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Category: Corporate And Other Laws

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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IS PRIVACY SACRED?

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

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

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

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

There are many others who believe in individual privacy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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“Fraud” Implications under Companies Act 2013

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

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

“Explanation.- For the purposes of this section-

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fraud is not an offence under the law of crimes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Overseas Foreign Currency Borrowings by Authorised Dealer Banks

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

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

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

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

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 30th June, 2014: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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

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Rupee Drawing Arrangement – ‘Direct to Account’ Facility

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

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

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Foreign investment in India in Government Securities

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

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

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

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Foreign investment in India in Government Securities

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

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

The revised position is as under: –

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

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

 

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

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

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

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Merchanting Trade Transactions – Revised guidelines

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

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

The highlights of the said guidelines are as under: –

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Risk Management and Inter Bank Dealings

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

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

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

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External Commercial Borrowings (ECB) for Civil Aviation Sector

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Introduction:

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

(a) payments of salaries

(b) payment to non-residents ; and

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

The unfairness:

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

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

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

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

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

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

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

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

Suggestion:

Similar exceptions should be provided in aforesaid sections as well.

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

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

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

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

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

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

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

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

Facts of the case

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

FCRA 1976 vs. FCRA 2010

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

What is “foreign contributions”?

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

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

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

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

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

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

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

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

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

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

Decision of court

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

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

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

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

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

FCRA 2010

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

Companies in which specified foreign persons hold more than  50%

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

Contribution through Electoral Trusts

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

Responsibility of the contributing Company

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

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

Sexual Harassment Act-II

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Synopsis

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

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

Internal Complaints Committee

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

The constitution of the ICC should be as follows:

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

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

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

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

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

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

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

Local Complaints Committee

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

Complaint by Aggrieved Woman

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

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

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

Inquiry Process

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

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

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

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

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

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

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

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

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

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

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

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

Annual Report by ICC

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

(a)    Number of complaints received in that year

(b)    Number of complaints disposed off during that
year

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

(d)    Number of workshops/awareness programmes
organised

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

Duties of Employer

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

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

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

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

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

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

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

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

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

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

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

Penalty on Employer

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

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

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

(c)    Contravenes any provisions of the Act.

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

Dwelling Place / House

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

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

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

False Complaints

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

Conclusion

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

PART D: GOOD GOVERNANCE

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

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

Quote From Arindam Chaudhari:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Corporate Social Responsibility – Companies Act, 2013:

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

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

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

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

• Effective date

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

• Applicability

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

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

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

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

B – For a Foreign company

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

Issues which may have to be clarified by MCA

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

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

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

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

• CSR Contribution

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

Issue which may have to be clarified by MCA

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

• Schedule VII of the Companies Act, 2013

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

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

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

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

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

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

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

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

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

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

10. Rural development projects.

• CSR Committee and the Board of Directors

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

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

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

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

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

•    Other key points as per the CSR Rules

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

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

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

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

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

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

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

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

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

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

•    Substantial changes compared to draft rules:

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

(i)    removal of 3 year block period concept,

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

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

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

(v)    restricting the health care initiative to prevention

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

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

•    Conclusion

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

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

ACCEPTANCE OF DEPOSITS BY COMPANIES

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1. Companies Act, 2013

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

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

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

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

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

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

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

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

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

(vi) Intercorporate Deposits;

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

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

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

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

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

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

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

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

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

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

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

5. Prohibition on Acceptance of Deposits from Public

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(i)    Section 74(1) provides that in the case of any deposit accepted by a company before 01-04-2014, if the amount of such deposit or part thereof or any interest due thereon remains unpaid on the above date or becomes due at any time thereafter the company shall

(a)    file, within a period of 3 months from 01- 04-2014 or from the date on which such pay- ments are due, with the ROC a statement of all the deposits accepted by the company and sums remaining unpaid on the above date with the interest payable thereon alongwith the arrangement made for such repayment in form DPT-4, pursuant to Rule 20 of the Rules.

(b)    repay within 1 year i.e., by 31-03-2015 or from the date on which such repayments are due, whichever is earlier.

8.    Manner and extent of deposit insurance:

As stated above, Rule 5(1) provides that every com- pany  referred  to  in  Para  5  and  6  above  shall  enter into  a  contract  for  providing  deposit  insurance  at least  thirty  days  before  the  issue  of  circular  or  advertisement or   at least thirty days before the date of renewal, as the case may be. Further, it clarifies that  amount  as  specified  in  the  deposit  insurance contract  shall  be  deemed  to  be  amount  in  respect of both principal amount and interest due thereon.

Rule  5(2)  provides  that  the  deposit  insurance  contract shall specifically  provide that in case the company defaults  in repayment of  principal amount  and interest thereon,   the depositor shall be entitled to the repayment of principal amount of deposits and interest thereon by the insurer upto the aggregate monetary  ceiling  as  specified  in  the  contract.  In case of   any deposit and interest not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of   the full amount of the deposit and in case  of any deposit and interest thereon in excess of  Rs.  20,000,  the  deposit  insurance  contract  shall provide  for payment of an amount not less than Rs. 20,000  for  each  depositor.  Rule  5(3)  provides  that the insurance premium for such deposit insurance shall be paid by the company.

9.    Limit & Terms and  Conditions of acceptance of deposits by companies:

Rule 3 of the Rules provides for limits and other terms of deposits as under:

(i)    No company referred to in section 73(2) and eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit:

However, that company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal subject to the conditions that-

(a)    such deposit shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and

(b)    such deposits are repayable not earlier than  3 months from the date of such deposits or renewal thereof.

(ii)    No company referred to in section 73(2) shall accept or  renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid up share capital and free reserves of the company. For this purpose paid up share capital shall include preference share capital also.

(iii)    No eligible company shall accept or renew-

(a)    any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital  and free reserves  of the company;

(b)    In the case of deposits from others, if the amount of such deposit together with the amount  of  such  other  deposits,   other  than the  deposit referred to Clause (a),  outstanding  on  the  date  of  acceptance   or  renewal exceed 25% of aggregate  of the paid-up share capital and  free  reserves  of  the  company.

(c)    In other words, an eligible company can accept deposits upto 35% of paid up share capital (including preference share capital) and free reserves subject to the sub-limit of 10% from members.

(iv)    No Government company eligible to accept deposit u/s. 76 shall accept or renew any deposit if the amount of such deposit together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid-up share capital and free reserves of the company.

(v)    No company referred to in section 73(2) or any eligible company shall invite or accept or renew any deposit in any form carrying a rate of interest or pay brokerage thereon at the rate exceeding the maximum rate of interest or brokerage as prescribed by RBI for acceptance of deposits by NBFC.

For this purpose, it is provided that the person who is  authorised,  in  writing,  by  a   company  to  solicit deposits on its behalf and through whom deposits are  procured  shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of this rule. It may be noted that Para 4 (7) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, that no NBFC shall pay more than 12.5%P.A. interest on public deposits.  Similarly,  Para 4(8) provides that the rate of Brokerage/Commission to brokers shall not exceed 2% of the deposit collected. Brokers  can  be  paid  actual  expenses  incurred  for this purpose but the same shall not exceed 0.5% of the  deposit so collected.

(vi)    The company shall not reserve to itself either directly or indirectly right to alter, to prejudice or disadvantage of the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted.

(vii)    Deposits may be accepted in joint names, not exceeding 3, with or without any of the Clauses viz.“jointly”  “Either or Survivor” “Anyone or Survivor”.

10.    Application mandatory

As per Rule 10 of the Rules , no company shall accept, or renew any deposit, whether  secured or unsecured, unless an application, in such form   as specified by the company, is submitted by the intending depositor for the acceptance of such deposit. The form of application referred to above shall contain a declaration by the intending de- positor to the effect that the deposit is not being made out of any money borrowed by him from any other person.

11.    Furnishing of deposit receipts to depositors:

Rule  12  of  the  Rules  mandate  that  every  company shall,  on  the  acceptance  or  renewal  of  a  deposit, furnish  to  the  depositor  or  his  agent,  a  receipt for the amount received by the company, within a period of 21   days from the date of receipt of money or  realisation of  cheque or  date of  renewal.

The receipt referred to above shall be signed by  an officer of the company duly authorised by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

12.    Maintenance of liquid assets and creation of deposit repayment reserve account:

As per Rule 13 of the Rules, every company referred to in section 73(2) and every eligible company shall, on  or  before  30th  April  of  each  year,  deposit  the sum  not  less  than  15%  as  specified  in  Para  5  (ii)  (c) above  with  any  scheduled  bank  and  the  amount so deposited shall not   be utilised for any purpose other  than   for  the  repayment of  deposits:

Further, it also mandates that the amount remaining deposited  shall  not  at  any  time  fall  below  15  %   of the  amount  of  deposits  maturing,  until  the  end  of the current financial year and the next financial year.

13.    Registers of deposits:

As per Rule 14 of the Rules, every company accepting deposits shall maintain at its registered office one or more separate registers for deposits accepted  or renewed, in which there shall be entered separately in the case of each depositor the particulars as listed in Rule 14.

The entries specified in this Rule shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorised by the Board for this purpose. The register referred to above shall be preserved in good order for a period of not less than eight years from the financial year in which the latest entry is made in the register.

14.    Premature repayment of deposits:

(i)    Rule 15 of the Rules provides that, if a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1 % from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced:

(ii)    However, nothing contained in this rule shall apply to the repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of (a) complying with the provisions of Rule 3; or (b) providing  war risk  or other related benefits to the personnel of the naval, military or air forces or to their families, on  an application made by the associations or societies formed by such personnel, during the period of emergency declared under Article 352 of the Constitution:

(iii)    If a company referred to in section 73(2) or any eligible company permits a depositor to renew his deposit, before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.

(iv)    Further, the Rule provides, where the period for which the   deposit had run contains any part   of a year then, if such part is less than 6 months,     it shall be excluded and if such part is 6 months or more, it shall be reckoned as 1 year.

15.    Return of deposits to be filed with the Registrar:

Rule 16 of the Rules requires that the company shall on or before 30th June, every year, file with the ROC a return in Form DPT-3 along with the prescribed fee and furnish the information contained therein as on 31st March, of that year duly audited by the auditor of the company.

16.    Penal rate of interest:

Rule 17 of the Rules provides that every company shall pay a penal rate of interest of 18 % per annum for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

17.    Penalty of Default

Sections 74(2), 74(3) and 75 of the Act, which have not yet been brought into force, provide as under.

(i)    If the company fail to repay any existing deposit or interest due to depositors within the time allowed u/s. 74, the following penalties can be levied.

(a)    The company shall be punishable with minimum fine of Rs. 1 crore which may be extend to Rs. 10 crore. This will be over and above the amount of Deposit and interest in respect which default is made for repayment.

(b)    Every defaulting Officer shall be punishable with imprisonment which may extent to 7 years or with minimum fine of Rs. 25 lakh which may extend to Rs. 2 Crore or with both.

(ii)    It may be noted that in both the above cases, the amount of minimum fine has no relationship with the amount in respect of which the  default  in repayment of deposit or interest is made. It may so happen that the default may be in respect of deposit of Rs. 25 lakh, against which minimum fine payable by the company is Rs. 1 crore. To this extent, the above provision is very harsh.

(iii)    If it is found that there is default in repayment of outstanding Deposit or  interest u/s. 74  and it  is proved that such Deposit was accepted by the Company with intent to defraud the depositors or that the same was accepted for fraudulent purpose, every defaulting officer shall be personally responsible for any loss or damage that is incurred by the depositor. It may be noted that this penal action is without prejudice to the penalty leviable u/s. 74(3) as stated in (i) above. Further, the defaulting Officer will also be punishable u/s. 447 which provides for the following penalties.

(a)    Imprisonment for minimum period of 6 months which may extend to 10 years.

(b)    If the fraud involves Public interest, the mini- mum imprisonment can be for 3 years.

(c)    Minimum fine will be of amount involved in the fraud which may extend to 3 times the amount involved in the fraud.

(iv)    Rule 21 of the Rules provides that if any com- pany referred to in section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 25,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 500 for every day after the first day during which the contravention continues.

18.    To Sum Up:

The above provisions for acceptance of deposits by Companies are very stringent as compared to the provisions under the Old Act. Considering these requirements, it will be difficult for some companies to comply with these provisions and will have to find alternate source of funds. In particular these provisions are very harsh for private companies as exemption for deposits or loans taken from members has now been withdrawn. The exemption is now given to deposits or loans from directors only. Under the Old Act exemption was given to deposits or loans from relatives of directors of private companies. This is not given under the New Act.

It is true that these provisions are made in the New Act in view of the fact that the Government has noticed in recent years that some Companies are defaulting in refunding the amount of deposits and interest on the due dates. Hence, such stringent provisions can be justified in the interest of persons who invest their hard earned monies in such public deposits. The provisions for Deposit Insurance, Credit Rating, Creation of Deposit Repayment Reserve Account, Creation of Security, appointment of Trustees for secured deposits etc. are provisions made to safeguard the interest of small depositors. However, it appears that there is no justification to rope in Private Companies which get deposit or loan from their members or their relatives.

Moreover, the penal provisions under which minimum fine can be levied for  default in  repayment of deposits or interest on due date are very harsh. The said fine can be levied on the Company and defaulting officer irrespective of the amount of the deposit and interest in respect of which default may occur.

New SEBI Corporate Governance Requirements – vis-à-vis New Companies Act – Overlap and Contradictions

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Synopsis
Recently, after the Companies Act, 2013 came into force, the SEBI has substantially revised its existing requirements for corporate governance of the listed companies by replacing the earlier Clause 49 of the Listing Agreement with a new one and also by inserting a new Clause 35B.

Against this backdrop of the Companies Act, 2013 and the new SEBI provisions – the overlapping and at times contradictory new requirements, the hurdles of complying with them, the problem of separate penal provisions in the cases of non-compliance of the said two directives calls for a detailed discussion. The Author analyses in depth the new requirements…

SEBI’s new requirements from 1st October, 2014
SEBI has brought into effect the comprehensively revised requirements for corporate governance for listed companies. The earlier Clause 49 of the Listing Agreement is now replaced with the new one. Further, a fresh new Clause 35B has also been put into effect that requires companies to provide e-voting for all shareholders.

To give a brief background recently, several provisions of the Companies Act, 2013, (‘the 2013 Act’) relating to corporate governance were notified to come into effect from 1st April, 2014. At the time when the Bill was close to being passed, SEBI had issued a Concept Paper proposing revised corporate governance requirements based on this Bill. The objective was to comprehensively revise its existing requirements taking into account provisions in the Bill and to initiate debate on the proposed requirements. Thereafter, recently, shortly after the provisions of the 2013 Act were notified, SEBI too brought into effect the new Clauses 49/35B. However, unlike the provisions in the 2013 Act, the SEBI requirements will come into force from 1st October, 2014.

Importance/implications of the new requirements
The new requirements of the two provisions need discussion for several reasons. Firstly, the changes made are substantial. Secondly, for reasons best known to legislators, two sets of overlapping and at times contradictory requirements have been brought into force. Thirdly, the consequences of non-compliance of these two norms will be dealt with in different ways. The penal and other consequences of violations under the 2013 Act are different from those under the Listing Agreement.

The penal consequences under the 2013 Act vs. the Listing Agreement
The consequences of violating the Listing Agreement are generally stated, in the form of a penalty upto Rs. 25 crore. (Note: As I write this article, SEBI has circulated draft provisions that could provide stricter punishments for violations, if brought into effect). This would be levied on the Company. However, SEBI often takes a fairly strong action against other persons like Independent Directors, Audit Committee members, etc. who fail in their duties by debarring them or, as a recent case showed, requiring them to compensate the company for huge losses allegedly caused by their acts/omissions. Even otherwise, SEBI has exercised its powers over the Board, directors, officers and even the Auditors and Courts have upheld these powers in several cases. The action taken may be in a variety of ways including debarment, requirement to compensate, etc.

In comparison, the consequences of violating the provisions of the 2013 Act are usually a fine on the Company and a fine or imprisonment for the officers in default. In some cases, it is possible that there may be class actions too, which can result in compensation to those who suffered loss. Another important difference is that considering that the requirements are contained in different provisions and there are generally different types of penal consequences provided, violation of different provisions of the 2013 Act can have different consequences.

Overlapping provisions
As will be seen later on, there is overlapping and an element of duplication. However, the provisions are often different too. In such a case, the logical recourse for a company seeking scrupulous compliance would be to, where possible and to the extent possible, comply with the stricter or narrower of the two provisions. For example, the 2013 Act provides for a lower number of independent directors while SEBI provides a higher number for certain companies. Thus, those companies would have to comply with the SEBI requirements which would automatically ensure that the provisions of the 2013 Act are also complied with.

Let us now consider a few important requirements.

Applicability
The SEBI requirements apply to all listed companies and certain other specified entities. The requirements under the 2013 Act apply in a varied manner. Generally, they apply to all listed companies. In addition, they apply to certain other companies too. For example, the requirement to have one woman director applies to public companies having a paid up share capital of Rs. 100 crore or more or having a turnover of Rs. 300 crore or more. The requirement relating to Independent Directors applies to public companies having (i) paid up share capital of Rs. 10 crore or more (ii) turnover of Rs. 100 crore or more (iii) having total outstanding loans/debentures/deposits exceeding Rs. 50 crore. And so on.

Woman/Independent directors
SEBI companies require to have at least one woman director. It does not matter whether such director is part of the Promoter Group, an Independent Director, an executive or a non-executive director. The 2013 Act also has similar provisions.

SEBI requires at least one-third of the total number of directors to be Independent Directors. If the Chairman is an Executive Director or is a Promoter or related to the Promoter Group, then the Company 50% of the Board should constitute of Independent Directors. The 2013 Act requires companies to have at least one-third of the total number of directors to be Independent Directors. Any fraction would be rounded off to one. For specified nonlisted companies, there should be minimum two independent directors, irrespective of the size of the Board.

The definition of Independent Director under the two sets of provisions are substantially similar.

Tenure of Independent Director
This is one of the several contradictions between the requirements of SEBI Clause/the 2013 Act. The 2013 Act states that an Independent Director shall hold office for term of five consecutive years at a time and this term can be renewed, by a special resolution, for another period of five years. The SEBI Clause has substantially similar requirements.

The 2013 Act says that the tenure held as on 1st April, 2014 would not be counted. SEBI Clause, however, states that if an Independent Director has held tenure of five years or more as on 1st October, 2014, he shall be eligible for another tenure of five years only.

Audit Committee
The requirements under the 2013 Act and SEBI Clause are broadly similar. However, there are a few differences.

The 2013 Act requires that a majority of the Audit Committee should consist of Independent Directors, while SEBI has a higher requirement of two-thirds. SEBI, in addition, also requires that the Chairman of the Audit Committee should be an Independent Director.

The requirement under the 2013 Act is that a majority of the members of the Audit Committee should be “financially literate,” as defined. SEBI has extended this requirement to all the members. Thus, to ensure due compliance, the stricter requirement in such a case would apply and all the members of the Audit Committee of a listed company should be financially literate.

The  role  and  functions  of  the audit  Committee  as  prescribed by SEBI are far more elaborate and detailed. Considering the nature of the obligations, though, a listed company will have to ensure due compliance of both the sets of provisions.

Material    subsidiary    companies SEBI Clause has certain requirements relating to material, non-listed indian subsidiary companies and other subsidiaries. material subsidiaries are those subsidiaries incorporated in india,that are unlistedand whose income or net worth is more than 20% of the consolidated income or consolidated net worth respectively of the listed parent   company.   for   such   companies,   there   are certain at least one independent director of the parent company shall be a director of such subsidiary.

A statement of significant transactions and arrangements by an unlisted subsidiary shall be periodically brought to the attention of the Board of directors of the parent. “Significant,” in this context, means a transaction or arrangement that exceeds, or is likely to exceed 10% of total revenues/expenses/assets/liabilities of such subsidiary.

Selling, disposal or leasing of more than 20% of the assets of a material subsidiary shall require the approval of the shareholders by way of a special resolution. it is not clear whether such requirement would be attracted if such sale, disposal or lease, is in one transaction or in one financial year or cumulative.

further, to reduce the holding or control of the parent to less than 50% in a material subsidiary, the approval of the shareholders by way of a special resolution would be required.

The 2013 Act contains no corresponding requirements.

Related party transactions
SEBI Clause and the 2013 Act both have fairly detailed requirements relating to related party transactions. analy- sis of this topic even for one of the two sets would require a separate article by itself. however, there are some important features of difference between the two.

What constitutes a related party is defined in different manner under the two provisions. While the 2013 Act seeks to be specific and provides a defined set of relationship that would make a party a related party, the SEBI definition is qualitative. It includes all parties treated as related party under the 2013 Act and adds more.

As regards approval, the 2013 Act requires that the Board shall approve the specified related party transactions. Companies having paid up capital of at least rs. 10 crore, shall obtain the prior approval of the shareholders by way of a special resolution. further, transactions beyond the specified amount as per specified formula would also be covered. at such meeting, members who are related parties  cannot  vote.  the  provisions  do  not  apply  to  trans- actions in the ordinary course of business and at arm’s length, as defined.

SEBI however requires that the audit Committee should approve all related party transactions. however, in case of “material” related party transactions, special resolution shall be passed to take approval where the related parties should not vote. a transaction with a related party would be treated as “material” if such transaction individually  or taken together with previous transactions during the financial year exceed 5% of the annual turnover or 20% of the net worth, whichever is higher, of the company.

Further,  though  SEBI Clause  will  come  into  force  generally from 1st october, 2014, all those material related party transactions that are likely to extend beyond 31st march, 2015 are required to be placed for approval of the shareholders at the first meeting of shareholders after 1st october, 2014. a Company may even get such approval at a meeting prior to 1st october, 2014.

E-Voting
SEBI has introduced a new Clause 35B to make e-voting mandatory by listed companies for shareholder resolutions. all shareholder resolutions including resolutions to be passed by postal ballot should be capable of being voted  through  e-voting.  The  e-voting  would  be  through an agency that provides such platform and complies with conditions as prescribed by the ministry of Corporate affairs.

The 2013 Act/Rules framed thereunder require all listed companies and companies having at least one thousand shareholders to provide facility of e-voting.

Conclusion
these  are  just  some  of  the  new  requirements  relating to corporate governance in the 2013 Act/SEBI Clauses. While the 2013 Act does not give much of a transition period, SEBI has given some time to implement. however, considering the overlapping requirements, significant provisions have become applicable. Considering the punitive and other consequences of non-compliance, the first full year of 2014-15 will require serious efforts to be compliant. at the same time, considering the manner in which they are introduced, there are likely to be several unintended violations. this will only get worse considering poor/loose drafting particularly in the 2013 Act. The fact that the requirements create substantial new requirements and even hurdles, make it even more difficult. One hopes that SEBI and the MCA takes a liberal approach during the year, gives relaxations where possible and takes a lenient view of unintended violations during the first full year of applicability.

Interpretation – Three months – Does not mean 90 days – Bar of Limitation – Application filed on next day after limitation period due to holiday on the said date – Not barred by limitation.

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Subodh Chandra Dash vs. M/s. B. Engineers & Builders Ltd., Bhubaneswar AIR 2014 Orissa 50

An agreement was executed between the parties. The bills were submitted by the petitioner, but they were not settled. The Arbitrator was appointed and the award was passed by the Arbitrator in favour of the petitioner. On 28- 01-2008, the opposite party obtained copy of the award. On 29-04-2008, Arbitration Petition was filed by the opposite party before the learned District Judge, Bhubaneswar u/s. 34 of the Arbitration and Conciliation Act, 1996. The opposite party filed objection to the said petition. The impugned order was passed on 18-08-2011 holding that the application filed u/s. 34 of the Act is within time.

The sole question that arose for consideration in the application is, whether the limitation of three months as provided in section 34 proviso to s/s. (3) of the Act should be calculated as ninety days.

The Court observed that in the case of State of H.P. and another vs. Himachal Techno Engineers and another,: 2010 SAR (Civil) 711, wherein the Supreme Court held that to equate 90 days to the expression of “three months” mentioned in section 34(3)of the Act is erroneous. The Supreme Court further held that a ‘month’ does not refer to a period of 30 days, but refers to the actual period of a calendar month. If the month is April, June, September or November, the period of the month will be thirty days. If the month is January, March, May, July, August, October or December, the period of the month will be thirty-one days. The Supreme Court further held that if the month is February, the period will be twenty-nine days or twentyeight days depending upon whether it is a leap year or not. In the aforesaid case, the Supreme Court further held that section 12 of the Limitation Act, 1963 provides for exclusion of time in legal proceedings.

The Court further held that section 9 of General Clauses Act, 1897 provides that in any Central Act, when the word ‘from’ is used to refer to commencement of time, the first of the days in the period of time shall be excluded. Therefore, to apply the said principle to the present case, while calculating the date of limitation, the date on which the copy of the award has been received by the opposite party i.e., on 28-01-2008 shall be excluded from computation of the limitation.

Therefore, computing the period of limitation from 29-01-2008, 3 days of January, 29 days of February (as 2008 was a leap year), 31 days of March and 28 days of April shall be included in the limitation. Thus, a total period of 91 days is the period of limitation for the present opposite party to prefer an application u/s. 34 of the Act. However, it was not disputed that the period of limitation ended on 28-04-2008. However, the application was filed on 29-08-2008. Therefore, it is seen that there is delay of one day in preferring the application u/s. 34 of the Act. However, it is not disputed that 28-01-2008 was a holiday, because the same was Lawyer’s Day, it is a holiday observed in the State of Odisha. Therefore, the application was filed on 29-01-2008 and is not barred by limitation.

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Hindu Succession-Co-parcenary property – Rights of daughter – Section 6, Hindu Succession Act 1956

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Pratibha Rani Tripathy and Anr vs. Binod Bihari Tripathy & Ors. AIR 2014 Orissa 74

The Appellants had filed an appeal for partition of the immovable & movable properties as described in Schedules-‘ A’ & ‘B’ of the plaint and for recovery of possession of the Schedule-‘C’ properties.

The late Shri Durga Charan Tripathy was the son of the Defendants 1 & 2. He was married to Plaintiff No. 1 as per the Hindu rites and customs and the Plaintiff No. 2 was born out of their wedlock on 16-12-2000. Durga Charan Tripathy expired on 29-06-2002. The suit land, which was the ancestral property of the Defendant No. 1 & his deceased son, was never partitioned between them at any point of time. After the death of Durga Charan Tripathy, the Plaintiffs & Defendant No. 2 succeeded to the interest of Durga Charan Tripathy over the Schedule ‘A’ property i.e., the land.

During the course of the hearing of the appeal, the Defendant Nos. 5 & 6, who are daughters of Defendant Nos. 1 & 2 & sisters of late Durga Charan Tripathy, have filed a cross objection, inter alia, claiming that they have equal share in Schedule ‘A’ property with their late brother Durga Charan Tripathy to which they are entitled to in view of the amendment of the Hindu Succession Act, 1956 by the Hindu Succession (Amendment) Act 2005. Admittedly, the said amendment came into force with effect from 09- 09-2005 i.e., during pendency of the suit.

The moot question, therefore, arose as to whether after amendment of the Hindu Succession Act in the year 2005, the Court below should have held that the Defendant Nos. 5 & 6 (daughters) have equal share with their brother late Durga Charan Tripathy in the property along with their mother Defendant No. 2.

The Hon’ble Court observed that, by the date the suit was disposed of i.e., in the year 2007, the amendment had come into force. Hence, the amended provisions of section 6 of the Hindu Succession Act with regard to right of the daughter will operate in the instant case as there has been no partition effected prior to 20-12-2004 as per s/s. (5) of the said section. Thus, the Trial Court, while determining the share of the parties over the joint family property described in Scheduled ‘A’, should have considered the amendment brought into the Hindu Succession Act by the commencement of the Hindu Succession (Amendment) Act 2005. Applying the aforesaid provision of section 6 as well as the amendment to section 23 of the Act, it would be seen that late Durga Charan Tripathy along with Defendant Nos. 1 & 2 & Defendant Nos. 5 & 6 would have been entitled to equal share in Schedule ‘A’ property & therefore, each of them would have got 1/5th share. 1/5th Share of late Durga Charan Tripathy is succeeded by the Plaintiffs as well as Defendant No. 2.

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Evidence – Printout generated from computer seized not admissible for non fulfillment of statutory conditions: Section 138C customs Act:

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Agarvanshi Aluminium Ltd vs. Commr. Of Cus. (I) NHAVA Sheva; 2014 (299) ELT 83 (Tri. Mum)

The brief facts of the case are that the importer imported aluminium scrap during the period July, 2004 to June, 2006 through various ports. The total quantity of aluminium scrap imported was 3889.998 MTs and the value declared was Rs. 23,84,81,992/-. The DRI, which investigated the imports, came to the conclusion that the appellant had misdeclared the value of imports and the actual value of imports amounted to Rs. 28,40,85,648/- and accordingly issued a show cause notice dated 31-12-2007 demanding differential duty of Rs.1,40,76,571/-.

This demand of duty was based on the evidence unearthed from the indenting agents premises involving differential duty of Rs. 48,80,774/- contemporaneous value of imports involving duty of Rs. 42,06,213/- and on the basis of LME prices minus permissible discount involving a duty of Rs. 49,89,584/-.

The appellant submitted that the demands towards differential duty is based on computer printouts recovered from the premises of the indenting agent (Shri Purshottam Parolia) cannot be relied upon as per section 138C of the Customs Act, 1962. As per the said provisions, the computer printouts can be taken as evidence only subject to fulfilling the terms and condition specified in the section and same have not been complied with in the instant case. The Hon’ble Tribunal observed that in this case, demands have been confirmed against the importer on three counts:

(a) On the basis of computer printout and statement of the indenter and the partner of the importer.
(b) On the basis of contemporaneous imports and
(c) On the basis of LME price,

As per the panchnama, in the list of the documents seized, initially the list of document typed was till Sr. No. 99, thereafter five items were added in handwritten form and Sr. No. 103, it is mentioned that four computer units without any mouse, keyboard, monitor and other accessories i.e., peripherals is mentioned. In the panchanama, the description of the item i.e., make, model, serial no. of the CPU were not mentioned. Moreover, they are handwritten and other 99 items are typed. Further, it was found that as per the panchanama, 4 CPU were seized, but as per the report of Directorate of Forensic Science, computers are found to be five in number and printouts are taken from these five CPUs which has been relied on in the impugned order. Therefore, the veracity of the panchanama is doubtful.

From the above provisions, it was clear that for admissibility of computer printout there are certain conditions which have been imposed in section 138C. Admittedly, the condition of the said section has not been complied with.

The Tribunal relied on the decision in case of Premier Instruments & Control Ltd. (2005) 183 ELT 65 (Trib.) wherein it was held that “computer printout were relied on by the adjudicating authority for recording a finding of clandestine manufacture and clearance of excisable goods. It was found by the Tribunal that printouts were neither authenticated nor recovered under Mahazar. It was also found that the assessee in that case had disowned the printout and he was not even confronted. The Tribunal rejected the printouts and the revenues finding of clandestine manufacture and clearance. Thereafter, it was found that there is a strong parallel between the instant case and the case cited. Nothing contained in the printout generated by the PC can be admitted as evidence for non- fulfillment of the statutory condition”.

Therefore, the printout generated from the PC seized cannot be admitted into evidence for non-fulfillment of statutory condition of section 138C of the Customs Act, 1962.

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Development Agreement – Conditional sale – Suit by developer for specific performance – maintainable: Contract Act section 202 and 204, Transfer of property Act 1882, section 54

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Ashok Kumar Jaiswal vs. Ashim Kumar Kar AIR 2014 Calcutta 92 (FB)

A development agreement is in the nature of an agreement for sale subject to certain conditions. It is an agreement for a conditional sale. A suit at the instance of a developer (where the developer is the non-owner party to a development agreement) is not prohibited by section 14(3) (c) of the Specific Relief Act, 1963.

A contract between a developer and an owner would also consist of reciprocal rights and obligations. It would be preposterous to say that only the owner can maintain a suit against the developer for enforcing his rights and not vice versa. If the developer has a right under the contract, he must have a remedy in the form of approaching a forum for grievance redressal. This is not to say that the developer will necessarily succeed in such a legal action. A question of maintainability of a suit is completely different from the question of whether the suit will succeed or not on the facts of the case and in the light of the applicable law. Section 14(3)(c) of the Specific Relief Act can in no manner be interpreted as debarring a developer from approaching the legal forum for redressal of his grievance. To that extent, a suit at the instance of a developer is maintainable and not barred by section 14(3) (c) of the Specific Relief Act.

Ordinarily, a Power of Attorney executed by an owner in favour of the developer for effectuating the terms and conditions of the development agreement does not give a bare agency to the developer but it gives the developer an interest in the property which forms the subject-matter of the agency. However, merely because such a power of attorney gives the developer such an interest, it cannot be said that the agency cannot be revoked or terminated. Further, merely because such a power of attorney may be revoked, it would not imply that the development agreement can otherwise not be specifically enforced if the facts in a particular case so warrant

Section 53A of the Transfer of Property Act would suggest, if a proposed transferee of an immovable property under an agreement for sale is put in possession and continues in possession in part performance of the contract and does some act in furtherance of the contract and is willing to perform the balance part, his possession would be protected and the transferor would be debarred from dispossessing him other than under a right expressly provided by the terms of the contract. If a developer files a suit for specific performance of a contract and the owner files a suit for recovery of possession, one may have to dismiss both on different logic. A court of law is duty-bound to resolve the controversy that is brought before it, as far as practicable. The Court of law is not entitled to complicate the issue by making the controversy more complicated.

Section 202 of the Indian Contract Act 1872, provides that when the agent had interest in the property under the agency agreement in the absence of an express provision, the contract could not be terminated to the prejudice of such interest. Section 203 permits the principal to revoke the authority of his agent. However, when the agent partly exercised his authority, such revocation would not be permissible u/s. 204. If one reads these three provisions together, one would find that the Power of Attorney so revoked by the owner should not be looked at in an isolated manner. The Power of Attorney generally issued to the developer, is in continuation of the original agreement for development of the property, meaning thereby, that the developer who was entrusted to develop the property would be given authority to further act, as per the contract, including dealing with the property to the extent permissible under the contract. Hence, the Power of Attorney was nothing but an agency agreement executed in furtherance of the original contract.

If the original contract creates an interest in favour of the developer even if the Power of Attorney is revoked such interest would not evaporate.

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Intercorporate Investments: Changes Galore

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Synopsis
The 2nd phase of the provisions of the Companies Act, 2013 has been made operative w.e.f. 1st April, 2014. This includes provisions dealing with intercorporate investments. Substantial changes have been made in the law in this respect. It is time for Corporate India to unlearn and relearn all they know in this respect. This article examines the salient features of the new provisions on intercorporate investments.

Introduction
Part-II of the Companies Act, 2013 (“the Act”) has made about 183 further sections (after the initial 98) effective from 1st April, 2014 and a Part-III is pending. The Rules in respect of Part-II sections have also been notified. One of the sections notified in Part-II is section 186 which deals with “Loans and investments by a company”. Section 186 coupled with section 185 has caused maximum heartburn amongst corporate India. This section 186 is a modern day avatar of section 372A of the Companies Act, 1956 (which in itself was a modern day avatar of the erstwhile section 372 of the same Act), but it has undergone a transmutation as compared to the original section. As the heading of the section suggests, it deals with two legs ~ loans by a company and investments by a company. In addition, there are certain other sections of the Companies Act, 2013 which deal with intercorporate investments. Through this article, let us examine the provisions relating to investments by a company in another body corporate, i.e., intercorporate investments.

Applicability
One of the most distressing features of section 186 is that it even applies to private limited companies which are not subsidiaries of public limited companies. Section 372/372A had a blanket exemption for private limited companies. A similar exemption is not found u/s. 186. Thus, all private companies would now have to comply with the provisions of this section.

Limit on Investments
The overall limit for a company to invest in the securities of another body corporate u/s. 186(2) is the higher of the following two limits:
(a) 60% of paid-up share capital + free reserves + securities premium; or
(b) 100% of free reserves + securities premium

This limit applies to investment by way of fresh acquisition or purchase or otherwise of securities of another body corporate.

The term ‘Securities’ has been defined u/s. 2(81) of the Act to mean securities as defined u/s. 2(h) of the Securities Contract (Regulation) Act, 1956. Thus, they would include shares (equity, preference, convertible preference, non-voting rights shares), debentures, bonds, derivatives in securities, warrants, other marketable securities of a body corporate. The limit would apply to investment by a company in the securities of both listed as well as unlisted companies.

Next let us examine the definition of the term ‘body corporate’. Section 2(11) of the Act defines it as including a company incorporated outside India. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. The most important aspect of a body corporate is that it is an independent legal entity with a distinct identity which is separate from its partners/shareholders/members and has a perpetual succession. It can own property on its own accord and in its own name. Hence, investing in the securities of a foreign subsidiary/joint venture would also fall within the purview of these limits. However, a mutual fund structured as a trust is not a body corporate and hence, investment in the units issued by a mutual fund (structured as a trust) would not be within the purview of section 186.

Let us next look at the composition of the limits for considering the 100% or 60%:

(a) Section 2(64) of the Act defines the phrase ‘paid-up share capital’ to mean such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paidup in respect of shares of the company but does not include any other amount received in respect of such shares, by whatever name called.

(b) The phrase ‘free reserves’ is defined by section 2(43) to mean such reserves which are available for distribution as dividend. These reserves are to be reckoned as per the last audited balance sheet of a company. The following are however, not treated as free reserves:

(i) any amount representing unrealised gains, notional gains or revaluation reserve, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(c) T he last component of the limits is ‘securities premium’ which is governed by section 52 of the Act and it states that where shares are issued at a premium, the amount of the premium received on those shares shall be transferred to a “securities premium account”.

What if Limits are to be exceeded?


In case the investment in another body corporate is to be in excess of the limits specified above, then the investor company must obtain a prior special resolution of its shareholders passed at a general meeting. The Rules notified u/s. 186 provide that this would not be required where a holding company proposes to invest (by way of subscription or acquisition) in shares of its wholly owned subsidiary. However, the resolution would be required if the subsidiary is not a 100% subsidiary. Thus, if any, only if, the entire share capital is held by the investor and/or its nominees, would a special resolution not be required. The resolution must specify the total amount up to which the Board is authorised to make such acquisition. Section 110(1) of the Act and the Rules notified therein specify the items which must be transacted through postal ballot. While giving of loans/guarantees/security in excess of limits u/s. 186 have been specified, investment in excess of the limits u/s. 186 has not been specified. Hence, such a resolution is not mandatorily to be passed via a postal ballot.

In addition, the requirements of the Companies (Management and Administration) Rules, 2014 as well as the revised Clause 35B of the Listing Agreement should be complied with by all listed companies. This requires that for all resolutions to be passed at General Meetings, evoting facility must be provided by the listed company.

Layers of Investment Companies


S/s. (1) of section 186 introduces a novel concept, i.e., any company can make an investment through not more than two layers of investment companies. Companies in India are accustomed to having a web of investment companies. This has often been criticised on the grounds that it gives rise to opacity and proves difficult for regulators to ascertain the ultimate owner of an investee company. Thus, any company desiring to make an investment, after the coming into force of section 186, can do so either directly or through an investment company or through one investment company followed by a 2nd layer of investment company. However, it cannot have a 3rd layer of investment company under the 2nd layer of investment company. This s/s. prohibits making any investment, unlike the limits u/s. 186(2)(c) (which apply only for investment in a body corporate) and this does not restrict the scope to investment in a body corporate. Hence, any investment by a company through more than 2 layers of investment companies is not allowed. Thus, investment in a company, LLP, body corporate, partnership firm, etc., would all be covered. Considering the way the s/s. is worded, one wonders whether this prohibition would also apply to investment by a company in other asset classes, such as, land. However, a harmonious reading with the other sub-sections does not seem to indicate so.

The restriction is on routing any investment through more than 2 vertical layers of investment companies as illustrated by the following diagram (illustration-1) which violates section 186:

Thus,  since aBC  has  routed  its  investment  in  XYZ  via 3 layers of investment companies, the prohibition u/s.
186(1) would apply.

It may be noted that the prohibition is on having more than 2 layers of investment companies and hence, we need to ascertain what constitutes an investment company? the section defines an ‘investment company’ to mean a com- pany whose principal business is acquisition of shares, debentures or securities. at the outset, it is very clear that the definition only applies to a company and not to any other body corporate or entity. A company is defined to mean a company incorporated under the act or under any previous company law. Hence, if an LLP is used as an investment vehicle then this prohibition u/s. 186 would not apply. Whether you can incorporate an investment LLP is another story altogether.

Secondly, it must be a company whose principal business is acquisition of securities. What is principal business has not been defined. In this context, the principal business tests  laid  down  by  the  reserve  Bank  of  india  to  determine what constitutes an nBfC (non-banking financial Company) may be helpful. according to these tests, a company will be treated as an NBFC if it satisfies both the following conditions as per its audited accounts:

(i)    Its financial assets as per the last audited Balance Sheet should be more than 50% of its total assets (netted off by intangible assets) and

(ii)    Its income from financial assets as per the last audited Profit & Loss Account should be more than 50% of its gross income.

It should be noted that both these tests should be sat- isfied in order to treat a company as an NBFC. A company whose principal business is acquisition of securities may generally also qualify as an NBFC unless it can be treated as a Core investment Company or a CiC or if it is a company exempted from nBfC provisions, e.g., stock brokers. in this respect, the decision of the madras high Court u/s. 372 of the Companies Act,1956 in HC Kothari, 75 Comp. Cases 688 (mad) may be referred to. this decision held that it is clear that the income derived from the business is not the criteria. the test would rather be, as to what is the principal business of the company? a balance- sheet should show as to what is the principal business of the company.

The  department  of  Company  affairs’  views  (dated  1st July, 1963) under the erstwhile section 372 may also be considered:

“In the Department’s opinion whether a company is or is not an investment company and the business which it should or should not transact to fall within the provision of the definition of an “Investment company” within the meaning of section 372(10) is actually a question of fact. The words used in the section are “whose principal business is the acquisition of shares.  ” These words imply that the company concerned is expected to hold the shares, etc., acquired by it for a reasonable time.”

The Department’s views (dated 23rd February, 1961 and 4th October, 1961) under the erstwhile section 372, in relation to a share trading company, were as follows:

“The question as to whether a particular share trading company which deploys its funds for short-term transaction in buying and selling shares is an investment company or not, is one of fact which has to be determined in relation to the actual business transacted by it. The Department is inclined to the opinion that a company should be treated as an investment company if the whole or substantially the whole of its business relates to shares, securities, stock and debentures, etc. A share trading company may take advantage of these provisions of section 372 if it can be classed as an investment company.”

The act expressly provides that the restriction on two layers of investment companies even applies to an NBFC whose principal business is acquisition of securities. CiCs are a class of NBFCs which invest 90% of their net assets in group companies’ securities and at least 60% of 90% of their net assets in group companies’ equity shares. thus, even NBFCs and CiCs are restricted from having only two layers of investment companies.

The investor company could be an investment or an operating company but it cannot route its investment via more than 2 layers of investment companies. if the investment is routed through an operating company or one whose principal business is not acquisition of securities, then the restriction u/s. 186 on 2 layers would not apply. The following diagram (illustration-2) would amplify this statement:

Thus, since PQR has routed its investment in XYZ via a mix of 2 layers of operating companies and 2 layers of investment companies, the prohibition u/s. 186(1) does not apply. as explained the prohibition is only on more than 2 layers of ‘investment’ companies. one additional factor to be borne in mind in structuring an investment through an investment company is the NBFC directions. it is quite possible that the investment company, i.e., one whose principal business is acquisition of securities may constitute either an NBFC or a CIC. if it is an NBFC-ND-SI/Systemically Important Non-deposit taking NBFC, i.e., one which has total assets of rs. 100 cr. and above, then the NBFC directions impose a restriction that it cannot lend and invest more than 40% of its owned funds to a single group of parties and more than 25% of its owned funds to a single party. thus, in such a case, the twin restrictions of the act as well as of the directions would have to be borne in mind.

Exemption:
The  prohibition  on  making  investments  only  through   a maximum of two layers of investment companies will not affect the following two cases:
(i)    a company from acquiring any other company incorporated in a country outside india if such other company has investment subsidiaries beyond two layers as per the laws of such country; or
(ii)    a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Further, section 186(1) gives power to the Government to prescribe such companies which can invest via more than 2 layers of investment companies.

Thus, exceptions presently available are if the indian in- vestor company has acquired a foreign company which, in turn, has more than two layers as per the laws of its country or if the subsidiary of an investor company, in turn, has any investment subsidiary for meeting the requirements of any law.

When indian companies make overseas investments, several times they consider routing such overseas investments through an intermediate holding Company (IHC), regional holding Company (RHC), etc. it is a moot point whether the prohibition u/s. 186 can apply to an investment made in a foreign company via more than 2 layers of IHCs/RHCs? This is because a company is defined under the act to mean a company incorporated under the act or under any previous company law and an ihC or a RHC incorporated abroad is a body corporate but not a company within the meaning of the act. interestingly, under the fema regulations, the RBI is also known to frown upon the use of multi-layered SPVs for making an overseas direct investment.

   Other compliances
in addition to the above substantive provisions, section 186 also lays down several compliances for the investor company, such as, holding investments in its own name, board resolution to be passed by unanimous consent of all directors present at the meeting, maintaining a register of investments, obtaining prior approval of financial institutions in certain cases, etc.

except the provisions relating to two layers of investment companies, none of the other provisions of section 186 are applicable to the following cases of investments:

(a)    to any acquisition made by a registered NBFC whose principal business is acquisition of securities in respect of its investment activities. it may be noted that the exemption is only available to an nBfC which is registered with the rBi. under the CIC directions, a CiC is also a class of nBfCs. hence, this exemption should be available even to registered CICs. however, only CIC-nd-Si, i.e., those which have an aggregate asset size in excess of rs.100 crore need to be registered with the rBi. other CiCs are exempted from  registration  both  as  a  CiC  and  as  an  nBfC. hence, will such exempted CiCs be eligible for the exemption u/s. 186 is a moot point?
(b)    to  any  acquisition  made  by  a  company  whose  principal business is the acquisition of securities. Such companies could be NBFCs, CICs, stock/subbroking companies, Venture Capital Companies, alternative investment funds structured as companies, etc.
(c)    to any acquisition of shares allotted in pursuance of clause (a) of s/s. (1) of section 62, i.e., allotment under a rights issue.

A related compliance is laid down u/s. 187 of the Act which requires all investments made or held by a company to be held in its own name. however, it may hold shares in its subsidiary company in the name of its nominees if it’s required to ensure minimum number of members. unlike the earlier section 49 of the 1956 act, section 187 even applies to a company whose principal business consists of buying and selling of securities.

An  additional  compliance  is  incorporated  in  the  report of the Board of directors. it requires to give particulars   of investments u/s. 186. Further, the Audit Committee’s terms of reference includes scrutiny of intercorporate investments.

Further, section 179(3) states that the power to invest the funds of the company can be exercised by the Board of directors only at a meeting of the Board. hence, a Circu- lar resolution is not possible.

    Exemptions u/s. 372a Dropped

Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

details

Section 372a of the 1956 act

Section 186 of the 2013 act

Applicability
to Private Companies

Entire
Section did not apply to Private Limited Companies

Entire
Section applies to Private Limited Companies. This is a major change

Companies
whose

Entire
Section did not

Restriction
on invest-

principal business

apply to a company

ment through 2 layers

is acquiring securi-

whose principal busi-

of investment com-

ties

ness was acquisition

panies even applies

 

of securities

to a company whose

 

 

principal business is

 

 

acquisition of securi-

 

 

ties. The remaining

 

 

s/s.s of section 186

 

 

do not apply to such a

 

 

company.

NBFCs

No
exemptions for

Restriction
on invest-

 

NBFCs

ment through 2 layers

 

 

of investment com-

 

 

panies even applies

 

 

to an NBFC but the

 

 

remaining sub-sections

 

 

of section 186 do not

 

 

apply to an NBFC.

Acquisition
by

Entire
Section did

Now the
exemption is

Holding Company

not apply to subscrip-

only available qua the

 

tion or purchase of

passing of a special

 

securities by a Holding

resolution by the Hold-

 

Company in its wholly

ing Company if the

 

owned subsidiary

limits u/s. 186 would

 

 

be exceeded by virtue

 

 

of such acquisition.

 

 

However, the other

 

 

s/s.s of section 186

 

 

continue to apply.

    Penalty
Section 186 imposes a heavy penalty for the violation of the provisions of this section. if a company contravenes the provisions of this section, the company shall be pun- ishable with fine which ranging from Rs. 25,000 to Rs. 5 lakh. Every officer who is in default shall be punishable with a term which may extend to 2 years and with fine ranging from rs. 25,000 to rs. 1 lakh.

  Layers of Subsidiaries
in addition to the restriction on layers of investment companies u/s. 186, there is also a restriction u/s. 2(87) of the act on the number of layers of subsidiaries which certain prescribed class of holding companies can have. a subsidiary includes a company as well as a body corporate, such as an LLP. Thus, in respect of prescribed holding companies they cannot have more than certain number of layers of subsidiaries. it may be noted that unlike the restriction on layers of investment companies, this restriction applies both to operating as well as investment subsidiaries and to subsidiaries which are companies or body corporates. Currently, no class of holding companies or number of layers have been prescribed.

one may compare the restrictions contained in section 186 vs. section 2(87) as follows:

 Compilance for The Investee company
The  investee  company  needs  to  pay  special  attention as to whether the issue of fresh securities to the investor company would constitute a private placement u/s. 42 read with the Rules notified thereunder and/or a preferential issue u/s. 62(1)(c) read with the Rules notified thereunder? Several substantive and procedural conditions have been laid down in this respect for the investee company.

Conclusion
The  law  relating  to  intercorporate  investments  is  one area which has witnessed a sea change under the Companies Act, 2013 as compared to the Companies Act, 1956! Corporate india is going to have to grapple with several intended and unintended consequences of these new  provisions  but  then,  who  said  law  and  logic  go together?

A. P. (DIR Series) Circular No. 107 dated 20th February, 2014

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Notification No. FEMA. 230/2012-RB dated 29th May, 2012, notified vide G.S.R. No. 797(E) dated 30th October, 2012 read with Corrigendum dated 10th September, 2013 notified vide G.S.R. No. 624(E) dated 12th September, 2013

Foreign Direct Investment (FDI) into a Small Scale Industrial Undertakings (SSI)/Micro & Small Enterprises (MSE) and in Industrial Undertaking manufacturing items reserved for SSI/MSE

Presently, an India Company which is a small scale industrial unit and which is not engaged in any activity or in manufacture of items included in Annex A, can issue shares or convertible debentures to a person resident outside India, to the extent of 24% of its paid-up capital. The said Company can issue shares in excess of 24% of its capital if:

(a) It has given up its small scale status.

(b) It is not engaged or does not propose to engage in manufacture of items reserved for small scale sector.

(c) It complies with the ceilings specified in Annex B to Schedule I.

This circular has aligned the policy on FDI with respect to investment in Small Scale Industrial unit and in a company which has de-registered its small scale industry status and is not engaged or does not propose to engage in manufacture of items reserved for small scale sector in lines with provisions of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. As a result:

(i) A company which is reckoned as Micro and Small Enterprises (MSE) (earlier Small Scale Industries) in terms of MSMED Act, 2006 and not engaged in any activity/sector mentioned in Annex A to schedule 1 can issue shares or convertible debentures to a person resident outside India, subject to the limits prescribed in Annex B to schedule 1, in accordance with the entry routes specified therein and the provision of FDI Policy, as notified from time to time.

(ii) Any Industrial undertaking, with or without FDI, which is not an MSE, having an Industrial License under the provisions of the Industries (Development & Regulation) Act, 1951 for manufacturing items reserved for manufacture in the MSE sector can issue shares in excess of 24% of its paid up capital with prior approval from FIPB.

In terms of the provisions of MSMED Act: –

(i) In the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951: –

(a) A micro enterprise means where the investment in plant and machinery does not exceed Rs. 25 lakh.

(b) A small enterprise means where the invest ment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore.

(ii) In the case of the enterprises engaged in providing or rendering services: –

(a) A micro enterprise means where the investment in equipment does not exceed Rs. 10 lakh.

(b) A small enterprise means where the investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.

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Settlement Deed – Cancellation – Registered Settlement deed cannot be cancelled by executing cancellation deed: Transfer of Property Act, 1882, section 9:

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V. Ethiraj vs. S. Sridevi & Ors.; AIR 2014 Karnataka 58

Once, the settlement deed was executed by mother in favour of her daughter, mother lost her right, title and interest in the schedule property. Subsequently, on the day mother executed cancellation deed, she had no right in the property. The registered settlement deed cannot be cancelled by executing a cancellation deed. If at all the said document is to be canceled, it had to be done under the provisions of Specific Relief Act, by approaching a competent civil Court for cancellation of such document. If the fact of fraud, undue influence, mistake or any other ground which is alleged for cancellation of the said documents is proved, the Court may order for cancellation. That is the only mode known to law to cancel the registered settlement deed. Otherwise, the parties by consent have to annul the settlement by executing the document of reconveyance. Therefore, by execution of the cancellation deed, the registered settlement deed did not stand cancelled. Unilaterally, the settler cannot execute a cancellation deed of settlement.

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Hindu Undivided Family – Not in existence prior to the coming into force of Hindu Succession Act, 1956 – Suit for Partition – Suit not maintainable

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Sushant vs. Sunder Shyam Singh AIR 2014 (NOC) 90 (Del.)

A Hindu Undivided Family was not in existence prior to the Hindu Succession Act coming into force. The Properties in question, inherited by the deceased owner on the demise of his father, would become his persona properties. The son of the deceased owner would not acquire any coparcenary share in the properties till the owner was alive. The suit property would devolve on the son of the deceased in his individual capacity on the death of the owner. Therefore, the claim of the grandson of the deceased for partition of suit properties on the grounds that the same were ancestral, was held not maintainable.

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Instrument – Chargeability to stamp duty – Document executed before Notary – Creating rights in land – Stamp Act, 1899, section 17, 2(14)

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Om Prakash Umar vs. State of U.P. through Secretary Fund & Revenue Dept. U.P. Shashan, Lucknow & Ors ARI 2013 Allahabad 209

A document before the Notary was executed on 14-12- 2009 by one Mr. Mahadeo and others by which they withdrew their rights on the abadi land admeasuring 80 ft. x 70 ft. and transferred them in favour of the petitioner for a consideration of Rs. 50,000/- only. The aforesaid document was written on a stamp paper of Rs. 150/- only. The Additional Commissioner (Stamp) vide order dated 18-04-011 held the above document to be an instrument of conveyance and assessing its market value determined the deficiency in stamp duty and imposed a penalty. The appellate authority affirmed the aforesaid order vide its order dated 25-11-2011.

The above two order dated 25-11-2011 and 18-04-2011 were under challenge by way of writ petition before the Allahabad High Court. The Hon’ble Court observed that section 17 of the Indian Stamp Act, 1899 provides that all instruments chargeable with duty and executed by any person in the India shall be stamped before or at the time of execution. Therefore, stamp duty on an instrument is payable at the time of execution of the instrument. The moment an instrument is executed stamp duty is payable on it. The validity of its execution or its non-registration has nothing to do with its execution and consequently the payment of stamp duty.

An instrument as defined u/s. 2(14) of the Act includes every document and record by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded. The above document executed before the Notary, with whatever name it may be called, creates rights in the land in favour of the petitioners, after extinguishing those of Mr. Mahadeo and others therein. It is, therefore, undoubtedly, an instrument as defined u/s. 2(14) of the Act.

In view of the aforesaid facts the aforesaid document dated 14.12.2009 is an ‘instrument’ within the meaning of Section 2(14) of the Act and its execution is not denied, it is chargeable to stamp duty.

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Evidence – Commission of Enquiry – Statements made before commissioner cannot be used as evidence before civil or criminal court – Conclusions based on such statements cannot be used as Evidence:

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SBI through General Manager vs. National Housing Bank & Ors(2013) 180 Comp. Cas 15 (SC)

The National Housing Bank drew a cheque on 3rd January, 1992, for an amount of Rs. 95.39 crore approximately on the Reserve Bank of India in favour of the State Bank of Saurashtra, a subsidiary of the appellant, which later merged with the appellant. Towards the end of April, 1992, the National Housing Bank found that it did not possess any bank receipts or supporting documents or any securities in respect of such transaction and addressed letters to the State Bank of Saurashtra requesting it to make delivery of bank receipts/securities or for return of the amount. The state bank of Saurashtra denied the existence of any “outstanding transaction”. The National Housing Bank filed a suit before the Special Court established under the Special Court (Trial of Offences Relating to Transactions in securities) Act, 1992 against (i) the State Bank of Saurashtra, (ii) HM, (iii) 2 employees of HM and (iv) the Custodian appointed u/s. 3(1) of the 1992 Act for recovery of an amount of Rs. 95.39 crore with interest alleging conspiracy, collusion and fraud between the defendants in the suit thereby causing loss to the National Housing Bank. The Special Court passed a decree in favour of the National Housing Bank and against the state bank of Saurashtra. The State Bank of Saurashtra challenged that part of the decree which was against, it and the National Housing Bank challenged that part of the decree of the Special Court directing it to deliver certain amounts to the Custodian:

The Hon’ble Court observed that u/s. 9A(1) of the Act, the Special Court has jurisdiction to adjudicate any matter or claim arising out of a transaction in securities entered into during the period specified in the section in which a notified person is involved in whatever capacity. Therefore, the Special Court was authorised by law to adjudicate the claim of the defendant, HM, without being shackled by the procedural fetters imposed under the code.

Further that though the 1992 Act declares that the Special Court is not bound by the Code of Civil procedure, 1908, it does not relieve the Special Court from the obligation to follow the Indian Evidence Act, 1872. The findings of even a statutory commission appointed under the Commissions of Inquiry Act, 1952, are not enforceable proprio vigore and the statements made before such commission are expressly made inadmissible in any subsequent proceedings civil or criminal. Therefore, courts are not bound by the conclusions and findings rendered by such commissions. The statements made before such commission cannot be used as evidence before any civil or criminal court. It should logically follow that even the conclusions based on such statements can also not be used as evidence in any court.

The Special Court had based its conclusions on Janakiraman Committee Report and the correspondence between the various parties (whose details are not even specified in the judgment).

The Court observed that the course adopted by the learned Judge of the Special Court of looking into the correspondence between the parties, which even according to the learned Judge had not been proved is not permissible in law. The Special Court Act though declares that the Court is not bound by the Code of Civil Procedure, it does not relieve the Special Court from the obligation to follow the Evidence Act. Further, the learned Judge extensively relied upon the second interim report of the Jankiraman Committee on the ground that the same was tendered by the 1st Defendant.

It is well settled by a long line of judicial authority that the findings of even a statutory Commission appointed under the Commissions of Inquiry Act, 1952 are not enforceable proprio vigore as held in Ram Krishna Dalmia vs. Justice S.R. Tendolkar and Ors.: AIR 1958 SC 538 and the statements made before such Commission are expressly made inadmissible in any subsequent proceedings civil or criminal.

In our view, the courts, civil or criminal, are not bound by the report or findings of the Commission of Inquiry as they have to arrive at their own decision on the evidence placed before them in accordance with law.

Therefore, Courts are not bound by the conclusions and findings rendered by such Commissions. The statements made before such Commission cannot be used as evidence before any civil or criminal court. It should logically follow that even the conclusions based on such statements can also not be used as evidence in any Court. Janakiraman Committee is not even a statutory body authorised to collect evidence in the legal sense. It is a body set up by the Governor of Reserve Bank of India obviously in exercise of its administrative functions, The Governor, RBI set up a Committee on 30th April, 1992 to investigate into the possible irregularities in funds management by commercial banks and financial institutions, and in particular, in relation to their dealings in Government securities, public sector bonds and similar instruments. The Committee was required to investigate various aspects of the transactions of SBI and other commercial banks as well as financial institutions in this regard.

The Court dismissed the suit.

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Doctrine of merger – Appeal to Appellate Tribunal – Not applicable when appeal rejected on limitation.

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Raja Mechanical Co.(P) Ltd vs. Commissioner of C. Ex, Delhi – I 2012 (279) ELT 481 (SC)

The facts in nutshell are that the assessee is a manufacturer of dutiable excisable goods. The assessee availed a MODVAT Credit of Rs. 1,47,000/- by filing a declaration dated 30-06-1995 under Rule 57T(1), whereby it declared the receipt of the goods from M/s. DGP Windsor India Ltd. vide invoice dated 18- 06-1995, alongwith the application for condonation of delay, before the adjudicating authority/assessing authority. Accordingly, the adjudicating authority had issued a show cause notice.

As there was a delay in filing the prescribed forms before the assessing authority. Therefore, the assessing authority had rejected the claim of the assessee and accordingly, had directed him for payment of the Excise duty credit availed by the assessee. Aggrieved by that order, the assessee had belatedly filed an appeal before the proper appellate authority. Since there was delay in filing the appeal and since the same was not within the time that the appellate authority could have condoned the delay, accordingly had dismissed the same. It is that order which was questioned before the Tribunal. Before the Tribunal, as we have already noticed, the assessee had requested the Tribunal to first condone the delay and next to decide the appeal on merits, i.e. to decide whether the adjudicating authority was justified in disallowing the benefit of the Modvat credit that was availed by the assessee. The Tribunal had not conceded to the second request made by the assessee and only accepted the findings and conclusions reached by the Commissioner of Appeals, who had rejected the appeal. The assessee’s stand before the Tribunal and before this Court is that the orders passed by the adjudicating authority would merge with the orders passed by the first appellate authority and the Tribunal ought to have considered the appeal filed by the assessee on merits also. In our opinion, the same cannot be accepted. In view of the plethora of decisions of this court, wherein this court has, categorically, observed that if for any reason an appeal is dismissed on the ground of limitation and not on merits, that order would not merge with the orders passed by the first appellate authority.

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Contract of guarantee and contract of indemnity – Difference – section 124 and 126, Contract Act, 1872:

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Punjab National Bank vs. Ram Dutt Sharma & Ors AIR 2013 Allahabad 198

Plaintiffs Sri Ram Dutt Sharma and his wife Smt. Saroj, instituted a Suit, impleading New Bank of India, Sri Chhote Lal Sharma, son of Sri Khacheru Singh and Smt. Saroj, wife of Sri Shiv Charan as defendants. The relief sought in the aforesaid suit was a mandatory injunction directing defendant No. 1 to auction Truck No. UHN 1077, belong to defendant Nos. 2 and 3, and in possession of defendant-Bank towards security/ guarantee against the amount of loan, advanced to defendant Nos. 2 and 3, and realise outstanding dues, before encashing Fixed Deposit Receipts of plaintiffs, lying with defendant-Bank.

The plaintiff’s case was that defendant Nos. 2 and 3 were running a transport business. They purchased a new Truck in 1985. The financial assistance in the aforesaid transaction was tendered by the Bank, advancing a loan of Rs. 1,50,000/-, against which Truck itself was hypothecated. Besides, the plaintiffs’ FDRs of Rs. 10,000/- and Rs. 70,000/- were pledged in security for a period of three years or till repayment of loan amount, whichever is earlier. There appears to be some default towards repayment of loan amount, on the part of defendant Nos. 2 and 3, but defendant No: 1, instead of realising defaulted amount from defendant Nos. 2 and 3, by sale/auction of mortgaged vehicle, proceeded to encash FDRs of plaintiffs lying in security with the bank, hence the suit.

The Hon’ble Court observed that it would be necessary to determine the nature of contract between the plaintiffs and the Bank. The contract between the Bank and respondents 3 and 4 was admittedly that of loaner and loanee. A “contract of guarantee” is defined in Section 126 of I.C. Act, 1872. It says that a “contract of guarantee” is a contract to perform the promise or discharge liability of a third person in case of his default. The person who gives the guarantee is called “surety”, person in respect of whose default the guarantee is given is called the “principal debtor” and the person to whom the guarantee is given is called the “creditor”. In case this Court found that the plaintiffs entered into a contract of guarantee with the Bank in terms of Section 126 of I.C. Act, 1872 the plaintiffs would be “surety”, respondents 3 and 4 would be the “principal debtor”, and the Bank would be “the creditor”. A guarantee, therefore, is an accessory. It is essentially a contract of accessory nature being always ancillary and subsidiary to some other contract or liability on which it is founded without support of which it must fail.

The distinction between the “contract of guarantee” and “contract of indemnity” comes out from the definitions of two. The phrase “contract of indemnity” is defined in Section 124 of I.C. Act, 1872 which states that a contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person is called “contract of indemnity”. One of the apparent distinctions between two is that a “contract of guarantee” requires concurrence of 3 persons, namely, the principal debtor, surety and the creditor, while “contract of indemnity” is a contract between two parties and promisor enters into such contract with other party. In other words, a person who is party to a contract, if he executes a promise to other party to save him from loss on account of promiser’s conduct or by the conduct of any other person, it, is a “contract of indemnity”, while for the purpose of “contract of guarantee”, it requires presence of three parties at least.

“Surety” is always liable to the extent of precise terms of his commitment and not beyond that. In the case of “contract of guarantee”, section 128 of I.C. Act, 1872 says that the liability of surety is co-extensive with that of principal debtor, unless it is provided otherwise by the contract.

The initial term of guarantee/surety was alleged to be three years or earlier thereto till the entire loan money is paid. The loan agreement was executed in 1985. Mere renewal of FDRs does not mean renewal of contract of guarantee between the surety and creditor. After the expiry of period of contract of guarantee, there was no occasion for the Bank to proceed to retain FDRs of plaintiffs surety as a collateral guarantee against the loan amount. Lower Appellate Court, had rightly read the averments contained in the plaint vis-à-vis the contract between the surety and the creditor that the renewal of FDRs, if matured before payment, were referable to a period prior to 3 years from the date of such contract and not to the extent of period of contract beyond 3 years. To that extent, there was a clear averment that contract was only for three years or earlier thereto when the entire loan amount was paid. The word “earlier” rules out any possibility of a continuing contract of guarantee beyond 3 years.

Collateral security of FDRs was, therefore, available to the bank for a period of 3 years only and not beyond that, unless consented by surety, i.e. plaintiffs. Admittedly, no such consent was obtained by plaintiffs-surety and, on the contrary, the Bank on its own gave extension to the principal debtor in the matter of re-payment of loan amount. The appeal was allowed.

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The Ministry of Corporate Affairs has vide General circular 19/2013 dated 10.12.2013 issued clarification on disclosures to be made with regard to applicability of Section 182(3) of Companies Act 2013 pertaining to Prohibition and restriction regarding political contributions

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As per the circular with the coming into force of the scheme relating to ‘Electoral Trust Companies’ in terms of section (24AA) of the Income Tax Act, 1961 read with Ministry of Finance Notification No. S.O.309(E) dated 31st January, 2013 pertaining to Electoral Trust Scheme 2013, it will be expedient to explain the requirements of disclosure on part of a Company of any amount or amounts contributed by it to any political parties u/s. 182(3) of the Companies Act, 2013. It is clarified that;

(i) Companies contributing any amount or amounts to an ‘Electoral Trust Company’ for contributing to a political party or parties are not required to make disclosures required u/s. 182(3) of Companies Act 2013. It will suffice if the Accounts of the company disclose the amount released to an Electoral Trust Company.

(ii) Companies contributing any amount or amounts directly to a political party or parties will be required to make the disclosures laid down in section 182(3) of the Companies Act, 2013.

(iii) Electoral Trust Companies will be required to disclose all amounts received by them from other companies/sources in their Books of Accounts and also disclose the amount or amounts contributed by them to a political party or parties as required by section 182(3) of Companies Act, 2013.

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A. P. (DIR Series) Circular No. 111 dated 13th March, 2014

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Rupee Drawing Arrangement – Increase in trade related remittance limit

At present, the limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA), as mentioned in the Memorandum of Instructions for Opening and Maintenance of Rupee/ Foreign Currency Vostro Accounts of Non-resident Exchange Houses, is Rs. 2,00,000.

This circular has, with immediate effect, increased the said limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA) from Rs. 2,00,000 to Rs. 5,00,000. Press Note No. 2 (2014 Series) D/O IPP File No: 12/10/2011-FC.1 dated 4th February, 2014

Policy on Foreign Investment in the Insurance Sector – Amendment of Paragraph 6.2.17.7 of ‘Circular 1 of 2013 – Consolidated FDI Policy’

This Press Note has, with effect from 5th April, 2013, replaced Paragraph 6.2.17.7 with respect to FDI in the Insurance Sector as under:

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A. P. (DIR Series) Circular No. 110 dated 4th March, 2014

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Money Transfer Service Scheme – ‘Direct to Account’ facility

This circular permits recipient banks to credit foreign inward remittances received under MTSS directly to the bank accounts of beneficiaries that are KYC compliant, subject to certain terms and conditions, through electronic mode, such as NEFT, IMPS, etc. The partner bank must clearly mark the direct-toaccount remittances to indicate to the Recipient Bank that it is a foreign inward remittance.

In cases where the bank accounts of the beneficiaries are not KYC compliant, the Recipient Bank has to carry out KYC/CDD before the remittance can be credited the bank account or allowed to be withdrawn.

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A. P. (DIR Series) Circular No. 109 dated 28th February, 2014

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Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

This circular states that new EDPMS has been operationalised with effect from 28th February, 2014 and the same will be available to banks from 1st March, 2014. Accordingly, banks must use the web link https://edpms.rbi.org.in/edpms for accessing the system. The user credentials for accessing the system have already been given to the banks.

As a result, entire shipping documents have to be reported in the new system. However, the old shipping documents will continue to be reported in the old system till the completion of the cycle. Both, the old and new systems will run parallel to each other for some time and the date of discontinuance of the old system will be communicated to the banks.

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SAT Discusses the Concept of “Due Diligence” – Decision Relevant to Merchant Bankers, Intermediaries, Directors and Other Professionals

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Background
A recent decision of the Securities Appellate Tribunal (SAT) discusses in detail as to what constitutes “due diligence” (Keynote Corporate Services Ltd. vs. Securities and Exchange Board of India, Appeal No. 84 of 2012, dated 19th February 2014). Intermediaries, including merchant bankers, are required to be diligent in the performance of their duties and this decision is of relevance to them. For Chartered Accountants in general and Auditors in particular too, this decision has relevance for at least two reasons. Firstly, professionals like CAs are required to carry out their duties exercising care of a level higher than the “due diligence” test. Hence, what constitutes “due diligence” should be of use. Secondly, CAs connected with listed companies and the SEBI registered intermediaries, though are not being regulated directly by the SEBI, do find their work reviewed by the SEBI. Hence, generally the standards laid down in this decision have relevance to intermediaries registered with SEBI.

Brief facts
In this case, to summarise the facts as reported, a merchant banker managed a public issue. As the readers would know, the manager to a public issue (“IPO”) has the highest and broadest of responsibilities, not only in managing the issue generally but coordinating with other intermediaries. In particular, it is his prime responsibility as regards the quantity and quality of information of disclosures made in the prospectus. It was found that in an issue managed by it, certain material disclosures were not made. The Company had, immediately before the IPO, borrowed monies from certain entities and used the same for advances for capital assets and other matters. The genuineness of such outgoing/ expenditure was not accepted by Securities and Exchange Board of India. The Company, after the IPO, repaid such loans from the IPO proceeds. The SEBI alleged that this amounted to siphoning off of funds. Further, it seems that the SEBI believed that the fact that the IPO proceeds were really meant to pay off such existing liabilities would have been a material consideration for the investors. Thus, disclosure of such facts would have affected their decision in investing.

The basic facts that the amounts were borrowed, then used for certain purposes and then the IPO proceeds were utilised for repayment of such borrowings do not seem to be in dispute. Also, nondisclosure of such pre-existing borrowings was also not in dispute. The issue in question was whether the merchant banker had carried out his duty with diligence that was expected of him.

Decision and principles laid down

The SAT laid down the law relating to the duties of the merchant banker as regards due diligence. Clause 64 of the SEBI (ICDR) Regulations 2009, reads as under:

“Due diligence.

64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents…..”

The SAT relied on the decision of the Supreme Court in the matter of Chander Kanta Bansal vs. Rajinder Singh Anand [(2008) 5 SCC 117] where due diligence was explained in the following words:

“The words “due diligence” have not been defined in the Code of Civil Procedure, 1908. According to Oxford Dictionary (Edn. 2006), the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort.”

The SAT then reviewed the Memorandum of Understanding between the merchant banker and the Company and the rights of the merchant banker stated in the following clause was highlighted:

“The BRLM shall have the right to call for any reports, documents or information necessary from the Company to enable them to verify that the statements made in the Draft Red Herring Prospectus or the final Prospectus are true and correct and not misleading, and do not contain any omissions required to make them true and correct and not misleading.”

The statement in the prospectus that was found to be incorrect read as under:

“Bridge Loan: We have not entered into any bridge loan facility that will be repaid from the Net Proceeds.”

The merchant banker raised several pleas in its defence, all of which (except one, which is not relevant for this discussion) were rejected.

Firstly, the merchant banker stated that it was not informed by the company about the borrowings and that such information was indeed withheld from them. The SAT did not accept this as a valid defense. It said that the merchant banker could not expect the company to provide its information on its own with the merchant banker not taking any initiative. The SAT observed, :-

“Appellant’s plea that the information regarding ICDs was withheld from Appellant by ESL cannot be accepted. BRLM, in carrying out its functions is generally expected to act in an independent and professional manner and should not rely only on issuer company to provide them with updates, if any. Due diligence on part of Merchant Banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out.”

The merchant banker said that it had obtained undertakings from the directors of the Company that the statements made in the prospectus are true. This too was rejected as being an insufficient defense. The SAT stated that accepting statements from the Company was no substitute for proper due diligence.

Then the merchant banker explained the manner in which he carried out his duties. He said that “when he handles IPO, he carries out random checks to verify authenticity of entities mentioned in the prospectus and has submitted documents in support of same”. In particular, the verification is “with reference to objects of issue and quotations, and in respect of IPO of ESL such checks were made in respect of major quotations submitted by ESL and, in support, Appellant submitted copies of few quotations along with nothings from concerned executive at its end, confirming veracity of offer document.”.

However, the SAT did not accept this and found that the manner in which such checks were carried out was insufficient. The Investigation had revealed that a sum of Rs. 4.75 crore from the IPO proceeds was allegedly siphoned off.

The SAT also explained the manner in which an intermediary such as a merchant banker in the present case should act while carrying out its duties with due diligence:-

“It is about making an active effort to find out material developments that would affect interest of investors. It is on faith that intermediary has conducted due diligence with utmost sincerity that investing public goes forward and decides to invest in a particular company. In present case Appellant had failed to exercise due diligence in carrying out its duties as BRLM in IPO of ESL.”

The SAT observed that the merchant banker had merely relied on certain statements provided by the Company and others. Moreover, even some of such statements were misleading or not in context of the issue before it. In any case, the SAT observed that this approach did not amount to carrying out its duties with due diligence. The SAT observed, :-

“Reliance of such documents, which in effect do not convey anything material or are misleading, infact, strengthens the case of Respondent that Appellant has done nothing to carry out due diligence and has been a passive actor, waiting for documents/information to come to him, whereas he should have been active in looking into various aspects of functioning of ESL, scrutiny of functioning of ESL, scrutiny of all relevant documents- including bank statements and order book position etc., before certifying correctnes of various statements in prospectus and issue of due diligence certificate at various stages of IPO”.


Curiously, the merchant banker pleaded that he had
a wide experience, knowledge and recognition in
the field. It had 35 years of experience in the field
and had managed more than 100 IPOs. He was a
regular speaker at various forums on the field. It
appears that this defence was raised to imply that
the merchant banker was well versed with his duties
and thus he would not have committed any
violation. However, this was actually went against
him. It was held that this past experience actually
raised the benchmark with which he ought to have
performed its duties and the facts did not evidence
‘due care’. The SAT observed,:-

“Appellant’s pleadings in Memorandum of Appeal
that the is highly experienced, and is a regular
speaker on subject of capital markets at various
forums and that he had carried out due diligence at
every stage, of issue of IPO and that he had fulfilled
all requirements of his responsibilities as BRLM/
Merchant Banker and some material disclosures
were not in issue documents, since these were done
at his back and not brought to his notice by ESL,
come to nothing, when he himself is not serious or
vigilant and is awaiting relevant information coming
to him and he then taking action on same, this
Tribunal has no hesitation is stating that Appellant
has failed in his duty to carry out due diligence, at
any stage of IPO of ESL and had failed not only the
investors in this issue but has done considerable
harm to security markets, at large.”

“….a professional person having wide knowledge
and experience in bringing out 125 IPOs during
its existence, is expected to show better professionalism
than was shown by Appellant. In the circumstances,
this Tribunal expects better standards
of performance from professionals, who charge
reasonably good fee from clients and who bring
out documents (prospectus in this case), which are
relied on by investors, at large, to take informed
decisions regarding investments in scrips/IPO and
this standard of professionalism should be higher
than a reasonable man with ordinary prudence will
demonstrate in the matter of due diligence but in
present case no mark of professionalism can be
seen from Appellant, who was merely a certificate
issue machine on dates when it was due, without
undertaking any due diligence whatsoever.”

The SAT, thus upheld the penalty levied on the
merchant banker. 

Other aspects/laws/developments



The original SEBI order, that levied the penalty
on the merchant banker, is also worth reviewing.
The SEBI reviewed several other past cases where
it was alleged that an intermediary did not carry
out its duties with due diligence. A review of such
decisions is useful to understand this concept better.
The Auditors of a listed company, apart from
of course carry out statutory audit, also carries out
limited review of financial results for disclosure. The
manner in which such limited review is carried out
can be considered by the SEBI.

“All the directors of the company
(including
independent directors) shall exercise their duties with
due and reasonable care, skill and diligence;”.

The implications of this decision thus is wide and
the principles laid down by the SAT will be useful
for intermediaries including merchant bankers,
chartered accountants and others associated with

 The SEBI also expects a common and high standard
of diligence from intermediaries generally. Clause 1.3
of the Code of Conduct, which is part of the SEBI
(Intermediaries) Regulations, 2008, reads as under:- 

“1.3 Exercise of Due Diligence and no Collusion
An
intermediary shall at all times render high standards
of service, exercise due skill and diligence over persons
employed or appointed by it, ensure proper care and
exercise independent professional judgment and shall
not at any time act in collusion with other intermediaries
in a manner that is detrimental to the investor(s).” 

Further, while the SEBI (Intermediaries) Regulations
do provide for a common duty of due diligence by
intermediaries generally as stated above, individual
regulations too, provide make specific or general
requirements of performance of duties by the
respective intermediaries with due diligence. The
SEBI (Debenture Trustees) Regulations, for example,
require that the Trustees shall exercise due diligence
to ensure compliance of various laws, the Trust
Deed, etc.
The SEBI (SAST) Regulations 2011 require
that the manager to the open offer “shall exercise
diligence, care and professional judgment to ensure
compliance with these regulations”.

The Companies Act 2013 also provides in section
149(12) that an Independent Director, a non-executive
director or a key managerial personnel would be
held liable only “where he had not acted
diligently”.
Not carrying out his role with diligence would thus
subject him to severe adverse consequences under
the Act. Schedule IV of that Act further lays down
the Code for Independent Directors and a fairly
high standard of performance of duties is expected
from the Independent Directors. The explanation
of the duties in this decision of the SAT would be
of guidance.

Clause 49 of the Listing Agreement which lays
down requirements of corporate governance also prescribes duties of the directors in general and of
the Independent Directors and the members of the
Audit Committee in particular. Here too, though not
stated explicitly, similar standards may be applied.
Indeed, SEBI’s concept paper which proposes to
substantially expand the standards of corporate
governance specifically states as follows:-

“All the directors of the company (including independent directors) shall exercise their duties with due and reasonable care, skill and diligence;”. The implications of this decision thus is wide and the principles laid down by the SAT will be useful for intermediaries including merchant bankers, chartered accountants and others associated with listed companies.

Sexual Harassment Law-I

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Synopsis

The Law for prevention of sexual harassment of women at workplace has now become an Act. Up until now it was in the form of Guidelines laid down by the Apex Court. The Act is very important since it applies to all organisations, public or private, small or big and even applies to houses in certain cases. What constitutes sexual harassment is also very widely worded. Business entities should choose to ignore this Law at their own peril! We will examine this Act through a two-part Feature.

Introduction
A major landmark was achieved when the Indian Government notified, on 9th December, 2013, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“the Act”). The Act’s preamble states that it is to provide protection against sexual harassment of women at the workplace and for the prevention and redressal of complaints relating to sexual harassment. The Constitution of India guarantees every citizen a right to life and dignity and freedom to practice any profession/business. These are fundamental rights which are available equally to men and women. A safe working environment for women is one such fundamental right. Gender equality includes protection from sexual harassment and right to work with dignity. This Act seeks to achieve the same. Recent infamous events in corporate India have highlighted the urgent need for a Legislation such as this.

The roots of this Act may be traced to the pathbreaking judgment of the Supreme Court in Vishaka vs. State of Rajasthan (1997) 6 SCC 241 which was followed up by an equally important decision in Medha Kotwal Lele vs. Union of India, (2013) 1 SCC 297. Inspite of clear directions to the Government by the Apex Court to pass a Law on this subject, the Act saw the light of the day 16 years after Vishaka’s case. Let us examine this important piece of Law which, as we will see, impacts not only workplaces but also some households.

Vishaka’s Case
Vishaka’s judgment, for the first time, dealt with the hitherto untouched subject to women’s safety at work. In an unusual judgment, in the absence of any enacted law, the 3 Member Bench took it upon themselves to frame Guidelines to prevent sexual harassment of women at workplaces. The Court held that these Guidelines should be strictly observed in all working places by treating them as the Law of the land under Article 141 of the Constitution. It further held that the Court’s Guidelines and norms would be binding and enforceable in law until suitable legislation is enacted to occupy the field.

Inspite of the Court’s clear directions, some States were not complying with Vishaka’s Directions. Hence, the Supreme Court in Medha Kotwal Lele’s case, again issued further directions. It held that the Guidelines should be implemented in its true spirit. The Court passed a speaking Order wherein it directed all Government Organisations, Bar Associations, Medical Clinics/Hospitals, Offices of Engineers/Architects, etc., which employed women, to implement the Guidelines. It also instructed the Medical Council, Council of Architecture, our ICAI, ICSI, and other statutory institutes to ensure that organisations, bodies, persons, affiliated with them follow the Vishaka Directions. Further, for any noncompliance with Vishaka’s Guidelines, the aggrieved persons should approach respective High Courts.

It is in the light of this judicial activism that the Act has been passed. Now that this Act has been passed, Vishaka’s Directions would no longer apply. Let us now examine the Act’s salient features.

Application
The Act applies to the whole of India. It applies to every workplace owned by an employer where an employee, who is a lady, is employed and who is sexually harassed. The meaning of each of these four terms is very crucial since it forms the heart of the Act. This Act provides for civil remedy for sexual harassment of a lady.

Section 354 of the Indian Penal Code, 1860 (IPC) provides punishment for a harassment which is criminal in nature, i.e., if it is an assault or criminal force on the woman with intent to outrage her modesty.

Workplace
The Act applies to harassment at the Workplace and hence, it is very important to understand what constitutes a workplace? The term is defined in an inclusive manner and Table-1, given below, enlists the inclusions referred to in the definition:

Employee
Next let us understand who is an employee under the Act. The persons covered under the definition of the term employee are given below in Table-2:

It may be noted that although there is a definition of the term employee, it is not necessary that the complainant lady should be an employee of the workplace where the incident occurred. She could be any lady who was harassed at that workplace as would be evident when we see the definition of the term “aggrieved woman” given below.

Aggrieved Woman
It is important to understand who is an aggrieved woman under the Act. In relation to a workplace, it means any woman of any age, whether employed or not, who alleges to have been sexually harassed by a respondent. A respondent is a person against whom a complaint is lodged. Thus, any lady who comes to a workplace (e.g., a client, a consultant, an auditor, a patient, a student, etc.,) could allege harassment at that workplace by a respondent working there. She need not be an employee of that workplace.

However, there is some disconnect when viewed along with the definition of the term workplace. Considering again the example of the auditor-auditee, in relation to an articled clerk who alleges harassment at the auditee’s workplace by the auditee’s employee, the aggrieved woman definition is wide enough to cover an auditor who has come into an organisation. However, the definition of the auditor’s workplace includes any workplace visited by his employee. The correct forum to complain should be the ICC of the auditee since that is the workplace where the alleged incident occurred. How can the auditor’s ICC have any control over an employee of the auditee? A better clarity on this very important issue is desirable.

Employer
The obligations under the Act are cast upon the Employer. In case of a private/NGO sector, it is defined to mean one responsible for the management, supervision and control of the workplace. The term management includes the person or the Board or the Committee responsible for the formation and administration of policies for such organisation. Thus, the Board of Directors in the case of a Company, Designated Partners in case of an LLP, Partners in case of a Firm, etc., would be treated as Employers.

Sexual Harassment This brings us to the all important question, what constitutes a sexual harassment under the Act? The term “sexual harassment” is defined in a very wide and all-encompassing manner. Several people who may be under an impression that a particular act of theirs cannot constitute harassment would be in for a rude shock. It is defined to include any one or more of the following unwelcome acts or behaviour, whether directly or by implication:

a) Physical contact and advances;
b) Demand or request for sexual favours;
c) Making sexually coloured remarks;
d) Showing pornography;
e) Any other unwelcome physical, verbal or nonverbal conduct of sexual nature.


While, for some of the above acts, it is quite apparent
that they constitute sexual harassment, it
is important to fully understand the meaning of
“making sexually
coloured remarks” and “any
other
unwelcome verbal or non-verbal conduct of sexual
nature”. Circulating
lewd text/WhatsApp messages
to female colleagues,, reading aloud vulgar jokes
to female colleagues, passing abusive remarks in
the presence of women, offensive screensavers on
laptops, commenting on women, staring, stalking,

etc., may all be
covered. Even something like asking
a lady colleague out for a drink may be covered
within this definition. The list cannot be exhaustive
and needs to be considered based on the facts and
circumstances, but one important parameter for an
act/behaviour to constitute harassment is that it
must be unwelcome.


In addition, the Act also states that one or more
of the following circumstances, if they occur or
are present in relation to or connected with any
act of sexual harassment, may amount to sexual
harassment:
• Implied/explicit promise of preferential or detrimental
treatment in her employment
• Implied/explicit threat of her employment status
• Interfering with her work

• Creating a hostile/offensive work environment
for her
• Humiliating treatment likely to affect her health/
safety

(…. to be continued)

PART A: ORDERS OF CIC

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Section 8(1) (j) of the RTI Act 2005:

Information sought-

The certified true copies of the original application filed by Mr. Pradeep Kumar (Director Postal Services, Mumbai Region) at the time of seeking a job at the Department of Post along with all the necessary documents attached to the original application. The information sought was from the date of appointment till date.

Decision notice-
It is fairly obvious that the information which the appellant has sought after in respect of the officer (viz. the application/documents on the basis of which he has been appointed) is in the nature of ‘personal information about third party.’ The employee might have filed these documents before the appointing authority for the purpose of seeking employment, but that is no reason enough for this information to be brought into the public domain to which anybody could have access.

It is also seen that the Hon’ble Supreme Court in its decision dated 13-12-2012 [Civil Appeal No. 9052 of 2012, Bihar Public Service Commission vs. Saiyad Hussain Abbas Rizvi & Anrs, [RTIT IV (2012) 307 (SC)]] has, inter alia, held as under:

“Certain matters, particularly in relation to appointment are required to be dealt with great confidentiality. The information may come to knowledge of the authority as a result of disclosure by others who give that information in confidence and with complete faith, integrity and fidelity. Secrecy of such information shall be maintained, thus, bringing it within the ambit of fiduciary capacity”.

“The appellant has not established any public purpose which the disclosure of this information would serve. Hence, we concur with the submissions of the CPIO that the information is exempt.”

[Pradeep Ambadas Ingole vs. CPIO & Director Postal Services, Mumbai Region, decided on 26-12-2013: RTIR I (2014) 42 (CIC)]

Section 2(f)of the RTI Act,2005 “Information”:

1. Appellant submitted RTI application dated 8th November, 2012 before the CPIO, Govt., Medical College & Hospital, Sector 32, Chandigarh; seeking information relating to break up of the class IV staff (Ward Staff) with each officer and each branch of the GMCH-32 through multiple points.

2. Vide CPIO Order dated 7th December, 2012, CPIO denied the requisite information on the ground that the requisite information is not covered u/s. 2 (f) of the RTI Act, 2005 which provides the definition of information. However, he wrote that the Applicant may get the requisite documents after inspecting the record on any working day.

Decision Notice:
“Both parties have been heard. Commission observes that the CPIO has not applied his mind while disposing the RTI application and in no way it can be construed that the information sought by the appellant is not covered under the definition of information given u/s. 2(f) of the Act. Simultaneously, CPIO has also stated that the appellant can inspect the requisite documents holding the information. Both these statements are contradictory and reflect the intention of the CPIO to avoid providing the requested information to the appellant. At the hearing also, Commission observed the reluctance of the CPIO in imparting the information which is held on record and is squarely disclosable as per the provisions of the Act. Now, CPIO is directed to provide points-wise information to the appellant within two weeks of receipt of order. Through this order, ‘Show Cause Notice’ is issued to the CPIO for attempting to obstruct the disclosure of the requested information. Date for personal hearing will be provided to him through separate notice.”

[Harmeet singh vs. Government Medical College & Hospital, UT Chandigarh: Decided on 11-12-2013: RTIR I (2014) 47(CIC)]

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Release Deed – Chargeability : Stamp Act, 1899:

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M. Suseelamma & Ors vs. The Chief Controlling Revenue Authority Chennai and Anr. AIR 2014 Madras 43.

The Late M. Krishnaiah Chetty had purchased the subject property from one, Sheela Devi. Subsequently, after the demise of M. Krishnaiah Chetty, who died intestate on 16-04-2000, leaving behind the appellants 1 to 7, wife, sons and daughters, as his class I legal heirs, a document, dated 09-10-2003, has been presented and numbered as 50 of 2003, on the file of the sub registrar (District Registrar Cadre), captioned as Deed of Release.

Where the husband of the appellant had purchased the subject property from its original owner by virtue of registered sale deed and husband died intestate leaving behind wife (appellant), sons and daughter as Class I heirs, then the wife, sons and daughter would inherit the property as Class I heirs in terms of the Hindu Succession Act. However, since the parties do not belong to HUF, the grandsons, when their father is alive would have no pre-existing right over property. Therefore, the release deed by appellant alongwith her sons, daughters and grandson in favour of another son was rightly treated as conveyance under Article 23 of Schedule.

In the light of section 8 of the Hindu Succession Act, the releasees 2 to 4 do not have any preexisting right over the subject property. They have not inherited any property, as per section 8 of the Hindu Succession Act. The value of the property shown in the document is Rs. 2 lakh. As per section 5 of the Indian Stamp Act, any instrument comprising, or relating to several distinct matters shall be chargeable with the aggregate amount of the duties, with which separate instruments, each comprising or relating to one of such matters, would be chargeable under the Indian Stamp Act.

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Precedent – Ratio decidendi – Must be understood in the background of the facts of the case – Judgements are not to be read as a statute: Constitution of India.

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Arasmeta Captive Power Company P. Ltd. & Anr vs. Lafarge India Pvt. Ltd. AIR 2014 SC 525

The judgments rendered by a court are not to be read as statutes. In Union of India vs. Amrit Lal Manchanda and another (2004) 3 SCC 75, it has been stated that observations of courts are neither to be read as Euclid’s Theorems nor as provisions of a statute. The observations must be read in the context in which they appear to have been stated. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes.

Words used in a judgment should be read and understood contextually and are not intended to be read literally. Many a time a judge uses a phrase or expression with the intention of emphasising a point or accentuating a principle or even by way of writing style. Ratio decidendi of a judgment is not to be discerned from a stray word or phrase read in isolation.

In this context the following words of Lord Denning are significant.

“Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.”

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Partnership firm – Unregistered – Not be barred from enforcing their rights under Transfer of Property Act: Partnership Act 1932 Section 69(2):

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Sandhya Anthraper & Anr vs. Manju Kathuria & Ors AIR 2014 Karnataka 21

Appellants who are plaintiffs/partners of an unregistered firm of M/s. Windsor Wings Developers, filed a suit against the defendants , for the relief of declaration that the registered Sale deed dated 26.04.2003 executed by defendant No. 1 is invalid, illegal and not binding on the plaintiffs, for cancellation of the sale deed and for permanent injunction restraining the defendants 2 to 5 from selling, leasing, mortgaging or otherwise alienating and interfering with their peaceful possession of the property. It is the case of the plaintiffs that the suit property was purchased in the name of the Firm. The plaintiffs suspected the conduct of the 1st defendant and they made enquiries about the suit property in the Office of the Sub-Registrar and discovered that the 1st defendant, who had no authority to sell the immovable property belonging to the Firm, without their consent had executed a sale deed dated 26-04-2003 on behalf of the Firm, in favour of the 2nd defendant for a consideration of Rs. 16,66,620/- though the property was worth more than Rs. 30,00,000/-. It is contended that the sale deed is invalid, void, fraudulent and the same is executed clandestinely with an intention of cheating the plaintiffs.

The defendants contented that the Suit is barred u/s. 69(2) of the Partnership Act. The trial Court, after hearing on the preliminary issue, answered the same in the affirmative in favour of the defendants and dismissed the Suit as not maintainable u/s. 69(2) of the Act.

Sum and substance of s/s. (1) of section 69 of the Act is that no suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court and the person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

The defendants have not pleaded that the suit is barred under s/s. (1) of section 69, but it is contended that the suit is not maintainable both under s/s. (1) and (2) of Section 69 of the Act.

The Hon’ble Court observed that the plaintiffs who are partners of the unregistered firm are neither enforcing their right arising from a contract nor the right conferred by the Act. The plaintiffs are enforcing their right under the contract of partnership deed dated 29-12-1995 and specifically Clause 25(d) which says that no partner of the firm shall, without the consent in writing of the other partners, be entitled to transfer immovable property belonging to the Firm, but the defendant No.1, as a partner of the partnership firm, has sold the suit land in favour of defendants 2 to 5. Though it is stated in sub-Clause (d) of Clause 25 of the partnership deed that no partner of the firm shall without the consent in writing of the other partner, be entitled to transfer immovable property belonging to the firm, the appellants/ plaintiffs seek to enforce their right conferred upon them under the Transfer of Property Act. It is well settled principle that a ‘partnership firm’ has ‘no separate legal entity’. It is always understood that ‘firm’ means ‘partners’, ‘partners’ means collectively a ‘firm’. Thus the property belonging to a partnership firm is the property of the partners of the firm.

In view of the above, under the Transfer of Property Act, each of the partner is entitled to claim his right to the immovable property of the firm, as co-owner. Under such circumstances, the contention that the suit filed by the plaintiffs enforcing their right under the contract of partnership deed, holds no water

As regards to s/s. (2) of section 69 no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as the partners in the firm. In the instant case, there is no contract between the plaintiffs on one side and defendants 2 to 5 on the other and thus, there is no question of plaintiffs enforcing a right arising from a contract and thus the Suit is not hit under s/s. (2) of section 69 of the Act.

As per section 69(1) of the Act, an unregistered partnership firm or partners are prohibited from enforcing a right arising from a contract or the right conferred by the Partnership Act, 1932, but the provision does not take away the right of the partners of an unregistered firm to enforce their right under other enactments. According to Article 300-A of the Constitution of India, no person shall be deprived of his property save by authority of law. The property of the partnership firm, was purchased under three registered Sale deeds dated 20-01-1996 by the partnership firm, viz., M/s.Windsor Wings Developers, out of the funds of the firm. Thus, the property becomes the property of the partners and they are co-owners. Therefore, the plaintiffs are entitled for the relief sought for. Defendant No.1 has committed breach of trust, which is an offence under the Indian Penal Code. The plaintiffs are enforcing their right as co-owners of the suit property conferred under the Transfer of Property Act and the Partnership Act does not bar the partners of an unregistered firm from enforcing their right conferred under the other enactments. In other words, at the cost of repetition, it must be mentioned that what is prohibited u/s. 69 of the Act is enforcement of contract of partnership, provisions of the Partnership Act, 1932 and enforcement of right arising from a contract (between the firm and third party) and not the rights conferred under the other enactments. Therefore, the trial Court erred in dismissing the suit as barred by s/s. (2) of section 69 of the Partnership Act, 1932.

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Lease – Amount of security deposit – No stamp duty on security deposit. Stamp Act 1899, Article 35(c):

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Moideen Koya vs. K. Girish Kumar & Anr. AIR 2014 Kerala 30

A lease agreement was executed between the landlord and the tenant on 29-09-2010, in which the monthly rent payable was fixed as Rs.3,500/. An amount of Rs. 50,000/- was given by the tenant as security deposit which was refundable on termination of the lease. The Rent Control Court refused to mark the lease agreement for the reason that the same was under stamped and the court ordered payment of the stamp duty alongwith penalty for security and the rent payable as per the lease agreement.

The legal question therefore arose as to whether Article 33(c) will cover a refundable security provided in a lease agreement, even though the same is adjustable towards the rent in arrears.

The Government letter dated 24-02-1983 addressed to the Inspector General of Registration reads as follows:

“In supersession of the instruction issued in Govt. letter No. 18769/E2/75/TD, dated 15-12-1975 and in accordance with the decision of the Delhi High Court in AIR 1980 Delhi 249, the following principles may be observed while classifying lease deeds.

(1) Duty is not chargeable under Article 35(c) of Schedule IA of the Indian Stamp Act, 1899 on the amounts of security/deposit/advance, which is refundable on determination of the lease, in addition to the duty paid on the rent reserved under Article 35(a) of the Schedule.

(2) It will not make any difference in the changeability of duty, if such deposit/advance is adjustable in rent/other charges dues payable under the lease.

(3) The amount of security deposit paid for the due performance of the contract of lease is chargeable under Article 57 of the Schedule read with section 5 of the Act.

Amount of security deposit – cannot be treated as “money advanced” in terms of Article 33(c) – Fact that it is adjustable to – wards unpaid rent – Immaterial – since it paid for due performance of obligations of lease and on termination of lease, it is refundable, such an amount which is refundable will not get character of `money advanced’ – Lessor consequently not bound to pay stamp duty on security deposit.”

A reading of Article 33(a), will show that it covers cases where the rent is fixed and no premium is paid or delivered. Going by Article 33(c), the provision is attracted where the lease is granted for a premium or for money advanced and the same will be in addition to rent reserved. Apparently, the Rent Control Court has treated the security deposit as money advanced for attracting section 33(c) in addition to the rent.

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Circulars – Binding nature – Circulars cannot override statutory provisions: Administrative Law:

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Glaxo Smithkline Pharmaceuticals Ltd vs. UOI & Others, AIR 2014 SC 410

The following principles emante out of this decision of the Supreme Court in relation to the Circulars issued by the Government under the fiscal laws (Income-tax Act and Central Excise Act):

1. Although a circular is not binding on a court or an assessee, it is not open to the Revenue to raise a contention that is contrary to a binding Circular by the Board. While a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that is not valid nor that it is contrary to the terms of the statute.

2. A show cause notice and demand contrary to the existing Circulars of the Board are ab initio bad.

3. It is not open to the Revenue to advance an argument or file an appeal contrary to the Circulars.

The above legal position is re-emphasised in Commissioner of Customs vs. Indian Oil Corporation (AIR 2004 SC 2799: 2004 AIR SCW 1310) has been followed in UOI vs. Arviva Inds. (I) Ltd.: (2007) 209 ELT 5 (SC)

4. It is well settled that if the departmental Circular provides an interpretation which runs contrary to the provisions of law, such interpretation will not bind the Court.

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Private Companies under the Companies Act, 2013

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Synopsis

The regime of the Companies Act, 1956 has come to an end, with the notification of a majority of the sections of the Companies Act, 2013 . Significant changes have been brought/new concepts have been introduced like withdrawal of several relaxations enjoyed by the private Companies with added compliance burden, introduction of new concepts like OPC (One Person Company), etc. The article discusses in detail the key changes notified/ proposed with respect to Private Limited Companies and will be of relevance to a large number of readers.

Background

The Companies Act, 2013 (‘New Act’) received the assent of the President on 29th August, 2013 and was notified in the Gazette on 30th August, 2013. Of the 470 sections in the New Act, 98 sections or part thereof have been brought into force from 12th September 2013. Further, the Government has clarified that the relevant provisions of the Companies Act, 1956 (‘existing Act’) which correspond to the provisions of those 98 sections of the New Act shall cease to have effect from the said date.

The New Act has made material changes to the provisions under the existing Act. In this article the various privileges and exemptions which are available to a private company under the existing Act and the status thereof, under the New Act are discussed. The said analysis is irrespective of the fact whether all the said provisions have been notified by the Central Government or not.

1. Definition of Private company:
Under the New Act a private company is defined u/s. 2(68) as under:

“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,-

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred: (emphasis supplied)

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that:

(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company; (emphasis supplied)

The following changes in the definition of a private company may be noted:

a) Except in the case of One Person Company: maximum number of members, which a private company can have, is increased to 200 from the existing limit of 50;

b) Under the existing Act, a private company by its Articles is prohibited from inviting the public for subscription of shares and debentures. Under the New Act the prohibition applies to securities as defined u/s. 2(h) of the Securities Contracts (Regulation) Act, 1956 which includes not only the shares and debentures but also other securities prescribed therein;

c) Under the existing Act, in order to form a private company it is essential that its Articles contain a Clause that prohibits a company from accepting deposits from persons other than its members, directors or their relatives. The New Act does not prescribe a similar condition and thus, under the New Act, a private company can be formed without inserting in its Articles, a Clause prohibiting invitation or acceptance of deposits from persons other than its members, directors or their relatives. This however does not imply that a private company can invite or accept deposits from any person since the said restrictions are contained in section 73 (and draft Rules thereon) which deal with the provisions for acceptance of deposits.

2. Restriction on commencement of business:

As per the New Act, a private company cannot commence business or exercise borrowing powers:

• till every subscriber to the memorandum has paid the value of shares taken by him and the directors of the company have filed declaration to that effect; and
• the Company has filed with the Registrar a verification of its registered office.

Under the existing Act, a private company could commence business or exercise borrowing powers immediately on being formed/incorporated.

3. Share Capital:

a) Under the existing Act, a company is prohibited from issuing classes of shares other than equity or preference shares. Further, the Act provides that the shareholder’s voting rights should be in the same proportion to his share of the paid up equity capital of the company. However, these provisions do not apply to a private company which is not a subsidiary of a public company [section 90(2) of the existing Act]. Thus, under the existing Act, a private company not being a subsidiary of a public company is permitted to issue types of shares other than the equity share or the preference share. It can also issue shares with disproportionate rights in regard to dividend, participation in any surplus on liquidation and with disproportionate voting rights.

However under the New Act, similar exemption is not given to a private company.

b) Under the existing Act, a private company can issue further share capital to any person or in any manner as it thinks best in its own interest. Its Articles may or may not provide for pre-emptive rights of the shareholders.

Under the New Act, however, all companies including a private company, are required to offer shares to persons who, on the date of the offer, are holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the paid up share capital on those shares. Thus the current practice in private companies of freely issuing shares to any outsider will be restricted.

4. Providing financial assistance for purchase of its own/holding company’ s shares:

Under the existing Act, a public company or a private company which is a subsidiary of a public company is prohibited from giving a loan, a guarantee, a security or any other kind of financial assistance to any person for the purpose of purchase of shares in the company or in its holding company.

Under the New Act, such prohibition is restricted to public company only. Accordingly, private companies, including those which are subsidiaries of a public company would be able to offer financial assistance to any person for purchase of shares in the company or in its holding company.

5. Appointment of Directors:

a) Where a person other than a retiring director stands for directorship:

U/s. 160 of the New Act, a person who is not a retiring director and desires to stand for directorship is required to give 14 days’ notice in writing and a deposit of Rs. 1 lakh or such higher amount as may be prescribed. The deposit amount would be refunded provided he gets elected or gets at least 25% vote. A private company is not excluded from the applicability of the said provisions.

U/s. 257 of the existing Act, such person was required to deposit a sum of Rs. 500 only. However, it seems that the existing provision was complied more in breach – the same may become more difficult to comply in view of the increase in the amount of deposit to Rs. 1 lakh.

b) Number of directorships:

U/s. 275 of the existing Act, a person cannot become a director in more than 15 companies. For the purpose, a person holding directorship in a private company which is neither a subsidiary nor a holding company of a public company is not considered.


U/s. 165 of the New Act the said limit is increased
to 20 but it further provides that in the
said limit of 20, the number of public companies
cannot exceed 10. Further it is clarified that for
reckoning the limit of public companies, directorship
in a private company which is either a
holding or a subsidiary of a public company is
to be included. Thus under the New Act, since
directorships in private companies will also
need to be considered, it will require several
persons to reduce their number of directorships
in private companies.


c) Appointment of
directors to be voted on individually: 

U/s. 162 of the New Act where a company including
a private company, desires to appoint 2 or more persons
as directors by a single resolution, it is necessary
first to pass a resolution authorising their appointment
in that manner without even one dissentient
vote being cast against such resolution.

Under the existing Act, a private company which is
not a subsidiary of a public company is permitted to
appoint two or more persons as directors even by a
single resolution with no pre-conditions attached to it.


d) Consent to act
as a director: 

U/s. 152 of the New Act where a person is proposed
to be appointed as a director by a company including
a private company, he is required to furnish a declaration
that he is not disqualified to become a director
under the Act. It is further provided that a person
appointed as a director shall not act as a director unless
he gives his consent to hold the office as director
and such consent has been filed with the Registrar.


Similar provisions under the existing Act were not
applicable to a private company (unless it is a subsidiary
of a public company).

6.
Appointment of Managerial Personnel:


a) As per section 269 of the existing Act, every
public company or a private company which
is a subsidiary of a public company, having a
paid up share capital of Rs. 5 crore, is required
to have a managing or whole time director or
manager.


As per section 203 of the New Act, every company
belonging to such class or classes of
companies, as may be prescribed by the Central
Government, is required to have the following
whole-time key managerial personnel:

• Managing director or Chief Executive Officer or
Manager or Whole-time director;


• Company secretary; and

• Chief financial officer.

Thus, if the specified class of companies includes
private companies above the specified threshold,
they will need to comply with the above.

b) Under the New Act, it is further specified that
a person who is the Managing director or Chief
Executive Officer cannot be appointed as the
Chairperson of the company unless Articles
of such company provide for the same or the
company carries on multiple businesses.

c) A whole-time key managerial personnel cannot
hold office in more than one company except
in its subsidiary company, though he can be a
director of any company with the permission
of the Board.

Under the existing Act a person can be appointed
as a managing director in two companies
and for the purpose, managing directorships in
a private company which is not a subsidiary of
public company is not considered;

d) As per section 196(3) of the New Act, which
applies to all types of companies, a person
cannot be appointed to the post of managerial
personnel who is below the age of 21 years or
has attained the age of 70 years.

Under the existing Act, no such age criteria
were prescribed in relation to a private company.
e) Under the existing Act, a private company (not
being a subsidiary of a public company) is not
prohibited from appointing a managing director
or a manager for a term which may exceed 5
years at a time.

Under the New Act, all types of companies, including
a private company, are prohibited from appointing
managing director or whole time director or manager
for a term exceeding 5 years at a time.

7.
Restrictions on Powers of Board: 

As per the New Act, the Board of a company, including
of a private company can exercise the following
powers only with the consent of the company by a
special resolution:


a) Sale, lease or otherwise disposal of the whole
or substantially the whole undertaking. The
term ‘substantial’ means where not less than
20% of the value of the undertaking is being
disposed off;

b) To invest, otherwise in trust securities, the
amount of compensation received by it as a
result of any merger/amalgamation;

c) To borrow money, where the money to be
borrowed, together with the money already
borrowed exceed the aggregate of its paid
up share capital and free reserves;

d) To remit, or give time for the re-payment of,
any debt due from a director;

Under the existing Act, there were no such requirements
or restrictions on a private company which is
not a subsidiary of a public company.

8. Loan to
directors:


As per section 185 of the New Act no company,
including a private company, can advance any loan
to any of its directors or to any other persons in
whom the director is interested or give guarantee
or provide any security in connection with any loan
taken by him or such other person.


The corresponding provisions of section 295 of the
existing Act were not applicable to a private company
(unless it is a subsidiary of a public company).

Section 185 has also become operative since 12th
September, 2013. Hence, in case of any fresh loans
given or renewal of loans after that date, the provisions
of the section would need to be complied with. 

9. Loans and investments by a company:


The New Act provides for the manner in which and
the limits up to which a company, including a private
company can give loan or give guarantee or provide
security in connection with a loan to any other body
corporate or person or acquire any securities of any
other body corporate. As per section 186 of the Act,
unless authorised by a special resolution passed at a
general meeting, such loans, investments,
etc.,
made
by any company cannot exceed 60% of its paid up
share capital, free reserves and securities premium account
or 100% of free reserves and securities premium
account, whichever is lower. It further provides that
the loan cannot be given at a rate of interest lower
than the prevailing yield of 1 year, 3 year, 5 year or
10 year Government security closest to the tenor of
the loan. It also empowers the Central government to
prescribe limits up to which the companies registered
u/s. 12 of the Securities and Exchange Board of India
Act, 1992 can take intercorporate loan or deposit.

Section 372A of the existing Act also restricts loans
and investments by the company. However, the
provisions under the New Act are more stringent and
restrictive. The material differences between the two
provisions are as under:

a) Section 372A is not applicable to a private
company not being a subsidiary of a public
company while section 186 applies to private
companies also;


b) New section not only covers inter-corporate
loans and investment but also to loans and
investment given to non-corporates;

c) As per section 372A, a loan cannot be made at
the rate of interest lower than the prevailing
bank rate made public u/s. 49 of the Reserve
Bank of India Act, 1934 – u/s. 186 of the New
Act, the rate of interest is linked to the prevailing
yield of Government securities;

d) Following transactions not covered (or exempted)
under the provisions of section 372A of the existing
Act gets covered u/s. 186 of the New Act:

• Investments in right issue of shares made in
pursuant of section 81(1)(a);

• Loan by a holding company to its wholly owned subsidiary;

• Guarantee given or security provided by a holding
company in respect of loan to its wholly
owned subsidiary;


• Acquisition of securities by a holding company
of its wholly owned subsidiary;

e) A new provision is inserted to prohibit investment
through more than 2 layers of investment
companies.

10. Interested director not to participate or vote in
Board’s proceedings:

As per section 184 of the New Act, every director
of a company, including of a private company, who
is concerned or interested in a contract or arrangement
entered into or proposed to be entered into
is required to disclose the nature of his concern or
interest at the meeting of the Board and he cannot
participate in proceedings of such meeting.
Similar provisions under the existing Act were not
applicable to a private company.


11. Administration related:

a) Time and Place of the Annual General Meeting:

Under the existing Act, a private company has the
option to fix the time for its annual general meeting
by its Articles or by a resolution passed in one
annual general meeting wherein time for holding
subsequent meeting is fixed/decided. In case of a
private company (unless it is a subsidiary of a public
company), it also has the option of fixing the place
of its annual general meeting in the like manner.

The New Act does not provide for similar options and
as provided in section 96(2), all companies, including
a private company, is required to hold its annual
general meeting between 9 a.m. and 6 p.m. on a day
that is not on a National holiday, at the registered
office of the company or at some other place within
the city, town or village in which the registered office
of the company is situated.


b) Meetings and Proceedings:


By virtue of the provisions of section 170 of the
existing Act, a private company by its Articles can
frame its own Rules as regards the length of notice
for calling meeting, contents and manner of service
of notice and person on whom it is to be served,
Explanatory statement to be annexed to notice,
Quorum for meeting, Chairman of meeting, Proxies
and manner of Voting on resolutions.

The New Act does not grant similar exemptions
hence, a private company is required to follow the
same rules and procedures as are applicable to a
public company.

c) Filing of the Financial Statements with the Registrar:

Proviso to section 220 of the existing Act permits a
private company to file copy of Statement of Profit
and Loss separately with the Registrar and the same
is not available to general public for inspection.

Under the New Act no such exemption is available
to a private company and all Financial Statements
filed u/s. 137 including the Statement of Profit and
Loss, would be available to the general public for
inspection.

d) Register of directors:

Under the existing Act, all companies, other than a
private company, which is not a subsidiary of a public
company are required to enter date of birth of a
director in the Register maintained. The exemption
granted to a private company has been withdrawn
under the New Act, and accordingly, the Register
maintained even by a private company shall contain
information about the date of birth of a director.

12. The following exemptions and privileges available
under the existing Act are also available under the
New Act:

(A) In the case of all types of private companies:

• Filing of statement in lieu of prospectus before
allotment of shares is not required;

• A private company need not have more than
2 directors;

(B) In the case of a private company not being
a subsidiary of a public company:


• The provisions relating to the managerial remuneration
like the extent and manner of payment, fixing of overall maximum remuneration,
limit of minimum managerial remuneration
in the event of no profits or inadequate
profits, etc., are not applicable and such company
can remunerate its managerial personnel
by such higher percentage of profits or in any
manner as it may think fit;
• The provisions relating to the appointment,
retirement, reappointment, etc., of directors
who are to retire by rotation and the procedure
relating thereto, are not applicable and
the company can frame its own Rules for the
purpose in the Articles;
• The provisions relating to the manner of filling
up casual vacancy among the directors are not
applicable and the company can frame its own
Rules for the purpose in the Articles;
• The company can by its Articles, provide for any
disqualification for appointment as a director
in addition to those specified in the Act;
• The company may provide any other ground
for the vacation of the office of a director in
addition to those specified in the Act;

13. One Person Company (OPC):
The concept of One Person Company has been introduced
under the New Act. Section 2(62) of the Act
defines the OPC to mean a company which has only
one person as a member and as per section 3, a company
formed by one person would be a private limited
company. Thus, the OPC would enjoy all the exemptions
and privileges enjoyed by any private company. In addition,
OPC enjoys following exemptions and privileges:
a) It is not mandatory for the OPC to prepare
the cash flow statement;
b) In the absence of company secretary, the Annual
Return filed u/s. 92 can be signed by the
director;
c) The OPC is not required to hold an Annual
general meeting;
d) The provisions of section 100 to 111 which
provides for matter regarding extraordinary
general meeting, the length of notice for
calling general meeting, contents and manner
of service of notice and person on whom it
is to be served, Explanatory statement to be
annexed to notice, Quorum for the meeting,
Chairman of the meeting, Proxies and manner
of Voting on resolutions, etc., do not apply to
the OPC;
e) The financial statement need not be signed
amongst others, by the Chief Financial Officer
and the Company secretary. It is sufficient
compliance if the same is signed by one director;
f) It is sufficient compliance if the OPC has only 1
director instead of minimum 2 required in the
case of a private limited company;
g) In case of the OPC it is sufficient if at least 1 meeting of the Board of
Directors is held in each half of a calendar year.
14. Conclusion
As seen above,
the New Act has brought in many changes in the existing Act and various new
concepts have also been introduced. To some extent, the Clauses in the Articles
of the existing private companies may not be in sync with the provisions of the
New Act. The Articles of the existing private companies are based on Table A of
the existing Act which corresponds to Table F of the New Act. It will be
advisable for all private companies to compare the existing Clauses in its
Articles with Table F of the New Act and making the necessary changes as
required.
In conclusion, it may be said that the Private Limited Company is one
of the most widely used legal forms by many businessmen in India. In fact, many
of the successful business group had begun their first venture by forming a
private company, the reason being it was relatively easy to form and lesser
regulations applicable. As seen above, a number of privileges enjoyed by the
private company under the existing Act have been withdrawn under the New Act.
Due to this, a lot of companies (especially family owned) would need to
expeditiously explore whether they can really cope with the new requirements or
that they need to change to some other form of entity like Limited Liability
Partnership (LLP).

INDEPENDENT DIRECTORS UNDER THE COMPANIES BIL, 2012

“Freethinkers are those who are willing to use their minds without
prejudice and without fearing to understand things that clash with their
own customs, privileges or beliefs. This state of mind is not common,
but it is essential for right thinking…”

— Leo Tolstoy

Introduction

 Leo
Tolstoy captures the essence of independent thinking and maybe, it is
this essence which led companies across the globe to adopt and
incorporate the concept of appointment of independent directors on their
Boards. This concept was first introduced in the United States of
America and slowly spread across the globe, both in developed and
developing countries. The recent Companies Bill, 2012 (Bill) has made an
attempt to match the current global standard vis-à-vis appointment and
role of independent directors. This article makes an attempt to briefly
discuss the provisions relating to independent directors in the Bill and
provide a perspective on the laudatory efforts as well as the
shortcomings of the provisions.

Brief history of independent directors in India

The
importance and role of independent directors in the Indian scenario was
brought to the forefront by the Kumarmangalam Birla Committee (KBC) in
the year 1999. The recommendations of the KBC Report lead to the
introduction of Clause 49 of the Listing Agreement (which deals with
appointment and role of independent directors of listed companies) by
the Securities and Exchange Board of India (SEBI) in the year 2000.
Subsequently in 2003, another committee chaired by Mr. Narayan Murthy
suggested further changes to Clause 49 of the Listing Agreement and the
current clause is mostly based on the recommendations made by the
Narayan Murthy Committee (NMC). Another committee set up by the Ministry
of Corporate Affairs called the JJ Irani Committee in 2005 further
recommended certain changes contrary to those suggested by the NMC,
which were incorporated in the previous bills introduced in the
Parliament, in an attempt to replace the Companies Act, 1956 (Act).
Unfortunately, the Companies Bill, 2009 was not approved by the
Parliament and therefore, another attempt has been made to replace the
Act in 2012. In the meanwhile, the Ministry of Corporate Affairs had
also introduced some voluntary guidelines in 2009 relating to
independent directors, but since it did not have any binding effect,
many of these guidelines are not being followed by most of the
companies.

Companies Bill, 2012

Whilst a detailed
comprehensive analysis of all the provisions in the Bill relating to
independent directors is beyond the scope of this article, an effort has
been made to highlight some of the important provisions and discuss
their implications.

Qualifications and Neutrality

The
Bill has prescribed detailed qualification criteria for independent
directors, which were not set out in so much detail in the Listing
Agreement. It is evident from the provisions in the Bill regarding
independent directors that much emphasis has been placed on ensuring
complete independence of independent directors. The effect of these
provisions is to ensure that an independent director has neither any
relationship with or any interest in the company and/or its group
companies, nor is he incentivised by them in any manner, which may lead
to bias in favour of the company where he is so appointed. Certain
criteria which a person must satisfy in order to be eligible for
appointment as an independent director have been discussed below.

An
existing or past promoter, key managerial personnel, or employee of the
company or its holding/ subsidiary/ associate companies (Group
Companies) cannot be an independent director. Despite the wide
definition of associate companies, an argument may be made that this
restriction is reasonable, since promoters, key managerial personnel and
employees of these associate companies may have vested interests in the
company. However, the Bill also prohibits relatives of promoters and
directors of the company or it’s Group Companies from being independent
directors. Further, persons whose relatives are key managerial persons
or employees of the company or its Group Companies are also not
permitted to be independent directors. Considering the broad scope of
the definitions of the terms “relative” and “associate company”, the
list of people who are barred from being independent directors in listed
companies may become huge, especially if the group structure is
multilayered or complicated.

Another restriction in the Bill is
that the independent director, along with his relatives, may not hold
more than 2 % of the voting power of the company. It is not clear
whether indirect holdings (through companies controlled by the
director/relatives) would be aggregated or only direct holdings would be
considered for this purpose. In case of the former, identification of
all such entities/persons and verification of their shareholding in the
company would be an extremely tedious process and may lead to an
enormous work overload for the compliance/ secretarial teams.

An
independent director must not have had “any pecuniary relationship”
with the company, its Group Companies, or their promoters or directors
for a period of two years prior to appointment, or during his term. This
provision is significantly more restrictive than the requirements under
the Listing Agreement at present, which state that an independent
director must not have any material pecuniary relationship or
transaction, which could affect his independence. Therefore, minor
transactions and pecuniary relationships between the company and an
independent director currently do not disqualify him. The proposed ban
on any pecuniary relationship for independent directors in the Bill may
be unreasonably restrictive, as there are situations where a transaction
or relationship of the director may safely be considered to be of a
nature which cannot affect the director’s independence. For example, a
proposed director may have a standard fixed deposit with a banking
company, on the rates applicable to the general public, which may be
ordinarily considered to be a perfectly mundane and ordinary transaction
which cannot possibly lead to any bias. However, this would be
considered to be a pecuniary relationship with the banking company and
would prevent the person from being appointed as an independent
director. Also, the broad definition of the term “associate company”
further exacerbates the restrictive nature of the provision, which
prohibits pecuniary relationships with such companies as well as their
promoters and directors. A proposed independent director may have some
on-going transactions with a director of an associate company, which may
not contribute significantly to the director’s income, and even
otherwise, may not be very significant for him. However, due to the
provisions of the Bill, which prohibit “any pecuniary relationship”,
such a person is disqualified from being appointed as an independent
director.

Several other restrictions have been built into the
Bill to ensure that there is no financial nexus between the independent
director and the company. For example, the Bill prohibits independent
directors from receiving stock options of the company. This is also a
change from the provisions of Clause 49 of the Listing Agreement, read
with relevant SEBI regulations, under which independent directors are
presently allowed to hold stock options in the company. Apart from the
restriction on stock options, the remuneration of independent directors
has also been limited to sitting fees, reimbursement of expenses for
participation in the Board and other meetings and profit related
commission as may be approved by the shareholders. Independent directors
also cannot be the chief executive or director or hold any other
similar position in any nonprofit organisation that receives twenty-five
percent or more of its receipts from the company, its promoters,
directors, Group Company or that holds two percent or more of the voting
rights of the company.

The fact that nominee directors are
excluded from being independent directors is another example of the
emphasis placed by the Bill on ensuring absolute neutrality of the
independent director. Under the Listing Agreement, nominee directors of
lenders/investors are deemed to be independent directors. However, the
Bill also expands the scope of the term ‘nominee director’ to mean any
director nominated by “any financial institution in pursuance of the
provisions of any law for the time being in force, or of any agreement,
or appointed by any Government, or any other person to represent its
interests”, and states that all such nominee directors may not be
classified as independent directors. It is true that a nominee director
may only be concerned about the decisions of the company which may
affect the interests of the entity/person who has nominated him.
Considering that, it may not be proper to deem such a director to be an
independent director, since the very nature of his position indicates
that he would put the interests of the nominating entity above the
interests of the company. Therefore, in this regard, the changes
introduced by the Bill may be considered necessary and appropriate.

Process of appointment and due diligence
The
Bill mandates that prospective independent directors may be selected
from databanks maintained by institutions to be notified by the ?entral
Government. It is not clear on what basis would people be permitted to
register themselves in this database, although the Bill states that
rules would be prescribed for maintenance of such databases. Further,
the Bill provides that the terms of appointment of an independent
director must be approved by a resolution of the shareholders.

The
Code for Independent Directors in Schedule IV of the Bill (Code) also
prescribes that the terms of appointment of the director must be
formalised through a letter of appointment that inter alia sets out the
fiduciary duties that come with such an appointment along with
accompanying liabilities. The concept of “fiduciary duty” being a broad
and subjective one, it is not clear what duties and liabilities would
have to be set out in the appointment letter. Further, it is also not
clear whether these fiduciary duties are in addition to the duties of
directors already prescribed under Clause 166 of the Bill, which are by
themselves quite burdensome and broad in scope. The fact that several
subjectively worded fiduciary duties have to be reduced to writing in
their appointment letter would not be a very appealing prospect for
independent directors.

The Bill further states that the company
is responsible for conducting due diligence on the candidate to ensure
that such person is not disqualified from being an independent director,
thus putting the onus for selection of a fit and proper person on the
company. There are two aspects to this due diligence exercise that
companies will have to conduct. Firstly, they would have to check
internally and with Group Companies regarding matters such as the
candidate’s shareholding, employment or association with them. This
aspect of the due diligence may be relatively simpler. However, to do a
complete diligence on the candidate, the provisions of the Bill require
the company to source information from several external entities and
sources. Listed companies must identify each auditing, consulting and
legal firm in which the proposed independent director is or was an
employee, or partner or proprietor of, and then ensure that such firms
have had no relationship with the company or its Group Companies.
Further, a comprehensive list of the relatives of the independent
directors, and all companies and other entities controlled by them would
have to be prepared and it must be verified that none of them hold more
than 2% of the share capital of the company, or its Group Companies or
have pecuniary relationships with such companies which go beyond the
prescribed thresholds in the Bill.

It is obvious that these
background checking and verification procedures would be extremely
onerous, resource-intensive and time-consuming for any company to carry
out.

The provisions of the Bill are unclear on whether listed
companies are required to constantly verify on an ongoing basis that the
independent director does not fall afoul of the prescribed criteria.
The Bill merely states that company must conduct the due diligence on a
proposed independent director “before appointment” of such director.
However, the provisions of Clause 149 (8), which state that the company
and independent director must comply with the Code, read with the terms
of the Code itself, may be interpreted to mean that the company and the
director are jointly and severally responsible for ensuring that the
independent director is not disqualified. This view may lead to several
absurd situations, where the company may be held responsible and
penalised for events entirely beyond its control. For instance, an
associate company, over whose decisions or actions a company may not
have control, may appoint a firm of auditors where an independent
director of the concerned company is a partner, thus disqualifying him
from being an independent director. In the ordinary course today, a
company may not even be aware of the auditors of its associate
companies, but the provisions of the Bill may require it to constantly
monitor such matters completely irrelevant to its business for the
purposes of ensuring compliance.

Participation

Certain
provisions of the Bill are aimed at preventing situations existing
presently, where independent directors are often appointed by companies
merely to be a rubber stamp for decisions taken by the Board. One such
provision is the mandatory presence of independent director on a number
of committees of listed companies. One third of the audit committee,
half of the nomination and remuneration committee, and at least one
member of the newly conceptualised corporate social responsibility
committee, must be independent directors.

The Code prescribes
that independent directors are required to hold at least one meeting
each year, without the attendance of non-independent directors and
members of management. In such meetings the independent directors shall
review the performance of the other directors, the Chairman and the
Board as a whole and asses the information flow between the management
and the Board. While there is no obligation on the Board to accept any
recommendations which may emerge from such a meeting, this provision is
welcome as it encourages discussion among the independent directors and
greater awareness of and participation in the functioning of the Board.
Another example of provisions encouraging participation by independent
directors is relating to Board meeting notices. The Bill provides that
Board meetings may be called by notice shorter than seven days only if
at least one independent director (if any) on the Board is present at
such meeting.

With regard to the composition of the Board, the
Bill mandates that one third of the Board of listed companies is
required to be independent directors. It may be pertinent to note that
this obligation is actually less strict than the one currently imposed
by the Listing Agreement, where if the Chairman of a listed company is
an executive director, half of the Board is required to be independent
directors. Finally, the re-appointment of independent directors is
required to be made on the basis of a report of performance evaluation
by the Board. However, the manner and criteria for such evaluation has
not been prescribed in detail.

The aggregate effect of the above
mentioned provisions would hopefully put a stop to the phenomenon of
token independent directors who are appointed by companies merely for
compliance with the Listing Agreement provisions, and who are
essentially proxies for the promoters.

Rotation

As
per the Bill, independent directors are not subject to the annual
rotation procedure applicable to other directors on the Board. They are
permitted to have a term of five years, with a limit of two consecutive
terms. After two such terms, a mandatory break of three years is
prescribed, during which the director again must not have any
association with the concerned company. It appears that the five year
term and exclusion from annual rotation is intended to protect
independent directors and prevent promoters and major shareholders from
forcing retirement onto directors who do not toe the line. Nevertheless,
it does not mean that a non-performing and non-cooperative independent
director can be complacent about his position, as his re-appointment by
the members is subject to the results of a performance evaluation, as
mentioned above. However, on Boards where the majority of directors are
independent, provisions relating to compulsory rotation and fixed term
may prove to be an issue, as the executive directors may need to retire
to meet the quota of directors required to retire by rotation.

Analysis

Upon a reading of the above, it is evident that:

•    There is an expectation that there will be an increased level of active participation by independent directors;

•   
The duties of independent directors are quite onerous, and in certain
cases, rather ill-defined and vague, such as the wide and subjective
nature of the Code;

•    The terms of appointment and penal
consequences for non-compliance with fiduciary duties are reduced to
writing in the terms of appointment of the independent director;

•   
Independent directors are required to constantly monitor their
relationships and transactions, including those of their relatives and
related entities in order to ensure that they don’t fall afoul of the
prescribed qualifications; and

•    There are several
restrictions on the remuneration allowed to be provided to independent
directors, including a prohibition on stock options.

Apart from
the fact that companies are required to test persons against all the
criteria laid down in the Bill to ensure that they qualify as
‘independent directors’, it will be difficult to convince people to
become independent directors on the Boards of companies in light of the
stringent and onerous responsibilities, duties and penalties listed
above. These harsh and inflexible provisions will deter people from
becoming independent directors, creating a scarcity of persons
interested in being appointed on Boards as independent directors.

Conclusion

While
the provisions of the Bill regarding independent directors may have
been drafted with noble and laudable intentions, it is evident that
compliance with such a restrictive regime would prove to be a nightmare
for companies. Indeed, as set out above, in certain situations
compliance may be impossible. The move towards a corporate governance
environment where independent directors are neutral and ‘independent’ in
the true sense of the term, is an effort which needs to be appreciated.
However, the provisions require a fair amount of tweaking in order to
ensure that they are effective without being unduly onerous or in some
cases impossible to achieve.

Rules prescribed under Companies Act 2013:

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The Following rules under the Companies Act 2013 have been prescribed on 27th March, 2014

• Chapter III – The Companies (Prospectus and Allotment of Securities) Rules, 2014.

• Chapter IV – The Companies (Share Capital and Debentures) Rules, 2014.

• Chapter VI – The Companies (Registration of Charges) Rules, 2014.

• Chapter VII – The Companies (Management and Administration) Rules, 2014.

• Chapter VIII – The Companies (Declaration and Payment of Dividend) Rules, 2014.

• Chapter IX – The Companies (Accounts) Rules, 2014.

• Chapter XI – The Companies (Appointment and Qualification of Directors) Rules, 2014.

• Chapter XII – The Companies (Meetings of Board and its Powers) Rules, 2014.

The following Rules under the Companies Act 2013 have been prescribed on 31st March 2014

• Chapter I – The Companies (Specification of definitions details) Rules, 2014.

• Chapter II – The Companies (Incorporation) Rules, 2014.

• Chapter V – The Companies (Acceptance of Deposits) Rules, 2014.

• Chapter X – The Companies (Audit and Auditors) Rules, 2014.

• Chapter XIII- The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

• Chapter XIV- The Companies (Inspection, Investigation and Inquiry) Rules, 2014.

• Chapter XXII- The Companies (Registration of Foreign Companies) Rules, 2014.

• Chapter XXI -The Companies (Authorised to Registered ) Rules, 2014.

• Chapter XXIV – The Companies (Registration Offices and Fees) Rules, 2014.

• Chapter XXVI – Nidhi Rules, 2014.

• Chapter XXIX – The Companies (Adjudication of Penalties) Rules, 2014.

• Chapter XXIX – The Companies (Miscellaneous) Rules, 2014.

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Clarification regarding maintenance of books of accounts and preparation of financial statements:

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Vide General Circular No. 08/2014 dated 04-04-2014 the Ministry of Corporate Affairs has clarified regarding that the provisions of the Companies Act 2013 with regard to maintenance of books of accounts and preparations/adoption/filing of financial statements, Auditors Report, Board Report and attachments to such statements and reports would be applicable for financial Years commencing from 1st April 2014.

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Fees Table notified

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The Ministry of Corporate Affairs has issued the Table of Fees (pursuant to Rule 12 of the Companies’ (Registration of Offices and Fees ) Rules 2014.

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Waiver of fees for all event based filing for April 2014 :

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Vide Circular No. 6/2014, the Ministry of Corporate Affairs has on 28th March informed that it shall waive fees for all event based filing whose date falls between 01-04-2014 to 30-04-2014. Only few forms can be filed presently mostly relating to filing of annual accounts, annual return, appointment of Cost Auditors , FTE ( Fast Track Exit Mode) Form , and Form 21 pertaining to Order of court / Authority till 14-04-2014. A list of New Forms along with the Old Form (in case any) have been given in the Circular.

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Enabling payment of Stamp Duty and Court fees through MCA site:

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Vide Circular No. 5/2014 dated 28th March 2014, The Ministry of Corporate Affairs has tried to remove the delay in the issue of Certified Copies filed with the ROC. The Ministry has enabled the payment of Stamp Duty and Court Fee online through the MCA portal. The circular is effective from 31st March 2014.

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Clarification in respect of resolutions u/s. 293 of Companies Act, 1956 wrt to compliance u/s. 180 of Companies Act, 2013:

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Vide General Circular No. 4/2014, the Ministry of Corporate Affairs has issued clarification to Section 180 of Companies Act 2013 referring to borrowings and or creation of security based on Ordinary resolution. The ministry has clarified that where before 12th September 2013, the resolution u/s. 293 of the Companies Act 1956 have been passed, they will be considered sufficient compliance u/s 180 of Companies Act 2013 for a period of 1 year from the date of notification of Section 180 of the Act.

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Central Government notifies 183 additional new sections:

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The Central Government has on 26th March 2014 has notified 183 additional new sections in addition to the earlier 99 notified provisions of the Companies 2013 and Rules made thereunder, forms under the new Act are mandatorily numbered alpha-numeric. Initial of forms is to be started with alphabet of two or three letters based on the subject of the Chapter, followed by serial number of the form. This will define the nature of the forms and would be easy to recognise.

There are total 29 chapters under the Companies Act, 2013. Chapters I and XXIII have been notified but no form is prescribed under these chapters. Following table is the summary of chapter wise nomenclature of forms Act 2014 which come into effect from 1st April 2014.

A ready reckoner Table containing provisions of Companies Act, 2013 as notified up to date and corresponding provisions thereof under Companies Act, 1956 and corresponding provisions of Companies act 1956 which shall remain in force.

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Names of Forms for e-filing on the MCA site have been Changed:

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To facilitate easy understanding of the e-forms being rolled out under the provisions of Companies Act,
 

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Change in Depreciation Rates:

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The Central Government has notified an Amendment to Schedule II of Companies Act 2013 which pertains to the Useful Lives to compute depreciation.

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D/o IPP F. No. 5(1)/2014-FC.I dated the 17-04- 2014

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Consolidated FDI Policy Circular of 2014

The DIPP has announced the yearly FDI Policy Circular. The said Circular is effective from 17th April 2014. This Circular consolidates, subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on 16th April, 2014 and reflects the FDI Policy as on 17th April, 2014.

This Circular will remain in force until superseded in totality or in part thereof. Reference to any statute or legislation made in this Circular will include modifications, amendments or re-enactments thereof. This circular is divided into 7 Chapters and contains 11 Annexures.

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A. P. (DIR Series) Circular No. 82 dated December 31, 2013

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Import of Gold by Nominated Banks/Agencies/ Entities

This circular clarifies that: –

1. Refineries are allowed to import dore up to 15% of their gross average viable quantity based on their license entitlement in the first two months for making this available to the exporters on First in First out (FIFO) basis. Thereafter, the quantum of gold dore to be imported has to be determined lot-wise on the basis of export performance.

2. Before the next import, not more than 80% can be sold domestically.

3. The dore so imported must be refined and must be released on FIFO basis following the 20:80 principle.

4. Subsequent imports will be allowed only up to 5 times the quantum for which proof of export has been submitted and this will be on accrual basis.

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Sebi and Saving Schemes Gold Saving/Purchase Schemes – How Far Legal? – Review, in Context of Recent Bombay High Court Decision

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Synopsis

In the recent past, there have been many instances where companies have lured customers to invest in ponzi schemes by promising high return for instalment schemes, few of them being with the intent to defraud the public . The SEBI regulations havey defined Collection Investment Scheme (‘CIS’) , in a broad manner wherein such schemes are liable to be classified as CIS including the Gold Savings / Purchase Scheme.

Read on to know the view of the Author on the Gold Savings / Purchase Schemes being CIS and the recent judgement by the Bombay High Court in a public interest petition filed towards seeking clarity on legality of such schemes.

Consumer friendly savings schemes

Often, companies engaged in various types of businesses set up consumer friendly schemes which unwittingly violate law, with potentially serious consequences. A good example is an instalment scheme for customers which helps them save and accumulate to buy something. In a sense, they are the reverse of instalment purchase in which the gold is purchased, delivered and enjoyed but the payment is made over a period of time in the future. The saving-instalment method, however, provides for periodic payment and then using the accumulated amount plus interest to buy the product. What is not realized is that this latter scheme could in many cases violate the SEBI Regulations on Collective Investment Schemes (CIS).

Such schemes, in themselves, may be well intended. They, on one hand, enable customers to exercise discipline of saving in advance for buying something, instead of buy-now-pay-later attitude. On the other hand, they enable businesses to sell goods, with added benefit of not worrying about recovery of payment for goods.

Wide and strict law relating to CIS
However, there has been rampant misuse of such Schemes, particularly by companies who use such schemes as a disguise for simply raising monies as deposits without having any underlying business. The recent scams in West Bengal and elsewhere are just examples of what has happened often in the past. In 1999, to prevent scams and regulate such Schemes, SEBI notified the CIS Regulations. They have extensive requirements including of registration, valuation, minimum net worth, etc. and a stringent review of the persons behind such companies/Schemes, before registration.

The term CIS is very widely defined. Essentially, however, they mean those schemes which involve raising and pooling of monies from investors with a view to return them with income/profits/products at a future date. There are other conditions too. While classic schemes of teak plantation, goat farming, etc. were kept in mind since these had become common, as several sunbsequent decisions of courts and SEBI showed, they could cover a wide variety of other cases including those for purchase of immovable property.

This broadly worded law, however, would cover many other schemes. Consider an increasingly common scheme in recent times, set up by scores of companies, including some very reputed houses. These are gold savings/purchase schemes known by various names. While the details may vary from company to company, they can be described as under.

What are gold-saving schemes and how they may violate the law

A customer is required to deposit with the business a certain sum of money, periodically, usually every month. At the end of the period, the amount accumulated plus a sum, called “bonus” by some, which seems to be disguised interest, is used to sell gold jewellery to the customer. Thus, for example, a customer may deposit Rs. 2,500 every month for eleven months, thus collecting Rs. 27,500. The shop may add a bonus to this and give some concession in making charges and thus give him 10 grams worth of gold jewellery.

However, in my view, though the detailed facts of schemes by different companies are not known, in principle, many of such schemes are liable to be classified as CISs. And if they are set up without being duly registered with SEBI, they may be deemed to be violations of the Act/Regulations. It is also possible that they may be yet another variant of disguised deposit-raising schemes, as the scams of recent past have shown. And thus, not eligible for registration as CIS Schemes

Recent Bombay High Court decision Considering this, a public interest petition was filed before the Bombay High Court seeking directions from the Court to SEBI and other authorities to look into the legality of such Schemes. However, the Bombay High Court rejected this PIL. (Sandeep Agrawal vs. SEBI [2013] 39 taxmann.com 139 (Bom.)). In a brief decision of less than half a page, the Court essentially held that these contracts are private commercial contracts and do not require interference by SEBI. The Court observed, “If any shop owner is running such a scheme and the consumers are voluntarily taking part in such a scheme, it is purely a commercial transaction between a businessman and a consumer”.

It is submitted that this decision requires reconsideration. It also appears that the necessary facts and law were not presented well before the Court, since the Court observed, “If the petitioner so desires to bring it in the nature of public ambit the least that is expected is to point out as to under what statutory provisions or the rules framed thereunder the said scheme is prohibited. Nothing is placed on record in that regard.”.

In other words, the petitioner does not seem to have laid down the detailed facts of the schemes, the specific provisions in the SEBI Act and the CIS Regulations that make such schemes to be CIS and thus subject to registration, etc. In absence of submissions explaining how SEBI could take action against such schemes or under which specific provision of law they are liable to be registered but not registered, the Court seems to have rejected the petition.

However, it is difficult to see how most of such schemes are not CISs. Section 11AA of the SEBI Act, which defines CISs widely, seems to be clearly applicable and the conditions specified therein are attracted.

While there are several reputed names who have set up in such schemes, the number of entities engaged in such schemes are numerous. It will not also be surprising of this model is adopted in other businesses too. Such schemes are ripe for misuse, assuming SEBI takes a view that the provisions relating to CIS do not apply.

Misuse of such Schemes
Consider, how the terms and conditions of the scheme can be structured which can eventually could be potential scams:

• An entity other than a gold-jewellery shop may set up such a scheme. The gold-jewellery purchase form may thus become a front.

• Then, the scheme may be for a long period of, say, three to five years. Longer the period, the greater the risk of the monies being lost.

• Huge incentives may be offered to agents to get such customers to accept such schemes.
• Also, without it being regulated, there is no control over where the amounts raised would be applied – even existing schemes do not seem to provide for assurance that the amounts raised would be used to buy gold which would be earmarked for the customer. The monies raised thus may be diverted into other businesses where there are risk of the monies being lost or blocked.

• The entity may offer an unduly higher “bonus” (which as stated really seems to be disguised interest) to attract customers. The higher the interest rate, the greater the risk of the entity not being able to fulfil its promises.

• It is easy to provide a cash alternative at time of maturity in form of ruling price of gold, which in any case can be assured, apart from “bonus”. Thus, effectively, the customer can obtain fixed interest on the amounts paid. Indeed, as past scams investigated by SEBI have shown, the schemes were actually marketed as deposit raising schemes with assured interest, with the paper work of being advance against goods being bogus.

It is arguable that each case would have to be decided on facts and perhaps some of such schemes may not attract the provisions. Also, most of the schemes may not have any intention of giving a cash alternative or be really in the form of deposit raising. In other words, many of such schemes may not be deposit raising exercises in disguise, as was found in many of the schemes that went bust in West Bengal and elsewhere.

However, while such disguised-deposit schemes would be blatantly illegal, even genuine schemes would require, in most of the cases, registration with SEBI as CIS. The Regulations provide for several levels of checks, at the time of entry and later too, to safeguard the interests of customers/investors.

In either case, the risks of such schemes are too many to be ignored. In the backdrop of recent scams in West Bengal and elsewhere, it is surprising that these schemes have not received closer attention. Ideally, and at the very least, SEBI should have assured the Court that it is looking into the schemes, more so since it was made a party to the petition.

Conclusion
In conclusion, it must also be stated that the Bombay High Court decision should not be treated as a precedent holding that such schemes are valid in law. The decision is on facts, or rather absence of facts. No real question of law was placed before the Court. The provisions of the Act and/or the Regulations were also not placed before the Court. On the other hand, though not specifically on gold-savings schemes, there have been numerous decisions of courts and SEBI that have, on facts, held what are CISs. The ratio of these decisions as well as the provisions of law are clear enough to hold such Scheme as requiring registration, with SEBI.

PART A: order of CIC

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• Central Information Commissioner, Mr. Rajiv Mathur who is in charge of appeals related to direct-tax matters has passed 8 Orders on 13-12-2013. 2 of these are summarised below:

Section 8(1) (j) of the RTI Act:

Vide an application dated 28-01-2013, the appellant had sought information on 6 points relating to Ramkumar Jalan Public Charitable Trust which included documents submitted for obtaining PAN, names of all Trustees, details of registered office address, details of Wealth Tax returns filed, TDS certificate issued and short term/long term capital gains.

Appellant observed that he was a tenant in a property which is owned by the Trust and he along with several other tenants were directly affected by the re-development work undertaken by the Trust and as such they cannot be held to be third parties.

Decision:
The Hon’ble Supreme Court in the case of Girish Ramchandra Deshpande has held that Income Tax Returns and related documents are personal information and exempt from disclosure u/s. 8(1) (j) of the RTI Act unless larger public interest is shown. In the instant case, the appellant has not been able to show any larger public interest. Accordingly, the denial of information u/s. 8(1) (j) is upheld.

[Shri Amit Shah, Mumbai vs. ITO (exam)-1 and CIT, Kolkata: CIC/RM/A/2013/000926: Order dated 13.12.2013]

• Information on TEP:

Vide an application dated 16-o2-13, appellant had sought information on 9 points relating to Tax Evasion Petition (TEP) filed by him stating that he was a victim of a false dowry case wherein his wife has alleged that her mother had paid over Rs. 30 lakh as dowry.

CPIO vide letter date 22-02-2013, informed the appellant that the complaint filed by the appellant was being enquired into.

An appeal was filed on 28-03-13 as no information was received.

AA vide order date 28-04-13 directed the CPIO to furnish information to the appellant and disposed of the appeal.

CPIO submitted that investigation into the TEP is still going on and is likely to be completed by December 2013.

Decision
It has been the consistent stand of the Commission that some sort of a feedback should be provided to the information provider once investigation into a tax evasion complaint has been finalised. The complainant has a right to know whether the information provided by him has been found to be false or true. We accordingly direct the CPIO to disclose the broad outcome of the TEP to the appellant once the enquiry is over. Details of investigation are, however, not required to be disclosed.

[Shri S. Z. Ahmed, Hyderabad vs. Income Tax Office ward 16 and Add1.CIT, Range 6, Hyderabad: Order No.CIC/RM/A/2013/000923 dated 13-12-2013]

• RTI application: Section 25(5) of the RTI Act

Decision of full Bench (3 members) of the Central Information Commission decision in connection with payment of fees for RTI application and other fees. Hereunder are reproduced paragraphs 11 & 12 of the Order. 1

1. It needs to be underlined that preamble of the RTI Act provides for setting out the practical regime of right to information for the citizenry in order to promote transparency and accountability in the working of every public authority. These words connote a pragmatic approach on the part of all concerned in implementing the provisions of this law. The Commission is aware that difficulties are being experienced by the information seekers in depositing the fee and copying charges and consequential delay in the provision of information. On a consideration of the matter, the Commission makes the following recommendations to the Ministries/Departments/Public Authorities of the Central Government u/s. 25 (5) of the RTI Act

(i) All public authorities shall direct the officers under their command to accept demand drafts or banker cheques or Indian Postal Order (IPO) payable to their Accounts Officers of the public authority. This is in line with clause (b) of Rule 6 of the RTI Rules, 2012. In other words, no instrument shall be returned by any officer of the public authority on the ground that it has not been drawn in the name of a particular officer. So long as the instrument has been drawn in favour of the Accounts Officer, it shall be accepted in all circumstances.

(ii) All public authorities are required to direct the concerned officers to accept IPOs of the denomination of higher values vis-à-vis the fee/copying charges when the senders do not ask for refund of the excess amount. To illustrate, if fee of Rs. 18/- is payable by the information seeker and if he sends IPO of Rs. 20/-, this should be accepted by the concerned officer rather than returning the same, for practical reasons. The entire amount will be treated as RTI fee.

(iii) All public authorities shall direct the CPIOs and ACPIOs under their command to accept application fee and copying charges in cash from the information seekers in line with Rule 6(a) of the RTI Rules. It is made clear that the CPIOs and APIOs will not direct the information seekers to deposit the fee with the officers located in other buildings/offices.

(iv) DoPT shall direct all the CPIOs/APIOs/Accounts Officers to accept money orders towards the deposition of fee / copying charges. This is in line with the order dated 19-09-2007 passed by the Karnataka Information Commission in B.V. Gautma vs. Dy. Commissioner of Stamps & Registration, Bangalore. (KIC 2038 CoM 2007).

(v) The Department of Posts has issued a detailed Circular No. 1031/2007-RTI dated 12-10-2007 for streamlining the procedure of handling applications by various CAPIOs which, interalia contains the following directions:-

“(1) Display of the signboard “RTI APPLICATIONS ARE ACCEPTED HERE” should be made on the notice board/prominent place in the post office. In addition, the names/ addresses of the CPIO and appropriate authorities of the Post office should also be displayed.

(9) The fee alongwith application should be accepted at the same counter and in no case the applicant should be made to visit another counter for depositing the requisite fee.”

The Department of Posts is required to ensure that the above directions are complied with by all concerned.

(vi) As noted herein above, as of now, the RTI applications and the requisite fee are being accepted by the designated Post Offices, numbering above 4700. Considering the size of the country and the number of RTI applicants/applications, the number of designated Post Offices appears to be too small. It has been brought to the notice of the Commission that there are

(vii) 25,464 Departmental Post Offices and 1,29,402 Extra Departmental Branch Post Offices. The Commission, therefore, advises the Secretary, Department of Posts, to consider designating all 25,464 Departmental Post Offices to accept RTI applications and the requisite fee.

(viii) The best solution to the fee related problems appears to be to issue RTI stamps of the denomination of Rs. 10/- by the Deptt. of Posts. It would save time and cost. The Commission would urge Department of Posts/DoPT to consider the viability of this suggestion with utmost dispatch.

(ix) The Commission also directs the CPIOs and the Appellate Authorities to mention their names, designations and telephone and fax numbers in the RTI related correspondence.

12. The Commission expects all Ministries/Departments/ Public Authorities of the Central Government to give urgent consideration to the above recommendations.

(Shri Subhash Chandra Agrawal vs. Ministry of Home Affairs. Complaint No CIC/BS/C/2013/000149/ LS, 000072/LS & 000108/LS: decided on 27-08-2013)

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Probate of Will – Delay in filing Application – May arouse suspicion – But not absolute bar of limitation : Succession Act 1925 section 222:

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Wilma Levert Canuao & Others vs. Allan Sebastian D’souza & Anr. AIR 2013 (NOC) 415 ( Bom)

The testator died on 5th September 1999. The two Respondents were the sons who are the original Plaintiffs. The testator was survived besides his two sons, by six daughters, three of whom, the Appellants, had lodged caveats in response to the Testamentary Petition seeking probate of the will alleged to have been executed by the testator on 20th March, 1989. Under his will, the testator directed his executors and trustees to pay a sum of Rs. 30,000/- to each of his daughters and an amount of Rs. 1.00 lakh to his wife. The residue was bequeathed to his two sons who are appointed as executors. Pauline, the wife of the testator, died on 20th July 1994. There were two attesting witnesses to the will of the testator. Both of them were solicitors and advocates. One of them, Jaswant Chimanlal Shah had filed an affidavit dated 18th December, 2006 in the testamentary petition. He died on 9th May 2008 before he could be examined in evidence. The second attesting witness Kantibhai R. Thakkar was also a solicitor but he too died in 1993. The learned Single Judge held that the will had been duly proved and directed that probate shall issue.

The Hon’ble Court observed that section 63 of the Succession Act, 1925 specifies the manner in which a will has to be executed. Clause (c) of section 63 requires attestation of a will by two or more witnesses each of whom has to have seen the testator sign or to have received from the testator a personal acknowledgement of the signature. Each of the two witnesses must sign the will in the presence of the testator but it is not necessary that more than one witness should be present at the same time. Section 68 of the Evidence Act specifies the requirements for adducing proof of the execution of a document which is required by law to be attested. U/s. 68, if a document is required to be attested by law, it cannot be used as evidence unless one attesting witness has been called for proving the execution of the document, if an attesting witness is alive. Section 69 deals with a contingency where no attesting witness can be found. In such a situation, section 69 requires proof that the attestation of one attesting witness at least is in his handwriting and that the signature of the person executing the document is in the handwriting of that person.

The Hon’ble Court observed that there is no warrant for the assumption that the right to apply for the grant of probate as envisaged in Article 137 of the Schedule to the Limitation Act necessarily accrues on the date of the death of the deceased. The Court held that such an application is to seek the permission of the Court to perform a duty created by the will or for a recognition as a testamentary trustee and the right to apply is a continuous right which is capable of being exercised so long as the object of the trust exists or any part of the trust, if created, remains to be executed.

Finally it was held construing the provisions of Rule 382 that while any delay beyond three years after the death of the deceased would arouse suspicion, but such delay, while it has to be explained, cannot be equated with an absolute bar of limitation.

Moreover, once the execution and attestation of will are proved a suspicion based on delay would no longer operate. In the circumstances, the contention that the delay should result in the dismissal of the suit was declined.

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Mortgage by conditional sale or sale with condition of repurchase – Suit for redemption – Dismissed: Transfer of property Act, 1882 section 58(c):

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Vanchalabai Raghunath/Ithape (D) by LR vs. Shankarrao Baburao Bhilare (D) by LRS & Ors A I R 2013 SC 2924

The Appellant is the legal heir of the original Plaintiff/widow who was admittedly the owner of the suit property.

Plaintiff’s case is that a deed was executed by Vanchalabai Raghunath Ithape (the original Plaintiff-now deceased) in favour of Defendant No. 1 Shankarrao Baburao Bhilare (the original Defendant/Respondent No. 1) on 12-07-1967 for a consideration of Rs. 3,000/-, by which the suit land along with 4 annas share in the mango trees was transferred to Defendant No. 1 and possession of the same was handed over, with a specific stipulation to the effect that the land was sold on the condition that after receiving Rs. 3,000/- in lump sum within 5 years before end of any Falgun month, by the Defendant, the land was to be returned to the Plaintiff. The Plaintiff’s case is that it was a mortgage transaction and the land was to be returned by the original Defendant after receiving the said consideration of Rs. 3,000/- within 5 years.

He denied of having any relationship of mortgagee and mortgagor between him and the Plaintiff. According to him, the Plaintiff had sold the suit property to him as per the said sale deed, but only as a concession the period of 5 years was mentioned in the deed to reconvey the said suit property and since there was no repayment in 5 years no re-conveyance could be claimed.

Admittedly, the Plaintiff filed the suit claiming a decree for redemption of the suit property. The trial court decreed the suit by passing a decree of redemption. The first appellate court reversed the findings recorded by the trial court and allowed the appeal and set aside the judgment and decree of the trial court. As against that, the Plaintiff preferred the second appeal. The High Court did not interfere with the findings of fact recorded by the first appellate court.

The Court observed that the document in question has been described as Sale Deed transferring the land along with the fixtures and possession was handed over to the Defendant

From a perusal of the aforesaid provisions especially, section 58(c) it is evidently clear that for the purpose of bringing a transaction within the meaning of ‘mortgage by conditional sale’, the first condition is that the mortgagor ostensibly sells the mortgaged property on the condition that on such payment being made, the buyer shall transfer the property to the seller. Although there is a presumption that the transaction is a mortgage by conditional sale in cases where the whole transaction is in one document, but merely because of a term incorporated in the same document it cannot always be accepted that the transaction agreed between the parties was a mortgage transaction, referred the case in Williams vs. Owen 1840 5 My. and Cr. 303 : English Reports 41 (Chancery) 386.

The Court held that the instant case, the trial court committed grave error in construing the document and erroneously held that the transaction is mortgage and hence, the Plaintiff is entitled to decree of redemption.

By reading the documents as a whole, it is found that there is a debt and the relationship between the parties is that of a debtor and a creditor. This is a vital point to determine the nature of the transaction.

The Court, therefore, held that the document was not a mortgage by conditional sale, rather the document was transfer by way of sale with a condition to repurchase.

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Govt. servant – Not consumer – Dispute regarding retrial benefits, PF Gratuity cannot be entertained by consumer for a Jurisdiction – Issue – Goes to root of matter – Can be raised at any stage – Doctrine of waiver does not apply:

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Dr. Jaymattar Sain Bhagat vs. Dir, Health Services, Haryana & Ors AIR 2013 SC 3060

The Appellant joined Health Department, of the Respondent State, as Medical Officer on 05-06-1953 and took voluntary retirement on 28-10-1985. During the period of service, he stood transferred to another district but he retained the government accommodation.

Appellant claimed that he had not been paid all his retrial benefits, and penal rent for the said period had also been deducted from his dues of retrial benefits without giving any show cause notice to him. Appellant made various representations, however, he was not granted any relief by the State authorities. Aggrieved, the Appellant preferred a complaint before the District Consumer Disputes Redressal Forum, the said Forum vide order dated 24.3.2000 dismissed the complaint on merits

The Appellant approached the appellate authority, i.e., the State Commission. The State Commission dismissed the appeal and revision application was also dismissed observing that though the complaint was not maintainable as the District Forum did not have jurisdiction to entertain the complaint of the Appellant as he was not a “consumer” and the dispute between the parties could not be redressed by the said Forum.

On further appeal the learned Senior AAG, Haryana, raised preliminary issue of the jurisdiction submitting that the service matter of a government servant cannot be dealt with by any of the Forum in any hierarchy under the Act. Therefore, the matter should not be considered on merit at all.

The Hon’ble Court observed that by no stretch of imagination a government servant can raise any dispute regarding his service conditions or for payment of gratuity or GPF or any of his retiral benefits before any of the Forum under the Act. The government servant does not fall under the definition of a “consumer” as defined u/s. 2(1)(d)(ii) of the Act. Such government servant is entitled to claim his retrial benefits strictly in accordance with his service conditions and regulations or statutory rules framed for that purpose. The appropriate forum, for redressal of any grievance, may be the State Administrative Tribunal, if any, or Civil Court but certainly not a Forum under the Act.

The Court further observed that conferment of jurisdiction is a legislative function and it can neither be conferred with the consent of the parties nor by a superior court, and if the Court passes a decree having no jurisdiction over the matter, it would amount to nullity as the matter goes to the roots of the cause. Such an issue can be raised at any stage of the proceedings. The finding of a court or Tribunal becomes irrelevant and unenforceable/inexcutable once the forum is found to have no jurisdiction. Similarly, if a Court/ Tribunal inherently lacks jurisdiction, acquiescence of party equally should not be permitted to perpetuate and perpetrate, defeating the legislative animation. The court cannot derive jurisdiction apart from the statute. In such eventuality the doctrine of waiver also does not apply.

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Dishonour of Cheque – Criminal liability – Joint Account holder -Drawer of cheque alone can be prosecuted: Negotiable Instruments Act section 138.

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Mrs. Aparna A. Shah vs. M/s. Sheth Developers P. Ltd & Anr AIR 2013 SC 3210

M/s. Sheth Developers P. Ltd. is the respondent a company engaged in the business of land development and constructions. Aparna A. Shah (the appellant) and Ashish Shah, her husband, are the land aggregators and developers and are the owners of certain lands in and around Panvel.

According to the appellant, in January, 2008 since the company was interested in developing a Township Project and a special economic Zone (SEZ) project in and around Panvel. The Broker, introduced them to the appellant and her husband as the land owners holding huge land in Panvel.

The respondent company agreed for the development of the said land jointly with the appellant herein and her husband. The appellant and her husband agreed for the same upon the entrustment of a token amount of Rs. 25 crore with an understanding between the parties that the said amount would be returned if the project is not materialise. Agreeing the same, the respondent company issued a cheque of Rs. 25 crore. However, for various reasons, the proposed joint venture did not materialise and it was claimed by the appellant herein that the whole amount of Rs. 25 crore was spent in order to meet the requirements of the initial joint venture in the manner as requested by the respondent company.

According to the appellant, again the respondent company expressed interest to start a new project. With regard to the same, the respondent Company approached the appellant herein and her husband and informed that they are not having sufficient securities to enable the bank to grant the facility and the bank is to show receivales in writing. Therefore, on an understanding between the respondent and the appellant, a cheque of Rs.25 crores was issued by the husband of the appellant from their joint account. It is the case of the appellant that in breach of the aforesamentioned understanding, on 05-02-2009, the respondent deposited the cheque with IDBI bank at Cuffe Parade, Mumbai and the said cheque was dishonoured due to “insufficient funds”.

On Complaint filed by the Respondent against the appellant the case was registered by the Magistrate the court held that u/s. 138 of the Act, it is only the drawer of the cheque who can be prosecuted. In the present case, the appellant is not a drawer of the cheque and she has not signed the same. A copy of the cheque brought to the notice of the Supreme Court though contains the name of the appellant and her husband, the fact remains that her husband alone put his signature. In addition to the same, bare reading of the complaint as also the affidavit of examination in chief of the complainant and a bare look at the cheque would show that the appellant has not signed the cheque. In case of issuance of cheque from joint accounts, a joint account holder cannot be prosecuted unless the cheque has been signed by each and every person who is a joint account holder. The said principle is an exception to section 41 of the N.I. Act which would have no application in the case on hand. The proceedings filed u/s. 138 cannot be used as an arm twisting tactics to recover the amount allegedly due from the appellant. It cannot be said that the complaint has no remedy against the appellant but certainly not u/s. 138. The culpability attached to dishonor of a cheque can, in no case “except in a case of section 141 of the N.I. Act” be extended to those on whose behalf the cheque is issued. This court reiterates that it is only the drawer of the cheque who can be made an accused in any proceeding u/s. 138 of the Act. Thus, criminal proceedings against appellant quashed.

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Compounding of offences – Can be compounded by CLB even after prosecution has been instituted: Interpretation of Statute: Companies Act

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V.L.S. Finance Ltd vs. UOI AIR 2013 SC 3182

The Registrar of Companies, NCT of Delhi and Haryana filed complaint in the Court of Chief Metropolitan Magistrate, Tis Hazari, inter alia alleging that during the course of inspection it was noticed in the balance sheet of 1995-96 Schedule of the fixed assets included land worth Rs. 21 crore. According to the complaint, M/s. Sunair Hotels Ltd., for short ‘the Company”, had taken this land from New Delhi Municipal Corporation on licence and the Company only pays the yearly licence fee thereof. Thus, according to the complainant, without any right land has been shown as land in the Schedule of fixed assets, which is not a true and fair view and punishable u/s. 211(7) of the Companies Act. The Company and its Chairman-cum-Managing Director, S.P. Gupta were arrayed as accused.

From a plain reading of section 621A(1), it is evident that any offence punishable under the Act, not being an offence punishable with imprisonment only or with imprisonment and also with fine, may be compounded either before or after the institution of the prosecution by the Company Law Board and in case, the minimum amount of fine which may be imposed for such offence does not exceed Rs. 5000/-, by the Regional Director on payment of certain fine.

The punishment provided u/s. 211(7) of the Act comes under category of offences punishable with fine or imprisonment or both aforesaid. Section 621A(1) excludes such offences which are punishable with imprisonment only or with imprisonment and also with fine. As the nature of offence for which the accused has been charged necessarily does not invite imprisonment or imprisonment and also fine. Hence, the nature of the offence is such that it was possible to be compounded by the Company Law Board.

Now the question is whether in the aforesaid circumstances the Company Law Board can compound offence punishable with fine or imprisonment or both without permission of the court. It is pointed out that when the prosecution has been laid, it is the criminal court which is in seisin of the matter and it is only the magistrate or the court in seisin of the matter who can accord permission to compound the offence. The Court observed that both s/s. (1) and s/s. (7) of section 621A of the Act start with a non-obstante clause. As is well known, a non-obstante clause is used as a legislative device to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non-obstante clause.

As is well settled, while interpreting the provisions of a statute, the court avoids rejection or addition of words and resort to that only in exceptional circumstances to achieve the purpose of Act or give purposeful meaning. It is also a cardinal rule of interpretation that words, phrases and sentences are to be given their natural, plain and clear meaning. When the language is clear and unambiguous, it must be interpreted in an ordinary sense and no addition or alteration of the words or expressions used is permissible. As observed earlier, the aforesaid enactment was brought in view of the need of leniency in the administration of the Act because a large number of defaults are of technical nature and many defaults occurred because of the complex nature of the provision.

Ordinarily, the offence is compounded under the provisions of the Code of Criminal Procedure and the power to accord permission is conferred on the court excepting those offences for which the permission is not required. However, in view of the non-obstante clause, the power of composition can be exercised by the court or the Company Law Board. The legislature has conferred the same power to the Company Law Board which can exercise its power either before or after the institution of any prosecution whereas the criminal court has no power to accord permission for composition of an offence before the institution of the proceeding. The legislature in its wisdom has not put the rider of prior permission of the court before compounding the offence by the Company Law Board and in case the contention of the Appellant is accepted, same would amount to addition of the words “with the prior permission of the court” in the Act, which is not permissible.

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A. P. (DIR Series) Circular No. 124 dated 21st April, 2014

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Press Note No. 1 (2014 series) D/O IPP dated 8th January, 2014

Notification No. FEMA. 296/2014-RB dated 3rd March, 2014, vide G.S.R. No. 270(E) dated 7th April 2014

Foreign Direct Investment in Pharmaceuticals sector – clarification

This circular states that, with immediate effect, the ‘non-compete’ clause will not be permitted in the case of FDI in Pharmaceuticals sector, except with FIPB approval. Hence, whenever parties want to incorporate the ‘non-compete’ clause in their agreements FDI will have to be under the Approval Route.

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Sale vs. Exchange

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Synopsis

This Article explores the difference in law between the terms “sale” and “exchange” which are both a mode of transferring property. Various Supreme Court and Other decisions have analysed this difference. The difference also has a bearing on the tax treatment of a sale and an exchange. Recently, the issue has gained importance because of the question of taxation of a slump exchange as compared to a slump sale.

Introduction

“A Rose by Any Other Name Smells As Sweet”— Shakespeare, Romeo and Juliet

While Shakespeare may be right in several cases, when it comes to the transfer of property, there is a difference between ‘Sale’ and ‘Exchange’. Property, whether movable or immovable, can be transferred in a variety of ways, such as, sale, gift, lease, mortgage, exchange, etc. Each of these terms has a different meaning and are not synonyms for one another. What is a sale and what is an exchange has often been the subject-matter of discussion under Tax and other Laws since the consequences of the same vary. Recently, the issue has come into sharp focus because of various decisions under the Income-tax Act dealing with the concept of Slump Exchange. Let us examine the meaning associated with these terms in law.

Meaning of Sale The Transfer of Property Act, 1882 defines sale (in respect of immovable property) to mean a transfer of ownership in exchange for a price paid or promise or part-paid and part-promised. In Samaratmal vs. Govind, (1901) ILB 25 Bom 696. The word ‘ price’ as used in the sections relating to sales in the Transfer of Property Act was held to be in the sense of money.

The Sale of Goods Act, 1930 which deals with the law relating to sale of goods is also relevant. It defines a contract of sale to mean a contract whereby the seller transfers property in goods to the buyer for a price. Where under such a contract, the goods are transferred by the seller, then the contract is called a sale. Thus, price is an essential element under both the Acts. This Act defines the term price to mean money consideration for a sale of goods. Thus, the Sale of Goods Act is very specific in respect of the definition of ‘price’.

Meaning of Exchange An exchange on the other hand, is defined by the same Act 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. The definition of exchange covers both immovable property as well as novable property/goods. Thus, the absence of money is the hallmark of an exchange. A part of the consideration may be in the form of money but there must be something more which must be in kind. E.g., Mr. A lives on a 3 bedroom flat on the 1st floor of a building and he also owns a 2 bedroom flat on the 5th floor of the same building. His neighbour Mr. X lives in a 2 bedroom flat on the 1st floor of the same building. Mr. A and Mr. X agree to swap their 2 bedroom flats, by which Mr. A becomes the owner of both the flats on the 1st floor while Mr. X now owns a flat on the 5th floor. This is a transaction of exchange. In case the properties are of different values, then some money consideration may be paid to neutralise the exchange. However, the transaction yet remains one of an exchange – Fathe Singh vs. Prith Singh AIR 1930 All 426.

Difference As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. However, a sale can also take place where instead of the buyer paying the seller, some debt owed by the seller to the buyer is set-off. That does not make the transaction one of an exchange. For instance in Panchanan Mondal vs. Tarapada Mondal, 1961 (1) I.L.R.(Cal) 619, the seller agreed to sell a property to the buyer for a certain price by one document and by a second document he also agreed to buy another property of the buyer for the same amount. Instead of the buyer paying the seller and vice-versa, they agreed to set-off the two amounts. It was held that the transactions were for execution of two Sale Agreements and not for a Deed of Exchange.

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:

(a) CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC)

The Court explained the distinction between an exchange and a sale by an illustration of a person selling his business to a company in exchange for its shares and a person selling his business for money and using that money for subscribing to the shares of that company. The Court held,

“……….. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale,..”

(b) CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC)

This was also a case of a sale of business to a company in exchange for shares of that company. The board of directors of a company executed a deed styled “exchange deed” whereby the company transferred all the assets of its cinema house for a consideration in the shape of certain preference shares in a sugar company. The question was whether the transaction was a sale? The Supreme Court held:

“………..that in essence the transaction …….was one of exchange and there was no sale of the assets of the cinema house for any money consideration …………

Sale is a transfer of property in goods ………… for a money consideration. But in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word “barter”. The difference between a sale and an exchange is this, that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter .The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.”

(c) CIT vs. B. M. Kharwar 72 ITR 603 (SC) ” Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange, and not of sale, ……. ”

These decisions have very clearly laid down that the difference between a sale and an exchange is that in a sale the price is always paid in money, whilst in an exchange it is always paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.

Each of the parties to an exchange are both a buyer and a seller of property and hence, each of them has the rights which a seller has and is subjected to the liabilities and obligations of a buyer. This is an unique feature of an exchange since a person plays a dual role of a seller as well as a buyer. The decision in the case of Kama Sahu vs. Krishna Sahu, 1954 AIR(Ori) 105 also throws light on this issue:

“…..It appears from this definition that a sale should always be for a price, but in the case of exchange the transfer of the ownership of one thing is not for any price paid or promised, but for transfer of another thing in return….. If in case a transfer of ownership of an immovable property is exchanged for money, then the transaction cannot be an exchange, but a sale. It being so, unless the properties of both parties are simultaneously transferred in favour of each other, the title to the property cannot pass in favour of the one when the other party does not execute any such document in favour of the other. Exchange can be effected either by one document or by different documents. The consideration for the one document executed in pursuance of an agreement for exchange is the execution of a document by the other party. Unless it is so done, the party who has taken the deed from the other party without himself executing any document in favour of that other party, cannot claim to have got a valid title to the property until and unless he executes a similar document transferring his interest in favour of that other party. …… In the case of an exchange, the intention of parties cannot but be that there should be a reciprocal transfer of two things at the same time and that until such a thing is done, the passing of title under the one document executed in pursuance of the contract, should always be postponed till after the execution of the another document by the other party…”

There cannot be an exchange if the parties to the transaction are not the same. In the case of Than Singh and Ors. vs. Nandu Kirpa Jat and Ors., 1978 AIR(P&H) 94, a Deed of Exchange was executed for two immovable properties between two persons. On the very same day, one of the persons to the Deed of Exchange executed a Sale Deed in respect of the property which she received under the Deed of Exchange. It was contended that the exchange was actually a sale. The Court considered the definition of the terms and held:

“….The deed in question fully complies with the requisites of exchange in terms of S. 118 of the Transfer of Property Act and it admits of no other interpretation except that of exchange. The subsequent transaction may be on the same day but it is not between the same parties. Hence it cannot be said that the deed in fact is a cloak on sale and is not an exchange…”

In Sardara Singh vs. Harbhajan Singh, 1974 AIR(P&H) 345, the Court held that Chapter III of the Transfer of Property Act deals with sales of immovable prop-erty, Chapter IV deals with mortgages of immovable property and charges, Chapter V deals with leases of immovable property, and Chapter VI deals with exchanges. Hence, the very scheme of the Act clearly shows that the sales, mortgages, leases and exchanges of the immovable property are dealt with on totally different footings and it is futile to urge that one takes colour from the other.

Tax Consequences of an Exchange
An exchange is a transfer u/s. 2(47) of the Income-tax Act. Hence, an exchange would give rise to capital gains in the hands of the transferor. If the property is immovable property then the provisions of section 50C / section 43CA of deemed sale consideration would also apply. The transferor would be taxed with reference to the fair market value of the property received by him in exchange for the property given up by him. Thus, it becomes important to arrive at a valuation of the property received as well as the property transferred. Unlike in the case of a sale, where the full value of consideration is to be taxed (except in case of deeming fictions, such as, section 50C) , in the case of an exchange one taxes the fair market value of the property received in exchange. This is a very important distinction between the two.

Stamp Duty is payable on an Deed of Exchange. The higher of the values of the two properties would form the basis for levying stamp duty. The rate of stamp duty is the same as applicable on a conveyance.

Taxation of a Slump Exchange
While on the subject of Sale vs. Exchange, we may also consider the position of a ‘slump exchange’. In the case of a slump exchange, all the assets and li-abilities relating to an undertaking is transferred to a buyer company and in consideration for the same, the buyer company issues its equity shares to the seller entity. Section 2(42C) of the Income-tax Act, defines a slump sale as transfer of one or more undertaking for lump sum consideration without values being assigned to individual assets and liabilities in such a sale. The capital gain arising on a slump sale is computed as per the provisions of section 50B of the Income-tax Act.

However, how does one compute capital gains in the case of a slump exchange? As discussed above, a sale requires that the consideration be in the form of money, whereas in case of a slump exchange, the consideration is shares of the buyer company.

The Mumbai Tribunal in the case of Bharat Bijilee Ltd, TS-96-ITAT-2011 (Mum), has examined the issue of tax-ability of a slump exchange. It held that in order to constitute a “slump sale” u/s. 2(42C), the transfer must be as a result of a “sale” i.e., for a money consideration and not by way of an “Exchange”. In that case, it was held that as the undertaking was transferred in consideration of shares and bonds, it was a case of “exchange” and not of “sale” and so section 2(42C) and section 50B would not apply. As regards taxability u/ss. 45 and 48, it was held that the “capital asset” which was transferred was the “entire undertaking” and not individual assets and liabilities forming part of the undertaking. In the absence of a cost/date of acquisition of the undertaking, the computation and charging provisions of section 45 fail and the transaction cannot be assessed. Hence, there was no tax on the transaction.

A similar view has been taken in the recent decision of Zinger Investments (P.) Ltd (2013) 38 taxmann. com 388 (Hyd).

In Avaya Global Connect Ltd., 26 SOT 397(Mum), the Tribunal held that section 2(42C) only deals with a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale would not qualify as a ‘slump sale’. It was further held that if the transfer is as a result of a Court-approved Scheme of Arrangement under which no monetary consideration is paid, then it is not a sale of an undertaking by the assessee.

However, in Virtual Software and Training (P), (2008) 116 TTJ 920 (Delhi) , there was a transfer of an undertaking as a going concern in consideration for an issue of equity shares of the buyer company. The Delhi Tribunal held that such a transaction would also be covered under the definition of slump sale under the Income-tax Act. Even if the trans-action did not constitute a sale under the Sale of Goods Act or Transfer of Property Act, it would still constitute a transfer u/s. 2(47) of the Income-tax Act.

The Delhi High Court in the case of SREI Infrastructure Finance Ltd, TS-237-HC-2012 (Del) had an occasion to consider a case where a sale of an undertaking was carried out by way of a Court-approved Scheme of Arrangement for consideration in cash. The Court held that the definition of slump sale was wide enough to cover sales which took place under Court Schemes also. It may be noted that this was not a case of a slump exchange but was actually a sale by virtue of a Court Scheme.

Conclusion

The way in which a transaction is structured and its documentation drafted would determine its tax and other consequences. Unintended consequences could follow if proper care is not taken while structuring and drafting.

Exercise of due care and caution is required and we need to remember that sale and exchange are as apart as chalk and cheese and never the twain shall meet!

Securities Laws

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Synopsis

On 9th January 2014, SEBI has notified the final Regulations for settlement of violations of various securities laws. A better set of provisions have replaced the earlier ones which have stronger base in law, but are complex. These new settlement terms are more certain now and leave lesser discretion for the authorities. The author discusses the importance of settlement route, the scheme of the Regulations and also, highlights some issues relating to the same.

Background

SEBI has notified, after consultations, trials and errors, on 9th January 2014, the final Regulations for settlement of violations of various securities laws. This culminates a long journey since 2007 when the first Guidelines were issued, then revised in 2011 and then, after certain changes to SEBI Act and other statutes, finally made formal and detailed Regulations.

Importance of settlement route to cure violations The importance of settlement proceedings lies in the fact that, on the one hand, the securities laws have become exceedingly elaborate and complex. On the other hand, the powers of SEBI to punish in various ways violations have only increased. A Supreme Court decision in Shriram Mutual Fund’s case (AIR 2006 SC 2287) is regularly relied on, mistakenly to some extent in my view, to take a view that penalty has to follow any violation. This mens rea, intention, etc. do not have to be established. For most persons associated with securities markets, the punishment is not just the penalty but the prolonged and legal costly proceedings. In comparison, the procedure of settlement is quick, relatively cheap and generally taint-free. Indeed, the settlement mechanism of SEBI compares quite favorably in many ways with corresponding settlement mechanism under other laws. However, with the passage of time the simple mechanism of the original 2007 Guidelines have inevitably become complex.

While the Regulations are largely an improved version of the Guidelines of 2011, which have been briefly discussed earlier in this column, it would be necessary to summarise the scheme of the Regulations here and highlight some issues.

At the outset, however, it is important to mention the reason why formal Regulations had to be issued and why the Guidelines were not found sufficient. A public interest litigation has been filed in Delhi High Court questioning the power of SEBI to settle violations under the Guidelines. The concern that exists is that the cases settled from 2007 till date may get affected if the Court gives any adverse decision. To alleviate this concern, the SEBI Act and other statutes were amended by a recent ordinance to empower SEBI to formulate regulations permitting settlement of cases.

Scheme of the Regulations The procedure remains broadly the same as under the original Guidelines of 2007. Any person who faces or could face charges for having violated any of the specified securities laws can apply to SEBI for settlement. An independent high power advisory committee (HPAC) would consider the application and clear the same for acceptance and the settled amount paid. In such case, no further proceedings would be taken in respect of such violations. If rejected, the proceedings may be initiated or continued.

However, there are several changes from the 2007 Guidelines and there are other aspects that need discussion too.

There is a three-step formal procedure for consent now. The application would be first placed before an internal committee of SEBI which will examine it in light of the Regulations, ask for further documents and call for personal appearance by the applicant (personally and/or through authorised representative). If the settlement can be finalised at this stage, the application would be forwarded to the HPAC which will then examine it and if required remit it back to the internal committee for reconsideration. Once the settlement is finalised and recommended by the HPAC, it goes to a Panel of two Whole-time Members of SEBI. Here again, if the Panel disagrees with the settlement, it may send the matter back to the Internal Committee where it starts all over again. Or, it may simply reject the application. However, if it finds the settlement to be in order, the applicant would be informed within seven days. Thereafter, the applicant would have to pay the amount of settlement and a final and formal order would be issued.

It may appear that considerable to and fro may arise between the three authorities set up to consider the application. However, it is likely, as seen from past experience, that, except where the matter involved is sensitive/serious or some other important factors/ complexities are involved, the process ought to be smooth and fast. It is likely that the recommendation of the internal committee would be accepted by the HPAC and similarly also accepted by the Panel. Alternatively, it may be rejected by the HPAC and that would be the end of the matter. This is even more likely considering, as also discussed later herein, that the settlement terms are more certain now and have considerably less discretion.

Which violations can be settled? Generally, any violation of the securities laws can be settled. However, a few violations have been stated as generally not capable of being settled. For example, insider trading violations as a rule cannot be settled. Serious cases of market manipulation, frauds, front running, etc. also generally cannot be settled. Non-settling of investor grievances, non compliance of SEBI notices/summons, etc. are some such others. However, the applicant can still apply in such a case where it feels there are reasons enough to make an exception and in case the reasons are found to be adequate, the case may be settled.

Settlement through monetary and non-monetary means Normally, the settlement is by offering a sum in money. However, depending upon the violation and circumstances involved, the settlement may also be through a monetary and/or settlement in kind. Thus, the applicant may offer (or may be asked to offer) settlement some another manner. For example, he may agree not to close his business for a specified period of time and/or remove a certain person from management, profits unjustly made may be disgorged. If accepted these would become part of the settlement terms.

However, unlike the monetary settlement amount, which has detailed formula for calculation that reduces discretion and arbitrariness, the settlement non-monetary settlement has no such formula.

Considerations for settlement

The determination of the amount of settlement is, in most cases, through a specified formula. However, for consideration of the application for settlement generally, there are certain qualitative factors also specified. Thus, even though the applicant may offer the full specified amount as settlement, still, the application would be subject to these qualitative factors. For example, the nature and gravity of the violations would be considered. The harm caused to investors would also be a factor. In case the applicant is a part of a group that has carried out the violation, the exact role by the applicant would also be considered. If the applicant has already undergone any other enforcement action for the same violation, then this also would be considered. And so on.

Formulae specified for determination of settlement amount
Though, as stated above, qualitative factors are also taken into account, and there are non -monetary punishments also possible, the amount of settlement is now provided with a fair degree of certainty in several types of common violations. It is seen over the experience of nearly two decades now that the most common violations are, for example, disclosures as are required under various securities laws are not made or an open offer under the Takeover Regulations has not been made or made belatedly. Price manipulation, unfair practices, frauds, violations by stock brokers of applicable law/code of conduct in dealings with their clients etc. SEBI has carefully considered the implications of these violations in monetary terms and accordingly provided various formulae corresponding to each of these types of violations. Thus, it is likely that applicants of such violations would know what would be the amount of settlement in the normal course.

Stage at which settlement is applied for

One of the fundamental principles of settlement is that the more the applicant saves SEBI time and efforts in the actual proceedings, the better the terms of settlement he would be eligible to. Thus, the formula for determination of settlement amount provides for two important qualitative fac-tors. Firstly, how early the applicant comes forward for settlement. For example, a person who waits till the last moment till a formal adverse order is passed against him for settlement has made SEBI go through the whole process. On the other hand is a person as soon as he becomes aware of the violation, comes forward on his own and makes an application for settlement. Considering this, the Regulations lay down factors that would decrease or increase the amount of settlement based on at which stage of the proceedings that the applicant comes forward.

Another factor is past orders against the applicant, for which also a multiplying factor is provided, for determination of the settlement amount.

Repetitive settlements

Repetitive applications for settlements are not al-lowed. The settlement process is not to encourage/ condone frequent violators because otherwise, the sanctity and respect of the law may be disregarded. Thus, an applicant cannot make another application for settlement within 24 months of an earlier settlement. Further, if, in the 36 months preceding the application, two settlement orders have been passed for the applicant, the application cannot be made.

Strangely, this bar is applicable even for non-similar violations. For example, a violation of a disclosure requirement and a violation of a more serious nature are both treated the same. Ideally, repetitive violations of the same type ought to have been barred.

Rejected application

The information submitted or representation sub-mitted by an applicant in an application cannot be used as evidence before any Court/Tribunal, in case the application is rejected. However, this does not apply where the settlement order is revoked or withdrawn in specified cases. In any case, it appears that information independently collected may still be evidence.

Time limit for making of application

The application for settlement has to be made within sixty days of the receipt of a show cause notice.

Retrospective application

A clause that may sound like a transitional one but is intended to resolve a nagging problem is Regula-tion 1(2) . It provides that the Regulations shall be deemed to have come into force from 20th April 2007. It appears that it aims at giving legitimacy to settlement orders and proceedings prior to the notification of these Regulations. As stated earlier, a matter is pending before the Delhi High Court as to whether SEBI has powers to settle proceedings through Guidelines issued on 20th April 2007 (revised in 2011). An Ordinance was recently notified which inserted a new section 15JB in the SEBI Act, also with retrospective effect from 20th April 2007, stating that cases may be settled in accordance with Regulations issued in this behalf. The present Regulations are thus issued in this context. The retrospective effect of these provisions/Regulations is, in my view, legally uncertain. One will have to see, however, how the Delhi High Court views the matter, considering also the fact that hundreds of settlements have already taken places and proceedings closed.

Conclusion

The settlement procedure now is speedy but com-plicated. Serious violations are unlikely to be settled though in some cases may be settled if the circumstances demand with perhaps higher settlement amount. The revised formulae provides for higher settlement amounts as compared to earlier settle-ment amounts seen in practice. This discourages the assumption that violations would be settled as easily. The certainty of amounts is helpful as the party can weigh carefully whether the proceedings ought to be settled. The fact that the party continues to have the option not to admit the violation also helps considering also the fact that often settlements are carried out to buy peace and reduce the efforts involved in settlement. All in all, a better set of provisions have replaced the earlier ones with stronger base in law, certainty though at the cost of being complex.

Is it fair?

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Introduction:

Members of our profession are being increasingly subjected to disciplinary cases for misconduct. The complainants are often not aware of the grave consequences on the member concerned; or sometimes they knowingly do so to harass the CA with an ulterior motive to exert pressure on a rival party. CA being a soft target is often victimised. Our Council is realising this; but is helpless due to the system.

It is observed that many a time, an altogether stranger to the dispute files a case and makes the life of our member miserable.

Consequences of a complaint:

For items specified in First Schedule to our CA Act, the prescribed punishments are any one or more of – (a) reprimand, (b) fine upto Rs. 1 lakh and (c) suspension of membership for a period up to 3 months.

For items in Second Schedule, any one or more of – (a) reprimand, (b) Fine upto Rs. 5 lakhs and (c) suspension for any length of time, including forever.

However, it is to be noted that the process of disposal of complaint is likely to cause more stress than these prescribed consequences.

Firstly, it takes at least 3 years from initiation of complaint to its disposal (if not contested in appeal). One has to carry the sword hanging on one’s head. It is a great mental agony. It involves expenditure – on paper work, counsel’s fees, traveling (at times to Delhi) to the place of hearing and so on. Most importantly, if one is held prima facie guilty, one is deprived of bank audits, Government audits ( C & AG), etc. This is a great monetary loss.

After all, it is a stigma on one’s professional career.

Locus Standi: For information of the readers, I wish to clarify the distinction between the items of First and Second Schedule. First Schedule contains offences within the members’ community while Second Schedule contains items affecting the outsiders. The latter is considered more serious.

The proceedings are considered as quasi criminal proceedings. Any person can file a complaint. If complaint is not validly made, the Disciplinary Directorate can initiate suo moto action based on ‘information’.

I have come across many cases where the complainant was strictly not concerned with the type of misconduct alleged. Particularly, in First Schedule, the items affect the rights of other members.

For example:
In one case, a company did not appoint its first auditor in the board meeting. (Section 224 (5) of Companies Act, 1956) It was advised to appoint auditor in EGM – section 224 (5)(b). They issued appointment letter which unfortunately did not mention them to be the first auditors. It was implied and understood. Auditors filed form 23 B to ROC. Later on there was a dispute between two groups of management. The Indian group, both the directors being CAs, fabricated the records so as to ‘create’ one more auditor before the EGM! They closed the accounts out of the way – contrary to a different accounting year stated in articles, and filed a frivolous complaint that the auditors (innocent, appointed in EGM) did not communicate with previous auditor! And the alleged ‘previous auditor’ did not even turn up during the proceedings. Complainants admitted that they had manipulated the records. The proceedings stretched over a period of 5 years and a very senior, reputed firm was the victim.

In the second case, there was a change-over in management. The old management, proved to be unscrupulous, created an ‘auditor’ in similar manner and filed similar complaint. The new auditor (genuine) communicated with previous auditor on record (he who signed last audit, and who according to the new management was the previous auditor). The innocent new auditor had no clue whatsoever to indicate the existence of any such ‘previous auditor’.

The third case is more serious. There was a split in management. Two brothers who were directors separated from each other. The outgoing auditor supplied information to an outside lawyer. He was staying in Rajasthan while the company had all its operations in Mumbai. The outsider was not a shareholder, director, employee, supplier, customer and had no connection with the company at all! He filed a case of negligence (Schedule 2) against the auditor ‘claiming himself to be a responsible citizen’ of our country. He found a few minor arithmetic errors in stock valuation sheets which contained hundreds of items (in 12 sheets). Those were human, inadvertent errors, having no material impact. Again the proceedings stretched over 5 years!

During the hearing, he never appeared and it transpired that he was a professional blackmailer.

Conclusion:
Unfortunately, the normal principle of a complainant coming with clean hands is not followed in disciplinary proceedings. Council claims to be concerned (rightly so) only with the members’ conduct and not that of an outsider. Therefore, complaints even from a criminal who is behind bars are entertained. So also, for First Schedule cases, like previous auditors communication, non-payment of undisputed fees, solicitors, advertisement, sharing with non-members, charging fees on percentage basis, etc. a stranger is no way concerned. When previous auditor is not complaining, how is a stranger concerned? This results in lot of burden on Disciplinary Directorate and on the respective committees of the Council as well.

It is suggested that locus standi, materiality and the like concepts be given due weightage in the proceedings.

levitra

PART A: orders of the court & CIC

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Section 8(1) (e), (g) & (j) of the RTI Act:

There were four writ petitions before the court.

In these petitions, the issue involved was whether the copies of office notings recorded on the file of Union Public Service Commission (UPSC) and the correspondence exchanged between UPSC and the Department seeking its advice can be accessed in the RTI Act or not by the person to whom such advice relates.

When one G.S. Sandhu sought information from UPSC to furnish him in respect of departmental proceedings against him, information sought was denied by PIO & FAA. However the Central Information Commission directed the UPSC to disclose the nothings relating to the matter in hand to the respondent, with liberty to the petitioner-UPSC to obliterate the name and designation of the officer who made the said notings.

Before the H.C.of Delhi, UPSC assailed the Commission on four different grounds as under:

(I)There is a fiduciary relationship between UPSC and the department which seeks its advice and the information provided by the Department is held by UPSC in trust for it. The said information, therefore, is exempted from disclosure u/s. 8(1) (e) of the Act, (ii) the file notings and the correspondences exchanged between UPSC and the department seeking its advice may contain information relating not only to the information seeker but also to other persons and departments and institutions, which, being personal information, is exempt from disclosure u/s. 8(1) (j) of the Act, (iii) the officers who record the notings on the file of UPSC are mainly drawn on deputation from various departments. If their identity is disclosed, they may be subjected to violence, intimidation and harassment by the persons against whom an adverse note is recorded and if the said officer of UPSC, on repatriation to his parent department, happens to be posted under the person against whom an adverse noting was recorded by him, such an officer may be targeted and harassed by the person against whom the note was recorded. Such an information, therefore, is exempt from disclosure u/s. 8(1) (g) of the Act and (iv) the notings recorded by UPSC officer on the file are only inputs given to the Commission to enable it to render an appropriate advice to the concerned department and are not binding upon the Commission. Therefore, such information is not really necessary for the employee who is facing departmental inquiry, since he is concerned only with the advice ultimately rendered by UPSC to his department and not the noting meant for consideration of the Commission.

After detailed discussion & analysis of two Supreme Court decisions in (i) Central Board of Secondary Education and Another vs. Aditya Bandopadhyay & Ors. (ii) Bihar Public Service Commission vs. Saiyed Hessian Abbas Rizvi & Another, the High Court of Delhi issued the following directions:

(i) The copies of office notings recorded in the file of UPSC as well as the copies of the correspondence exchanged between UPSC and the Department by which its advice was sought, to the extent it was sought, shall be provided to the respondent after removing from the notings and correspondence, (a) the date of the noting and the letter, as the case may be; (b) the name and designation of the person recording the noting and writing the letter and; (c) any other indication in the noting and/or correspondence which may reveal or tend to reveal the identity of author of the noting/letter, as the case may be;

(II) If the notings and /or correspondence referred in (i) above contains personal information relating to a third party, such information will be excluded while providing the information sought by the respondent;

[Union Public Service Commission vs. G.S. Sandhu & Ors: Decided on 10.10.2013; RTIR IV (2013)216 (Delhi)]

Section 6 (1) of the RTI Act, 2005:

K.K. Mishra, the appellant through his RTI application dated 16.01.2012 sought certified copies in respect of M/s. Nandi Infrastructure Corridor Enterprises Ltd., Bangalore showing composition of Board of Directors and Members/Shareholders of the Company as filed by the Company from time to time with ROC, Karnataka Bangalore from 1.1.2000 onwards.

The CPIO responded by citing one earlier decision of the Commission wherein it was held as under:

“The Registrar of Companies has already put in place system for disclosure of information including the procedure for payment of cost for providing the information. There is no denial of information to the applicant. There is, therefore, no reason why the procedure of the Registrar of Companies in respect of disclosure of information should not be adhered to and followed. As the working of the Office of Registrar of Companies is transparent in so far as public activities are concerned, there is no justification for invoking the cost and fee rules as prescribed under the RTI Act. In case, however, there is any hindrance in providing access to the documents which are expected to be in the public domain, the provisions of the RTI Act could be invoked. In view of this, there is no justification for not respecting the fee and cost rules of the Registrar of Companies as per the relevant provisions under Section 610 of the Companies Act”.

Before the Commission, the appellant stated that for getting the information, he has to first register himself before he can access the information and thereafter pay Rs. 50/- for viewing the information for three hours. Whereas, under RTI Rules, the inspection of documents is free for first hour and thereafter the charges are Rs. 5/- for every 15 minutes. The appellant states that he paid Rs. 50/- through internet banking, but thereafter there were no instructions on the website as to how to access the information on net, the fee payable is Rs. 25/- per page as against Rs. 2/- per page prescribed under RTI Rules. The appellant contested that it would not be appropriate for the CIC to allow ROC to charge such exorbitant rates for information which is in direct conflict with the provisions of the RTI Act and rules. The appellant stated during that hearing that in the above said order specifically mentioned that in case of hindrance in providing access to the documents, the provisions of the RTI Act could be invoked. The respondent CPIO on the other hand stated that in case the appellant is not able to access the information from the website of the ROC, he can approach the help Desk which is placed In their Office to assist the people to access information on the website.

The Commission then quoted from one order of the High Court of Delhi (in the matter of Registrar of Companies & Ors. vs. Dharmendra Kumar Garg & Another) as under:

34.    “The mere prescription of a higher charge in the other statutory mechanism (in this case section 610    of the Companies Act), than that prescribed under the RTI Act does not make any difference whatsoever. The right available to any person to seek inspection/copies of documents under sec-tion 610 of the Companies Act is governed by the Companies (Central Government) General Rules & Forms, 1956, which are statutory rules and prescribe the fees for inspection of documents etc. in Rule 21A. The said rules being statutory in nature and specific in their application do not get overridden by the rules framed under the RTI Act with regard to prescription of fee for supply of information, which is general in nature, and apply to all kinds of applications made under the RTI Act to seek information. It would also be complete waste of funds to require the creation and maintenance of two parallel machineries by the ROC – one u/s. 610 of the Companies Act, and the other under the RTI Act to provide the same information to an applicant. It would lead to unnecessary and avoidable duplication of work and consequent expenditure.”

35.    “The right to information is required to be balanced with the need to optimize use of limited fiscal resources. In this context I may refer to the relevant extract of preamble to the RTI Act which, inter alia, provides……………………………………………..”

41.    “Firstly, I may notice that I do not find anything inconsistent between the schemes provided u/s. 610    of the Companies Act and the provisions of the RTI Act. Merely because a different charge is collected for providing information under Section 610 of the Companies Act than that prescribed as the fee for providing information under the RTI Act does not lead to an inconsistency in the pro-visions of these two enactments. Even otherwise, the provisions of the RTI Act would not override the provision contained in Section 610 of the Com-panies Act. Section 610 of the Companies Act is an earlier piece of legislation. The said provision was introduced in the Companies Act, 1956 at the time of its enactment in the year 1956 itself. On the other hand, the RTI Act is a much later enactment, enacted in the year 2005. The RTI Act is a general law/enactment which deals with the right of a citizen to access information available with a public authority, subject to the conditions and limitation prescribed in the said Act. On the other hand Section 610 of the Companies Act is a piece of special legislation, which deals specifically with the right of any person to inspect and obtain records i.e. information from the ROC. Therefore, the later general law cannot be read or understood to have abrogated the earlier special law.”

In view of above Order, the Commission found no reason to disagree with the reply of office of the Register of companies, Karnataka, Bangalore

[K.K. Mishra vs. office of the ROC, Karnataka, Ban-galore decided on 20.09.2013 in CIC/SS/A/2012/2005: RTIR IV (2013)181(CIC)]

 Section 6 of the RTI Act, 2005

In a short order of CIC, it is decided that paying application fees through money order is as good as paying cash and hence the RTI application cannot be rejected on the ground that mode of paying fees is not as per rules. Also in the Order, the Commission referred to the full bench decision reported in BCAJ of January 2014.

In the light of above the Commission decided that the CPIO should have accepted the RTI application and dealt with the same as per the provisions of the RTI Act

[S. Viswanatha Rao vs. Department of Posts, Secunderabad: decided on 27.09.2013: CIC/ BS/C/2012/000279/3569: RTIR IV (2013) 163 (CIC)]

”

A. P. (DIR Series) Circular No. 123 dated 16th April, 2014

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Press Note No. 1 (2011 series) D/O IPP dated 20th May, 2011

Notification No. FEMA. 298 /2014-RB dated 13th March, 2014 c.f. G.S.R. No.190(E) dated 19th March, 2014

Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)

 This
circular permits Foreign Direct Investment (FDI) in Limited Liability
Partnerships (LLP) that are formed and registered under the Limited
Liability Partnership Act, 2008.

The details scheme, procedure and forms to be used for the same are annexed to this Circular.

Highlights
of the scheme – called Foreign Direct Investment (FDI-LLP) in Limited
Liability Partnerships (LLPs) formed and registered under the Limited
Liability Partnership Act, 2008 – are as under: –

1. Eligible Investors

A
person resident outside India or an entity incorporated outside India
shall be eligible investor for the purpose of FDI in LLP. However, the
following persons shall not be eligible to invest in LLP: –

(i) A citizen/entity of Pakistan and Bangladesh or

(ii) A SEBI registered Foreign Institutional Investor (FII) or

(iii) A SEBI registered Foreign Venture Capital Investor (FVCI) or

(iv) A SEBI registered Qualified Foreign Investor (QFI) or

(v)
A Foreign Portfolio Investor registered in accordance with Securities
and Exchange Board of India (Foreign Portfolio Investors) Regulations,
2014 (RFPI).

2. Eligibility of LLP for accepting foreign Investment

(i)
An LLP, existing or new, operating in sectors / activities where 100%
FDI is allowed under the automatic route of FDI Scheme is eligible to
receive FDI.

(ii) An LLP engaged in the following sectors / activities is not eligible to accept FDI: –

a)
Sectors eligible to accept 100% FDI under automatic route but are
subject to FDI-linked performance related conditions (for example
minimum capitalisation norms applicable to ‘Non-Banking Finance
Companies’ or ‘Development of Townships, Housing, Built-up
infrastructure and Construction-development projects’, etc.); or

b)
Sectors eligible to accept less than 100% FDI under automatic route; or
c) Sectors eligible to accept FDI under Government Approval route; or

d) Agricultural/plantation activity and print media; or

e)
Sectors not eligible to accept FDI i.e. any sector which is prohibited
under the extant FDI policy as well as sectors / activities prohibited
in terms of Regulation 4(b) to Notification No. FEMA 1 / 2000-RB dated
3rd May 2000.

3. Eligible investment

Contribution
to the capital of a LLP would be an eligible investment under the
Scheme. Note: Investment by way of ‘profit share’ will fall under the
category of reinvestment of earnings

4. Entry Route

Any
FDI in a LLP will require prior Government/ FIPB approval. Any form of
foreign investment in an LLP, direct or indirect (regardless of nature
of ‘ownership’ or ‘control’ of an Indian Company) will require
Government/FIPB approval.

5. Pricing

FDI in an
LLP either by way of capital contribution or by way of
acquisition/transfer of ‘profit shares’, will have to be more than or
equal to the fair price as worked out with any valuation norm which is
internationally accepted/adopted as per market practice (hereinafter
referred to as “fair price of capital contribution/profit share of an
LLP”) and a valuation certificate to that effect shall be issued by a
Chartered Accountant or by a practicing Cost Accountant or by an
approved valuer from the panel maintained by the Central Government.

In
case of transfer of capital contribution/profit share from a resident
to a non-resident, the transfer will have to be for a consideration
equal to or more than the fair price of capital contribution/profit
share of an LLP. Further, in case of transfer of capital
contribution/profit share from a non-resident to a resident, the
transfer will have to be for a consideration which is less than or equal
to the fair price of the capital contribution/profit share of an LLP.

6. Mode of payment for an eligible investor

Payment
by an eligible investor towards capital contribution/profit share of
LLP will be allowed only by way of cash consideration to be received: –

i) By way of inward remittance through normal banking channels; or

ii) By debit to NRE/FCNR(B) account of the person concerned.

7. Reporting

(i)
LLP must report to the Regional Office concerned of RBI, through its
bank, at the earliest but not later than 30 days from the date of
receipt of the amount of consideration:

(a) Details of the
receipt of the amount of consideration for capital contribution and
profit shares in Form FOREIGN DIRECT INVESTMENT – LLP (I) together with a
copy/ies of the FIRC/s evidencing the receipt of the remittance
(b) KYC report on the non-resident investor
(c) Valuation certificate (as per paragraph 5 above) as regards pricing.

The Regional Office concerned, will allot a Unique Identification Number (UIN) for the amount reported.

(ii)
The bank in India, receiving the remittance must obtain a KYC report in
respect of the foreign investor from the overseas bank remitting the
amount.

(iii) Disinvestment/transfer of capital contribution or
profit share between a resident and a non-resident (or vice versa) must
be reported within 60 days from the date of receipt of funds in Form
FOREIGN DIRECT INVESTMENT – LLP (II).

8. Downstream investment

a)
An Indian company, having foreign investment (direct or indirect,
irrespective of percentage of such foreign investment), will be
permitted to make downstream investment in an LLP only if both, the
company as well as the LLP, are operating in sectors where 100% FDI is
allowed under the automatic route and there are no FDI-linked
performance related conditions. Onus will be on the LLP accepting
investment from the Indian Company registered under the provisions of
the Companies Act, as applicable, to ensure compliance with downstream
investment requirement as stated above.

b) An LLP with FDI under this scheme will not be eligible to make any downstream investments in any entity in India.

9. Other Conditions

(i)
In case, an LLP with FDI, has a body corporate as a designated partner
or nominates an individual to act as a designated partner in accordance
with the provisions of section 7 of the Limited Liability Partnership
Act, 2008, such a body corporate must be a company registered in India
under the provisions of the Companies Act, as applicable and not any
other body, such as an LLP or a Trust. For such LLP, the designated
partner “resident in India”, as defined under the ‘Explanation’ to
Section 7(1) of the Limited Liability Partnership Act, 2008, will also
have to satisfy the definition of “person resident in India”, as
prescribed u/s. 2(v)(i) of the Foreign Exchange Management Act, 1999.

(ii)
The designated partners will be responsible for compliance with all the
above conditions and also liable for all penalties imposed on the LLP
for their contravention, if any.

(iii) Conversion of a company
with FDI, into an LLP, will be allowed only if the above stipulations
(except the stipulation as regards mode of payment) are met and with the
prior approval of FIPB / Government.

(iv) LLP cannot avail External Commercial Borrowings (ECB).

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A. P. (DIR Series) Circular No. 122 dated 10th April, 2014

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External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 30th June, 2014: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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Clarification with regard to Holding of shares or exercising power in a fiduciary capacity – Holding and Subsidiary relationship u/s. 2(87) of Companies Act 2013

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The Ministry of Company Affairs has clarified vide Circular No. 20/2013 dated 27th December that it has received a number of representations consequent upon notifying section 2(87) of the Companies Act, 2013 which defines “subsidiary company” or”subsidiary”. The stakeholders have requested this Ministry to clarify whether shares heldor power exercisable by a company in a ‘fiduciary capacity’ will be excluded while determining if a particular company is a subsidiary of another company. The stakeholders have further pointed out that in terms of section 4(3) of the Companies Act, 1956, suchshares or powers were excluded from the purview of holding-subsidiary relationship. The Ministry has thus clarified that the shares held by the company or power exercisable by it in another company in a ‘fiduciary capacity’ shall not be counted for the purpose of determining the holding-subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013.

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A. P. (DIR Series) Circular No. 97 dated 20th January, 2014

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Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards / Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 Money changing activities

This circular contains the amended the instructions issued to Authorised Money Changers (AMC) with respect to establishment of business relationships by corporates. The revised guidelines are as under: –

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A. P. (DIR Series) Circular No. 95 dated January 17, 2014

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Facilities for Persons Resident outside India – Clarification

This circular clarifies that a foreign investor is free to remit funds on cash/TOM/spot basis through any bank of its choice for any permitted transaction. The funds so remitted must be transferred to the designated custodian bank through the banking channel. KYC in respect of the remitter, wherever required, will be the joint responsibility of the bank that has received the remittance as well as the bank that ultimately receives the proceeds of the remittance. The remittance receiving bank is required to issue a FIRC to the bank receiving the proceeds to establish the fact the funds had been remitted in foreign currency.

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A. P. (DIR Series) Circular No. 94 dated 16th January, 2014

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Conversion of External Commercial Borrowing and Lumpsum Fee/Royalty into Equity

Presently, an Indian company can issue equity shares against its liability in respect of External Commercial Borrowings (ECB), import of capital goods, lump sum fees/royalties, etc.

This circular clarifies that the rate of exchange prevailing on the date of the agreement between the parties concerned has to be applied at the time of conversion of foreign currency liability in respect of External Commercial Borrowings (ECB), import of capital goods, lump sum fees/royalties, etc. into Indian rupees, for the purpose of issue of equity shares/other securities, as the case may be, against the same. However, the Indian company is free to issue equity shares for a rupee amount less than that arrived at based on the rate of exchange prevailing on the date of the agreement by a mutual agreement with the lender/supplier.

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A. P. (DIR Series) Circular No. 93 dated 15th January, 2014

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Notification No. FEMA.293/2013-RB dated 12th November, 2013, vide G.S.R. No. 767(E) dated 6th December, 2013

Clarification- Establishment of Liaison Office/ Branch Office/Project Office in India by Foreign Entities- General Permission

Presently, no entity or person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China is permitted to establish in India, a branch office or a liaison office or a project office or any other place of business by whatever name called, without obtaining prior permission of RBI.

This circular clarifies that the said restrictions also apply to entities from Hong Kong and Macau. As a result, prior permission of RBI is required to be obtained by entities from Hong Kong and Macau to setup, in India, a Liaison/Branch/Project Offices or any other place of business by whatever name.

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A. P. (DIR Series) Circular No. 92 dated 13rd January, 2014

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Risk Management and Inter Bank Dealings

Presently, residents (other than exporters and importers) cannot cancel and rebook forward contracts, involving Rupee as one of the currencies, booked by them to hedge current and capital account transactions. Exporters are allowed to cancel and rebook forward contracts to the extent of 50% of the contracts booked in a financial year for hedging their contracted export exposures and importers are allowed to cancel and rebook forward contracts to the extent of 25% of the contracts booked in a financial year for hedging their contracted import exposures.

This circular now permits everyone with a contracted exposure to freely cancel and rebook forward contracts in respect of all current account transactions as well as capital account transactions with a residual maturity of one year or less. In the case of FII/QFI/other portfolio investors, forward contracts booked by them, once cancelled, can be rebooked up to the extent of 10% of the value of the contracts cancelled. However, forward contracts booked by them can be rolled over on or before maturity.

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A. P. (DIR Series) Circular No. 90 dated 9th January, 2014

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Provisions u/s. 6 (4) of Foreign Exchange Management Act, 1999 – Clarifications

Section 6 (4) of FEMA, 1999 permits a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

This circular clarifies that the following transactions are covered u/s. 6(4) of FEMA, 1999: –

(i) Foreign currency accounts opened and maintained by such a person when he was resident outside India.

(ii) Income earned through employment or business or vocation outside India taken up or commenced while such person was resident outside India, or from investments made while such person was resident outside India, or from gift or inheritance received while such a person was resident outside India.

(iii) Foreign exchange including any income arising therefrom, and conversion or replacement or accrual to the same, held outside India by a person resident in India acquired by way of inheritance from a person resident outside India.

(iv) Persons resident in India can freely utilise all their eligible assets abroad as well as income on such assets or sale proceeds thereof received after their return to India for making any payments or to make any fresh investments abroad without RBI approval if the cost of such investments and/or any subsequent payments are met exclusively out of funds forming part of eligible assets held by them and the transaction is not in contravention of the provisions of FEMA.

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A. P. (DIR Series) Circular No. 88 dated 9th January, 2014

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

This circular has expanded the scope of the Rupee Drawing Arrangements (RDA) by including the following items under the list of Permitted Transactions: –

1. Payments to utility service providers in India, for services such as water supply, electricity supply, telephone (except for mobile top-ups), internet, television etc.

2. Tax payments in India.

3. EMI payments in India to Banks and Non- Banking Financial Companies (NBFCs) for repayment of loans.

The detailed list under Part (B) of Annex-I is annexed to the circular.

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A. P. (DIR Series) Circular No. 87 dated 9th January, 2014

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Resident Bank account maintained by residents in India – Joint holder – liberalisation

Presently, individuals resident in India can include Non-Resident Indian (NRI) close relative(s) as defined in Section 6 of the Companies Act, 1956 as a joint holder(s) in their resident savings bank accounts on “former or survivor” basis. However, such NRI close relatives cannot operate the said account during the life time of the resident account holder.

This circular provides that individuals resident in India can now include NRI close relative(s) as defined in Section 6 of the Companies Act, 1956 as a joint holder(s) in their new/existing resident savings bank accounts/other bank accounts on “either or survivor” basis. The NRI has to give a declaration in the prescribed format stating that he/she will not use the proceeds lying in the above account for any transaction in contravention of FEMA and in case of any violation he/she will be responsible for the same.

The above liberalisation is subject to the following: –

a) The said account will be treated as resident bank account for all purposes and all regulations applicable to a resident bank account will be applicable.

b) Cheques, instruments, remittances, cash, card or any other proceeds belonging to the NRI close relative cannot be credited to the said account.

c) The NRI close relative can operate the said account only for and on behalf of the resident for domestic payment and not for creating any beneficial interest for himself.

d) Where the NRI close relative becomes a joint holder with more than one resident in the said account, such NRI close relative must be the close relative of all the resident bank account holders.

e) Where due to any eventuality, the non-resident account holder becomes the survivor of the said account the same must be categorised as Non- Resident Ordinary Rupee (NRO) account and all such regulations as applicable to NRO account shall be applicable. Onus will be on the NRI account holder to inform the Bank to get the account categorised as NRO account.

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A. P. (DIR Series) Circular No. 86 dated 9th January, 2014

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Foreign Direct Investment – Pricing Guidelines for FDI instruments with optionality clauses

This circular permits the issue of equity shares and compulsorily and mandatorily convertible preference shares/debentures under FDI Scheme to a person resident outside with an “optionality clause”. Under this clause, after a minimum lockin period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence and construction development sector where the lock-in period of three years has been prescribed), the non-resident investor exercising option/right of buy-back will be eligible to exit without any assured return at the price prevailing/ value determined at the time of exercise of the option. The lock-in period will be effective from the date of allotment of such shares or convertible debentures unless otherwise prescribed.

Valuation will be as under: –

(i) In case of a listed company, the market price prevailing at the recognised stock exchanges.

(ii) In case of unlisted company, price not exceeding that arrived at on the basis of Return on Equity (i.e. Profit After Tax/Net Worth – where Net Worth would include all free reserves and paid up capital) as per the latest audited balance sheet.

(iii) Compulsorily Convertible Debentures (CCD) and Compulsorily Convertible Preference Shares (CCPS) are to be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit and which is to be duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

All existing contracts will also have to comply with the above conditions to qualify as FDI compliant.

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A. P. (DIR Series) Circular No. 85 dated 6th January, 2014

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External Commercial Borrowings (ECB) Policy – Liberalisation of definition of Infrastructure Sector

This circular provides that ‘Maintenance, Repairs and Overhaul’ (MRO) will also be treated as a part of airport infrastructure for the purposes of ECB. As a result, MRO will be considered as part of the sub-sector of Airport in the Transport Sector of Infrastructure.

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A. P. (DIR Series) Circular No. 84 dated 6th January, 2014

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Issue of Non-convertible/redeemable bonus preference shares or debentures – Clarifications This circular grant general permission, as against the present system of case-to-case approval, to Indian companies for issue of non-convertible/redeemable preference shares or debentures by way of distribution as bonus from the general reserves, to nonresident shareholders, including the depositories that act as trustees for the ADR/GDR holders, under a Scheme of Arrangement approved by a Court in India under the provisions of the Companies Act, as applicable, subject to no-objection from the Income Tax Authorities.

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Natural justice – Bias – Judicial conduct– No one can act in judicial capacity if his previous conduct gives ground for believing that he cannot act with an open mind or impartially

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Narinder Singh Arora vs. State (Govt. of NCT of Delhi) 2012 (283) ELT 481 (SC)

The Appellant had filed a complaint against the Respondents. Subsequently, the charges were framed against the Respondents u/s. 498A, 304B read with section 34 and Section 302 of the Indian Penal Code by Shri. Prithvi Raj, learned Additional District & Sessions Judge dated 15-05-1995. Thereafter, the case was listed before Shri. S.N. Dhingra, Additional Sessions Judge for the trial, however, the learned Judge had recused from hearing the matter for personal reasons vide Order dated 25-09-2000.

Accordingly, the case was withdrawn from the Court of Shri. S.N. Dhingra, Additional Sessions Judge and transferred to the Court of Shri. S.M. Chopra, Additional Sessions Judge vide the Order dated 29-09- 2000 of the Sessions Judge. Eventually the accused Respondents were tried and acquitted vide judgment and Order dated 22-03-2003 passed by Ms. Manju Goel, Additional Sessions Judge. Being aggrieved by the judgment and Order, the Appellant preferred a revision petition before the High Court. The same was dismissed vide impugned final judgment and Order dated 01-09-2010 passed by learned Judge, Shri. Justice S.N. Dhingra.

The Court observed that it is apparent that the fact of earlier recusal of the case at the trial by learned Shri Justice S.N. Dhingra himself, was not brought to his notice in the revision petition before the High Court by either of the parties to the case. Therefore, Shri Justice S.N. Dhingra, owing to inadvertence regarding his earlier recusal, has dismissed the revision petition by the impugned judgment. In our opinion, the impugned judgment, passed by Shri Justice S.N. Dhigra subsequent to his recusal at trial stage for personal reasons, is against the principle of natural justice and fair trial. It is well settled law that a person who tries a cause should be able to deal with the matter placed before him objectively, fairly and impartially. No one can act in a judicial capacity if his previous conduct gives ground for believing that he cannot act with an open mind or impartially. The broad principle evolved by this Court is that a person, trying a cause, must not only act fairly but must be able to act above suspicion of unfairness and bias.

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Applicability of PAN requirement for Foreign Nationals

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The Ministry of Corporate Affairs has vide General Circular No. 11/2014 dated 22nd May 2014, has clarified that the PAN details are mandatory only for those foreign nationals who are required to possess “PAN” in terms of provisions of the Income Tax Act, 1961 on the date of application for incorporation while filing Form INC -7 for incorporation of Company. Where the intending Director who is a Foreign National is not required to compulsorily possess PAN, it will be sufficient for such a person to furnish his/her passport number, along with undertaking stating that provisions of mandatory applicability of PAN are not applicable to the person concerned. The form of Declaration is required to be made in the proforma given in the circular.

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Certification of forms under the Companies Act, 2013 by practicing professionals

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The Ministry of Corporate Affairs has vide General Circular No. 10 /2014 dated 7th May 2014, invited the attention of the professional bodies ( ICAI, ICSI, ICWAI) for authenticating the correctness and integrity of documents being filed by them with the MCA in electronic mode. It is required to examine e-forms or non e-forms attached and filed with general forms on MCA portal viz. to verify whether all the requirements have been complied with and all the attachment to the forms have been duly scanned and attached in accordance with the requirement of above said rules.

Where any instance of filing of documents, application or return or petition etc. containing false or misleading information or omission of material fact or incomplete information is observed, the Regional Director or the Registrar as the case may be, shall conduct a quick inquiry against the professionals who certified the form and signatory thereof including an officer in default who appears prima facie responsible for submitting false or misleading or incorrect information pursuant to requirement of above said Rules; 15 days’ notice may be given for the purpose.

The Regional Director or the Registrar will submit his/her report in respect of the inquiry initiated, irrespective of the outcome, to the Governance cell of the Ministry within 15 days of the expiry of period given for submission of an explanation with recommendation in initiating action u/s. 447 and 448 of the Companies Act, 2013 wherever applicable and also regarding referral of the matter to the concerned professional Institute for initiating disciplinary proceedings.

The E-Gov cell of the Ministry shall process each case so referred and issue necessary instructions to the Regional Director/ Registrar of Companies for initiating action u/s 448 and 449 of the Act wherever prima facie cases have been made out. The E-Gov cell will thereafter refer such cases to the concerned Institute for conducting disciplinary proceedings against the errant member as well as debar the concerned professional from filing any document on the MCA portal in future.

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