D. 415. Unless a different intention arises from the contract, the following three rules have been laid down under the Act to determine the intention of the parties as to when the property passes to the buyer:
(a) When contract is for sale of specific goods in a deliverable state, property passes to buyer when contract is made, irrespective of whether time of payment or delivery is postponed.
(b) However, when under a contract for specific goods and the seller has to do something to the goods for putting them in a deliverable state, then property passes only when such thing is done and the buyer is given notice of the same. E.g., a 2nd hand car dealer agrees to sell a car but it needs certain repairs before it can run properly. Property passes only once the repairs are done and the buyer is intimated about the same.
(c) When contract is for sale of specific goods in a deliverable state but seller has to weigh, measure, test or do some act for ascertaining the price, the property passes to buyer when such act is done and buyer is given notice of the same. E.g., a seller sells cotton at a price per ton. To ascertain the price, he needs to weigh the cotton. Till such act is done, property does not pass.
It is essential to determine when property passes because if there is any damage or loss to the goods then the same would be borne by the seller in cases where property has not yet passed to the buyer. The Act provides that unless the contract provides otherwise, the goods remain at the seller’s risk till property passes to the buyer. However, where the property has passed risk passes to the buyer even if the delivery has not yet been made. E.g., a seller sells a certain vase to a buyer but both payment and delivery are postponed till the next day. Before delivery can be effected, the vase breaks due to mishandling. The loss is to the buyer’s account since property of specific goods in a deliverable state under an unconditional contract passes immediately even if delivery is postponed. But when delivery is delayed due to the fault of any one party, the risk of loss is to his account.
NEMO DAT QUAD NON HABET
‘No one can give a better title than what he himself has’ is the meaning of the above Latin maxim. Thus, a sale by a person who is not the legal owner of the goods does not give any title to the buyer. The actual owner can recover possession of the goods from the buyer without compensating him. However, if the seller has authority of the owner; he is an authorised mercantile agent (e.g., broker, factor); he is a joint owner, etc., then he can give a good title to the buyer. Whether the buyer can raise a plea of being a bona fide purchaser without notice is a matter which depends upon the facts of each case – Sumitra Debi Jalan vs. Satya Narayan Prahladka, AIR 1965 Cal 355.
CONDITIONS AND WARRANTIES
A contract of sale may come with conditions and warranties as to the quality, fitness, title, etc. of the goods. A condition is a stipulation essential to the main purpose of the contract. If breached, the contract may be repudiated. A warranty on the other hand is collateral to the main purpose and a breach of the same gives rise to a claim for damages but not a right to repudiate the contract. Thus, sale of soft drinks with pesticides is a breach of a condition, i.e., it is fit for human consumption. However, sale of soft drinks in glass bottles instead of plastic bottles, as contracted, is a breach of a warranty. The former entitles the buyer to cancel the contract while under the latter the buyer can sue for damages. It may not be always a cut and dried situation as to whether a stipulation is a condition or a warranty and the determination of the same depends upon the contract as a whole. Even a Share Purchase Agreement (SPA) carries conditions and warranties from the seller as to the shares. Breach of material conditions can lead to cancellation of the SPA.
CAVEAT EMPTOR; QUI IGNORARE NON DEBUIT QUOD JUS ALIENUM EMIT
Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another – buyer beware of what you buy for the seller has no obligation to caution you is the meaning of this maxim. Section16 of the Act lays down that subject to this Act and any other law in force, there is no implied condition or warranty as to the fitness or quality of the goods sold by a seller. This is a statutory recognition of the above maxim. The Supreme Court in Commissioner of Customs (Preventive) vs. M/s. Aafloat Textiles (I) P. Ltd. has explained the maxim as follows:
“….Caveat emptor means “Let the purchaser beware.” It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence.
21. “Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.” (See Wallis vs. Russell (1902) 21 R 585, 615).
22. “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication he represents such defects not to exist.” (See William R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d. Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.
23. Caveat emptor, qui ignorare non debuit quod jus alienum emit. A maxim meaning “Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another. Hob. 99; Broom; Co., Litl. 102 a: 3 Taunt. 439.
24. As the maxim applies, with certain specific restrictions, not only to the quality of, but also to the title to, land which is sold, the purchaser is generally bound to view the land and to enquire after and inspect the title- deeds; at his peril if he does not.
25. Upon a sale of goods the general rule with regard to their nature or quality is caveat emptor, so that in the absence of fraud, the buyer has no remedy against the seller for any defect in the goods not covered by some condition or warranty, expressed or implied. It is beyond all doubt that, by the general rules of law there is no warranty of quality arising from the bare contract of sale of goods, and that where there has been no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in the goods, unless there are circumstances beyond the mere fact of sale from which a warranty may be implied. (Bottomley vs. Bannister, [1932] 1 KB 458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers) 14
26. No one ought in ignorance to buy that which is the right of another. The buyer according to the maxim has to be cautious, as the risk is his and not that of the seller.
27. Whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he made enquiry and took requisite precautions to find out about the genuineness of the SIL* which he was purchasing. If he has not done that consequences have to follow.”
* SIL = Special Import Licence
However, the Law also provides for the following statutory exceptions to this Rule:
(a) Where the buyer makes known to the seller that he requires goods for a particular purpose, then goods must meet such purpose. In Eternit Everest Ltd. vs. Abraham, AIR 2003 Ker 273, it was held that corrugated asbestos sheets are mainly used for roofing of buildings for protecting the building from sun and rain and it is not being used for a variety of purposes. The leakproof of the asbestos sheet is the essential quality of the sheets and only if it is leakproof, it can be said to be fit for the purpose for which it is purchased.
(b) Where goods are bought by description from a seller who deals in goods of that description, then there is an implied condition as to the merchantable quality of the goods. In Agha Mirza Nasarali Khoyee & Co. vs. Gordon Woodroffe & Co., AIR 1937 Mad 40 it was held that goods are treated as being of merchantable quality if they are of such quality that any defects which a buyer of ordinary diligence and experience would have detected by due diligence in the use of all ordinary and usual means (what is due diligence, depending upon the circumstances).
(c) An implied warranty or condition as to quality or fitness for a purpose may be annexed by the usage of trade.
CONCLUSION
This is a very important mercantile Law which is relevant for commercial matters. It is essential for businesses to keep in mind the provisions of this Act while entering into contracts for sale and purchase of goods.
In 1900, Baikuntha Nath Dutta had founded a “thakurbari.” He installed this deity and started worship. By his will dated 30-07-1916 various properties of the testator were dedicated to the above deity. Shebaits were appointed. Clause 5 of the Will dealt with the devolution of Shebaitship.
Many years had passed since the making of this dedication. The main question that was posed before the court was whether the stipulation in the Will and in the Codicil that Shebaitship would vest only in sons of the Shebaits was valid or not.
The issue in this case was in regard to the rule against perpetuity. The rule applied equally to transfer of property inter vivos as it did to transmission of property by succession. In this case those rules regarding transmission of property by succession were relevant. The owner of a property, while bequeathing it, could not postpone the vesting of the absolute legal and beneficial ownership thereof indefinitely. He could not fetter the powers of alienation, indefinitely.
Hence, if A is disposing of his property by Will or by creation of a trust, he cannot hold up its absolute vesting in some other person, for an uncertain period. Neither can he tie this person’s hands regarding alienation for an uncertain time.
If there was any further postponing of absolute legal and beneficial ownership of the property, the bequest or settlement was void as it violated the rule against perpetuity. The law against perpetuity did not favour, as observed earlier, tying up of property without its vesting, for an indefinite period of time.
The Indian Succession Act, 1925, section 114 enacts as follows:
“114. Rule against perpetuity. – No bequest is valid whereby the vesting of the thing bequeathed may be delayed beyond the life-time of one or more persons living at the testator’s death and the minority of some person who shall be in existence at the expiration of that period, and to whom, if he attains full age, the thing bequeathed is to belong.”
Hence, the Clause in the will devolving Shebaitship only on grandson and on death of grand sons to their sons violates the rule against perpetuity.
Triveni Engineering & Industries Ltd vs. The State of Karnataka & Ors AIR 2014 Karnataka 75
The doctrines of per incuriam and sub silentio operate as exceptions to the rule of precedent. Incuriam literally means carelessness. In practice, per incuriam means per ignorantium. Doctrines of per incuriam and sub silentio have been taken recourse to by the courts for relieving from injustice perpetrated by unjust precedents. A decision which is not express and is not founded on reasons or consideration of the issue, could not be deemed to be a law declared having binding effect as is contemplated under Article 141 of the Constitution.
The doctrine of per incuriam has no application in a case to ignore the principle laid down after analysing the relevant provisions of law by a co-ordinate bench. The doctrine of per incuriam is resorted to when decisions are rendered without reference to statutory prescriptions or other binding authorities.
While hearing on SLP against an order passed by the High Court in context of a complaint filed u/s. 138 of the Negotiable Instrument Act, 1881 the court was required to consider the meaning of term ‘months’.
Proviso (a) to section 138 provides that the cheque should be presented within six months from the date on which it is drawn. Word month has been defined u/s. 3(35) of General Clauses Act to mean a month reckoned as per British calendar. Period of six months cannot therefore be calculated on 30 days basis.
As regards computation of six months period section 9 of General Clauses Act has to be pressed in service proviso (a) to section 138 of the Act uses the expression “Six months from the date on which it is drawn.” Once the word “from” is used for the purpose of commencement of time, in view of section 9 of the General Clauses Act, the day on which the cheque is drawn has to be excluded and the last day within which such act needs to be done is to be included. In other words, six months period stipulated in section 138 would expire on day prior to the date in the corresponding month and in case no such day falls, the last day of the immediate previous month. For calculating period of six months for cheque drawn on 31-12-2005 the first day, i.e., 31-12-2005 has to be excluded and the period of six months will be reckoned from the next day i.e. from 01-01-2006; meaning thereby that according to the British calendar, the period of six months will expire at the end of the 30th day of June, 2006.
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
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.
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.
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.
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.
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!
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.
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.
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.
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.
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.
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: –
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.
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.
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]
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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!
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 |
clause 49 of |
Accounting Party disclosures |
|
Every |
Details |
Accounting |
|
The Explanatory Statement to the Notice |
The |
The |
|
A |
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!!
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.
DIPP time schedule
DIPP has put the following Time schedule for processing proposals under NRI/EOU/RT schemes
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.
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.
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.
The pricing guidelines (existing & revised) are as under: –
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.
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.
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.
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.
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.
