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1. Financial Action Task Force (FATF) has issued a Statement on June 24, 2011 calling its members and other jurisdictions to apply counter-measures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from Iran and Democratic People’s Republic Korea (DPRK). However, Authorised Persons (Indian Agents) are not precluded from entering into legitimate trade and business transactions with Iran.
2. FATF has also identified the following countries — Bolivia, Cuba, Ethiopia, Kenya, Myanmar, Sri Lanka, Syria and Turkey — as Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies and calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction. Authorised Persons (Indian Agents) are advised to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.
1. Financial Action Task Force (FATF) has issued a Statement on June 24, 2011 calling its members and other jurisdictions to apply counter-measures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from Iran and Democratic People’s Republic Korea (DPRK). However, Authorised Persons are not precluded from entering into legitimate trade and business transactions with Iran.
2. FATF has also identified the following countries — Bolivia, Cuba, Ethiopia, Kenya, Myanmar, Sri Lanka, Syria and Turkey — as jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies and calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction. Authorised Persons are advised to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.
Takeover Regulations hit the front pages of newspapers for wrong reasons. Takeover of companies in India is relatively lesser in number but takeovers have a glamour attached to them, hence changes to law relating to takeovers get disproportionate attention. At the same time, the manner in which the Regulations are framed ensure that not only the listed company and its promoters are affected but even the shareholders are affected. Promoters and other specified persons have to carry out certain regular or ad hoc compliances, reporting, etc., though even at that stage there is no takeover involved. Non-compliance of these requirements can result in stiff penalties and even an open offer. Further, many corporate restructuring transactions are structured keeping these Regulations in mind.
Now that SEBI has notified the long-awaited revised Regulations last month, listed companies, their promoters and those concerned with legal aspects of corporate laws relating to listed companies need to examine them closely.
In this article, some important changes are highlighted. It must be emphasised though that the Regulations are substantially rewritten and hence it is not as if there is a list of specified amendments that can be identified and discussed. And though the outline of the Regulations remains the same, there have been changes, major and minor, at several places. To begin with, it is worth reviewing generally what the Regulations are concerned with. The Regulations essentially intend that if there is a change of control of a listed company, whether through acquisition of controlling interest or otherwise or even a substantial acquisition of its shares, the public shareholders should be given an option to exit. This usually happens when a new promoter acquires the controlling stake from the existing promoter(s). However, the acquirer may simply acquire substantial shares in the company. The public shareholders are required to be paid a minimum price which is not less than what the outgoing promoters get, but the price for public shareholders can be higher. There are requirements of disclosure when a person acquires substantial quantity of shares and generally many other related requirements to ensure that this basic intent is achieved.
The Takeover Regulations were originally issued in 1994 and then revised in 1997. Several amendments were made from time to time and, recently, a committee was set up to recommend draft new Regulations under the leadership of Late Shri C. A. Achuthan who gave a detailed and elaborate report (‘the Committee Report’) but, sadly, left the world soon thereafter.
The new Regulations should be seen in the light of this Report. However, care should be taken since some of the recommendations have not been accepted or accepted only partially.
The most significant change is that the minimum threshold for making an open offer has been increased from 15 to 25%. The link of 25% with the percentage required to block a special resolution is obvious. Taking into account the fact that, in most Indian companies, the Promoters hold much more than 25%, even this 25% limit may sound low. For strategic investors, this higher limit would help and thus this increase would help the Company, its Promoters and shareholders since the Company can accept higher strategic investments without such investors having to make an open offer.
The other major change is that the minimum open offer percentage has been increased from 20 to 26%. Again this 26% can be logically understood as if we add 25 and 26%, we get a majority holding of 51%, though one could have argued that 1 share above 50% is sufficient to have a majority. Public shareholders would be rightly disappointed as the Committee Report recommending making an open offer for 100% of the public holding has not been accepted. This, in my view, is unfair as while the whole of the holding of the Promoters is usually acquired, only partial acquisition of public holdings is made. The argument made is that this would make the open offers unduly expensive for an acquirer. However, this can not be a sufficient reason to deprive public shareholder of getting a price that the Promoters receive. If an acquirer seeks to acquire, say, 51%, he can simply acquire such percentage from all shareholders including the Promoters by offering to acquire 51% of each person’s holdings. It is sad that the main purpose of these Regulations of protecting the interest of the public shareholders has been sidelined.
Certain regular and ad hoc compliances are required to be made under the Regulations. They mainly serve the basic objective of protecting shareholders’ interests in case of significant change in shareholding. Thus, an early intimation system provides that if a person acquires more than 5% shares, he should inform the Company and the stock exchanges immediately. Such person should thereafter keep informing if his holding changes by 2% in either direction. This provision has been substantially maintained. However, it is now made explicit — which was otherwise confirmed by court decisions under the 1997 Regulations — that it is the holding of the acquirer along with persons acting in concert as a whole that would be counted and not just the separate holding of an individual acquirer.
Creeping acquisition is a popular term, though not a legal one, to refer to the slow and gradual increase in holding allowed by law to a substantial holder of shares without being required to make an open offer. A substantial shareholder consolidates its holding by acquiring more shares and the law believes that such consolidation should also require an open offer under certain situations. The 1997 Regulations allowed 5% increase per financial year for acquirers who held more than 15% shares provided that the cumulative holding is not more than 55%. Beyond 55%, an additional 5% can be acquired in specified manner but no further without an open offer. The amended law allows creeping acquisition of the same 5% every financial year but all the way up to the maximum holding they can hold without reducing the minimum public holding required under law. Thus, for example, where minimum public holding is prescribed to be 25%, an acquirer can make creeping acquisitions up to 75% by acquiring 5% each financial year.
There was a minor controversy as to whether the 5% incremental acquisition was allowed as a net or gross increment. For example, if an acquirer acquires 7% in a year but sells 3%, has he acquired 4% or 7% ? The Regulations now specifically clarify that it will be the gross acquisition and not net and thus in the above example, the acquisition will be considered as 7% and thus beyond the 5% limit.
It is also clarified that in case of acquisition by issue of fresh shares (e.g., preferential allotment) where the capital of the Company also expands, the percentage in the expanded capital will be considered.
This leaves one group of existing promoters in a strange situation. There are Promoters, albeit small in number, who hold between 15% and 25%. As explained above, the 1997 Regulations allowed creeping acquisition of 5%. However, as the minimum threshold of 15% has been raised to 25%, such Promoters now would have to make an open offer if they cross 25% even if they are holding, say, 23% and acquire another 3%. Under the 1997 Regulations, they would not have been so required. Of course, the other side is that a person holding, say, 14% can acquire another about 11% without being required to make an open offer.
An important concept of Takeover Regulations is of ‘persons acting in concert’. This concept is a part of the Regulations to ensure that if a group of persons acquires shares with a common understanding or agreement, all such acquisitions are counted together to check whether the Regulations are attracted or not. Further, reporting of shareholding is also to be made of the total holding of such group. The question then is whether transfers within such group should be allowed or should such inter se transfers be considered as acquisitions. Logically, a transfer within the group is a zero sum transaction if the group as a whole is considered. Even the wording — of the 1997 Regulations as well as the 2011 Regulations — on the face of it should not apply since the holding of the acquirer along with persons acting in concert does not increase in such a case. However, SEBI has, by curious reasoning, which is upheld in appeal, taken a view that since inter se transfers are exempt under certain circumstances, then it must be held that inter se transfers otherwise amount to acquisition ! This reasoning is likely to continue even under the new Regulations though it would have been more elegant in law if the Regulations had expressly provided for this. However, what has been now changed is that inter se transfers, to qualify for exemption, need to comply with stricter conditions. For example, inter se transfers between persons acting in concert or Promoters will require that both parties should have been declared in relevant filings as such for at least three years. The exemption to inter se transfers within the ‘group’ has been dropped.
Earlier, there was an exemption from open offer for acquisition of control, without the minimum acquisition of shares, of a company if such acquisition was approved by the shareholders by a special resolution. Now this exemption is dropped. Perhaps this was necessary as the threshold limit has been increased from 15 to 25%.
A change worthy of appreciation is that non-compete fees are now to be counted as part of the acquisition price paid by an acquirer to the existing promoters. Earlier, the law allowed an acquirer to pay up to 25% of the acquisition price as non-compete fees to existing promoters and such amount was not to be counted as part of the acquisition price. To give an example, say, an acquirer pays Rs.100 as price for acquisition of shares and Rs.25 as non-compete fees to the Promoters. The law, which otherwise requires that the open offer should be made at a price that is at least the price paid to the Promoters, allows in such a case the open offer to be made at Rs.100. This resulted in cases where on the face of it, an exact non -compete fee of 25% was paid and was excluded from the open offer price. The new Regulations have rightly dropped this exemption to non-compete fees.
A major new feature is the voluntary open offer that is allowed. Normally, an acquirer is required to make a minimum open offer of 26% if he crosses the specified threshold limit or creeping acquisition. However, if a person, who is already having 25% shares and desires to increase his holding by more than 5% a year can now make a voluntary open offer of at least 10% to all the shareholders. This also ensures that all shareholders are able to participate and not just a selected few.
Then there is an infrequent but interesting situation that arises which earlier SEBI handled it a little arbitrarily. This is a situation where a Company carries out a buyback of shares. Simple mathematical calculation will show that if a Company carries out buyback of shares, the shareholding of a person who did not participate in the buyback increases though he has not acquired a single share. For example, if the Company’s share capital is Rs.10 crore and a person is holding Rs.2.40 crore. If the Company carries out a buyback of 20% with such person not participating, his new percentage holding would be higher at 30% (Rs.2.40 crore as a % of Rs.8 crore) without he having acquired a single share. SEBI took a view that open offer was required to be made by such person. This was of course absurd and even if SEBI intended that an open offer should be required, it should have provided for it. The new Regulations now provide that such an increase will not result in open offer provided certain conditions are satisfied failing which the differential percentage of shares should be sold within 90 days.
Visit the IASB website for a list of the illustrative examples and the IFRS Taxonomy 2011 guide.
The IFRS Foundation has announced that it will publish supplementary tags for the IFRS Taxonomy that reflect disclosures that are commonly reported by entities in their IFRS financial statements.
For complete text of the Notification visit:
http://www.mca.gov.in/Ministry/pdf/Circular_12- 2011_7apr2011.pdf
To be more specific, to start a business as a private limited company, a client has to apply for the following registrations, licences and numbers:
In my view all the above are possible through a single-window (SW) registration website. This Single Window Registration website will be an attempt to expedite and simplify information flows between trade and the government and bring meaningful gains to all parties.
(Paper formalities for registrations, licensing, etc. in the proposed system is illustrated in Annexure.)
A QFI can purchase, on repatriation basis:
(1) Up to INR620 billion in Rupee-denominated units of equity schemes of SEBI-registered domestic Mutual Funds.
(2) Up to INR186 billion in units of debt schemes which invest in infrastructure (‘Infrastructure’ as defined under the extant ECB guidelines) debt of minimum residual maturity of five years, within the existing ceiling of 25 billion for FII investment in corporate bonds issued by infrastructure companies.
They can invest under two routes:
(i) Direct Route — SEBI-registered Depository Participant (DP) route.
(ii) Indirect Route — Unit Confirmation Receipt (UCR) route.
Similarly, foreign entities who may have established LO or BO with the permission from the Government of India, must also approach RBI along with a copy of the said approval for allotment of a Unique Identification Number (UIN).
These applications/requests must be submitted to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai-400001 in form FNC and should be routed through the bank where the account of such LO/ BO is maintained. A.P. (DIR Series) Circular No. 3, dated 21-7- 2011 —Facilitating Rupee Trade — Hedging facilities for non-resident entities.
This Circular permits non-resident importers and exporters to hedge their currency risk in respect of exports from India and import to India, respectively, where invoices are raised in Indian Rupees. The operational guidelines, terms and conditions, etc. are annexed to this Circular.
One of the stated purposes is of course that such comprehensive Regulations covering all types of funds will help them being granted exemptions from other statutes. However, the detailed control over them as proposed seems disproportionate to the needs of the exemptions. The other benefit of registration and regulation stated is that such control and supervision of SEBI may increase the credibility of such funds in the eyes of the investors in such funds.
Alternative Investment Fund (‘AIF’) means funds other than which are governed by specific Regulations such mutual funds, Collective Investment Schemes, etc. Many of such AIF are specifically identified, such as private equity funds, real estate funds, private pooled investment vehicle (‘PIPE’), etc. But generally, it is an inclusive definition covering all such funds except those specifically excluded.
Take the example of the proposed framework for Venture Capital Funds. The total fund size shall not be more than Rs.250 crore. Investment is permitted only in companies at an early stage of their busi-ness life by way of seed capital or minority stake in new ventures using new technology or innovative business ideas. Investment is not permitted in any company promoted by any of the 500 top listed companies or their promoters. At least 2/3rd of the investments shall be in equity shares of unlisted companies. There are further restrictions regarding investments of the remaining 1/3rd. Investment in Share Warrants is not permitted.
Debt Funds need to invest at least 60% of its corpus in debts of unlisted companies and not more than 25% of which shall be in convertible For each of the categories of AIFs, detailed requirements have been laid down. How much minimum percentage shall be invested in certain types of industries, in what type of investment such investment shall be made, etc. are specified. The aim seems to be that each category should specialise in a particular type of investment. At the same time, investment in some industries are barred. Certain types of instruments are also restricted for investment.
There are similar quite rigid conditions on what should be the investment mix for various types of funds. Further, an AIF cannot change the nature/ category of its fund mid-way. Thus, a set of fairly rigid conditions apply to each AIF even though the funds are raised from large and knowledgeable investors and on a private-placement basis after due disclosure.
Unfortunately, there is no free category in which, even if agreed between the AIF and its investors, the AIF could invest in any type of securities in any mix/proportion it desires.
It is stated in the introductory note to the proposed Regulations that portfolio managers who pool their clients’ assets would also be required to be registered as an AIF. However, this is not part of the Regulations. Apparently, this provision will come through separately by an amendment to the Regulations relating to portfolio managers.
The AIF Regulations will also give relief from certain possibly unintended technical violations of law by some funds. For example, having access to inside information during diligence process by PIPE funds shall not be deemed to be violation of the SEBI Regulations prohibiting insider trading. However, an important condition is that the investment made pursuant to such diligence shall be locked in for five years.
An interesting category is of Social Venture Funds. These are for those types of investments where a useful social purpose, rather than merely profit, is the theme of the fund. The nature of such social purposes is left for the AIF to decide with the investors.
A glaring omission is of the so-called art funds where investments are made in paintings, antiques, etc. These have come under scrutiny in recent years for various reasons. It is not one of the specific categories of AIF under the Regulations. It is not totally clear whether they would be governed under the SEBI Regulations for Collective Investment Schemes (‘CIS’) or whether SEBI intends to cover them under these AIF Regulations. Earlier, SEBI had taken a view that these are governed under the SEBI CIS Regulations. However, there is a residuary category for registration and perhaps under such category, they may be required to be registered. However, the conditions of investment, etc. of such funds are not specified.
To conclude, the draft Regulations show the tendency to overregulate. Without any need, all funds, without a basic exemption are sought to be covered. The control over investment pattern is perhaps too restrictive and in some aspects even too minute. The Regulations instead could have provided an overseeing role for SEBI to ensure transparency as well as avoidance of systemic risks. That has not happened and one hopes that the final Regulations achieve these objectives instead of micro-regulating this sector.
This Circular advices banks to exercise due caution and be extra vigilant in respect of remittances under scheme so as to avoid payments towards margin money for online foreign exchange trading transactions as these derivative transactions can only be undertaken by persons resident in India based on the presence of an underlying price risk exposure.
Further, any person resident in India collecting and effecting/remitting such payments directly/indirectly outside India would make himself/herself liable to be proceeded against with for contravention of FEMA, 1999 besides being liable for violation of regulations relating to Know Your Customer (KYC) norms/Anti Money Laundering (AML) standards.
(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran
(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).
This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.
This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.
(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/ FT) risks emanating from the jurisdiction: Iran
(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).
This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.
This Circular clarifies that this practice adopted by foreign airlines is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 and foreign airlines are advised to immediately discontinue the same.
(i) Pricing of convertible instruments:
Instead of specifying the price of convertible instruments upfront, companies will now have the option of prescribing a conversion formula, subject to FEMA/SEBI guidelines on pricing.
(ii) Inclusion of fresh items for issue of shares against non-cash considerations:
The existing policy provides for conversion of only ECB/lump-sum fee/Royalty into equity. This Circular now permits issue of equity, under the Government Route (Approval Route), in the following cases, subject to specific conditions:
(a) Import of capital goods/machinery/equipment (including second-hand machinery)
(b) Pre-operative/pre-incorporation expenses (including payments of rent, etc.)
(iii) Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the ‘same field’:
With a view to attract fresh investment and technology inflows into the country and to also reduce the levels of Government intervention in the commercial sphere the Government has decided to abolish this condition of obtaining prior approval in case of existing joint ventures/technical collaborations in the same field.
(iv) Guidelines relating to down-stream investments:
The guidelines have been comprehensively simplified and rationalised. Companies will now been classified into only two categories — ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. The earlier categorisation of ‘investing companies’, ‘operating companies’ and ‘investingcum- operating companies’ has been done away with.
(v) Development of seeds:
In the agriculture sector, FDI will now be permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’.
This Circular has relaxed the six months’ rule for a further period up to 30th September, 2011, subject to review. Hence, export proceeds in respect of export of goods and software (except in cases of exports from units in SEZ or exports to exporters’ own warehouses outside India) up to 30th September, 2011 can be realised and repatriated within twelve months from the date of export.
However, there is no change in the provisions in regard to period of realisation and repatriation to India of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to exporters’ own warehouses outside India.
In the September issue of BCAJ, I covered a decision of three-member Bench of Maharashtra State Information Commission. In this issue, I cover one more.
Under the RTI Act, there are two types of authorities to which the Act is applicable: Public Authority and Competent Authority. The latter is defined u/s.2(e) as under:
“Competent authority means —
(i) the Speaker in the case of the House of the People or the Legislative Assembly of a State or a Union Territory having such Assembly and the Chairman in the case of the Council of States or Legislative Council of State;
(ii) the Chief Justice of India in the case of the Supreme Court;
(iii) the Chief Justice of the High Court in the case of the High Court;
(iv) the President or the Governor, as the case may be, in the case of other authorities established or constituted by or under the Constitution;
(v) the Administrator appointed under Article 239 of the Constitution;
This case deals pertains to the Bombay High Court, Mumbai. It is the decision of three-member Bench comprising the then State Chief IC (Shri Vilas Patil), SIC, Amravati (Shri M. L. Shah) and SIC, Aurangabad (Shri D. B. Deshpande).
Shri Anandnatraj submitted an RTI application to PIO, in the office of the Registrar, Bombay High Court (BHC) seeking the information in respect of writ petition Nos. 2650 of 95 and 2689 of 95. He asked for photocopies of all papers filed and orders issued in respect of the petition.
The PIO expressed his inability to furnish the information, stating that “the application was not complete in all respects as received as per the Bombay High Court Right to Information Rules, 2006. As per the said Rules, a Court Fee Stamp of Rs.12 is required on the application, however, Rs.10 Court Fee Stamp is affixed. Hence there is deficit of Court Fees of Rs.2. As per the said Rules, the applicant has to submit the application in prescribed format. Please see High Court website ‘bombayhighcourt.nic.in’ for the said Rules. Moreover, in view of the provision to Rule 9 and Rule 19 of the Bombay High Court Right to Information Rules, 2006 the information in respect of judicial proceeding or records cannot be supplied under Right to Information, but you may obtain the said Information as per the procedure prescribed in the Bombay High Court Rules and Orders”.
The applicant preferred an appeal to the First Appellate Authority (FAA). The grounds of appeal were: “the BHC RTI Rules, 2006 are not consistent and in agreement with the provisions of the Right to Information Act, 2005. As provided in Rule 9 of the said Rules, that is, Rule 9 in para 1 obtaining information in respect of third party is permissible by submission of application in Form ‘A’ as per Rule 3, the same rule in para 2 forbids the information of 3rd party in respect of judicial proceedings and records. The said contradiction in clause 9 needs proper interpretation/classification by the Public Information Officer in his reply.”
FAA responded “it is clear that the reply sent by the Public Information Officer cannot be faulted with. The information sought is relating to record of judicial proceedings and copies of the same can be obtained by applying at the facilitation centre of the High Court.” The appeal was disposed of accordingly.
The applicant then furnished the second appeal to Maharashtra Information Commission. First the appeal was heard by a single member by one SIC, Shri Ramanand Tiwari. However he passed on order that “since the issues involved are very important, I suggest that the case should be heard by the full Bench of the Commission or least a Bench consisting of three Commissioners and directed to the Secretary of the Commission to obtain the orders of the CIC and do the needful.”
Accordingly a three-member Bench heard the matter on 14-3-2011. The appellant submitted his written statement and argued also as briefly noted hereinafter.
The respondent PIO also submitted written statement and argued that the PIO and FAA have acted according to BHC RTI Rules which are made by the Chief Justice of the HC, being the ‘Competent Authority’ u/s.28 of the RTI Act.
The main contention before the Commission was that “rules framed by the Competent Authority u/s.28 of the Act, can only be for giving effect to and for carrying out the provisions of the Right to Information Act and cannot be contrary to the provisions of the Right to Information Act. They would be ultra vires and illegal and consequently unenforceable in view of the provisions of section 22 of the Act”.
“The Chief Justice of the Bombay High Court cannot negate the provisions of the Right to Information Act, since neither section 8, nor section 24 gives exemption in respect of providing information related judicial proceeding and records.”
The Commission made the following decision:
“Hence, it is necessary to examine the rules of Interpretation of the statutes.
Once the Legislature has passed the Act, it is subject to judicial review in respect of the constitutionality and the implementation of the provisions of the said Act.
No doubt, the rules made in exercise of the powers delegated under the principal Act, for carrying out the purpose laid down in the principal Act, cannot travel beyond the scope of the Act, nor can they, themselves, enlarge the scope of statutory provisions. They cannot also militate against the provision under which they were made (AIR 1956 SC, AIR 1957 SC 532).
However, the Rules framed under the Act have the force of the Law. (AIR 1954 All 639).
Therefore, the function of the Court is to apply the law as it stands. It is not for the Court to re-write the law, even though the Court notices anomalies and omission and considers the provision as they stand unreasonable (AIR 1982 Ker. 126).
In view of such principles of interpretation of statutes, the Commission has to give the decision as per the rules framed by the Chief Justice High Court of Judicature of Bombay as a Competent Authority u/s.28 of the Act.
Therefore, the decision of the First Appellate Authority is upheld and there is no necessity to interfere with the order of the First Appellate Authority.
However, in view of the points raised by the appellant, the Commission, in view of provisions of section 25(5) of the RTI Act, recommends to the Public Authority, that is the High Court to examine judicially the rules framed by the Chief Justice of the Bombay High Court, whether they are in conformity with the provisions or spirit of the RTI Act, and if found not to be in conformity with the provisions or spirit of the Act, then take such steps to promote such conformity”.
[Shri S. Aanandnatraj, Mumbai v. FAA and PIO of High Court of Mumbai, decision dated 29-4-2011 under Appeal No. 5842/02]
It is a case where matter was fixed for the plaintiff’s evidence in which the plaintiff submitted affidavit. She could not appear in the Court for cross-examination. In her place, her husband filed affidavit in the capacity of power of attorney. Objection was taken by the respondents that her husband can be examined as a witness, but cannot be examined as the plaintiff. The application aforesaid was allowed. The only rider was that he should not be treated as the plaintiff. The Court observed that if the interpretation of Order 3, Rules 1 and 2 is to mean that appearance of recognised agents or pleader is permissible for all purposes including deposition of statement in place of the principal, then it would mean that the pleader can also depose for the principal.
The Court should give interpretation to the provisions which are not only harmonious, but remain applicable in all situations with same interpretation. If the interpretation of Order 3, Rules 1 and 2 is that power of attorney can depose in place of principal in all circumstances, then the same interpretation will apply to the pleader, in view of the heading of the provision.
The purpose of Order 3, Rule 1 is not for appearance of a recognised agent or pleader as witness in place of the principal. They are authorised to appear as representative of the party to the extent it is permissible, but not in the manner that they may replace the principal itself. If the power of attorney has acted in place of principal prior to filing of the suit, he can depose for the principal, but not in all circumstances.
The
Slum Rehabilitation Authority (SRA) is empowered to prepare a Slum
Rehabilitation Scheme for areas within its purview. This would cover all
slums and hutment colonies within such area. The actual mechanics of
the Slum Rehabilitation Scheme are prescribed under the Development
Control Regulations of Greater Bombay, 1991 (‘DCR’) issued under the
Maharashtra Regional & Town Planning Act, 1956. Two types of Slum
Rehabilitation Schemes are permissible under the DCR and they are known
by the Regulations under which they are approved. These are:
The salient features of a transit scheme are as follows:
Appendix IV to DCR
The
ratio is as follows:
A typical Slum Rehabilitation Scheme involves the following steps:
(a) All slum/pavement inhabitants on electoral rolls on or before 1st January 1995 and who are actual occupants are eligible.
(b)
70% of such eligible occupants must come together to form a
co-operative housing society and pass a resolution appointing a chief
promoter who can apply for name reservation for the society. The chief
promoter can collect share capital of Rs.50 per member for slum
societies and Re.1 as entrance fees and to open a bank account in any
co-operative bank.
(c) The proposed society should get the plot surveyed and a map prepared showing the slum structures.
(d)
The proposed society must then take a decision to appoint a competent
developer for the society. He would act as the promoter.
(e) The
promoter can enter into an agreement with every eligible slum-dweller
while putting up a slum rehabilitation proposal to SRA for approval.
(f)
The Promoter has to appoint an architect to prepare the plans under DCR
33(10). He would submit the plans and proposal along with the scrutiny
fee. The SRA has recently decided that it would only permit contractors
registered with them to carry out slum rehabilitation schemes. The
decision follows complaints by slum-dwellers and non-government
organisations about the poor quality of construction in the
rehabilitation buildings.
(g) SRA would then scrutinise the plans and the proposal.
(h) SRA would give the letter of intent conveying approval to the scheme, approval to the layout, building-wise plan approval (Intimation of approval) and commencement certification. Earlier, these 4 were issued in instalments but now to speed up the process, they are issued in one go at least for the rehab proposal. The approval is valid for three months.
(i) The scheme must provide for temporary transit accommodation to the slum-dwellers, during the construction of rehab portion.
(j) Transit camp accommodation is provided by drawing of lots. Slum-dwellers are shifted to transit camps and huts are demolished. If these members do not agree to participate within 15 days of the approval of the proposal, they are physically evicted from the site under the provisions of sections 33 and 38 of Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971, to ensure that there is no obstruction to the scheme.
(k) After demolition of the structures, work up to plinth is completed. After checking the plinth dimensions, further permission to carry out construction beyond plinth is granted.
(l) The architect submits the building completion certificate.
(m) While applying for the occupation certificate of the rehab building, the architect is expected to give the details of tenement allotments done by the society by drawing lots in the joint names of the household head and his spouse. SRA issues computerised ID cards.
(n) Sale building construction is taken up.
(o) Separate property cards are issued for the rehab and sale portion.
(p) Once all the buildings are constructed, the land is leased to the society of slum-dwellers.
In a very important decision in the case of Lokhandwala Infrastructure P. Ltd. & Others v. Om Omega Shelters & Others, Writ Petition No. 95 of 2011, the Bombay High Court has held that it was not open to the slum-dwellers’ proposed society to enter into agreements with developers as per their whims and fancies.
The High Court did not accept arguments made by two proposed societies of 500 slum-dwellers in Worli that they were entitled to enter into or terminate development agreements without scrutiny or regulation by government bodies. The Court held that “Such a proposition would lead to a chaotic situation in the implementation of slum rehabilitation schemes. Managing committee members of proposed societies would then be at liberty to pursue their private ends and switch loyalties between rival builders on considerations of exigency. Many slum rehabilitation projects land in Court with disputes over the appointment of rival builders by slum-dwellers, with each developer claiming majority. The HC said these development agreements are not purely private contracts and have a ‘public character’ to them as the aim is to rehouse slum-dwellers with dignity. “Often the land belongs to the state, the BMC or the housing board. The state has a vital public interest in ensuring that the schemes are not trammelled by private interests,” the court observed. “Once a developer has made a proposal to redevelop a slum, authorities have to scrutinise whether a proposal involving change of developer is in the interest of slum-dwellers and whether or not the new developer would fulfil the needs and requirements of the scheme and has the necessary capacity to do so and whether the new developer has the consent of 70% of slum-dwellers,” said the Judges, adding that the authorities have to determine if the new developer would be able to fulfil all the requirements. “The second developer cannot ride on the 70% consent given to the first developer as it would only lead to ‘misuse of the scheme.’ “The dispute between a society and the developer does not lie purely in the realm of a private contractual dispute. The dispute has an important bearing on the proper implementation of the slum rehabilitation scheme and its consequences go beyond the private interests of the society and the developer. The scheme involves other stakeholders, including public bodies which own the land, whose interest ought to be protected too.”
In the present case, the dispute was between Lokhandwala Infrastructure Pvt. Ltd. and Om Ome-ga Shelters. In 2002, Lokhandwala was appointed to redevelop a plot in Mumbai. 500 slum-dwellers, who resided on the plot, formed two societies. In 2003, it applied for sanction.
Nothing moved for six years. In 2009, the two societies issued a letter terminating their agreement with Lokhandwala. The SRA called for a meeting of the slum societies in February 2010. In November 2010, the two societies, at a general body meeting, claimed that 343 of 401 eligible slum-dwellers present had consented to Omega. Based on this, the SRA CEO approved Omega as the developer instead of Lokhandwala. Lokhandwala, which challenged the SRA order, as ‘perverse’ said its proposal had never been rejected. It argued, and the Court up-held, that the new developer cannot do away with the requirement of 70% majority consent. Omega said it had individual agreements with over 80% slum-dwellers. The slum-dwellers argued that they were entitled to make a proposal and that the “developer is merely an agent of the cooperative society” to provide tenements.
The Bombay High Court held that the SRA order left much to be desired and set aside the SRA’s order favouring Omega and asked the SRA to again hear both sides and decide whether Lokhandwala continues to enjoy the support of 70% slum-dwellers and, if not, whether Omega does.
Income-tax concession
Section 80-IB(10) of the Income-tax Act, 1961 provides for a deduction from the gross total income of profits derived by an undertaking from developing and building housing projects approved before 31st March 2008. The following two conditions which are normally applicable for claiming such a deduction are not applicable in the case of a slum rehabilitation project which has been notified by the CBDT:
(a) such undertaking completes the construction in a case where a housing project has been, or, is approved by the local authority on or after the 1st day of April, 2004, within four years from the end of the financial year in which the housing project is approved by the local authority.
(b) the project is on the size of a plot of land which has a minimum area of one acre.
Thus, the Act provides a relaxation to slum rehabilitation schemes.
The CBDT has by Notification No. 67/2010 [F.No. 178/37/2006-IT(A-I)]/SO 1898(E), dated 3-8-2010 notified the Scheme contained in Regulation 33(10) of Development Control Regulation for Greater Mumbai, 1991 read with the provisions of Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992, as a scheme for the purposes of the said section subject to the following conditions, —
(i) slum development falling in Category VII mentioned in Notification No. TPB-4391/4080(A)/UD-11(RDP), dated 3rd June, 1992 shall be excluded from the Scheme;
(ii) slum development falling within clause 7.7 of the Appendix IV of regulation 33(10) which provides for joint development of slum and non-slum areas shall be excluded from the Scheme; and
(iii) any amendment in the Scheme hereby notified shall be required to be re-notified by the Board.
The CBDT has by Notification No. 01/2011 [F. No. 178/35/2008-IT(A-I)]/SO 14(E), dated 5-1-2011 notified, the Scheme for slum redevelopment prepared by the Maharashtra Government under sub-section (2) of section 37 of the Maharashtra Regional Town Planning Act, 1966 and published vide Notification No. TPS-1893/973/CR-49/93A/UD-13, dated the 26-2-2004, as a scheme for the purposes of the said section subject to the condition that any amendment to the Scheme hereby notified shall be required to be re-notified by the CBDT.
By a subsequent Notification, the CBDT has clarified that as the provisions of section 80-IB(10) apply only to housing projects approved before 31st March, 2008, the above Notifications would also be deemed to apply to housing projects approved by a local authority under the aforesaid scheme on or after the 1st April, 2004 and before 31st March, 2008.
Stamp duty concession
Under the Bombay Stamp Act, 1958, the Maharashtra Government has reduced the stamp duty chargeable under Article 5(g-a) (Development Rights Agreement), Article 25 (Conveyance) and Article 36 (Lease) executed for the purpose of rehabilitation of slum-dwellers as per the Slum Rehabilitation Schemes. The duty is reduced to Rs. 100 instead of the ad valorem rates specified under these Articles. However, the reduction of duty is permissible only in respect of instruments relating to tenements allotted to the slum-dwellers for residential purpose under the Slum Rehabilitation Schemes and is not allowed for the sale/free component buildings.
Service tax concession
No service tax is payable on the taxable service of construction of residential complex referred to in section 65(105)(zzzh) of the Finance Act provided to the Rajiv Awaas Yojna. Thus, any construction for slum rehabilitation under the RAY is exempt from service tax.
FDI
Foreign Direct Investment in companies engaged in slum rehabilitation schemes is governed by the conditions specified in the Consolidated FDI Policy of 2011/ erstwhile Press Note 2 of 2005. No relaxations or concessions are provided from these conditions to a company engaged in slum rehabilitation and any FDI in a company engaged in slum redevelopment needs to comply with the following key conditions:
(a) The minimum area to be developed under each project would be as under:
(i) In case of development of serviced housing plots, a minimum land area of 10 hectares/25 acres.
(ii) In case of construction-development projects, a minimum built-up area of 50,000 sq.mts
(iii) In case of a combination project, any one of the above two conditions would suffice.
(b) Minimum capitalisation of US$10 million for wholly-owned subsidiaries and US$ 5 million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the company.
(c) The original investment cannot be repatriated before a period of three years from the completion of minimum capitalisation.
Property tax concessions
The BMC has granted a concession in property taxes to any building constructed under a slum rehabilitation scheme under the Act. The concession was given in a phasewise manner. For the period of 2011 to 2015 the property taxes levied on such buildings would be 80% of the rate levied in a particular year.
Auditor’s duty
The Auditor should enquire of the auditee, in case the auditee is into slum rehabilitation, whether the terms and conditions of the Act have been duly complied. In case of any doubts, he may ask for a legal opinion. Non-compliance with this could have serious repercussions for the developer.
By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.
The plaintiffs were residents of Bangalore. They claim that the suit properties were their joint family properties. The family consisted of over one hundred and twenty members. It was the case of the plaintiffs that in order to enjoy the family properties separately a ‘panchayath partition’ was effected and was reduced to writing on 20-2-1990. The particulars of the items of the property allotted to the plaintiffs’ branch forms the suit properties. The plaintiffs as well as the other members of the several branches of the family had subscribed their hand to the family arrangement and settlement and the respective parties had over a period of time enjoyed their respective shares. The revenue records were similarly effected in the names of the respective parties. It is the plaintiffs’ claim that they have secured one acre of land as their share. The defendant No. 4, who is a stranger to the family sought to interfere with the a part of land. It was found that the claim of the fourth defendant was that he had purchased the same from the first defendant without the knowledge or consent of the plaintiffs, though it was allotted to the share of the plaintiffs. The first defendant had no right or interest which he could convey in favour of the fourth defendant. It was in that background that the suit was filed for declaration in respect of the said item of land. The moot question was whether the document of panchayath partition was a memorandum of partition or it was to be construed as a partition deed, and whether it was invalid for want of registration, in which event, it could not be relied upon in evidence and could not be the basis for the appellant’s case.
The Court observed that as per the tenor of the document in question, it is not as if there was an oral arrangement between the parties several years prior to the execution of the document. Such an agreement preceded the execution of the document. Therefore it was a continuous process whereby the parties had discussed the terms of settlement and had reduced it into writing, dividing the properties amongst themselves and therefore, it was in the nature of a partition deed and cannot be construed as a memorandum of oral partition. If that position is accepted, the law of the land would require that the document be registered. Though partition amongst the Hindus may be effected orally, if the parties reduce it in writing to a formal document which is intended to be evidence of partition, it would have the effect of declaring the exclusive title of the coparcener to whom a particular property was allotted in partition and thus the document would be required to be compulsorily registered u/s. 17(1) (b) of the Registration Act, 1908. However, if the document did not evidence any partition by metes and bounds, it would be outside the purview of section 17(1)(b) of the Registration Act.
In view of the above, there is no substance in the contention put forth that the document in the case on hand was a mere record of a family arrangement that had taken place much earlier. It was a partition deed which was compulsorily registerable u/s. 17(1)(b) of the Indian Registration Act, 1908. Therefore, it was inadmissible in evidence for want of registration and could not have been relied upon as the basis to claim that there was an earlier partition.
A production sharing contract was executed between the 5 parties in regards to exploration of natural resources. As per the contract, the seat of arbitration was Kuala Lumpur (Malaysia). In 2000, disputes arose between the respondents and the contractor with respect to correctness of certain cost recoveries and profit. Since the parties could not resolve their disputes amicably, the same were referred to the Arbitral Tribunal as per the contract. The Arbitral Tribunal fixed the date of hearing at Kuala Lumpur (Malaysia), but due to outbreak of epidemic SARS, the Arbitral Tribunal shifted the venue of its sittings to Amsterdam in the first instance and, thereafter to London where on 31-3-2005 partial award was passed. The respondent No. 1 (Govt. of India) challenged the partial award by filing a petition in the High Court of Malaysia at Kuala Lumpur. The appellant questioned the maintainability of the case before the High Court of Malaysia by contending that in view of the contract, only the English Courts have the jurisdiction to entertain any challenge to the award. At that stage, the respondents filed a petition u/s. 9 of the Arbitration and Conciliation Act, 1996 in the Delhi High Court for stay of the arbitral proceedings. The High Court held that it had jurisdiction to entertain the petition filed u/s. 9 of the Act. The said order was challenged before the Supreme Court.
The first issue which arose for consideration was whether Kuala Lumpur was the designated seat or juridical seat of arbitration and the same had been shifted to London. The issue was important as the procedure for the conduct of arbitral proceeding would depend upon the procedural law of the country where the seat of arbitration is seated. The Court observed that as per the terms of the contract entered into by five parties, the seat of arbitration was Kuala Lumpur, Malaysia. However, due to outbreak of epidemic SARS, the Arbitral Tribunal decided to hold its sittings first at Amsterdam and then at London and the parties did not object to this. In the proceedings held at London, the Arbitral Tribunal recorded the consent of the parties for shifting the juridical seat of arbitration to London. Whether this amounted to shifting of the physical or juridical seat of arbitration from Kuala Lumpur to London?
As per the terms of agreement, the seat of arbitration was Kuala Lumpur. If the parties wanted to amend clauses of the contract they could have done so only by written instrument which was required to be signed by all of them. Admittedly, neither any agreement was there between the parties to the contract to shift the juridical seat of arbitration from Kuala Lumpur to London, nor was any written instrument signed by them for amending clause of the contract. Therefore, the mere fact that the parties to the particular arbitration had agreed for shifting of the seat of arbitration to London cannot be interpreted as anything except physical change of the venue of arbitration from Kuala Lumpur to London. Under the English law the seat of arbitration means juridical seat of arbitration, which can be designated by the parties to the arbitration agreement or by any arbitral or other institution or person empowered by the parties to do so or by the Arbitral Tribunal, if so authorised by the parties. In contrast, there is no provision in the Act under which the Arbitral Tribunal could change the juridical seat of arbitration which, as per the agreement of the parties, was Kuala Lumpur. Therefore, mere change in the physical venue of the hearing from Kuala Lumpur to Amsterdam and London did not amount to change in the juridical seat of arbitration.
The next issue for consideration was whether the Delhi High Court could entertain the petition filed by the respondents u/s. 9 of the Act. It was held that once the parties had agreed to be governed by any law other than Indian law in cases of international commercial arbitration, then that law would prevail and the provisions of the Act cannot be invoked questioning the arbitration proceedings or the award. The parties had agreed that the arbitration shall be governed by the laws of England. This necessarily implies that the parties had agreed to exclude the provisions of Part I of the Act. It was held that the Delhi High Court did not have the jurisdiction to entertain the petition filed by the respondents u/s. 9 of the Act and the mere fact that the appellant had earlier filed similar petitions was not sufficient to clothe that the High Court had the jurisdiction to entertain the petition filed by the respondents. The appeal was allowed.
In a criminal matter an accused was remanded to police custody. When the order of the police remand was not found favourable, his advocate started hurling abuses and detrogatory remarks against the Magistrate. The advocate uttered unparliamentarily words and also threatened the Magistrate with dire consequences. The Magistrate requested fellow advocates who were called, also abused the Magistrate and wanted to assault him physically.
The High Court initiated contempt proceedings. The High Court found the advocates guilty of criminal contempt and convicted them u/s. 12 r.w.s. 15 of the Contempt of Court Act, 1971. On appeal, the Supreme Court accepted the unconditional apology and discharged the contemnors.
The Court observed that a Court, be that of a Magistrate or the Supreme Court, is sacrosanct. The integrity and sanctity of an institution which has bestowed upon itself the responsibility of dispensing justice is ought to be maintained. All the functionaries, be it advocates, Judges and the rest of the staff, ought to act in accordance with morals and ethics.
An advocate’s duty is as important as that of a Judge. Advocates have a large responsibility towards the society. A client’s relationship with his/her advocate is underlined by utmost trust. An advocate is expected to act with utmost sincerity and respect. In all professional functions, an advocate should be diligent and his conduct should also be diligent and should conform to the requirements of law by which an advocate plays a vital role in preservation of society and justice system. An advocate is under an obligation to uphold the rule of law and ensure that the public justice system is enabled to function at its full potential. Any violation of the principles of professional ethics by an advocate is unfortunate and unacceptable. Ignoring even a minor violation/ misconduct militates against the fundamental foundation of the public justice system. An advocate should be dignified in his dealings to the Court, to his fellow lawyers and to the litigants. He should have integrity in abundance and should never do anything that erodes his credibility. An advocate has a duty to enlighten and encourage the juniors in the profession. An ideal advocate should believe that the legal profession has an element of service also and associates with legal service activities. Most importantly, he should faithfully abide by the standards of professional conduct and etiquette prescribed by the Bar Council of India in Chapter II, Part VI of the Bar Council of India Rules.
As a rule, an advocate being a member of the legal profession has a social duty to show the people a beacon of light by his conduct and actions rather than being adamant on an unwarranted and uncalled for issue.
Compilers Comment — The ratio is equally applicable to other professionals.
An agreement was entered to sell a house by all co-owners except one. As the parties failed to execute the sale deed, a suit for specific performance by the plaintiff purchaser was filed. The co-owner who was not party to the agreement proposed to purchase shares of other co-owners. The counsel for the plaintiff gave consent to such purchase by the co-owner, not party to agreement, at reasonable market value within a stipulated period. The valuation of property at reasonable market value was agreed to, by both parties. Order was passed to execute sale deed in favour of the co-owner not party, by a consent order. Against this, an appeal was filed before the Supreme Court.
The Court observed that apart from both parties including the plaintiff-appellant had agreed for a reasonable market valuation. The statement made by the counsel before the High Court, as recorded in the impugned judgment and order, cannot be challenged before this Court. It was also clear that the High Court had recorded in the impugned judgment that the counsel agreed with instructions from the plaintiff. A concession made by a counsel on a question of fact is binding on the client, but if it is on a question of law, it is not binding.
It is a consent order. As per section 96(3) of the Code of Civil Procedure Code, no appeal lies from a decree passed by the Court with the consent of the parties. For all the reasons, more particularly, the statement of fact as noted in the impugned judgment under Article 136, the Apex Court would not interfere with the order of the High Court which has done substantial justice.
This Circular permits, under the Approval Route, Indian companies in the infrastructure sector, to utilise 25% of the fresh ECB raised by them towards refinancing of the Rupee loan(s) availed by them from the domestic banking system, subject to the following conditions:
(i) At least 75% of the fresh ECB proposed to be raised must be utilised for capital expenditure towards a ‘new infrastructure’ project(s), where ‘infrastructure’ is as defined in terms of the extant guidelines on ECB.
(ii) In respect of remaining 25%, the refinance shall only be utilised for repayment of the Rupee loan availed of for ‘capital expenditure’ of earlier completed infrastructure project(s); and
(iii) The refinance shall be utilised only for the Rupee loans which are outstanding in the books of the financing bank concerned.
Companies desirous of availing such ECBs may submit their applications in Form ECB through their designated Authorised Dealer bank with the following documents:
(i) Details of the project(s) completed duly certified by the designated AD Category I bank;
(ii) Certificate from the Statutory Auditor as well as from the domestic lender bank(s) regarding the utilisation of Rupee term loans with respect to ‘capital expenditure’ for the completed infrastructure project(s);
(iii) Certificate from the designated Authorised Dealer bank mentioning the outstanding Rupee loans; and
(iv) Details of the proposed end-use of the new infrastructure project.
This Circular, in addition to the above, permits issue of equity shares/preference shares to persons resident outside India for consideration other than cash under the Approval Route in the following cases:
1. Import of capital goods/machineries/equipments (including second-hand machineries), subject to compliance with all the following conditions:
(a) The import of capital goods, machineries, etc., made by a resident in India, is in accordance with the Export/Import Policy issued by the Government of India.
(b) There is an independent valuation of the capital goods/machineries/equipments (including second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents/certificates issued by the customs authorities towards assessment of the fair value of such imports.
(c) The application should clearly indicate the beneficial ownership and identity of the importer company as well as the overseas entity.
(d) All such conversions of import payables for capital goods into FDI should be completed within 180 days from the date of shipment of goods.
2. Pre-operative/pre-incorporation expenses (including payments of rent, etc.), subject to compliance with all the following conditions:
(a) Submission of FIRC for remittance of funds by the overseas promoters for the expenditure incurred.
(b) Verification and certification of the preincorporation/ pre-operative expenses by the statutory auditor.
(c) Payments should be made directly by the foreign investor to the company. Payments made through third parties citing the absence of a bank account or similar such reasons will not be eligible for issuance of shares towards FDI.
(d) The capitalisation should be completed within the stipulated period of 180 days permitted for retention of advance against equity under the extant FDI policy.
(1) Transfer by way of sale of shares of a JV/ WOS not involving write-off of the investment.
(2) Transfer by way of sale of shares of a JV/ WOS involving write-off of the investment.
If the transaction does not fulfil the conditions mentioned under the Automatic Route, prior permission of RBI will need to be obtained before undertaking the same.
Indian Party is required to submit the details of divestment within 30 days from the date of divestment to RBI through its bank.
It is worth recounting briefly the background of this law, the circumstances of those times to understand the implications better.
The last few years of the preceding millennium saw a lot of companies and other entities raising monies in various forms at very ‘attractive’ rate of return and then defaulting. The monies were raised in innovative forms and not merely in the conventional form of raising of deposits, though of course, huge amounts were raised as deposits too. The series of defaults that followed revealed several things. Firstly, the promised ‘returns’ were high enough to be impossible to maintain at all times. Secondly, the businesses in which they were invested were risky, partly because the rate of return promised was high. Of course, some monies were straightaway siphoned off and huge commissions/ incentives were paid to agents. Thirdly, many of the schemes were purely ‘Ponzi’ schemes where fresh monies raised were the source of payment of ‘returns’ to earlier deposits, apart from return of principal.
The series of defaults and the resulting uproar resulted in several drastic laws being passed. The Reserve Bank of India Act was amended with strict provisions being inserted to regulate non-banking financial companies. SEBI notified its Regulations relating to Collective Investment Schemes which, ensured the closure of most of such schemes. However, at the State level, various States, over the following few years, passed laws for protection of depositors. Maharashtra, Tamil Nadu, Bihar, Gujarat, etc. were amongst such States [in Maharashtra, it was “the Maharashtra Protection of Interests of Depositors (in Financial Establishments) Act, 1999]. The broad model and most of the details of the laws of each of such States were more or less the same.
The basic scheme of the State Law was to give relief to the depositors where the monies were raised from them with a fraudulent intent. In case there was default due to this, the law provided for wide-ranging reliefs and punishment. The assets could be traced and attached, even if in other entities or in the names of the promoters/employees, etc. of the company. The definition of fraudulent intent was made artificially wide by including two situations. If monies were raised at returns that were commercially unviable, then the law deems that there was a fraudulent intent. Further, if the monies so raised were invested in businesses that were inherently risky, then, too, the law deems that the there was a fraudulent intent. The law covered corporate as well as several non-corporate entities such as individuals, firms, etc. Importantly, it covered even — corporates governed u/s. 58A of the Companies Act, 1956, and non-banking financial companies governed by regulations of the Reserve Bank of India.
The term ‘deposit’ is widely defined and would include monies in any form and not merely ‘public deposits’ or loans. However, there were certain exceptions provided for, but still, the definition was far wider than the word may normally convey. The law provided for appointment of an authority to take charge of the assets to ensure their disposal for meeting the liabilities to the depositors.
Stringent punishment was also provided. The State laws typically provide that in absence of special and adequate reasons, the punishment shall not be less than imprisonment of three years. The promoter, partner, director, manager or any other person or an employee responsible for the management or conducting the business of such entity is liable to be punished.
In case of default, not only the assets of the entity are to be attached, but if they are not sufficient, the properties of the director, partner or member of such entity can also be attached, if the State Government deems fit.
This law was challenged, inter alia, in the Bombay High Court. The Bombay High Court, by a Full Bench decision, held the law in Maharashtra to be unconstitutional (Shri Vijay C. Puljal v. State of Maharashtra, WP No. 5186 of 2001). However, a Full Bench decision of the Madras High Court upheld the constitutionality of the law in Tamil Nadu.
The decision of the Madras High Court was appealed against and the decision of the Bombay High Court was cited. The Supreme Court upheld the decision of the Madras High Court and held that of the Bombay High Court as not correct.
Various grounds were raised for holding the law to be unconstitutional including that the State had no power to enact such a law and that the other laws relating to deposits such as section 58A of the Companies Act, 1956, the Reserve Bank of India Act, etc. covered this field.
The Court gave the background in which the law by various States was enacted and particularly highlighted that the object of the Act and the reliefs provided thereunder were different from those under the RBI Act.
First, it described the background of the circumstances which necessitated such a law in the following words:
“The present case illustrates what has been going on in India for quite some time. Non-banking financial companies have duped thousands of innocent and gullible depositors of their hardearned money by promising high rates of interest on these deposits, and then done the moonlight flit, often disappearing into another State or even foreign countries leaving the depositors as well as the State police high and dry.”
The next contention was that: “the said Act is beyond the legislative competence of the State Legislature as it falls within Entries 43, 44 and 45 of List I of the Seventh Schedule to the Constitution. It was also submitted that the impugned Act is liable to be struck down as the field of legislation is already occupied by legislation of the Parliament, being the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, the Indian Companies Act, 1956 and the Criminal Law Amendment Ordinance, 1944 as made applicable by Criminal Law (Tamil Nadu Amendment) Act, 1977.”
It was also contended that the Tamil Nadu Act was arbitrary, unreasonable and violative of Articles 14, 19(1)(g) and 21 of the Constitution.
The Court, applying the doctrine of pith and substance to consider under whose powers the field belonged, held that the State did have power to enact laws covering the field.
“12. As noted in the impugned judgment, the Tamil Nadu Act was not focussed on the transaction of banking or acceptance of deposits, but it is designed to protect the public from fraudulent financial establishments who defraud the public by offering lucrative returns on deposits and then disappear with the depositors’ money or refuse to return the same with interest. In our opinion, the impugned Tamil Nadu Act is in pith and substance relatable to Entries 1, 30 and 32 of the State List (List II) of The Seventh Schedule.”
“20. It may be noted that though there are some differences between the Tamil Nadu Act and the Maharashtra Act, they are minor differences, and hence the view we are taking herein will also apply in relation to the Maharashtra Act.”
“26. The doctrine of pith and substance means that an enactment which substantially falls within the powers expressly conferred by the Constitution upon a Legislature which enacted it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another Legislature.”
The Court then highlighted the objective of the State Law and also its different scope to distinguish this law from the other laws. It observed,:
“30. The Tamil Nadu Act was enacted to find out a solution for the problem of the depositors who were deceived on a large scale by the fraudulent activities of certain financial establishments. There was a disastrous consequence both in the economic as well as social life of such depositors who were exploited by false promise of high return of interest.
31. By the impugned Act the State not only proposed to attach the properties of such fraudulent establishments and the mala fide transferees, but also provided for the sale of such properties and for distribution of the sale proceeds amongst the innocent depositors. Hence, in our opinion, the doctrine of occupied field or repugnancy, has no application in the present case.”
The Court even more specifically said that the other statutes that also provided for certain matters relating to depositors had different scope even if overlapping. However, since the State Law had a different angle and purpose, it had to be upheld.
“35. The Reserve Bank of India Act, the Banking Regulation Act and the Companies Act do not occupy the field which the impugned Tamil Nadu Act occupies, though the latter may incidentally trench upon the former. The main object of the Tamil Nadu Act is to provide a solution to wipe out the tears of several lakhs of depositors to realize their dues effectively and speedily from the fraudulent financial establishments which duped them or their vendees, without dragging them in a legal battle from pillar to post.”
Thus, the Supreme Court upheld the constitutionality of the Tamil Nadu and the Maharashtra State laws for protection of depositors. Implicitly, this should mean that the corresponding laws in other States, being pari materia, may also be held to be constitutional.
The implications are quite far reaching because of the wide scope of the State Laws and the powers granted and also the deeming provisions contained therein. While the other laws restricting deposits provide for quantitative restrictions in the form of maximum interest rates, maximum deposits, etc., this law considers qualitative aspects. It considers the intent of the entity raising deposits including the unreasonableness of the returns promised and the nature of investments made. Further, the law can be invoked not just when there is a default, but even earlier if the conditions specified by the law are met.
In conclusion, an old, harsh and wide-ranging law is brought alive again and any entity raising monies in any form need to consider this law, though apparently it is intended to cover entities with fraudulent intent.
In the last RTI article of July 2011 in Part B it was reported that CBI is now exempted from RTI. I had also reported that in the Madras High Court the validity of the said Notification is challenged. Now it is learnt that the same is challenged also in the Delhi High Court.
Further development is that IC, Shailesh Gandhi on 1st July passed an order holding that the said Notification is ultra vires.
The complaint of Mr. Justice R. N. Mishra (Retired) v. PIO-CBI was made on 5-2-2011. While the Notification exempting CBI u/s. 24 of the RTI Act was issued on 9-6-2011. So firstly, IC held that the said Notification cannot be made retrospective. The order reads:
“It follows from the above that CBI has been brought within the Second Schedule of the RTI Act, thereby exempting it from the application of the RTI Act in accordance with section 24 of the RTI Act. However, on a plain reading of the Notification, it does not appear to have a retrospective effect. Reliance may be placed upon the decision of the Supreme Court of India in P. Mahendran v. State of Karnataka AIR 1990 SC 405, wherein it observed as follows:
“It is well-settled rule of construction that every statute or statutory rule is prospective, unless it is expressly or by necessary implication made to have retrospective effect. Unless there are words in the statute or in the rules showing the intention to affect existing rights, the Rule must be held to be prospective. If a Rule is expressed in language which is fairly capable of either interpretation it ought to be construed as prospective only. In the absence of any express provision or necessary intention, the rule cannot be given retrospective effect except in matter of procedure.”
The Notification was issued on 9-6-2011 and there is no express stipulation whatsoever, the Notification shall come into force with effect any date prior to 9-6-2011. Moreover, the Notification does not appear to indicate any intention of affecting existing rights and therefore, must be construed as prospective in nature. Hence, information sought in any RTI application filed prior to 9-6-2011 with CBI must be provided in accordance with the provisions of the RTI Act.
IC then examined whether the Notification itself is within the letter and spirit of the RTI Act. The Commission perused the CBI website to find out what are its functions. It then wrote:
“On careful perusal of the material, it can be ascertained that CBI was established for the special purposes of investigation of specific crimes including corruption, economic offences and special crimes. It continues to discharge its functions as a multi-disciplinary investigating agency and evolve more effective systems for investigation of specific crimes. Members of CBI have all the powers, duties, privileges and liabilities which police officers have in connection with the investigation of offences. There is no claim in its mandate and functions, as described above, that CBI is involved in intelligence gathering or is a security organisation. Even the additional functions performed by CBI other than investigation of crimes do not include any function which would lend it the character of an ‘intelligence or security organisation’ u/s. 24(2) of the RTI Act.”
“By enacting the Notification and bringing CBI within the Second Schedule, the Government appears to have increased the scope of section 24(2) of the RTI Act, which was not envisaged by the Parliament. Given the fact that the Right to Information is a fundamental right, any provision by which the said right is sought to be curtailed must be strictly construed. The Government, however, appears to have stretched the interpretation of section 24(2) of the RTI Act far beyond what the Parliament had intended, by including an investigating agency such as CBI within the Second Schedule, which was envisaged exclusively for intelligence or security organisations. The Government has read additional qualification into section 24(2) of the RTI Act which were hitherto not contemplated. By this method the Government could keep adding organisations to the Second Schedule, which do not meet the express criteria laid down in section 24(2) of the RTI Act and ultimately render the RTI Act ineffective. The Government cannot frustrate a law made by the Parliament by resorting to such colourable administrative fiat.”
“Therefore, by enacting the Notification and placing CBI in the Second Schedule, the Government appears to be claiming absolute secrecy for CBI without the sanction of law. The RTI Act was a promise to citizens by the Parliament of transparency and accountability. Given that the previous year has been characterised by unearthing of various scams in the Government which are being investigated by CBI, inclusion of CBI in the Second Schedule by the Government would be a step to avoid the gaze and monitoring of citizens in matters of corruption.”
Finally the Commission concluded:
“In view of the foregoing reasons, the Commission is of the view that the Notification is not in consonance with, either the letter or spirit of the RTI Act, — in particular section 24, — for the following reasons:
(1) As observed above, CBI is not an ‘intelligence or security organisation’, which requirement needs to be satisfied in order for it to be covered u/s. 24 of the RTI Act and therefore, it cannot be included in the Second Schedule.
(2) No reasons have been provided by the DoPT or the Ministry of Personnel, Public Grievances and Pensions, as required u/s. 4(1)(d) of the RTI Act, to justify the inclusion of CBI in the Second Schedule. In the absence of reasons, inclusion of CBI in the Second Schedule along with National Intelligence Agency and National Intelligence Grid appears to be an arbitrary act. The promise made to citizens u/s. 4(1)(d) of the RTI Act must be fulfilled.
This Commission rules that the said Notification of 9-6-2011 is not in consonance with the letter or spirit of section 24 of the RTI Act, since it constricts the citizen’s fundamental right in a manner not sanctioned by the law.”
CBI had before the Commission also submitted that in any case the information sought is exempt u/s.8(1)(g) and (h) of the RTI Act. The Commission also held that the said clauses also do not cover the denial of information sought by the applicant. Finally the Commission held:
“The Complaint is allowed.
The CPIO is directed to provide to the complainant copy of the FIR lodged by CBI. The CPIO is further directed to send copies of FR-I, FR-II and GEQD Expert report to the complainant. The information should be sent to the complainant after servering the names and other particulars of persons, the disclosure of which would endanger their life or physical safety or identify the source of information or assistance given in confidence for law enforcement or security purpose. The information as directed here should be sent to the complainant before 25th July 2011.”
Everyone is awaiting now the response of CBI to this decision.
This is a landmark decision and the full text is posted on the website of BCAS and PCGT.
[Mr. Justice R. N. Mishra (Retired), Allahabad v. PIO & Head of Branch, CBI Anti-Corruption Branch, Decision No. CIC/SM/C/2011/000117/SG/13230, dated 1-7-2011]
Considering the rampant nature of slums across India, the Ministry of Housing & Urban Poverty Alleviation has come out with a Scheme titled the Rajiv Awas Yojana (‘RAY’) for slum dwellers and urban poor. It envisages States granting property for slum dwellers. The RAY envisages that each State would prepare a State Slum-free Plan of Action (‘POA’). The preparation of legislation for assignment of property rights to slum dwellers would be the first step for State POA. The POA would need to be in two parts, Part-1 regarding the upgradation of existing slums and Part-2 regarding the action to prevent new slums. In Part-1 the State would need to survey and map all exiting slums in selected cities proposed by the State for coverage under RAY. In Part-2 the Plan would need to assess the rate of growth of the city with a 20-year perspective, and based on the numbers specify the actions proposed to be taken to obtain commensurate lands or virtual lands and promote the construction of affordable EWS houses so as to stay abreast of the demand. The Centre intends to provide to States/UTs financial support and handholding/ capacity development support. The National Steering Committee for slum-free city planning — Rajiv Awas Yojana will monitor the financial and physical progress under the Scheme.
The Central Government approved the launch of the phase-1 of RAY in June 2011. As per the decision of the Cabinet Committee on Economic Affairs, the Centre will bear 50% of the cost of slum redevelopment. To encourage creation of affordable housing stock, the existing schemes of Affordable Housing in Partnership and Interest Subsidy Scheme for Housing the Urban Poor have been dovetailed into RAY. The Finance Minister has approved Rs.5,000 crores towards RAY under the 5-Year Plan up to 2012.
This Article aims to look at some of the crucial provisions under this very important Act and the process of slum improvement, clearance, redevelopment, etc.
Competent Authority
The Act also provides for the creation of a Slum Rehabilitation Authority (‘SRA’). The SRA is in charge of the Brihan Mumbai area and is headed by the Chief Minister of Maharashtra. The powers of the SRA are:
(a) To survey and review the existing position regarding slum areas;
(b) To formulate schemes for rehabilitation of slum areas;
(c) To get the slum rehabilitation schemes implemented;
(d) To do all such acts as are necessary for achieving the rehabilitation of slums.
By amendment to the Maharashtra Regional & Town Planning Act 1956, the Slum Rehabilitation Authority has been declared as a planning authority, to function as a local authority for the area under its jurisdiction. SRA has been empowered to prepare and submit proposals for modification to the Development Plan of Greater Mumbai. The SRA can declare any area as slum rehabilitation area for the rehabilitation of slums and in certain cases slum areas become slum rehabilitation area by means of deeming provisions. All such slum rehabilitation areas where slum rehabilitation schemes are proposed and being implemented, come under the jurisdiction of SRA.
The SRA can appoint officers and executives for its better functioning.
Slum rehabilitation area
(i) It is a source of danger to the health, safety and convenience of the public because it has inadequate or no basic amenities, or it is insanitary, squalid, over-crowded, etc.
(ii) The buildings therein are unfit for human habitation or are dilapidated, over-crowded, lack ventilation/lighting/sanitation, etc.
Protection of occupiers
An occupier has been defined to include the following:
(a) Any person who is paying the owner rent for the land or building;
(b) An owner is in occupation of his land or building;
(c) Rent-free tenant of any land or building;
(d) Licensee in occupation of any land or building; and
(e) Any person who is liable to pay to the owner damages for use and occupation of land or building. Owner has been defined under the Act to mean a person who receives rent of the land or building if it were let and includes:
(a) An agent/trustee who receives such rent on account of the owner (b) A Court-appointed receiver/manager (c) A mortgagee-in-possession. However, the definition of an owner excludes a Slumlord.
A Slumlord is defined to mean a person, who:
(a) Illegally takes possession of lands; or
(b) Enters into or creates illegal tenancies, leave and licence agreements, etc. on such lands; or (c) Constructs unauthorised structures for sale or hire; or
(d) Gives such lands on rental/licence for construction/occupation of unauthorised structures; or
(e) Knowingly gives financial aid to any person for the above; or
(f) Collects rent/charges from occupiers by criminal intimidation/use of force/illegal means.
No person can without the prior approval of the Competent Authority:
(a) institute any suit for the eviction of an occupier from any building or land in a slum area;
(b) apply to any Court for a distress warrant for rent arrears against any occupier.
Slum improvement
(a) If the Competent Authority is satisfied that any slum area is capable of being improved, then it may serve a notice to the owner of the property of its intention to carry out such improvement. It would invite objections and suggestions from them also.
(d) For the above improvement, the Competent Authority may require the occupiers to vacate the premises occupied by them. It may as far as practicable offer alternative accommodation.
(e) If buildings in a slum area are unfit for hu man habitation or any area is a source of danger to the health, safety and conve nience of the public, then the Competent Authority may serve a notice on the owner to execute such works of improvement as it deems fit.
(f) It has powers to enforce the notice for carrying out works of improvement.
(g) The Competent Authority may direct that no person shall erect any building in a slum area without its prior permission.
(h) The Competent Authority can order that any building in a slum area which is not fit for human habitation should be demolished.
Slum clearance
U/s.11 of the Act, if the Competent Authority is satisfied that the most satisfactory method of dealing with a slum is the demolition of all the buildings in that area, then it may by an order direct that such area should be cleared of all buildings in accordance with the provisions of the Act. Such an order is known as a ‘clearance order’ and such area is known as a ‘clearance area’. It must also make provisions for accommodating those dishoused. The order is then forwarded to the Administrator appointed under the Act. The Administrator in Greater Bombay is a person not below the rank of a Divisional Commissioner. He may either confirm or vary or reject the clearance order.
Once an area has been cleared of its buildings, its owner may apply for redevelopment of the land. Alternatively, the Competent Authority itself may decide to redevelop the land at its cost, with prior approval of the Administrator.
It is only advocates, whose names are entered on the rolls of the State Bar Council, who have the right to practise in any Court. If a person practises in any Court without any such authority, and without such an enrolment, it would be committing an offence u/s. 45 of the Act, punishable with imprisonment for a term which may extend to six months. Therefore GPA Shri T. D. Dayal was not entitled to appear and argue for the appellant. He had no right of audience in the case or any other case.
Considering this situation, the law of the land is sought to be kept simplified to a certain extent. Every law provides some relief to the illiterate and poor class of entrepreneurs, helping them to abide by the law without being subjected to its complexity.
In the Income-tax Act, 1961, there are sections such as section 44AD/AF/AE/B/BB, etc. which are commonly known as Presumptive Tax Provisions. They mainly cover a certain class of entrepreneurs such as contractors in civil construction, small retailers, transporters, etc. The main intention of these provisions is to tax businesses on a certain percentage of their turnover or receipts. This percentage specified is normally an industrywise approved profitability norm. The relief provided by these sections is in the form of non-maintenance of books of accounts and no further verifications or questioning through cumbersome scrutiny procedures. In short, the taxpayers enjoy’s his peace of mind. However, a provision of compulsory Tax Audit u/s 44AB needs to be complied with, if the profit declared by such specified business organisation is below the prescribed percentage. This provision is aimed at preventing misuse of the relief provided by the Act. In my sixteen years of practice, I have seen many genuine cases where the actual profit earned is below the specified percentage, but due to the threat of harassment through scrutiny procedures, businessmen have adopted the prescribed percentage and have declared higher profits and paid tax on the unreal income. I have also come across a few cases wherein the lack of awareness of law has led to non-conduct of audit and consequently payment of penalty due to noncompliance.
A similar situation may be faced by many in the near future, due to modification in the sections relating to presumptive tax i.e., sections 44AD/AE etc. becoming effective from A.Y. 2011-12. Due to the amendments, section 44AD is now applicable not only to contractors in civil construction businesses but also to all ‘eligible’ business organisations. The definition of ‘eligible business’ as given in the section includes all business organisations run by individuals, HUFs and firms. Therefore, these modifications have a very widespread impact. Further, it is also rather unfair that the rate of 8% net profit has been prescribed across the board, irrespective of the nature of assessess. A majority of such businessman would be small retail traders. For them the rate hitherto was only 5%. The net profit is now suddenly perceived to be 8%! Further, it might so happen that cost of compliance may even exceed the tax liability and on the top of it, the fear of scrutiny!
The positive side is that all small businessmen having a turnover or gross receipts below Rs.60 lakh can seek shelter u/s. 44AD and after declaring 8% profit, can get rid of complicated accounting and audit requirements and threatening scrutiny proceedings. However, on the flipside, due to the effect of the modified section 44AB, all such eligible businesses declaring a profit below 8% will have to maintain their books of account and get them duly audited, besides filing their return of income. Earlier a small organisation having turnover below Rs.40 lakh and not belonging to a specified class under presumptive tax sections, was completely out of the purview of section 44AB and the audit of such organisations was not mandatory under the provisions of the Act.
To make the law fair — percentage of profit should be trade/industry or businesswise based on survey of reasonable sample of the business, rather than ad hoc percentage of 8%. However, if 8% is based on survey carried on by the CBDT, then in the interest of fairness and transparency, the same needs to be disclosed.
1. Applicable rate of service tax should be the rate applicable at the time when the services are deemed to have been provided.
2. Service tax shall be payable upon deemed provision of services.
3.
When an invoice has been issued or a payment is received for a service
which is not subsequently provided, the service provider can take credit
of service tax paid earlier, provided the amount has been refunded to
the payer.
4. Maximum amount admissible for adjustment of excess
service tax under Rule 6(4B)(iii) has been increased from Rs.1 lac to
Rs.2 lac.
5. Self-assessed amount of service tax, if not paid,
shall be recovered along with interest as per the provisions of section
87 of the Finance Act, 1994.
6. Composition rate applicable in
relation to purchase or sale of foreign currency including money
changing has been reduced from 0.25% to 0.10%.
Identification of customer-related intangible
assets
Valuation of customer-related intangible
assets
Comparison with Ind-AS
Conclusion
Identification:
Examples
FASB ASC 805 under US GAAP and IFRS-3 (January 2008) under IFRS, give the following examples of customer-related intangible assets:
Before we start, it is imperative to know that selfgenerated intangibles (including goodwill) are not allowed to be recognised under any accounting guidance. The identification and the valuation of these intangibles would arise only in the case of an acquisition, resulting in a business combination where the acquirer would be required to allocate the value paid for the target to, inter alia, intangible assets by way of a purchase price allocation process. Hence, in the discussion below we would constantly talk about an acquirer-target relationship.
Definitions:
Customer contracts and the related customer relationships:
Standard: When an entity establishes relationships with its customers through contracts, customer relationships arise from these contractual rights. Customer contracts refer to signed contracts as at the date of the valuation.
Customer contracts are signed contracts by the target as at the valuation date. On account of the acquisition, the acquirer will get the benefit of these contracts and hence it is an intangible for the acquirer. Related to these contracts would be their associated relationships and the acquirer will also get the benefit of these contractual relationships. ?
Non-contractual customer relationships:
Standard: A customer relationship acquired in a business combination that does not arise from a contract may nevertheless be identifiable because the relationship is separable.
There would be few instances in practical life where relationships are contractual. Most of the times relationships are non-contractual and though the benefits are not guaranteed, a trend can be observed wherein the same customers continue to give business repeatedly. This recall value is what is measured and termed as no contractual customer relationships.
Customer lists:
Standard: A customer list consists of information about customers, such as their names and contact information. A customer list also may be in the form of a database that includes other information about the customers, such as their order histories and demographic information. Databases are collections of information, often stored in electronic form. A database that includes original works of authorship may be entitled to copyright protection.
Customer lists (all type of information) depending on the industry can open more avenues for business by adding new customers and hence would add value to the acquirer.
Order or production backlog:
Standard: An order or a production backlog arises from contracts such as purchase or sales orders and therefore is considered a contractual right.
Order or production backlog refers to the unexecuted orders as at the valuation date. The only difference between customer contracts and order or production backlog is that in customer contracts the work on the contracts has not started, while in order or production backlog, the work on the contracts has not been completed.
Basis of identification:
Additional highlights: Customer contracts and the related customer relationships:
(i) It is an intangible and will meet the contractuallegal criterion even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquiree.
(ii) A customer contract and the related customer relationship may represent two distinct intangible assets.
(iii) Both the useful lives and the pattern in which the economic benefits of the two assets are consumed may differ.
(iv) A customer relationship related to the customer contract exists between an entity and its customer if
(a) the entity has information about the customer and has regular contact with the customer, and
(b) the customer has the ability to make direct contact with the entity.
(v) Customer relationships related to the customer contracts meet the contractual-legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
(vi) Customer relationships related to the customer contracts also may arise through means other than contracts, such as through regular contact by sales or service representatives. Consequently, if an entity has relationships with its customers through these types of contracts, these customer relationships also arise from contractual rights and therefore meet the contractual-legal criterion.
(vii) Customer contracts can also be a contract-based intangible asset. If the terms of a contract give rise to a liability (for example, if the terms of an operating lease or customer contract are unfavourable relative to market terms), the acquirer recognises it as a liability assumed in the business combination.
Non-contractual customer relationships:
Exchange transactions for the same asset or a similar asset that indicate that other entities have sold or otherwise transferred a particular type of no contractual customer relationship would provide evidence that the no contractual customer relationship is separable. For example, relationships with depositors are frequently exchanged with the related deposits and therefore meet the criteria for recognition as an intangible asset separately from goodwill.
Customer lists:
(i) A customer list generally does not arise from contractual or other legal rights. However, customer lists are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion. For example, customer and subscriber lists are frequently licensed and thus meet the separability criterion.
(ii) Whether customer lists have characteristics different from other customer lists, the fact that customer lists are frequently licensed generally means that the acquired customer lists meet the separability criterion.
(iii) However, a customer list acquired in a business combination would not meet the separability criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing, or otherwise exchanging information about its customers.
(iv) A database acqui
The Company incorporated in 1999. It started as a trading company with the seed capital raised from within the family. At that time, it was entirely family-owned and run. Within a few months, stepping on the dream of being a global company since beginning, the first international office was inaugurated. Also parallely, the first manufacturing facility with three production lines was set up in India. In a short span of two years the sterile manufacturing facility received an important certification and the Company also touched an important revenue landmark. This brought immense confidence to us and gave us a direction towards the upward journey. Integrity, implementation, excellence, innovation and patient satisfaction became our values.
In 2003, the Company received approvals from regulatory authorities from various other developing countries. The global growth strategy also permitted the Company to apply in various developed markets. Still, the organisation’s size was small and structure was not very much in order, hence most of the functions were directly managed by the family members. Managing an international set-up for a family-run company was obviously placing a great deal of pressure on the top management. The time had come for us to transit to the next orbit. Today we have market a presence in 76 countries and this has been achieved by decentralising the organisation and creating various presidents, business heads, division heads, and managers.
When I stepped into the MD’s role, I first focussed on new product development and streamlining of manufacturing and operations of the Company. We brought advanced technology equipments and automated machines to add up to manufacturing capacity and to enhance productivity. We established management systems and processes and review mechanisms across organisation which were to become base for advanced transition later.
In 2006, one of the largest international private equity funds invested in our Company. The introduction of this private equity fund in the Company was a crucial point in the transition of our Company towards professional management. We inducted independent directors to improve our corporate governance and to attain the highest standards of corporate governance. Improving the corporate governance helped us in maximising the long-term value for all stakeholders of the Company, including shareholders, employees, customers, society, etc. Our corporate governance philosophy and practice consists of the following facets:
To make timely disclosures and adopt transparent policies
To show greater responsibility and fairness in dealings with all
To demonstrate the highest level of accountability towards employees
To conduct our business in an ethical manner.
We introduced more robust systems like SAP and centralised inventory system. On one hand, where the business was flourishing in terms of back-end, on the other, the front-end needed further focus to match with the market demands and be at the edge with the competition. Hence, as MD I took charge of Businesses (Sales and Marketing) and focussed more on visiting countries, meeting people, getting market insights and devising international marketing strategies. We established a great market presence across various regulated markets as well as emerging markets. USFDA approval for sterile injectable manufacturing facility was one of the greatest milestones which opened a new scope for expansion of the business. The Company also focussed on enhancing visibility in the market in terms of participation in conferences and competing in awards and came out with flying colours. We received several awards. We also ramped up effective management of back-end and front-end as per demand of time-witnessed manifold growth in business, presence across countries, thousand-plus registrations across.
Looking at the volume and growth of the company, it became quintessential to streamline and professionalise the organisation structure. We developed the second-level and third-level management cadre and assigned functional accountability to non-family members who needed to independently handle their teams. Delegation of responsibility and giving authority to the second level helped improve the organisation and also develop a better workforce. We maintained inherent cultural values, focussed on people policies and practices which later helped the Company achieve recognition as one of ‘the Best Places to Work for in India’ and #1 Healthcare Company to work for.
The Company started to work on its dream of going public, following a culture of continuously upgrading best practices in corporate governance and management quality. The Company shifted gears and prepared itself in all aspects to take this big move. In 2010, the Company became a listed company. This was the next big thing for us and has put us in a completely different bracket. Through the IPO, the Company raised proceeds which it has already started investing in augmentation of manufacturing capabilities. Listing brings with it greater responsibility and greater external scrutiny but also puts your company on a higher pedestal.
Throughout, the journey, the Company made sure that its growth does not get hampered in bringing about a professional management approach. We always believed in ourselves and will continue to do so, thereby removing every hurdle that comes on the way. The underlying mantra behind the success story is ‘dream big and work hard’. As we look back on these 12 years, we have transitioned from a family-run and owned company to a professionally-run company to a PE-funded company and finally to a family-owned listed company. The road has been long and arduous but very satisfying and fulfilling. We have miles to go before we sleep but we believe in one motto which has been our mantra through the years:
“The world changes view, if you change yourself”.
The topic is opportune because the ‘family managed companies’, are now a powerful force and play a dominant role in an economy. Family business has graduated long ago from ‘mom-and-pop stores’ to giant companies like Cargil having headquarters in the United States. Cargil1 the family controlled company2 is the rule in most of the world. Statistics indicate that family controlled company businesses account for 99% of Italian businesses, 70% of Portuguese, 75% of British, 80% Spanish, between 85% and 90% of Swiss, 90% of Swedish and 80% of Canadian. Even in the United States between 80% and 95% of the companies are family controlled.
As of 20093, the private sector represented 95% of all companies in China, the vast majority are family controlled firms and most of the remaining firms are state owned enterprises. The rural areas are heavily populated by small farms.
In India,4 family businesses account for as much as 95% of all Indian businesses. Nearly 80% of family companies dominate Indian economy. About 461 of the 500 most valuable companies are under family control. In addition, the family controlled businesses also comprise large groups like the Tata group and the Aditya Birla group to mention a few. “IT giant TCS and financial services major HDFC (once a family managed company) have been named as India’s two best managed companies in an annual poll conducted by Finance Asia magazine. TCS and HDFC are followed by IT major Infosys, telecom giant, Bharti Airtel and PSU behemoth ONGC in the list of the top-five best managed companies in the country”, says a report in The Times of India on 18th May 2011. The best managed companies are thus a mixed bag.
“The Aditya Birla Group5 is also a hard-charging multinational corporation emerging from that country. (India). The Birla Group produces and sells such products as fibre, chemicals, cement, metals, yarns and textiles, apparel, fertiliser, and carbon black (a petroleum-based material used in the manufacture of rubber and plastic). It is a US $ 30 billion conglomerate operating in about 25 countries, with 60% of its revenues now coming from outside India.”
Competition that firms face now, as we pointed out earlier, is no longer local. Competition cannot remain confined within the borders of a nation. In many industries, competition has now become global. Textile and clothing, automobile, IT, and ITES are just a few examples of industries which now face global competition. Firms compete globally with global strategies in mind. Firms compete globally by participating in global trade and through direct foreign investments. The family managed companies must therefore face global competition.
What are family controlled companies? Do they have the vitality and the dynamism to compete globally? The purpose of this article is to discuss these questions.
A family business6 is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.
“Family firms7 were often able to take a longerterm, more strategic approach and kept stronger relations with their customers, says Harvard Business School professor Belén Villalonga, who has just completed a study comparing the performance of 4,000 family and public firms in the U.S. and Europe. Between 2006 and 2009, she says, family controlled firms both gained market share — increasing sales 2% faster than non-family firms — and outperformed their public peers by 6% on company market value. Another report, by the German consultancy Roland Berger, looked at family owned firms in Europe’s biggest economy and found they navigated the crisis with better liquidity and less debt. This all builds on what has become a decade-long trend of family firms outperforming the market, says Villalonga.”
The Indian experience seems to support this view. Indian companies like Wipro, TCS, Reliance Industries have achieved impressive growth in their sales revenues, exports, profits and market capitalisation. The development of all these organisations in a short period is truly astounding.
Our discussion so far should not lead us to the conclusion that all is well with family managed companies. The carcases of the closed textile mills in Ahmedabad show the utter failure of the family management of the textile industry, the oldest Indian industry. These seasoned captains of the industry could not anticipate the changing competition in the Indian textile industry and therefore could not forge a new competitive strategy to survive in the changed environment.
“From8 behemoths such as Ford to mom-andpop shops, they (family businesses) share a set of common challenges in today’s business climate.” This quotation from Stacy Perman’ article ‘Taking pulse of family business’ aptly describes the situation in India. The small and medium enterprises in India face similar challenges as the large family businesses face. Similarly, the small and medium family businesses have the same dynamism as the large family businesses have. We illustrate our reasoning with the help of an example from the textile and clothing industry. In Appendix I, we present the data about the export of textiles and clothing. The Indian exporters of textiles are mostly medium and large textile mills that are large family controlled [Except the textile mills owned by the National Textile Corporation (NTC) that are not family controlled textile mills. However, the contribution of the NTC mills to export is not substantial and we can safely ignore it]. This data shows the Chinese exports of textiles are about 2.42 times the Indian exports of textiles.
On the other hand, the Indian exporters of clothing are small to medium family owned firms. Here again we notice that the Chinese exports of clothing are 2.79 times the Indian exports of clothing (The firms in the clothing industry are small and medium family owned businesses). These examples support our point that small and medium family businesses have the same dynamism as the large family businesses have.
It may not be out of place to cite another example of a medium-sized family owned pharmaceutical company to reinforce our point about the dynamism in the medium-sized family owned companies. The name of this company is Shiva Pharmachem Pvt. Ltd. whose annual sales in the year 2009-10 were about one billion rupees (Rupees one hundred crore). However, before we discuss the example of Shiva Pharmachem Pvt. Ltd., we explain below some terms that we have used in discussing the example of Shiva Pharmachem Pvt. Ltd.
Value added. Following Paul Samuelson9, we will define the term value added as the sales an organisation achieves minus the items that it buys form outside to achieve the sales that it makes. Some scholars define value added as:
Total income – items bought from outside
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Value |
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Value added per employee |
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Total no. of employees |
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Capital employed. We will define capital
employed as net worth plus long-term loans or as net fixed assets plus
working capital.
Return on Capital employed
We will define return on Capital employed as
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Return on |
Profit before tax –Financial |
charges |
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Capital employed = |
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Capital employed |
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Margin on sales |
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Profit |
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Margin on sales = |
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(1.4) |
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Net income |
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Capital turnover |
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Net income |
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Capital turnover |
= |
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(1.5) |
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Capital employed |
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From these definitions, it is easy to see |
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Capital turnover x Margin on sales |
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= Return on capital employed. |
(1.6) |
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We now return to the example of Shiva Pharmachem Pvt. Ltd. that we want to cite in support of our point. In Table 1 below, we show the salient features of the company’s financial statements for the years ending 31st March 2010 and 2009, respectively.
|
|
Units |
Year ending |
Year ending |
Percentage |
|
|
|
31-3-2010 |
31-3-2009 |
change 2010 |
|
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|
|
over 2009 |
|
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|
|
|
Total income |
Rs. |
1,098,460,704 |
829,779,826 |
24.46% |
|
|
|
|
|
|
|
Capital employed |
Rs. |
317,443,961 |
193,143,180 |
39.16% |
|
|
|
|
|
|
|
Value added |
Rs. |
995,495,000 |
731,879,761 |
26.48% |
|
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|
|
|
|
|
Value added per employee |
Rs. |
2,488,738 |
1,829,699 |
26.48% |
|
|
per employee |
|
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|
|
|
per year |
|
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|
|
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|
|
Profit before tax |
Rs. |
202,661,937 |
125,113,584 |
38.26% |
|
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|
|
|
Margin (profit before tax + |
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|
financial |
% |
20.22% |
20.20% |
0.05% |
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|
Return on capital employed |
% |
69.95% |
86.8% |
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Capital turnover |
Number |
3.46 |
4.30 |
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How effectively has Shiva Pharmachem Pvt. Ltd. used its human and monetary resources? Do the financial results of the company show the management’s dynamism? We now turn to a discussion of these questions.
From Table 1 we can glean the three important conclusions that we list below.
(1) The firm’s return on capital employed declined in the financial year ending 31 March 2010. However, even the lower return on capital employed is sufficiently high to give the firm’s owners a good return on their capital.
(2) The value addition the firm achieved in the year 2009-10 was higher than the value addition the firm achieved in the year 2008-09.
Further, the value added per employee in 2010 is much higher than the minimum a company should achieve. We believe that the minimum value addition that a company must achieve is about Rs.1,200,000. Now it is quite common to see that the average wage bill for a company per employee per year is about Rs.100,000.
(3) Therefore, the results the company achieved comprise a mixed bag. It has used its human capital better than what it has used in the previous year. However, it has not used its monetary capital as well as it used in the previous year.
The reason for the decline in the return on capital employed is easy to see. From the last two rows of Table I, we see that in the year 2010, the margin the company achieved on sales was almost equal to the margin on sales the company achieved in the previous year. However, the turnover of capital the company achieved was much lower in the year 2010 than what the company achieved in the previous year. Now, we have from (1.6) Return on capital = margin on sales x turn over.
From Table 1 we can see that the margin on sales is almost the same as the margin on sales in 2009. However, the capital turnover in 2010 is much lower than the capital turnover in 2009. Therefore, the return on capital will be lower in 2010. Does the decline in the return on capital in the year ending on 31st March 2010 show the lack of the management’s dynamism in using the capital effectively? The answer is not conclusive. We must wait for at least two years before we come to that conclusion. The decline in the return on capital employed shows the management’s enthusiasm to grow and develop rapidly by making substantial investment in the business. From Table 1 we can see that the capital employed in the company has increased by 39.16% in the year ending on 31st March 2010. Obviously, the management would not make such a large capital investment unless it has a strong desire to develop rapidly, and has the confidence in its abilities to earn a good return on the capital it invests. Here is another example of a family managed company that has the vitality to participate actively in a globalising business. Having achieved high levels of productivity that we measure by its value addition per employee and return on capital employed, Shiva Pharmachem Pvt. Ltd., we have no hesitation in saying that the company is ready to prosper and develop in a globalising economy.
However, all is not well with the family managed businesses. Stacy Perman in his report ‘Taking the Pulse of Family Business’11 observes
“Generally speaking, the failure rate for all private businesses is high. According to the Small Business Administration’s Office of Advocacy, 580,900 new businesses were launched in 2004, the most recent date available for data, while 576,200 closed. Given that only one in three family businesses succeeds in making it from the first to the second generation, it’s clear they have their own inherent risks.
Each succeeding generation has its own ideas about taking the company forward — or if, indeed, it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses —and in the next ten years will see a major increase in the number of companies facing that hurdle, as more baby boomers begin to retire.”
Accordingly, the question arises as to whether and how boomers will pass the baton along to their children. The issue is fast becoming a critical one. The challenges to longevity are substantial.
For starters, many of the concepts that have been traditionally associated with family businesses have eroded and new sources of potential conflicts have arisen, as have new opportunities and challenges. Compared with 10 or 20 years ago, the sense of duty and obligation to join the family business has weak-ened, while the sense of entitlement has grown.
In the same vein Michael J. Conway12, JD and Ste-phen J. Baumgartner, MSc (Econ) observe “While there is entertainment value to the drama and intrigue which surround the Earnhardt, Wrigley, Murdoch, and Walton family owned businesses, their highly publicised trials and tribulations can also provide real-life lessons for family owned businesses that operate well out of the limelight. Family owned businesses face unique issues — succession planning, marriages and divorces, complicated relationships — as well as routine issues that emerge around turf battles, shareholder control, compensation structures, and processes for strategic decision-making. Without proper documentation in place to help address these and other issues when they arise, the family owned business is at risk from an operational, management and financial perspective.”
Closer at home, Professor D. Tripathi13 observes “Behind the glare of momentous changes wrought by liberalisation, a very significant development went almost unnoticed. This was the declining importance of business families in the nation’s life. A well-regarded observer of contemporary business scene has gone to the extent of suggesting that the joint family is dead for all practical purposes.” Professor Tripathi concludes by saying “These prognoses may or may not turn out to be correct, but the mounting crisis in family business is bound to greatly influence the course of private enterprise and its management in the future.”
This article would be incomplete without a discussion about the dichotomy between family managed companies and professionally managed companies. Rahul Bajaj is directionally correct in his comments on the dichotomy between family managed companies and professionally managed companies. According to Bajaj14 , “if a professionally managed firm means one that is managed by those who hold no equity in the enterprise, there is ‘no reason to believe that a non-owner is more competent than an owner. In fact, a lot of studies done recently in the U.S. show that family owned businesses are doing better than non-family managed companies.’ What is relevant in a competitive economy is that the company has to be efficiently managed.” To resolve the apparent dichotomy we must understand the significance of the word ‘profession.’ In the contemporary world management, practitioners and thinkers use two yardsticks to judge whether a business is profession. Below we list the yardsticks.
(1) Are the practices in the business based on a body of knowledge that can stand a rigorous logical scrutiny as in medicine and engineering?
(2) Is there a code of conduct in the business that puts service before self?
The last verse of the Bhagvadgita15 sums up the code of conduct extremely well. The last verse asks us “to unite vision (yoga) and energy (dhanuh) and not allow the former to degenerate into madness and the latter into savagery. High thought and just action must ever be the aim of man”.
When we use the word profession to mean that its practices are based on rigorous logic and the profession demands a high code of conduct, then the dichotomy between professionally managed companies and the family managed companies disappears.
Unfortunately, the recent spate of ‘scams’ that we are witnessing leads us to ask “does the Indian business have a code of conduct? In India, businesses, both the professionally managed and the family managed, fail to measure up to the second yardstick.
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Appendix I |
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Appendix II?: India’s share of Textile and Clothing |
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Textile Export |
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Clothing Export |
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Total T&C Export |
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Year |
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World |
India |
India |
China |
World |
|
India |
India |
China |
India |
China |
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|
(US$ bn) |
(%Share) |
(US bn) |
(%Share) |
(US$ bn) |
|
(%Share) |
(US bn) |
(%Share) |
(US$ bn) |
(US$ bn) |
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1994 |
|
133 |
2.91 |
3.87 |
8.98 |
141 |
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2.63 |
3.71 |
16.86 |
7.53 |
35.55 |
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1995 |
|
152 |
2.86 |
4.35 |
9.14 |
158 |
|
2.60 |
4.11 |
15.19 |
8.47 |
37.97 |
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1996 |
|
153 |
3.23 |
4.94 |
7.93 |
166 |
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2.54 |
4.22 |
15.07 |
9.15 |
37.15 |
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1997 |
|
156 |
3.37 |
5.26 |
8.88 |
178 |
|
2.45 |
4.36 |
17.91 |
9.59 |
45.63 |
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|
1998 |
|
150 |
3.04 |
4.56 |
8.55 |
186 |
|
2.57 |
4.78 |
16.16 |
9.34 |
42.87 |
||
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1999 |
|
146 |
3.48 |
5.08 |
8.92 |
185 |
|
2.79 |
5.16 |
16.29 |
10.24 |
43.12 |
||
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2000 |
|
159 |
3.78 |
6.01 |
10.17 |
198 |
|
3.12 |
6.18 |
18.21 |
12.18 |
52.21 |
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2001 |
|
149 |
3.6 |
5.36 |
11.27 |
194 |
|
2.83 |
5.49 |
18.91 |
10.86 |
53.48 |
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||
|
2002 |
|
156 |
3.87 |
6.04 |
13.19 |
206 |
|
2.93 |
6.04 |
20.03 |
12.07 |
61.86 |
||
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|
2003 |
|
175 |
3.92 |
6.86 |
15.41 |
234 |
|
2.83 |
6.62 |
22.24 |
13.47 |
78.96 |
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|
2004 |
|
196 |
3.58 |
7.02 |
17.1 |
261 |
|
2.55 |
6.66 |
23.74 |
13.64 |
95.28 |
||
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2005 |
|
205 |
4.13 |
8.47 |
20.01 |
278 |
|
3.31 |
9.20 |
26.68 |
17.67 |
115.21 |
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2006 |
|
219 |
4.27 |
9.35 |
22.27 |
311 |
|
3.27 |
10.17 |
30.63 |
19.52 |
144.07 |
||
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||
|
CAGR |
|
4.24% |
3.25% |
7.63% |
7.86% |
6.81% |
|
1.83% |
8.77% |
5.10% |
8.26% |
12.37% |
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China/ |
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India |
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2.42 |
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2.79 |
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A dabbawala (one who carries lunch box), some-times spelled dabbawalla, tiffinwalla, tiffinwallah or dabbawallah, is a person in the Indian city of Mumbai whose job is to carry and deliver freshly home-made food in lunch boxes to office workers. Tiffin is an old-fashioned English word for a light lunch, and sometimes for the box it is carried in. Dabbawalas are sometimes called tiffin-wallas.
Though the work sounds simple, it is actually a highly specialised trade that is over a century old and which has become integral to Mumbai’s culture.
The dabbawala originated when a person named Mahadeo Havaji Bachche started the lunch delivery service with about 100 men. Nowadays, Indian businessmen are the main customers for the dabbawalas, and the service often includes cooking as well as delivery.
Economic analysis
Everyone who works within this system is treated as an equal. Regardless of a dabbawala’s function, everyone gets paid about two to four thousand rupees per month (around 25-50 British pounds or 40-80 US dollars).
More than 175,000 or 200,000 lunches get moved every day by an estimated 4,500 to 5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. According to a recent survey, there is only one mistake in every 6,000,000 deliveries.
The BBC has produced a documentary on dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably in the eyes of many Westerners, the success of the dabbawala trade has involved no western modern high technology. The main reason for their popularity could be the Indian people’s aversion to western style fast food outlets and their love of home-made food.
The New York Times reported in 2007 that the 125-year-old dabbawala industry continues to grow at a rate of 5-10% per year.
Low-tech and lean
Dabbawala in action: Although the service remains essentially low-tech, with the barefoot delivery men as the prime movers, the dabbawalas have started to embrace modern information technology, and now allow booking for delivery through SMS. A website, mydabbawala.com, has also been added to allow for online booking, in order to keep up with the times. An online poll on the website ensures that customer feedback is given pride of place. The success of the system depends on teamwork and time management that would be the envy of a modern manager. Such is the dedication and commitment of the barely literate and barefoot delivery men (there are only a few delivery women) who form links in the extensive delivery chain, that there is no system of documentation at all. A simple colour coding system doubles as an ID system for the destination and recipient. There are no multiple elaborate layers of management either — just three layers. Each dabbawala is also required to contribute a minimum capital in kind, in the shape of two bicycles, a wooden crate for the tiffins, white cotton kurta-pyjamas, and the white trademark Gandhi topi (cap). The return on capital is ensured by monthly division of the earnings of each unit.
Uninterrupted services
The service is uninterrupted even on the days of extreme weather, such as Mumbai’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. Occasionally, people communicate between home and work by putting messages inside the boxes. However, this was usually before the accessibility of instant telecommunications.
In literature
One of the two protagonists in Salman Rushdie’s controversial novel The Satanic Verses, Gibreel Farishta, was born as Ismail Najmuddin to a dabbawallah. In the novel, Farishta joins his father, delivering lunches all over Bombay (Mumbai) at the age of ten, until he is taken off the streets and becomes a movie star.
Dabbawalas feature as an alibi in the Inspector Ghote novel Dead on Time.
Etymology
The word ‘Dabbawala’ can be translated as ‘box-carrier’ or ‘lunch pail-man’. In Marathi and Hindi, ‘dabba’ means a box (usually a cylindrical aluminium container), while ‘wala’ means someone in a trade involving the object mentioned in the preceding term, e.g., punkhawala with ‘pankha’ which means a fan and ‘wala’ mean the person who owns the pankha (The one with the fan).
1. Cally Jordan ‘The family
controlled company in Asia’ (Melbourne Law School: The University of Melbourne,
Legal Studies Research paper 334 P. 5).
2 . Ibid P. 4
3 . The author has downloaded this information from
the Internet.
4. Ibid
5. Vikas Sehgal, Ganesh
Panneer, and Ann Graham ‘A Family-owned Business Goes Global’ downloaded from
the Internet.
6. The author has downloaded this definition from
the Internet.
7. Sandy Huffaker/Corbis ‘In
Hard Times, Family Firms Do Better’ Newsweek P. 2. The author has downloaded
this article form the Internet. Consequently, the author did not have the
complete details about the date of publication of the article and the Volume
number of the Newsweek’s issue in which this article was published.
8. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report, 13 February 2006)
9. Paul A. Samuelson, Economics International, Student
Edition (Tenth Edition) P. 185.
12. Michael J. Conway, JD and
Stephen J. Baumgartner, MSc (Econ) ‘The Family-Owned Business’ (2007 Volume 10
Issue 2)P.1
13. D. Tripathi ‘Crisis in
family businesses’ (Chapter VIII from a forthcoming book) P. 1
14. Rahul Bajaj ‘on
Family-Owned Enterprises, the U.S. Auto Industry and Global Pollution’ (India
Knowledge@Wharton 16 November 2006) P. 1
15. S. Radhakrishnan ‘The
Bhagavadita’ (Bombay: Blackie & Son Publishers Pvt. Ltd. 1982) P. 383.
All data, analysis and arguments put forth in this article are in the context of listed companies alone for obvious reasons. Secondly, non-family company’s universe would include Government-owned companies which face certain challenges unique to them, but are not discussed in this article.
We now look deeply into the many pros and cons of family companies versus non-family companies normally tendered in any discussion on this subject. These can be grouped broadly under five categories and then objectively assessed. These five categories are as follows.
A. Family wealth versus Company wealth
By far the largest number of arguments against family companies is that they have poor standards of corporate governance. Many lay persons carry the impression that owner families tend to treat family wealth and company wealth as fungible. Memories are fresh of robber barons who in the past have expropriated a disproportionate wealth from public companies under their control.
Good governance is, without any doubt, a fundamental attribute of a ‘good company’. However, on the other hand, one cannot just assume that a non-family company would have passed the governance test automatically. The latter, if controlled by self-serving professionals, could be as bad. There is enough evidence to bear this fact.
Hence, at the end of the day, a robust regulatory environment and an active set of independent board members can alone ensure similar standards of governance in either class of companies.
B. Control versus Ownership
The second issue is that families exert control over their companies far in excess of their economic interests. Though it appears serious on the face of it, we think it is a non-issue for three reasons.
(i) At the end of the day, whether professionals or families, there has to be a single point of control over the affairs of the company. Without this, the company will not pull in one direction. As long as the governance issues are reasonably addressed, it does not matter the percentage holding of the controlling entity.
(ii) In India, in fact, there is a tendency of the family to keep its holding as high as possible. Data shows that during the last decade many of India’s top families have increased their stake in their leading companies. (ET dated 20th June, 2011).
(iii) And, finally, the market now has a takeover code that would dissuade families to mismanage their companies whilst having a small stake.
The above two categories cover most of the issues that are listed as negatives of family companies. These were, in fact, very significant negatives of such companies in the past. It is our case that in the current environment they are not necessarily applicable to only one class of companies. On the other hand, the next three categories of arguments definitely favour family companies.
C. Entrepreneurship versus Professionalism
Even the strongest critic of family companies cannot deny that (i) entrepreneurship is the sine quo non of a commercial venture, and (ii) this quality is to be generally found with families who risk their wealth. Yes, professionals are likely to be better qualified on the average (though lately the gap is narrowing) and bring more scientific rigour to the decision-making process. But they sometimes fall prey to what is crudely termed ‘paralysis from analysis’ syndrome.
Finally, key decisions, are driven by a combination of intuition and entrepreneurial dreams. Family companies will certainly score better on this front.
Another point that finds mention is that non-family companies have elaborate systems and processes unlike in family companies. Well this is not entirely true. Family companies also have systems but they are more informal and centred around the promoter. (This issue becomes serious when more members of newer generations come on board and each wants his/her own informal system.)
D. Long-term versus Short-term Families, especially in Asia, tend to create and build for their progeny. Therefore, they tend to take a very long-term view of all value-creating propositions. On the other hand, professionals do not have any incentive to look beyond their own tenure. In addition, it is felt that performance-based remuneration militates against taking a long-term view. Interestingly there are reports that the tenure of a professional CEO is becoming shorter and shorter. In short, the family companies are more likely to work towards long-term goals.
E. Personal reputation versus Company reputation
And, lastly, the family equates its own reputation with that of the companies it manages. Nonperformance of one impacts adversely the family’s ability to tap the capital markets for fresh funds. So much so, one very often comes across a family placing its private wealth and personal guarantee as collateral to help out a listed company during financial difficulties. It is very unlikely that a professional director would pledge his personal reputation, let alone his wealth, to bail out the company which he manages.
Based on the above discussions we now face a conundrum. Empirical studies indicate that family companies perform as well as non-family ones, if not better. The dissertation of the anatomy of both these classes of companies lead to a conclusion that family companies are more likely to create long-term value for all stakeholders. Yet, popular opinion is almost against the former as a preferred model for managing companies. What is the reason for the disconnect between facts and perception ?
The reasons lie partly in history and partly in definitions.
Historically, as stated earlier, because of a weak regulatory framework, there have been many instances of corporate misdeeds. But more important, different sectors/companies in an economy do become uncompetitive and slowly decay or disappear. This is economics at work. Sometimes changes in government policy, labour laws, etc. have adverse consequences. Unfortunately, failures arising out of such developments tended to be family companies as there were hardly any professionally managed Indian companies in the early days of Indian corporate history. Therefore, public memory tends to associate corporate failures with family managements.
A more rational reason may be found in the way people, subconsciously, define ‘family’ and ‘professional’. Let us take, as an example, a venture started by a bright IIT engineer with no history of business behind him. After nurturing the business successfully for, say, five years he floats the company through a listing. Even as a listed company, he will continue to hold a stake and will control the company for many more years. But, in popular perception, this company will be bracketed as a professional company and will command relatively higher valuation. On the other hand, the perception of a similar venture started by an old-economy family company would be quite different even if that venture were to employ equally bright IIT engineers as employees.
This leads us to believe that the markets are not averse to ‘family’ per se. What it is saying is that so long as the Board/Management team exhibits entrepreneurial energy, sound domain knowledge and unitary control, it is does not matter if the promoter/family runs it. In the second example we gave above, whilst the promoting family may still be good entrepreneurs, the board would typically have members of the extended family with little domain knowledge. Hence the poor treatment by the market.
To put it differently the markets are, perhaps, saying that they prefer a family company as long as the founding family member is still firmly in control. But with the passage of time the family members grow in number, control gets diffused and domain knowledge diluted. Therefore, as the company moves from generation to generation, the role of professionals in the decision-making process should increase exponentially for this company to enjoy higher valuation.
Long ago, a popular topic for school debates used to be: Which is more important — Art or Science. Whilst all argued their respective cases vociferously, the moderator always used to sum it up by saying that both are important for the well-being of the human race. In the similar vein, both family and non-family companies have important roles to play depending at what stage of the evolution the company is in.
The Ministry of Corporate Affairs has vide General Circular No 45/2011- dated 8th July 2011 issued the Name Availability Guidelines, and the applicants and the Registrar of Companies are advised to adhere to them while applying for or approving a name.
The appellant State Bank of India preferred application before the Debts Recovery Tribunal, Ahmedabad. Though a prayer was made to restrain the defendant borrowers from leaving India without prior permission of the DRT, originally no such order was passed.
The case was not decided for more than six years. After 6 years, the bank filed an interlocutory application for various interim reliefs including the direction to the Regional Passport Authorities to provide passport numbers and addresses of the defendant borrowers, for bringing them from the USA to India and for a direction to surrender the passports. Further prayer was made to direct the defendant Nos. 1, 2 and 3 not to leave India without prior permission of the DRT. The DRT, passed certain interim orders and also restrained defendant Nos. 1, 2 and 3 from leaving India without prior permission of the Tribunal. The borrowers preferred appeal to the Appellate Tribunal. The Appellate Tribunal in its order observed that the borrowers, had not approached the Tribunal for seeking permission to leave the country, and further observed that they could approach the DRT, justifying the travel abroad and seek permission accordingly. At this stage the borrowers filed a writ petition holding that — DRT had no power to control physical movements or to impound the passport. The bank filed appeal against this order.
The Court observed that Article 21 of the Constitution safeguards the right to go abroad against executive interference which is not supported by law; and law here means ‘enacted law’ or ‘State law’. Thus, no person can be deprived of his right to go abroad unless there is a law made by the state prescribing the procedure for so depriving him and the deprivation is effected strictly in accordance with such procedure.
Sub-sections (12), (13A), (17) and (18) of section 19 do not empower the Tribunal to issue any prohibitory order prohibiting the borrower from leaving the country without prior permission. Section 22 deals with the procedure and powers of the Tribunal and the Appellate Tribunal. It relates to summoning and enforcing the attendance, requiring the discovery and production of documents, receiving evidence on affidavits, issuing commissions for the examination of witnesses or documents, reviewing its decisions, dismissing an application for default or deciding it ex parte, setting aside any order of dismissal of any application for default or any order passed by it ex parte, or any other matter which may be prescribed, but no provision has been made therein or by a separate Notification issued by the Central Govt. empowering the Tribunal to deprive a person of his personal liberty to move abroad as guaranteed under Article 21 of the Constitution of India. In absence of any such ‘Enacted Law’ or ‘State Law’, it was held that the Tribunal had no jurisdiction to deprive the defendants, the respondents herein, of their right to go abroad.
For example, there is a term commonly used in securities laws — ‘person associated with securities markets’ — this term almost gives an omnibus power to cover any person directly or indirectly connected with securities markets. Investors, auditors and even independent directors have been held to be ‘persons associated with securities markets’ and thus action has been taken against them for alleged wrongs. It is important to highlight this since there are many persons such as insiders, acquirers which have been specifically defined in securities laws — who can be acted against only if it is first demonstrated that they do fall within the definition.
This impression is further supported by the areas in which SEBI can issue directions. These terms are also of wide import — for example:
Directions can be issued for purposes such as ‘in the interests of investors’ or ‘orderly development of securities markets’.
A clause in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 reads that “no person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner”.
‘Power to issue Directions’ — this term is capable of a fairly wide interpretation.
‘Power to punish’ may mean penalty, suspension or cancellation of registration, debarring a person from dealing in securities for a specified period.
Provision prohibiting indulging in ‘fraudulent or an unfair trade practice in securities’. There are numerous acts/omissions specifically listed which are deemed to be fraudulent or unfair trade practices. It is often found in actual cases that several of these provisions in the law are thrown at the alleged culprit and even the final order usually lists a long list of provisions that are said to have been violated by a single act/omission.
However, a well-settled principle of law is that the crime and punishment both have to be well defined and the person who is supposed to obey the law also has to be specified. This principle is obviously applicable even to securities laws and thus one occasionally sees decisions that strike down an order of SEBI on this ground. The recent decision of the Securities Appellate Tribunal (‘SAT’) in the case of G. M. Bosu & Co. Private Limited v. SEBI and others, (Appeal No. 183 of 2010, dated 15th February 2011) is worth reviewing in this context.
The facts of the case show a long series of steps a defrauded investor had to take to get back her money. Simplifying the facts a little, it appears that an investor was defrauded by a person who sold her shares in the open market by taking her signature on some forms. These signatures were taken on the pretext that they were required incidental to transfer of shares from her deceased husband’s name to her name. Such person, who was an ex-employee of a depository participant, then allegedly sold the shares in the market and thus defrauded the investor. On a police complaint being made, he confessed his guilt and agreed to compensate the investor. However, he died without compensating her. The investor then initiated a long legal battle in which the essential argument was that she should be compensated by the depository. The legal basis for this was a provision in Regulation 32 (though amended later on) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 which requires that the depository should ensure that payment has been received by the investor before the shares are transferred to a third party.
It is worth mentioning here that the investor had to petition multiple authorities multiple times including finally facing, albeit indirectly, the SAT. Suffice it is to state that SEBI investigated the matter and held the depository participant concerned (DP) (which was the appellant here) responsible for the lapse in non-complying with the said Regulation 32. It ordered the DP to credit the account of the investor with the 100 shares with all benefits accrued on the shares (incidentally, the 100 shares had become 1500 shares by then). This direction was issued by SEBI exercising powers under sections 11 and 11B of the SEBI Act.
The DP went in appeal to the SAT pointing out that SEBI did not have any powers to direct the DP to give such compensation to the investor u/s. 11B of the Act. It pointed out that Regulation 64 of the SEBI Depositories Regulations clearly stated that in case if a depository participant who “contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations . . . . shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008”. In other words, it was argued that action could only be taken under the said SEBI (Intermediaries) Regulations, 2008 and resorting to section 11B and requiring payment of compensation by way of credit of the shares to the account of the investor was not in accordance with the law.
The SAT noted:
Firstly, the obligation of complying with Regulation 64 was on the depository and not on the depository participant.
Secondly, even assuming that there was a violation by the DP, the provisions of Regulation 64 and thereby the provisions of the SEBI (Intermediaries) Regulations should have been followed in taking action against the DP. This is what the SAT observed:
“Assuming (though not holding) that there was such a violation, Regulation 64 of the regulations requires that the depository or a participant who contravenes any provision of the regulations “shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.” The word ‘manner’ means that the procedure laid down in Chapter V of the intermediaries regulations shall have to be followed. Regulations 24 to 30 in that chapter provide the detailed manner/procedure according to which the delinquents are to be dealt with. These provisions envisage a two-stage inquiry before taking any action against the delinquent. A designated authority is required to be appointed which shall issue a show-cause notice to the delinquent and after holding an inquiry, a report shall be submitted. The report will then be considered by the designated member after issuing a notice to the delinquent who will also be furnished with a copy of the report. It is only then that the designated member can take any one or more of the actions referred to in Regulation 27 of the intermediaries regulations keeping in view the facts and circumstances of the case. Admittedly, this procedure has not been followed and neither the appellant nor the depository were dealt with in the manner prescribed in Chapter V of the intermediaries regulations. Instead, directions have been issued u/s. 11B of the Act to compensate respondent 3.”
Finally, the question was whether the powers u/s. 11B were wide enough to order such a compensation being made by the DP. The SAT observed as follows:
“It is true that the powers of the Board u/s. 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to pun
http://www.mca.gov.in/Ministry/notification/pdf/ Revised_Report_Rules_03jun11.pdf
‘Gathering information about the Pawars was a difficult task. However, we used the RTI Act to search the data of air-travel of Mr. Pawar and his family members on Balwa’s air craft’ from the Pune air traffic control. Through RTI application it was gathered that Balwa’s plane was used by Pawar on several occasions and on one trip, besides BCC president Shashank Manohar and his wife, the Balwas accompanied Pawar and his family to Dubai. Khadse has also reportedly dug up facts to prove that Supriya, along with her husband Sadanand and DB Realty, was the promoter of a technology park near Pune set up on an illegally procured land.
Disclosure of personal properties by CIC:
In a major step to introduce greater transparency and accountability, the six Central Information Commissioners now have declared details of their properties on the Commission’s Website.
The Commissioners draw a salary of Rs. 90,000 p.m. Following are the brief summary of declarations made:
S. Mishra : Land, property worth Rs. 1.5cr.
D. Sandhu : Agriculture land worth Rs. 81,000,
2 houses worth Rs. 5.5cr.
S. Singh : house, flat worth Rs. 66.5 lakh.
S. Gandhi : Flat worth Rs. 80,000 (cost at
time of purchase), plus shares,
mutual funds and bank deposits.
A. Dixit : Flat, cottage worth Rs. 51 lakh.
M. L. Sharma : Property worth Rs. 4.50 lakh.
Selection procedure of for appointment of Chief of Trai:.
The selection procedure of the chairman of telecom regulator Trai, including all the details of the selection committee meeting, should be made public, the Central Information Commission (CIC) has held. The panel rejected the plea of the cabinet secretariat that the information was personal in nature and cannot be given u/s. 8(1)(j) of the Right to Information Act, which prohibits disclosure of such details.
“We fail to understand how the desired information could be classified as personal information at all … The information sought in these cases is far from personal. Selection and appointment to certain posts in the government are part of the administrative decision-making process and must be placed in the public domain as soon as possible in order to ensure transparency,” Chief Information Commissioner Satyananda Mishra said. He directed the secretariat to allow the RTI applicant the inspection of the entire file related to the selection of the Trai chairman.
BMC’s functioning :
We all know that it takes months, sometimes years to get projects and files cleared from Brihanmumbai Municipal Corporation (BMC) babus. However, if you have the right connections, then your work could be done in a single day. In 2008 the BMC displayed exemplary promptness and granted permissions in a single day for construction of 13 additional floors on a building in Dadar. Interestingly, all clearances were granted to the builder and the area of a reserved public playground was reduced to make way for the building.
The issue came to light when residents procured documents under the Right to Information (RTI) Act. They learnt how BMC’s Building Proposal Department allowed developers, Finetone Realtors Pvt. Ltd. to construct 13 additional floors on the plush 20-storey Garden Court building in Dadar. Arun Sapkal, a Dadar resident and RTI activist said, “It’s shocking how the BMC first granted permission and later issued stop notice to the builder after the construction was over?” However, developers Ramakant Jadhav of Finetone Realtors Pvt. Ltd. said, “ we have all the necessary permissions in place as per the DCR rules for construction of the building and the playground. We have kept the reservations as allowed by the BMC.”
Information on ITR thru RTI:
Manoj Kumar Saini made an RTI application to get information on income tax-return (ITR) of his father-in-law Mr Munna Lal Saini, CIC Deepak Sandhu ruled:
The I-T returns of individuals do not enjoy ‘absolute ban’ from disclosure CIC has held, while directing the I-T department to provide details of the total income of a person to his son-in-law who is facing a dowry case. We direct the CPIO to provide information pertaining to the taxable income of Munna Lal Saini, father-in-law of the appellant,” Information Commissioner Deepak Sandhu said. The case relates to RTI application filed by Manoj Kumar Saini, who sought to know income of his father-in-law Munna Lal Saini from the I-T as he needed it to buttress his arguments in a dowry case filed against him.
Maharashtra State Information Commission’s Annual Report for the year 2010 is out, just now only in Marathi. Some brief statistics:
RTI applications filed : 5.49 lakh
Appeals received : 19,483
Appeals disposed : 17,266
Complaint received : 4,592
Complaint disposed : 3,911
Public Information Officers penalised : 523
Total penalties : Rs 34.38 lakh
Department action against PIOs : 602
PENDENCY
Taking note of the increasing pendency of appeals/ complaints in the Commission over the last few years and realising the need for their expeditious disposal, the Commission hereby resolves that each single bench of the Commission shall take urgent steps to maximise its disposal without comprising the quality thereof, as a general rule, each single bench will endeavour to finally decide about 3200 appeals/complaints per year.
Application of the provisions of the RTI-Act to the entities under the Public Private Partnership (PPP Arrangement)
Chief CIC has exchanged letters with the Deputy Chairman, Planning Commission, India on the subject of PPP Arrangement. Extracts from the same:
Satyananda Mishra, CIC on 04.01.2011 writes:
A PPP entity should be deemed to be a public authority u/s. 2(h) for the purpose of the RTI Act.
All Projects which are handed over to a PPP entity for building, operating or maintaining the land, even if not any other resources, given by the Government, forms a vital component of the project and, to that extent, can be deemed to substantial financing.
However, due to a lack of clarity on this at various levels and, especially since the RTI Act does not expressly refer to such bodies while defining the public authorities, a lot of confusion persists and such entities have, by and large, remained outside the purview of the RTI Act.
This Commission is of the view that time has come to clarify the role and responsibility of the PPP entity for implementing the RTI Act in order to bring in greater transparency in implementation of such projects.
Letter then suggest how the coverage is to be implemented and once carried out, a lot of confusion in this regard will go and the citizens will have access to vital information regarding the projects which affect their lives. Needless to say, this will also greatly improve the accountability of such entities to both the Government and the public at large.
In reply, Montek Singh Ahluwalia vide letter dated 14.03.2011 states:
In the Press Note issued, we recognise that the powers of the Information Commission are laid down in the RTI Act. It is for the Commission to exercise these powers in their best judgment. It may not be appropriate to expand or reduce the jurisdiction of the Information Commissions through a contractual arrangement in the concession agreements. However, we have referred the matter to the Department of Legal Affairs for advice and I will revert to you on receiving their advice.
The Commission discussed above referred letter at its meeting of 22-03-2011 and recorded as under:
The Commission discussed the letter of the Deputy Chairman, Planning Commission on application of RTI Act to the entities under the PPP. The CIC decided to wait for two months for the Planning Commission to send a copy of response of Department of Legal Affairs on this issue as referred to in the letter of the Deputy Chairman dated 14-03-2011.
It is now reported in ET of 26 April that MoF objects to plan Panel’s role in social PPPs and says that they fall in its domain. Matter has been referred to the cabinet secretariat seeking its intervention on the matter.
I hope that PPP arrangements come in the domain of RTI whoever may be in charge of the same at Government level.
The Charity Commissioner has powers of supervision,
regulation and control of public trusts. All public trusts must register
under the Act with the Charity Commissioner. It should be remembered
that all public trusts are trusts, but all trusts need not be public
trusts. The Act does not apply to section 25 companies which are created
under the Companies Act, 1956. The Bombay Chartered Accountants’
Society is an instance of a public trust registered under this Act.
Definitions:
A
public trust is defined to mean an express or constructive trust for
either public or charitable purpose or both and includes a temple, a
math, a wakf, church, synagogue, agiary or any other religious or
charitable endowment and a society formed either for religious or
charitable purposes or both and registered under the Societies
Registration Act, 1860.
The word ‘trust’ is not defined under
the Act and hence, one needs to refer to the definition under the Indian
Trusts Act, 1882. Section 3 of the said Act defines a ‘trust’ as an
obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner or declared and accepted
by him for the benefit of another or of another and the owner. A public
trust must be for the public at large or some significant portion of
the public. However, the number of beneficiaries must be a fluctuating
body. It is the extensiveness of object which affords some indication of
the public nature of the trust — Prakash Chandra v. Subodh Chandra, AIR
1937 Cal. 67. A trust cannot be held to be for charitable purpose if it
is not for public benefit. Thus, private charitable trusts are not
governed by this Act. The term public purpose is not capable of any
strict definition and depends upon the facts and circumstances of each
case. No rigid rules can be applied to define the same — State of Bombay
v. S. R. Nanji, AIR 1956 SC 294.
The Supreme Court in
Radhakanta Deb v. Commissioner of Hindu Religious Endowments, Orissa,
AIR 1981 SC 798, the Court held that “the cardinal point to be decided
is whether it was the intention of the founder that specified
individuals are to have the right of worship at the shrine, or the
general public or any specified portion thereof.” Thereafter, the Court
observed that the mere fact that members of the public are allowed to
worship by itself would not make an endowment a public, unless it is
proved that the members of the public had a right to worship in the
temple.
The Supreme Court formulated four tests as providing
sufficient guidelines to determine on the facts of each case whether an
endowment is of a private or of a public nature. The four tests are as
follows:
(a) Whether the use of the temple by members of the public is of right;
(b)
Whether the control and management vests either in a large body of
persons or within the members of the public and the founder does not
retain any control over the management;
(c) Whether the dedication
of the properties is made by the founder who retain the control and
management and whether control and management of the temple is also
retained by him; and
(d) Where the evidence shows that the founder
of the endowment did not make any stipulation for offerings or
contributions to be made by the members of the public to the temple,
this would be an important intrinsic circumstance to indicate the
private nature of the endowment.
Charitable purpose is defined u/s. 9 of the Act to include:
(a) relief of poverty or distress
(b) education
(c) medical relief
(d)
provision for facilities for recreation or other leisure-time
occupation (including assistance for such provision), if the facilities
are provided in the interest of social welfare and public benefit, and
(e)
the advancement of any other object of general public utility, but does
not include a purpose which relates exclusively to religious teaching
or worship.
Hence, a trust for both religious and charitable
purposes is feasible under the Bombay Public Trust Act, although the
same is not recognised u/s. 11 of the Income-tax Act (if created after
1-4-1961).
The term ‘public’ does not mean the humanity as a
whole, but some indefinite class of persons, a crosssection of the
community — CIT v. Radhaswami Satsang Sabha, 25 ITR 472 (All). Charity
need not benefit the entire mankind but should at least benefit an
ascertainable section of the community — Hazarat Pirmahomed Sahah Sahib
Roza Committee, 63 ITR 490 (SC). The trustees can decide on such
charitable purpose as they deem fit — Smith v. Massey, (1960) ILR 30
Bom. 500. A trust does not become invalid if the discretion of selecting
the charitable purpose is left to the trustees and they are free to
apply the fund in such manner and at such time and to such charities as
they deem fit — Sardar Bahadur Indra Singh Trust, AIR 1956 Cal. 164.
Registration:
Section 18 of the Act and the Bombay Public Trust Rules lay down the procedure for registration of a trust as follows:
(a) Apply to the Deputy Charity Commissioner of the region in Schedule II within three months of creation of the trust.
(b)
The application must contain the names and details of the trustees, the
trust, list of movable and immovable properties along with their
approximate market values, etc. A copy of the trust deed should also be
annexed. A memorandum must also be sent, which must contain the
prescribed particulars relating to the immovable property of the trust.
Schedule IIA to the Rules contains the format for the same. Section 22C
of the Act also provides for particulars of the memorandum.
On
receipt of the application, the Deputy Commissioner would make an
inquiry u/s.19 for ascertaining whether there exists a public trust and
whether the trust falls within its jurisdiction. The principles of
natural justice must be followed in this inquiry process. On completion
of the inquiry, the Deputy Commissioner shall record his findings with
reasons as to the matters inquired by him and may make an order for the
payment of the registration fee. The Charity Commissioner shall maintain
a Register containing all details of the trust.
Investment of trust money:
The
funds of the trust which cannot be deployed for the purposes of the
trust shall be deposited either with a bank or invested in designated
public securities. Public securities means those issued by the
Central/State Government/Railways/Local Authorities, etc.
The
money may also be invested in the first mortgage of immovable property
if the property is not leasehold for a term of years, i.e., the lease
must be indefinite, and secondly, the value of the property must exceed
the mortgage money by one-half times. Thus, if the value of the property
is Rs.1.50 crores, the investment permissible in the first mortgage is
Rs.1 crore.
Purchase of an immovable property as an investment
of trust funds would also require the permission of the Charity
Commissioner. If the property is purchased without its permission, then
the trustees would become liable for penalty for contravention of the
Act. However, the transaction is not void ab initio. This is contrary to
the provisions for sale of an immovable property. Any sale transaction
without the Commissioner’s permission is void ab initio.
Trustees
cannot borrow money for the purpose of or on behalf of
Though contractual work under work order has been carried out in territorial jurisdiction of India the parties had agreed to refer their dispute to arbitration in Singapore in accordance with Singapore International Arbitration Center (SAIC) Rules. According to the said Rule during subsisting of arbitration proceedings under such rules, law of arbitration shall be governed by the International Arbitration Act. Any of party aggrieved by any interim ruling or order of arbitrator, may resort remedy for under Rule 32 of SIAC Rules of the International Arbitration Act. International Arbitration Act (2002 Ed. Statutes of the Republic of Singapore), Chap. 143A, Rule 32 deals with Jurisdiction of the Court. Where parties agreed to refer dispute to arbitration in Singapore in accordance with SIAC rules, whereby during subsisting arbitration proceedings, jurisdiction of the Indian Court was expressly or impliedly ousted. Arbitration being carried out by arbitrator according with SIAC rules. Indian courts has no jurisdiction to entertain any appeal against award of arbitrator. After referring dispute to the arbitrator, parties could not be permitted to approach Court in India, specially when the parties are bound by SIAC Rules. The same cannot be challenged under the Arbitration and Conciliation Act 1996 or any other enactment except the International Arbitration Act. No appeal would lie u/s.37(2)(b) of the Act of 1996.
The properties in question were the ancestral properties of one the late Manmohan Swain. One Smt. Sanjukata Swain purchased a TATA truck by availing a loan from Orissa State Financial Corporation (‘OSFC’). Accordingly, an agreement was entered into between the parties. In the said loan, the late Manmohan Swain, and other two persons, namely, Ganeswar Swain and Ghanashyam Swain stood as guarantors and created equitable mortgage in respect of the properties in question in favour of OSFC. Since the loan amount was not paid, the OSFC published a notice for sale of the mortgaged properties in the newspaper. The said properties were put to auction and the sale was finalised in favour of Shri Subhransu Sekhar Padhi for a total consideration of Rs.10,09,000. Pursuant to such sale, sale deed was executed between OSFC and Shri Subhansu. Thereafter, OSFC sent a notice by Registered Post to the petitioner Prafulla Chandra Swain, the son of the late Manmohan Swain to take refund of Rs.2,85,486. Being dissatisfied with such action of OSFC, the petitioners filed the writ petition.
The High Court observed that section 29 speaks about the right of financial corporation in case of default in repayment of loan. The default contemplated thereby is of the industrial concern. When an industrial concern makes any default in repayment of any loan or advance or any instalment thereof under the agreement or in meeting its obligation in relation to any guarantee given by the corporation, the financial corporation has the right to take over the management or possession or both of the industrial concern. It further gives right to the corporation to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated as assigned to the financial corporation by the industrial concern. The right of financial corporation in terms of section 29 must be exercised only on a defaulting party. Section 29 does not empower the corporation to proceed against the surety even if some properties are mortgaged or hypothecated to it. The said view is further strengthened by the provisions of sub-section (4) of section 29 which lays down appropriation of sale proceeds with reference to only industrial concern and not surety or guarantor. In view of the above, the Court held that the OSFC in exercise of power vested u/s. 29 of the SFC Act cannot sell out the properties mortgaged to it by the guarantors. The Court further observed that section 31 of the SFC Act provides for a special provision for enforcement of claims by the financial corporation against a surety or guarantor. The financial corporation can proceed against a surety or mortgagor invoking the provision u/s. 31 for the default committed by the industrial concern, and also where the financial corporation requires the industrial concern to make immediate repayment of loan or advance in terms of section 30 and the industrial concern fails to make such repayment. To exercise power u/s. 31, the OSFC is required to apply to the District Judge having appropriate jurisdiction. Thus, section 29 is concerned with the property of industrial concern, while section 31 takes within its sweep both the property of industrial concern and that of the surety. The statute provides an additional remedy for recovery of the amount in favour of the OSFC by proceeding against the surety in terms of section 31 of the OSFC Act. Such a power is not vested with the corporation u/s. 29.
Needless to say that public money has to be recovered from the defaulters, who do not repay the loan amount to the financial institutions. This does not mean that financial institutions are at liberty to dispose of the secured asset of the defaulters in unreasonable or arbitrary manner in flagrant violation of the statutory provisions and principles of natural justice.
In a suit when the counter-claim was pending for cross-examination of the witnesses of the opposite party, Shri P. Deshmukhya, counsel for the plaintiff-petitioners, filed an application, stating to the effect, inter alia, that the plaintiff-petitioners had taken away all their papers, documents/files from him as they had decided to engage another lawyer and that he (P. Deshmukhya) and Shri B. K. Acharyya, another counsel, had accordingly withdrawn from the suit. On considering the application, so filed, the learned Munsiff passed an order dispensing with the cross-examination of the defendant, namely, Swapon Saha, (i.e., opposite party No. 1) and fixed the counter-claim, on next date, for cross-examination of further witness of the counter-claimant.
On the date so fixed, while the defendant’s counsel was present, none appeared on behalf of the plaintiffs. The learned Trial Court, then, passed an order dispensing with the cross-examination of the defendant’s witness, closed the evidence of the defendant’s side and fixed the counter-claim, for argument. Before the date, so fixed, the plaintiffpetitioner, namely, Anamika Gupta filed a petition, with the prayer to adjourn the argument and give another opportunity to the plaintiff-petitioners to cross-examine the defendant and his witness. The plaintiff-petitioners stated that Shri Acharyya, advocate, had expressed his inability to conduct the suit and advised the plaintiff-petitioners to engage another lawyer; the plaintiff-petitioners came to know that their engaged counsel had already withdrawn from their case, but the relevant papers/files remained with the said counsel and all the efforts made by the plaintiff-petitioners to obtain the papers/files from the said counsel did not yield any result; thereafter, the plaintiffpetitioner No. 1 applied for certified copies of the plaint, written statement, counter-claim, evidence, orders, etc., which were received in May 2010, and it was after receipt of the said certified copies that they were able to engage, in June 2010, Shri P. Deb, advocate, as their counsel. The Trial Court rejected the application.
Aggrieved by order rejecting the application, the same was challenged before the High Court. The Court observed that while considering the provisions, embodied in Rules 1, 2 and 4 of Order III of CPC, it may be noted that in a civil suit, it is not necessary for a party to remain present, in person, on every date of hearing unless there is a specific order passed, in this regard, by the Court. It is for this reason, therefore, that order III Rule 1 provides that appearance, on behalf of the parties, may be made by recognised agents. A party or his recognised agent may also appoint a pleader and every such appointment shall be filed in the Court. Once duly appointed, the engagement of the pleader subsists until engagement is determined with the leave of the Court. It logically follows that withdrawal of engagement cannot be an arbitrary act and the permission of the Court is necessary to terminate engagement of a counsel.
It is also worth noticing that the appointment of a pleader, filed in the Court, shall be deemed to have remained in force until determined ‘with the leave of the Court’ by (i) a writing, signed by the client or the pleader, as the case may be, and filed in the Court, or (ii) until the client or the pleader dies, or (iii) until all proceedings, in the suit, have ended so far as regards the client. This clearly shows that until the client or the pleader dies or until all proceedings, in the suit, end as far as the client is concerned or until the leave of the Court is obtained determining the relationship of pleader and client, the appointment, once made and filed in a suit, shall continue to remain in force.
In the present case too, when no leave had been granted by the learned Trial Court, mere filing of the petition by the plaintiffs’ pleader intimating the Court that the plaintiffs had taken away all the papers or documents from their counsel had not determined the relationship of client and pleader, which had existed between the plaintiffs’ pleader and the plaintiffs. In such circumstances, the order, dispensing with the cross-examination of the defendant, could not have been made.
http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf
http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf
For further information:
http://www.mca.gov.in/Ministry/notification/pdf/ DIN_GSR_02jun2011.pdf
Annexed to this Circular is a new applicationcum- declaration form for purchase of foreign exchange under the Liberalised Remittance Scheme (popularly known as the INR12,360,898 Scheme). This new form has become necessitated due to certain additional items being covered under the said Scheme.
We saw in the immediately preceding
article in this column some highlights of the recently introduced SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(‘Regulations’) which replaced the preceding Regulations of 1997. In
this second and concluding article, let us examine the newly notified
Regulations from a perspective of day-to-day applicability of the
Regulations. The first impression of the Regulations is that they apply
to takeovers including substantial acquisition of shares and control.
These are fairly rare or at least quite infrequent events. Also, the
procedure for open offers in such takeovers, etc. is quite elaborate and
hence their detailed study and analysis may not be worthwhile for most
Chartered Accountants including even those who are concerned with
compliance matters.
However, the reality is that the Regulations
apply to a far wider range of events and there are also certain
periodic compliances. These are required to be complied with even when
there is no substantial acquisition of shares or takeovers. In fact,
even if the shareholding is unchanged, there are some reporting
requirements. Acquisition of a relatively small quantity of shares can
also result in compliances and even an open offer. The problem also is
that innocuous transactions may also inadvertently lead to an open
offer. If one even casually reviews the SEBI orders where penalty or
other adverse action has been taken, a very significant number of orders
relate to non-compliance of the Regulations in situations where there
was no takeover or even substantial acquisition of shares.
The
other aspect is that even while carrying out other type of corporate
restructuring transactions, the Takeover Regulations have to be kept in
mind because they can affect the structure being worked out. A buyback
of shares, a merger of even group companies, significant borrowings and
even an innocuous rights issue could require compliance of the
Regulations.
Hence, some such situations and some regular compliances are explored in this article.
The
most common case of significant noncompliance of the earlier
Regulations of 1997 was that promoters and substantial holders of shares
did not report their holdings of shares in the manner required. A
person is required to report his acquisitions on acquiring a certain
number of shares and also, if he holds certain number of shares, then he
is required to regularly report the holding even if there is no change
in holding.
Acquisition of non-substantial quantity of shares
An
acquirer is required to report acquisition of shares when he crosses
certain specified limits. In fact, as we will see, under certain
circumstances, even the sales are to be reported. When an acquirer
[along with persons acting in concert (‘PAC’)] acquires more than 5% of
shares in a listed company, he is required to report such acquisition
within the specified time to the Company and the stock exchanges where
the shares of the Company are listed. The Company thereafter is required
to also report such acquisition to the stock exchanges. This is
obviously an early warning to shareholders of the Company (indeed even
the Promoters) that an acquirer is acquiring shares and could result in a
takeover. Arguably, this 5% limit can be viewed to be a little low to
serve as an early warning of an impending takeover. It made sense under
the 1997 Regulations when the trigger for open offer was 15%. Now the
trigger is 25%, but this trigger for disclosure of 5% remains unchanged.
Once the 5% limit is crossed, thereafter, every purchase and
sale of 2% is required to be reported. Thus, at any point of time, the
public knows what types of significant transactions are carried out by
persons holding significant quantity of shares.
Regular reporting of holdings
Even
where there is no acquisition of shares beyond the specified limit, a
person holding more than specified percentage of shares and certain
other persons are required to report their holdings periodically.
An
annual disclosure of holdings as of 31st March is required by persons
holding 25% or more shares. Similar disclosure is required by the
Promoters of the Company. This reporting is in addition to the reporting
required under other laws such as the listing agreement. Thus, the
shareholders and general public can keep track of the holdings of the
shares of such significant shareholders and stakeholders.
Encumbrances/pledges/liens
It
may sound curious why encumbrances are required to be disclosed and
that too under Regulations relating to takeovers and substantial
acquisition of shares. After all, there is no takeover or even
acquisition of shares. The issues sought to be addressed are dual.
Firstly, it is human ingenuity to find a way to avoid the law. Thus,
often, acquisitions/sales were sought to be disguised as encumbrances
and then ‘invoked’ only a little later and thus the spirit of the
Regulations of advance warning may be lost. Also, at times, certain
lenders have argued that pledges/ encumbrances in their favour, even
when they are invoked and underlying shares acquired, should not be
treated as acquisition of shares. SEBI had adopted an ad hoc approach in
this regard. Some types of encumbrances were treated not to be
acquisitions. Reporting of encumbrances were, till recently, not
required at all. Also, some part of the law was laid down by the
Securities Appellate Tribunal in appeal. Expectedly, there was still
some confusion in some areas and the recodification of the law was a
good time to make comprehensive provisions in this regard. The present
law now provides, to simplify a little, as follows.
Firstly,
encumbrances are treated similar with acquisitions in the sense of
making disclosures. Similarly, releases of encumbrances are also
required to be disclosed. However, unlike acquisitions/sales,
disclosures of encumbrances and their release is required to be made
without regard to the quantity of shares involved. However, of course,
encumbrances are not treated as acquisitions for the purposes of
triggering the open offer requirements unless the encumbrances result in
transfer of shares. What is encumbrance and what types of such
encumbrances are covered under the Regulations is a separate and
detailed subject, but suffice is here to state that the revised
definition is fairly wide.
Creeping acquisition of shares
In
the normal course, Regulations on takeovers should be attracted once
and only once — and that is in case of a takeover where the control of a
company changes from one group to another. Thus, acquisitions up to 25%
should not concern the Regulations and acquisitions beyond 25% shares
(or of control), after an open offer is made, should not concern the
Regulators. However, for several reasons, not necessarily wholly valid,
restrictions are specified even otherwise. It was argued in the early
stages of the introduction of the Takeover Regulations that Indian
Promoters did not have significant holding of shares and thus they
should be allowed to acquire further shares from time to time to
increase their holdings without requiring an open offer to be made.
Grudgingly, a certain percentage of shares (which kept changing by
amendments) was allowed to be acquired every financial year to allow
their holdings to increase slowly (and hence the term ‘creeping
acquisition’ of shares). If shares were acquired in a financial year
more than such permitted percentage, then the open offer requirements
got triggered.
Over a period of time, these requirements got fairly complicated since for every crisis in the markets or economy or for other reasons, amendments were made in the law. Thus, there were twists and turns and back-turns on the road from 15 to 75% holding (and even beyond).
The new law is now fairly simple at least in its basic structure. A person holding 25% or more shares in a company can increase his shareholding by 5% every financial year without the open offer requirements getting triggered. This he can continue doing till his holding reaches the maximum permitted to allow the minimum prescribed public holding to be maintained. Thus, for a company in which a minimum 25% holding is prescribed to be held by the public, acquisition of up to 5% per annum can be made till the maximum limit of 75% is reached.
Inter se transfer of shares
It is quite common for the promoters of a company to hold shares through various entities. The issue is: whether transfer between these entities and persons acting in concert would trigger public offer. In the normal course, since there is no increase in the total holding of an acquirer and persons acting in concert with him the open offer (or other) requirements are not attracted. However, by a slight reverse and even weird logic, since it is provided that inter se transfers are exempted subject to certain conditions, it is an accepted interpretation that inter se transfer is not exempt. Thus, if there is an acquisition even by way of inter se transfer of, say, more than 5% in a financial year, then the open offer requirements would be attracted unless certain conditions are met.
The Regulations thus provide that inter se transfer is exempted from the requirements of open offer if certain conditions are met. However, it is important to note that such acquisitions are altogether not counted as acquisitions even as ‘creeping acquisitions’. Thus, an acquirer is free to acquire further shares as ‘creeping acquisitions’ even if he has acquired shares as inter se transfer that are exempt under the Regulations.
The 1997 regulations provided for several types of inter se transfer and exempted such transfers under different conditions. In practice, some misuse of such inter se transfers was observed. The newly codified Regulations made significant modifications and while removing certain provisions that were misused, made detailed complex provisions. One common condition, for exempting inter se transfer amongst immediate relatives, is that the transferor and transferee should be disclosed as promoters/persons acting in concert, etc. for at least 3 years prior to such transfers. Further, the acquisition price for such inter se transfer should not be more than 25% of the price calculated as per prescribed formula. The intention seems to be that the acquirer should not pay more than 25% of the value of the shares that is calculated with reference to ruling market prices in the recent past or, if the shares are not frequently traded, then as per valuation of the shares in the manner prescribed.
Further, certain types of inter se transfers also need to be specially reported in the prescribed manner along with payment of prescribed fees.
Conclusion
It is seen that there are numerous requirements that would go without being complied with if one considers the Takeover Regulations to apply only to significant acquisition of shares/takeovers. Non-compliance of these requirements can result in significant adverse consequences in terms of theoretically huge penalties and open offer, apart from the taint of having violated the Regulations. A careful review of the Regulations is a must for all persons concerned with compliance of securities laws by listed companies, by their promoters and generally by large investors. Even persons concerned with restructuring of companies need to consider these requirements.
Section 314 of the Companies Act, 1956 (‘the Act’) deals with situations where either the director or any of his relative or any person mentioned in section 314 holds ‘office or place of profit’.
Meaning
As per s.s (3) of section 314, any office or place shall be deemed to be an ‘office or place of profit’:
In case of director
If the director obtains from the company anything by way of remuneration over and above remuneration to which he is entitled as such director, whether as salary, fees, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
In case of any other individual or body corporate
If the individual or that body corporate obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite, the right to occupy free of rent any premises as a place of residence, or otherwise.
Conditions
As per s.s (1) of section 314, except with the consent of the company accorded by a special resolution:
(a) No director of a company shall hold office or place of profit, and
(b) (i) No partner or relative of such direc tor,
(ii) no firm in which such director, or a relative of such director is a partner
(iii) no private company of which such director is a director or member, and
(iv) no director or manager of such a private company shall hold office or place of profit carrying a total monthly remuneration as prescribed (Rs. 250,000 per month).
One may interpret that because of the word ‘such’ used above, the relative or partner or firm or private company as mentioned above would attract the provisions of section 314(1) only when the concerned director is already holding office or place of profit. Where the director himself does not fall within the ambit of section 314, the relative/firm/private company as mentioned above need not satisfy the condition of special resolution even though he/it may be holding office or place of profit.
However, s.s 314(1B) starts with a non-obstante clause which states that notwithstanding anything contained in s.s (1), where the relative/partner/firm/ private company holds any office or place of profit carrying monthly remuneration more than the sum prescribed (Rs.250,000 p.m. from April 2011), then the company shall be required to obtain prior approval of the Central Government and pass a special resolution for such an appointment.
Hence, it deduces that where the remuneration exceeds the prescribed limit i.e., Rs.250,000 per month, the approval of the Central Government and special resolution will be required even when the concerned director does not hold place of profit.
The above requirement applies to private limited companies also. This implies that even small private limited companies which are nothing but family-managed businesses would be required to comply with this section. This article attempts to bring out the unfairness in applying section 314 particularly the condition of obtaining the Central Government approval in case of private limited companies.
The underlying object of this section is to prohibit a director from misusing its influential position in the company. Hence, section 314 puts certain checks like special resolution by the company and approval of the Central Government. Naturally, it follows that such checks particularly, getting approval of the Central Government would be more apt when interest of public at large is involved.
However, there are many small private limited companies with family members as shareholders and occupying important positions. Normally, these companies do not have outside persons as shareholders. Hence, their internal affairs would not affect the interest of general public. In such scenario, applying to the Central Government does not make much of sense. Again, getting the Central Government approval would prove to be a task in itself in terms of time and efforts involved.
Moreover, many of these small private limited companies are not liable to furnish Compliance Certificate to the Registrar of Companies. They do not have a dedicated company secretary to point out company law compliances. There is every possibility that requirements of section 314 may go unnoticed. Again the threshold limit of Rs.250,000 has been raised in April 2011 only. Previously, the limit was only Rs.50,000. This steep rise in the limit itself implies how irrational the earlier limit was.
Further, it is pertinent to note that section 40A(2) of the Income-tax Act, 1961 already seeks to provide some control over excessive or unreasonable remuneration. However, in case of this provision also, there is an element of unfairness in its implementation. Interestingly, there are decisions to say that where the payment is actually made and where the payee has incorporated such payment in its/ his income and paid taxes thereon, disallowance u/s.40A(2) cannot be made [see CIT v. Udaipur Distillery Company Ltd., (Raj.) (316 ITR 426) and Modi Revlon (P) Ltd. v. ACIT, (Del.) {2 ITR (Trib.) 632}].
Suggestions
In all fairness, it would be in interest of all the parties involved to exempt private limited companies from rigours of section 314. Seeking of prior Central Government approval may be made mandatory only for public companies and private companies which are subsidiaries of public companies.
An RTI activist, known for his opposition to various illegal activities in Juhapura area of Ahmadabad was hacked to death. Nadeem Saiyed, 38, who was also an eyewitness in the Naroda Patia riots case, was stabbed 25 times with a butcher’s knife and axes.
A decade ago, there were no problems but now, one moves with caution. “There is cautiousness in the administration. Nobody is willing to take a decision,” he added.
After collecting various documents from Dr. Rathod’s hospital, Patel filed an RTI query, enquiring about Rathod’s presence in the hospital on April 27. Patel was in for a rude shock as the hospital authorities in their reply stated that Dr. Rathod was present at the hospital on April 27, and was even paid Rs. 7,368 as NPA.
Mr. Dhiraj Rambhai’s success story
WHAT A SURPRISE! THINGS WHICH WERE NOT DONE IN 90 DAYS GOT DONE IN 9 MINUTES
Government departments which were working at lesiure at tortoise speed have started working at hare speed due to RTI ACT, 2005. Here is one more example.
Kanti Gada & Priti Gada stay at Mulund Vinanagar having business of plastic drum manufacturing.
They own a farm house in the outskirts of Mumbai at Asangaon district, Thane. On 5th June 2011 due to heavy rains the wires supplying electricity to their farm house got short circuited and the power supply to their farm house was cut as safety mea-sures. After 2-3 days when the weather was normal Preeti Gada requested local MSEDCL office to re-store the supply but no action was taken on their repeated complaints. They lodged the complaint in writing 5-6 times but it went to files only and their farm house remained in dark for almost three months. One fine day they read one of the success story of the RTI in Dhiraj Rambhia column ‘JAN JAGE TO SAVAR’ on the RTI in Gujarati news paper MUMBAI SAMACHAR. Inspired by the column they approached TARUN MITRA MANDAL, Thane RTI guidance centre on 27th August. After listening to Preeti Gada’s problem, Thane centre volunteers prepared the RTI application asking for the information on (1) steps taken on Preetiben’s earlier complaints (2) the reasons recorded regarding delay in action on complaints (3) the name and designation of the officer responsible for the delay in action. On 28th August, Priti Gada went to local MSEDL office to submit the application, When the officer in the office read the application his fuse got blown. He immediately pleaded to Priti Gada not to make the application and immediately phoned the concerened line men to connect the electric supply Thus, action which was not taken for 90 days was done in 9 minutes.
The plaintiff No. 1 is the husband of the original plaintiff No. 2 who suffered from cancer and was consequently admitted to the hospital of defendants being the Trustees of Bombay Hospital Trust. The defendant No. 1 was an Honorary Surgeon attached to Bombay Hospital (BH). The plaintiffs’ case is that the original plaintiff No. 2 suffered from cancer since July 1977. She was admitted to BH. The husband i.e., plaintiff No. 1 desired the services of the defendant No. 1. He was informed that the defendant No. 1 would separately charge his fees. The plaintiffs accepted and agreed to those terms. It is the case of the plaintiffs that it was agreed between the defendant No. 1 and the plaintiffs that the defendant No. 1 will himself operate upon the plaintiff No. 2.
It is the plaintiffs’ case that despite the contract between the plaintiffs and the defendant No. 1, the defendant No. 1 failed and neglected to operate upon the plaintiff No. 2 and accordingly committed a breach of the contract by non-performance. The surgery of the original plaintiff No. 2 was wholly unsuccessful. It was realised upon her abdomen being opened that nothing further could be done. Her abdomen was stitched up. She was given treatment in the hospital thereafter. The plaintiffs’ case in tort upon medical negligence is essentially that the advise of the defendant No. 1 itself was erroneous and was given without any care or caution despite having been shown the reports of the doctors from the USA who had earlier treated the plaintiff No. 2. Upon the complete non-performance by the defendant No. 1 of performing surgery or treating the plaintiff No. 2 the plaintiffs claim that BH itself through its trustees were vicariously liable in tort for the negligence of the defendant No. 1.
The Court observed that the contract between the parties was absolutely clear as to the contracting parties, as to the performance of the date of the contract as also the specific operation to be performed. It is admitted that the contract was not performed by the defendant No. 1 as to why it was not performed, calls for the consideration of the aspect on damages for its breach.
The Court observed that the attitude of the defendant doctor shows how the patients are treated by doctors of such standing and how much the patient can expect of the doctor. It shows the standard of care and the quality of the personal service given by the doctor and the extent of service accepted by the patient under extreme constraint and hopelessness. It however does not alter the legal obligations and rights of the parties. It would at best require the Court to see how the surgeon, who contracted with the patient, at least remained available near her and at her service. Availability cannot include a direction without a look at the patient. The damages can be claimed for breach of the contract as well as for negligence in tort. Since the contract was voluntarily entered into and was breached, the plaintiffs would be entitled to damages upon such breach of contract by nonperformance or misperformance even if there be no negligence in tort.
The extent of damages for the breach of the contract of professional services agreed and failed to be rendered and for the consequent mental agony, distress and anguish would be analogous to the damages which are grantable for similar effects upon a tort. The Court also observed that the breach of the contract of a personal nature more so by a professional involves violations of human rights and is the most acute and profound in case of doctors. Their breach by non-performance would result also in fatality. It would result in considerable mental distress and may lead to other mental problems including depression arising from such distress and agony. Such damages cannot be computed upon the precise monetary loss alone. The Court granted interest @ 16% p.a. for the entire period from the date of the surgery of the original plaintiff till the date of the judgment and thereafter @ 6% p.a. till payment/realisation.
The Trial Court on the objection raised by the respondent with regard to admissibility of partition deed had held that the same was inadmissible in evidence on the ground that it was neither registered, nor properly stamped.
The Court on further appeal observed that section 36 of the Stamp Act provides that where an instrument had been admitted in evidence, such admission shall not, except as provided in section 61 thereof, be called in question at any stage of the same suit or proceeding on the ground that the instrument has not duly been stamped. Section 35 of the Act casts a duty on the Court not to admit in evidence any document which is not duly stamped. Similarly section 36 bars the objection with regard to admissibility of a document at any stage of the same suit or proceeding on the ground that the instrument has not been duly stamped. One of the essential elements of estoppels by conduct is that the party against whom it is pleaded, should have made some representation intended to induce a course of conduct by the party to whom it was made.
Section 74 of the Evidence Act, 1872 (1872 Act) provides that the documents which are on record of the acts of the Court are public documents within the meaning of section 74(1)(iii) of the 1872 Act. There is distinction between the record of the acts of the Court and record of the Court. A private document does not become public document because it is filed in the Court. To be a public document it should be a record of act of the Court. In the instant case, admittedly, the partition deed was marked as exhibit. Marking of an exhibit on the document is an act of the Court. Thus, the partition deed is record of the act of the Court and is thus a public document within the meaning of section 74(1)(iii) of the 1872 Act.
The other issue i.e., whether the partition deed which is unregistered and unstamped can be looked into for collateral purposes. It is well settled in law that relevancy, admissibility and proof are different aspects which should exist before a document can be taken into evidence. Mere production of certified copies of public documents does not prove the same, as the question of its admissibility involves that contents must relate to a fact in issue or a facet relevant under various sections of the Indian Evidence Act. Thus, merely because the document in question is a public document, it is not per se admissible in evidence. It is required to be stamped under the provisions of the Indian Stamp Act, 1899. The Court further relying on the Supreme Court decision in case of Avinash Kumar Chauhan v. Vijay K. Mishra, AIR 2009 SC 1489 held that if a document is not duly stamped it would not be admissible even for collateral purpose.
In
a suit filed against the carrier for damage caused to insured goods the
Court observed that u/s.151 of the Contract Act, the carrier, as a
bailee, is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar circumstances, take of his
own goods. If that amount of care, which a person would have taken of
his own goods, is not taken by the carrier, it would amount to
deficiency in service and the carrier would be liable in damages to the
owner for the goods bailed to him. The liability of a carrier to whom
the goods are entrusted for carriage is that of an insurer and is
absolute in terms, in the sense that the carrier has to deliver the
goods safely, undamaged and without loss at the destination, indicated
by the consignor. So long as the goods are in the custody of the
carrier, it is the duty of the carrier to take due care as he would have
taken of his own goods and he would be liable if any loss or damage was
caused to the goods on account of his own negligence or criminal act or
that of his agent and servants.
The plea that since the goods
were booked at ‘Owner’s Risk’ the carrier would not be liable for any
loss to those goods, is not acceptable because even where the goods were
carried at ‘owner’s risk’, the carrier is not absolved from his
liability for loss of or damage to the goods due to his negligence or
criminal acts. Section 9 of the Carriers Act provides that the common
carriers are liable for the loss, if any, caused to the goods entrusted
to the carriers and it is the duty of the carriers to carry the goods to
the destination station.
A suit was filed by one Bimla Rani (the plaintiff) seeking partition of the suit property. The plaintiff Bimla Rani is the daughter of late Bhola Ram and Smt. Lajo Devi. The defendants are the step-sisters of the plaintiff; the defendants are borne out of the wedlock of late Bhola Ram and Smt. Motia Rani (second wife). Father of the Plaintiff and the defendants late Bhola Ram is common.
The late Bhola Ram was the owner of the suit property. He had by a registered will bequeathed the property to Motia Rani. Motia Rani had by a subsequent will bequeathed the property to her two daughters i.e., the two defendants. There was no dispute that after the death of Bhola Ram by virtue of his will, Motia Rani had become the owner of this suit property. The contention of the plaintiff was that she also being the daughter of Bhola Ram was entitled to a share in the suit property, therefore the suit for partition had been filed. Contention of the defendants was that under the law of succession, the daughters of Motia Rani alone could have inherited this property from Motia Rani and Bimla Devi not being her ‘daughter’, (u/s.15 of the Hindu Succession Act, 1956); she had no interest in the suit property.
The High Court observed that u/s.14 of the Hindu Succession Act, 1956 (HSA) any property possessed by a female Hindu, whether acquired before or after the commencement of that Act, shall be held by her as full owner thereof and not as a limited owner. Thus, there is no dispute that the suit property had devolved upon the Motia Rani in her capacity as a full-fledged owner. The dispute between the heirs was as to whether the expression ‘daughter’ as appearing in section 15(1)(a) includes a step-daughter i.e., the daughter of the husband of the deceased by another wife. The word ‘daughter’ and ‘step-daughter’ have not been defined in the HSA. The expression ‘daughter’ in section 15(1)(a) of the Act would thus include:
(a) daughter borne out of the womb of the female by the same husband or by different husbands and includes an illegitimate daughter; this would be in view of section 3(j) of the HSA.
(b) adopted daughter who is deemed to be a daughter for the purpose of inheritance. Children of a pre-deceased daughter or an adopted daughter also fall within the meaning of the expression ‘daughter’ as contained in section 15(1)(a). If the Legislature had felt that the word ‘daughter’ should include the word ‘step-daughter’, it should have said so in express terms. Thus, the word ‘daughter’ appearing in section 15(1)(a) would not include a ‘step-daughter’ and such a step-daughter, would fall in the category of an heir of her husband as referred to in clause 15(1)(b). When once a property becomes the absolute property of a female Hindu, it shall devolve first on her children (including children of the predeceased son and daughter) as provided in section 15(1)(a) of the Act and then on other heirs, subject only to the limited change introduced in section 15(2) of the Act. The step-sons or step-daughters will come in as heirs only under clause (b) of section 15(1) or under clause (b) of section 15(2) of the Act.
The step-daughter of Motia Rani does not fall in the category of succession as contained in section 15 of the HSA; the expression ‘daughter’ in section 15(1)(a) does not make reference to a ‘stepdaughter’ i.e., a daughter borne to the husband of the deceased female Hindu out of the wedlock with another woman.
Private Equity Investments and Foreign Direct Investments in nine out of 10 cases, contain an exit option. This may be in the form of a put option whereby the investor has a right/option but not an obligation to sell the shares to the promoter of the investee company in case the company does not give an exit in the form of an IPO or an Offer for Sale or Buyback of the investor’s shares. In some cases, the promoters also have a call option under which, they can buy out the investor at their option. In addition, the investment carries certain pre-emption rights for the investor in the form of Right of First Refusal, Tag Along Rights, Drag Along Rights, etc. This is a standard practice internationally and is something which is not unique to the Indian scenario. Even in India, this has been in vogue for the last several years and the ship was sailing quite smoothly. However, recent change in stance by the SEBI, the RBI and the DIPP and the High Courts have created a very stormy and turbulent climate for private equity/ foreign investment/joint ventures in India. If the issues thrown up by these changes are not resolved urgently, then we may see a severe hit to India’s growth story since most international investors would be wary of investing in such a climate. Let us look at the murky environment which has been created due to these changed regulatory positions.
FDI Policy
Exit options have been a norm in foreign direct investments. However, since the last couple of years the RBI has been taking a view that exit options, such as put and call options, attached to Compulsorily Convertible Debentures/Preference Shares for foreign direct investment are not valid. The view being taken was that a fixed exit option makes the equity instrument equivalent to a debt instrument. Another view advanced by the RBI was that only exchangetraded derivatives are permissible and these option agreements are not exchange-traded. Gradually the RBI extended this view even to options attached to equity shares.
A counter-argument to this view of the RBI was that as long as the pricing guidelines are met on the exercise of the option and there is no fixed rate of Internal Rate of Return/fixed price, the option agreements are valid. If there is no guaranteed exit price and the ultimate price is subject to the prevailing FEMA pricing guidelines, a put or a call option was considered to be valid. Another argument was that if these were debt instruments, then who was the borrower? The foreign investment was in the Company, but the exit option was provided by the promoter. In such an event how can the options be classified as debt?
While this debate was raging, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce issued the Consolidated FDI Policy vide Circular 2/2011 on 30th September 2011, which acted like the final straw which (temporarily) broke the camel’s back. This Policy contained a Clause 3.3.2.1, which stated that only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the ECB guidelines. This bolt from the blue left the industry reeling.
Subsequently, taking heed to the adverse industry reaction, on 31st October 2011, a Corrigendum was issued by the DIPP deleting the above Clause 3.3.2.1. Hence, now according to the FDI Policy, even equity instruments/CCDs/CCPS issued/transferred to nonresidents having in-built options, would qualify as eligible instruments for FDI. Accordingly, they would not have to comply with the ECB Guidelines.
Earlier, there was a question mark over the validity of such options under the FEMA Regulations. However, it is now submitted that in view of the express provision in the FDI Policy banning exit options and its subsequent deletion, the Government’s position on this issue has become clear. For instance, the Supreme Court in the case of V. M. Salgaocar, 243 ITR 383 (SC) held that the fact a provision was introduced in the Income-tax Act in 1984 and subsequently repealed in 1985 showed the legislative intent. Now to take a view that put and call options are not permissible under the FDI Policy/FEMA Regulations is not tenable in the author’s view. One hopes that this is the last see-saw in the FDI Policy/FEMA Regulations and this stand is endorsed by all concerned.
SEBI’s view for listed companies
In addition to the flip-flop in the FDI policy, lately the SEBI has also sought removal of option clauses from Agreements. This stand was taken by the SEBI in the context of listed companies. The SEBI first took this view in the case of Cairn India Ltd.-Vedanta Resources Plc. When Vedanta filed a letter of offer to acquire the shares of Cairn India, the SEBI noticed that there was a put and call arrangement and preemptive rights. The SEBI asked the parties to drop these clauses.
Again, in the Informal Guidance issued by the SEBI to Vulcan Rubber Ltd., the SEBI held that an option arrangement in the case of a listed company is not valid. Option agreements have been around since several years. It is only now that the SEBI has woken up to them and is raising objections. However, these option agreements in the case of listed companies have had a very chequered past which also merits attention. Given below is a brief account of their history in chronological order:
(a) The Securities Contracts (Regulation) Act (‘SCRA’) regulates transactions in securities. This Act prohibits certain type of contracts and permits spot-delivery contracts or contracts through brokers. Spot-delivery contracts have been defined to mean contracts in securities which provide for the delivery and payment either on the day of the contract or on the next day.
(b) As far back as in 1955, the Division Bench of the Bombay High Court in the case of Jethalal C. Thakkar v. R. N. Kapur, (1955) 57 Bom. LR 1051 had upheld the validity of an option agreement in the context of the erstwhile Bombay Securities Contracts Control Act, 1925 (the Act in force prior to the SCRA). The Court held that an option agreement is a contingent contract and not a contract at all till such time as the contingency occurs. Hence, it is a valid contract and enforceable in law.
(c) By a 50-year old Notification (SO 1490), issued in 1961, the Central Government had specified that contracts for pre-emption or similar rights contained in the promotion or collaboration agreements or in Articles of Association of limited companies would not be covered within the purview of the Act. Thus, as far back as in 1961, the validity of pre-emptive and other rights were upheld.
(d) Subsequently, in June 1969, the Government issued another Notification u/s.16 of the SCRA stating that all contracts for sale and purchase of securities other than spot-delivery contracts were prohibited. The 1969 Notification did not rescind the 1961 Notification.
(e) The 1969 Notification was superseded by a Notification dated 1st March 2000, which divided the power to regulate various contracts in the securities between the SEBI and the RBI. The sum and substance of the 2000 Notification was on the lines of the 1969 Notification.
(f) Section 20 of the SCRA, which specifically prohibited options in securities was deleted w.e.f. 25-1-1995. Even the preamble prohibiting options was deleted. It is submitted that these deletions specifically show that the legislative intention was to permit options after 1995.
(g) In 2005, in a Summons for Judgment No. 766 of 2004 (in Summary Suit No. 2550 of 2004) a Single Judge of the Bombay High Court held in the case of Nishkalp Investments & Trading v. Hinduja TMT Ltd., that an agreement for buying back the shares of a company in the event of certain defaults was hit by the definition of spot-delivery contract under the SCRA and hence, unenforceable. It distinguished the Division Bench’s judgment in the case of Jethalal Thakkar (supra) on the grounds that it was rendered in the context of an earlier Act.
(h) As recent as in 2009, the validity of the 1961 Notification, relaxing pre-emptive and other rights from the purview of the SCRA, was upheld by the Punjab & Haryana High Court in the case of M/s. Rama Petrochemicals Ltd. v. Punjab State Industrial Development Corp. Ltd., CWP No. 12861/2006 (Order dated 27th Nov., 2009).
Thus, it is evident that this is a matter which is not free from a judicial controversy. Under the Indian Contract Act, 1872, an offeror makes a proposal to an offeree. Only when such an offer/proposal is accepted by the offeree and there is a valid consideration for the same, an agreement is said to have been executed. An agreement enforceable by law is a contract. Thus, a contract is completed only when there is an offer and an acceptance. In the case of an option agreement, there is only an offer, but no acceptance. Acceptance only takes place when the offeree exercises its option and at that point of time a contract is concluded. Till such time it is a contingent contract. Further, if the option agreement provides that once the option is exercised, it would be executed on a spot-delivery basis, i.e., the payment and delivery would take place either on the same day or by the next day, then the spot-delivery condition would also be complied on exercise of the contract.
Section 2 of the SCRA defines three terms – contract, derivatives and option in securities. Sections 13 and 16 of the SCRA deal with contracts. Section 18A deals with derivatives. Erstwhile section 20 dealt with options. Even section 20 which deals with penalties, provides separate penalties for contracts and derivatives. With the deletion of section 20 even the penalty provision relating to options was deleted from section 23. Thus, there are three separate sections dealing with three different types of instruments. Hence, it is submitted that the 2000 Notification u/s.16 of SCRA applies only to a contract in securities and not to an option in securities. Options in securities is not covered by section 16 and the erstwhile section 20 has been specifically deleted.
Hence, it is submitted that an option agreement is not an executed contract but only a contingent contract and that such an agreement is valid and not hit by the prohibitions under the SCRA.
One can still find some merit in the SEBI’s argument in cases where both the put and call options are at the same price (As was the case in the Vedanta deal). This is because in such cases it is a no-brainer that one of the parties would definitely exercise its option under the Agreement and this could make it the equivalent of a definite/binding forward contract. However, where there is a price differential between the two, then, in the author’s view, an option agreement is valid and enforceable. An option agreement is a contract between two shareholders of a company. How can there be any fetters on the right of a shareholder to sell his shares, to grant an option on these shares, etc.? Can the SEBI’s jurisdiction extend over such private treaties also? Several Government disinvestments, such as, Balco, contained put and call options. Were all of these also be invalid and that too ab initio? One hopes the Regulator takes a relook at these factors and does a rethink on its stance.
Validity of Pre-emptive Rights
Even while we are jostling with the issue of validity of option agreements, comes a much larger issue — are pre -emptive and other rights valid at all in the case of listed and unlisted public companies? These would include pre-emptive rights, such as right of first refusal, tag along rights, drag along rights, etc.
Various Supreme Court decisions, such as V. B. Rangaraj v. V. B. Gopalkrishnan, 73 Comp. Cases 201 (SC), have held that a Shareholders’ Agreement executed between members of a company is binding on the company only if it is contained in the Articles of Association of the company.
A Single Judge of the Bombay High Court in the case of Western Maharashtra Development Corporation v. Bajaj Auto Ltd., (2010) 154 Comp. Cases 593 (Bom.), had ruled that a Shareholders’ Agreement containing restrictive clauses was invalid since the Articles of a public company could not contain clauses restricting the transfer of shares and it was contrary to section 108 of the Companies Act, 1956.
Subsequently, a two-Member Bench of the Bombay High Court, in the case of Messer Holdings Ltd. v. Shyam Ruia and Others, (2010) 159 Comp. Cases 29 (Bom.) has overruled this decision of the Single Judge of the Bombay High Court. The Court here was concerned with the validity of a Right of First Refusal Clause. The Court held that the intent of section 111A of the Companies Act dealing with free transferability of shares does not in any manner hamper the right of its shareholders to enter into private treaties so long as it is in accordance with the Companies Act and the company’s Articles. Had the Act wanted to prevent such private contracts it would have expressly done so. The Court relied on the Supreme Court’s decision in the case of M. S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., (2004) 117 Comp. Cases 19 (SC) which has held that consensual agreements between shareholders relating to their shares do not impose restriction on transferability of shares and they can be enforced like any other agreement.
Hence, as the position now stands, restrictive clauses and pre-emptive rights in a public limited company would be valid under the Companies Act. It may be specifically noted that the judgment in Messer Holdings (supra) was in the case of a listed company which is contrary to SEBI’s stance taken in the case of Cairns as regards validity of pre-emptive rights. The High Court’s judgment is binding even on the SEBI.
A later decision of a Single Judge of the Bombay High Court in the case of Jer Rutton Kavasmanek v. Gharda Chemicals Ltd., (2011) 166 Comp. Cases 377 (Bom.) has held that there are only two types of companies under the Companies Act — private and public. The concept of a deemed public company has been done away with and hence, pre-emptive rights which are contained in the Articles of a public company must not be recognised. Shares of a public company are freely transferrable and this would override anything contained in the Articles to the contrary. It may be noted that the Court did not go into whether a Shareholders’ Agreement executed by members which contained a pre-emptive clause was valid or not. It only dealt with a situation where the Articles of Association contained pre-emptive clauses. The conclusion arrived at seems to be that where the shareholders have not executed any agreement, but the Articles themselves provide for a restriction, the same would be invalid.
Conclusion
One fails to understand when the position has been so well settled since the last several years, why take such steps which upset the investment climate? Even Courts respect the doctrine of stare decisis, i.e., to stand by the decided and not to unsettle the settled law which has been practiced for several years — ALA Firm, 189 ITR 285 (SC). At a time when the international economy is reeling with recession, India is one of the few countries which are looked upon favourably by foreign investors. A monkey wrench in the works would only scare away PE/FDI funds and seriously curtail the Indian growth story. One can only hope that this fog of uncertainty is cleared and sunshine returns soon. The current puzzled regulatory scenario reminds one of William Shakespeare’s famous quote:
“Confusion Now Hath Made his Masterpiece!”
The Ministry had originally notified the CRZ Guidelines in 1991 vide Notification No. S.O. 114(E), dated 19th February 1991. These were amended and updated from time to time. There have been about 25 amendments to this Notification between 1991 and 2009, some of which have been emanated from the Supreme Court orders. However, these have now been rescinded by the Coastal Regulation Notification 2011 issued on 6th January 2011. Keeping in mind the special needs of Mumbai, several concessions have been provided to CRZ areas within Mumbai. Let us examine some of the important provisions of the CRZ 2011.
Definition of CRZ
The following areas are declared as CRZ:
(i) the land area from High Tide Line (HTL) to 500 mts. on the landward side along the sea-front. The term HTL means the line on the land up to which the highest water line reaches during the spring tide and so demarcated. HTL will be demarcated within one year from the date of issue of the 2011 notification.
(ii) the land area between HTL to 100 mts. or width of the creek, whichever is less on the landward side along the tidal influenced water bodies (i.e., bays, rivers, creeks, etc. that are connected to the sea and are influenced by tides).
(iii) the land area falling between the hazard line and 500 mts. from HTL on the landward side, in case of seafront and between the hazard line and 100 mts. line in case of tidal influenced water body. ‘Hazard line’ means the line demarcated by the Ministry of Environment through a survey of India. This is a new development probably prompted by the recent tsunamis impacting coastal regions.
(iv) land area between HTL and Low Tide Line (LTL) known as the intertidal zone.
(v) the water and the bed area between the LTL to the territorial water limit or 12 nautical miles in case of sea. This is an important change to expand the CRZ to include territorial waters as a protected zone.
(vi) the water and the bed area between LTL at the bank to the LTL on the opposite side of the bank, of tidal influenced water bodies.
The significance of declaring an area as CRZ is that the Notification imposes various restrictions on the setting up and expansion of industries, operations or processes, etc., in such areas.
Classification of CRZs & Regulations
For the purpose of conserving and protecting the coastal areas and marine waters, the CRZ area is classified into various categories. Depending upon these categories, the development or construction activities therein are also regulated. These are explained below.
CRZ-I
Meaning
CRZ-I includes those areas that are ecologically sensitive and those which play a role in maintaining the integrity of the coast, such as mangroves, in case mangrove area is more than 1,000 sq mts., a buffer of 50 mts. along the mangroves shall also be provided, coral reefs, sand dunes, national parks, wildlife habitats, structures of archaeological importance, heritage sites, etc. It also includes the area between Low Tide Line and High Tide Line. Thus, CRZ-I are the very core areas which are the first point of protection of the coastal line.
Regulation of Construction
No new construction activities are permitted in CRZ-I. Certain exceptions are made for constructions/ industries of vital importance, such as Atomic Energy projects, construction of trans-harbour sea link, development of green field airport at Navi Mumbai, construction of dispensaries/ schools/ bridges/roads, etc., which are required for traditional inhabitants living there, etc.
CRZ-II
Meaning
The areas that have been developed up to or close to the shoreline. Developed area is defined as that area within the existing municipal limits/ urban areas which are substantially built-up and has been provided with drainage, approach roads and other infrastructural facilities, such as water supply and sewerage mains.
Regulation of Construction
Construction is permitted in CRZ-II subject to the following important restrictions:
(a) buildings are permitted only on the landward side of the existing/proposed road, or on the landward side (i.e., towards land) of existing authorised structures. These shall be subject to the existing local town and country planning regulations (such as the Development Control Regulations for Greater Mumbai and other BMC Regulations for buildings), including the existing FSI norms. However, no permission for construction of buildings will be given on the landward side of any new roads which are constructed on the seaward side of an existing road.
(b) reconstruction of authorised building is permitted subject to the existing FSI norms and without any change in present usage.
(c) construction involving more than 20,000 sq mts., built-up area in CRZ-II shall be considered by the Ministry in accordance with its Notification dated 14th September 2006 and in case of projects less than 20,000 sq mts. built-up area shall be approved by the concerned State/Union territory planning authorities in accordance with the 2011 Notification.
CRZ-III
Meaning
These include those areas that are relatively undisturbed and those do not belong to either CRZ-I or II which include coastal zone in the rural areas (developed and undeveloped) and also areas within municipal limits or in other legally designated urban areas, which are not substantially built-up.
Regulation of Construction The Notification provides for several regulations for CRZ-III. Some important regulations for CRZ-III include the following:
(a) NDZ: An area of up to 200 mts. from HTL on the landward side in case of seafront and 100 mts. along tidal influenced water bodies is to be earmarked as ‘No Development Zone’ (NDZ). The significance of NDZ is as follows:
— No construction is permitted within NDZ.
— Repairs or reconstruction of existing authorised structure not exceeding existing FSI/ plinth area/density is allowed.
— Construction/reconstruction of dwelling units of traditional coastal communities, fishermen is permitted, subject to certain restrictions.
— Certain key activities are permitted, such as agriculture, atomic energy generating power by non-conventional energy sources, construction of dispensaries/schools/roads, etc. which are required for the local inhabitants, etc.
(b) Area between 200 mts. to 500 mts. from HTL
— The following activities are permissible:
— Hotels/beach resorts for tourists or visitors subject to certain conditions.
— Notified ports.
— Foreshore facilities for desalination plants and associated facilities.
— Facilities for generating power by nonconventional energy sources.
— Construction of public utilities.
— Reconstruction or alteration of existing authorised building.
CRZ-IV
Meaning
The water area from the Low Tide Line to 12 nautical miles on the sea-ward side and the water area of the tidal influenced water body from the mouth of the water body at the sea up to the influence of tide which is measured as 5 parts per 1,000 during the driest season of the year.
Regulation of Construction
Activities impugning on the sea and tidal influenced water bodies are regulated except for traditional fishing and related activities undertaken by local communities which are subject, however, to certain conditions.
Other areas
Meaning
These include those areas which require special consideration for the purpose of protecting the critical coastal environment and difficulties faced by local communities, such as, the CRZ area falling within municipal limits of Greater Mumbai. This is a new feature of the 2011 Notifications and a welcome move. For the first time the unique nature of Mumbai’s coastlines and real estate problems have been recognised and addressed.
Regulation of Construction
CRZ areas of Greater Mumbai are further regulated as follows:
(i) CRZ-I areas
In CRZ-I areas of Mumbai the only activities which can be taken up are construction of roads, approach roads and missing link roads which are approved in the Developmental Control Regulations of Greater Mumbai. However, all mangrove areas should be notified and 5 times the number of mangroves destroyed/cut during the construction process should be replanted.
(ii) CRZ-II areas
In CRZ-II areas of Mumbai, the development can continue to be undertaken in accordance with the norms laid down in the Town and Country Planning Regulations as they existed on the date of issue of the Notification dated the 19th February, 1991.
(iii) Slum Redevelopment
One of the highlights of the CRZ 2011 includes the relaxations granted for slum redevelopment schemes. The features include:
By a very recent Circular, the SRA proposes to do away with the height restrictions imposed in CRZ II areas on buildings provided they are a part of a 33(10) or a 33(14) Scheme.
(iv) Redevelopment of dilapidated, cessed and unsafe buildings
The Notification also deals with redevelopment of old and dilapidated, cessed and unsafe buildings in the CRZ areas of Greater Mumbai. This again is a welcome move for several buildings along coastal lines, such as Marine Drive, Juhu, Chowpatty, etc. Such redevelopment can be done subject to the following conditions:
(v) All open spaces, parks, gardens, playgrounds indicated in development plans within CRZ-II shall be categorised as no development zone.
(vi) Floor Space Index up to 15% shall be allowed only for construction of civic amenities, stadium and gymnasium meant for recreational or sports-related activities and residential or commercial use of such open spaces shall not be permissible.
Approvals
For all projects attracting the CRZ, 2011 Notification, an application for CRZ clearance must be made to the concerned State or the Union territory Coastal Zone Management Authority. It will make recommendations within a period of 60 days from the date of receipt of complete application to the Ministry or the State Environmental Impact Assessment Authority. The Ministry or the Authority shall consider such projects for clearance based on the recommendations of the concerned CZMA within a period of 60 days. The clearance accorded to the projects under the CRZ Notification shall be valid for the period of 5 years from the date of issue of the clearance for commencement of construction and operation. A procedure for post-clearance monitoring is also provided.
Enforcement
To implement the provisions of the CRZ 2011 Notification, powers prescribed under the Act are available to the Ministry, the Coastal Zone Manage-ment Authorities and the State Government.
Auditor’s duty
The Auditor should enquire of the auditee, in case the auditee is a builder who has constructed a building in coastal zones, whether the conditions of the Notification have been duly complied and whether necessary approvals have been obtained. Non-compliance with this could have serious repercussions for the builder. This also has very important repercussions for flat/office buyers in such a building. The Bombay High Court in the case of Sudhir M. Khandwala, Writ Petition No. 1077 of 2007 refused to stay the demolition of/regularise an unauthorised construction. Hence, a buyer of a premises in a building constructed in violation of the CRZ Regulations could lose his property. Thus, the Auditor can provide a value-added service by alerting his client of the repercussions of buying such a property. In such cases, he may advice his client to obtain a legal opinion.
By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.
In a civil appeal against the order of CESTAT the Court observed the conflicting orders on identical issues by the Bench of Tribunal.
After deciding the issues on merits the Court showed their deep concern on the conduct of the two Benches of the Tribunal while deciding appeals in the cases of IVRCL Infrastructures & Projects Ltd. (2004) 166 ELT 447 and Techni Bharathi Ltd. (2006) 198 ELT 33. In spite of noticing the decision of a Co-ordinate Bench in the present case, the Tribunal still thought it fit to proceed to take a view totally contrary to the view taken in the earlier judgment, thereby creating a judicial uncertainty with regard to the declaration of law involved on an identical issue in respect of the same Notification. It needs to be emphasised that if a Bench of a Tribunal, in identical fact-situation, is permitted to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, it will be destructive of the institutional integrity itself. What was important is the Tribunal as an institution and not the personality of the members constituting it. If a Bench of the Tribunal wishes to take a view different from the one taken by the earlier Bench, the propriety demands that it should place the matter before the President of the Tribunal so that the case is referred to a larger Bench, for which provision exists in the Act itself. In this behalf, the Court referred to the following observations by a three-Judge Bench of the Court in case of Sub-Inspector Rooplal and Anr. v. Lt. Governor and Ors., (2000) 1 SCC 644.
“At the outset, we must express our serious dissatisfaction in regard to the manner in which a Coordinate Bench of the Tribunal has overruled, in effect, an earlier judgment of another Co-ordinate Bench of the same Tribunal. This is opposed to all principles of judicial discipline. If at all, the subsequent Bench of the Tribunal was of the opinion that the earlier view taken by the Co-ordinate Bench of the same Tribunal was incorrect, it ought to have referred the matter to a larger Bench so that the difference of opinion between the two Co-ordinate Benches on the same point could have been avoided. It is not as if the latter Bench was unaware of the judgment of the earlier Bench but knowingly it proceeded to disagree with the said judgment against all known rules of precedents . . . . .”
The Court directed that all the Courts and various Tribunals in the country shall follow the above salutary observations in letter and spirit.
On 18th July, 2004, at about 1.20 p.m. the deceased, Mukesh Jain, was riding his two-wheeler scooter with his son, Shashank Jain, as pillion rider. According to the prosecution, when they had reached the SDM’s Office, Delhi, a motorcycle, being driven in a very rash and negligent manner, tried to overtake the scooter and in that process struck against the scooter with great force, as a result whereof the deceased and his son were thrown on to the road and the deceased succumbed to the fatal injuries sustained by him.
A claim was filed by the widow, two daughters and one son of the deceased before the Motor Accident Claims Tribunal, the Tribunal awarded a sum of Rs.8,35,067 in favour of the claimants together with interest @7%. The insurer was held liable to satisfy the Award and to recover the amount from the owner of the motorcycle.
The Supreme Court observed that Jatin was a minor on the date of the accident and was riding the motorcycle in violation of the provisions of the Motor Vehicles Act, 1988, and the Rules framed thereunder.
It was Jatin, who came from behind on the motorcycle and hit the scooter of the deceased from behind. Thus the responsibility in causing the accident was found to be solely that of Jatin. However, since Jatin was a minor and it was the responsibility of the petitioner to ensure that his motorcycle was not misused and that too by a minor who had no licence to drive the same, the Motor Accident Claims Tribunal quite rightly saddled the liability for payment of compensation on the petitioner and, accordingly, directed the insurance company to pay the awarded amount to the awardees and, thereafter, to recover the same from the petitioner.
One late N.P.S. Mahendran was running two establishments under the name of M/s. Aarthi Bala Tea Plantations and M/s. Sanjay Bala Tea Plantations. The deceased availed loan from the appellant bank and deposited the title deeds by way of collateral security and also executed various documents in order to secure due payment of loan. After the death of the said N.P.S. Mahendran, the respondents petitioners (wife and sons) became liable to pay Rs.1,14,86,428.32, which was outstanding in several loan accounts. The 1st respondent, widow, liquidated the entire outstanding dues lying in the account. The bank, after acknowledging the same, issued ‘No Due’ certificate in her favour. The respondents, then, requested the appellant bank to return the title deeds relating to the properties, which were deposited with the bank by Late N.P.S. Mahendran. In spite of repeated requests, the documents were not returned. The respondents-petitioners approached the bank on many occasions requesting for return of documents, but the same were not returned.
The appellant bank contended that the bank was exercising a general lien on the title documents standing in the name of Late N.P.S. Mahendran, who stood as a guarantor for other facilities and liabilities outstanding against M/s. Somerset Tea Plantation. It was contended by the bank that such cash credit facilities were availed from another branch of the bank, by one M/s. Somerset Tea Plantation and the deceased, husband of the 1st respondent, stood as a guarantor for the said facilities. The said firm had committed default and more than Rs.2.03 crores was due from the said firm. Hence, the bank had initiated a proceeding against the firm and the guarantor and after the death of N.P.S. Mahendran, the present respondents have been impleaded as legal representatives.
The Court observed that the liability under the guarantee is not revoked or extinguished on the death of the guarantor. Section 131 of the Contract Act clearly provides that in case of death of guarantor, the date of guarantee/continuing of the guarantee executed in favour of the bank stands revoked in respect of future transactions. It is well settled that on the death of the guarantor, the liability exists and such liability can be fastened on the estate of the deceased being inherited by his legal heirs, and the creditor can recover the dues out of the estate of the deceased.
The borrower, (late) N.P.S. Mahendran, had admittedly deposited the title deeds of the property to secure a loan transaction availed in respect of two plantation companies. This fact had not being disputed by the appellant bank. Therefore, the contract/mortgage, had been created by the deceased borrower for a specific purpose and for a specific loan and the contract was self-contained and the terms and conditions were binding upon both the borrower as well as the bank. When such is the situation, the bank cannot contend that they could hold the documents for a balance due in a different loan account where the said N.P.S. Mahendran was not a borrower. Further, the language of section 171 of the Act is explicit to the fact that the bankers are entitled to retain as a security for a ‘general balance account’. Admittedly, it was not the case of the appellant bank that the amount, which was now said to be due on account of the borrowings of M/s. Somerset Tea Plantation, was a general balance account of the deceased borrower N.P.S. Mahendran.
Therefore, this agreement/mortgage has to be construed as a ‘contract to the contrary’ and therefore, held that the bank could not claim these documents by invoking the power of general lien u/s.171 of the Indian Contract Act, 1872. The bank was directed to return of title deeds.
The issue before the High Court was:
Whether the registered power of attorney under the provisions of section 32 r.w.s. 33 and section 17(1)(b) of the Indian Registration Act could be revoked without registration or cancellation thereof.
The power of attorney dated 17-3-1967 was relating to the agricultural land of the plaintiff and included the power to sell the land. When there is a transfer of all rights and liabilities over the land including the power to transfer, then it was required to be registered and was registered. The power of attorney contained a clause that it would not be disputed or that there shall be no dispute between the parties and it shall not be ignored. By its cancellation the rights created are sought to be extinguished. The rights created related to immovable property of a value of more than one hundred rupees. Hence u/s.17(1)(b) of the Registration Act a document that creates or extinguishes any right in such immovable property would require registration. In the event a document required to be registered u/s.17 is not registered the effects of non-registration are detailed u/s.49 of the Act. Such a document shall not affect any immovable property or confer any power or create any right or relationship. Therefore, the document whereby the registered power of attorney dated 17-3-1967 was cancelled required registration u/s.17 of the Act and since it was admittedly not registered the effect of non-registration u/s.49 of the Act would affect it.
In the present case a notice dated 20-2-1973 canceling the power of attorney was duly served and received by the attorney prior to the execution of the sale-deed dated 26-12-1975 by him. Admittedly it was a communication sent by the plaintiff to the attorney.
The power of attorney dated 17-3-1967 was revocable. It did not contain any clause that it would be irrevocable. It only said that the parties thereto will not dispute it or ignore it. Normally revocation is complete when it comes to the knowledge of the person against whom it is made. The power of attorney dated 17-3-1967 was not a mere proposal or just a promise. It was also not a simple agreement between the parties. An agreement between the parties would have to contain an element of consideration or act or omission to give it enforceability as a contract. The power of attorney created rights in immoveable property including that of alienation. Being revocable it could be revoked. But not just by a communication. Since it dealt with immoveable property of a value of more than one hundred rupees and created a right to transfer the property it was compulsorily registrable. And when it was registered it could be revoked only upon execution of a registered document of revocation. Hence due to non-registration of the communication/document of revocation it could not affect the sale deed dated 26-12-1975 executed by the attorney, nor could it affect the power of attorney dated 17-3-1967. The relationship of principal and agent established through a registered deed could be validly terminated by a registered deed in view of the Registration Act.
The conclusion would, therefore, be that when the document/notice of cancellation dated 20-2- 1973 was compulsorily registrable and it was not registered, then even upon its execution or service upon the attorney it would not in any manner affect the rights created under sale deed dated 26-12-1975. It did not extinguish the rights created or assigned on the attorney upon execution of a registered power of attorney.
The issue that arose for consideration before the High Court was as to whether a person who is not a citizen of India, who has issued a foreign country cheque on a drawee bank functioning in a foreign country could be prosecuted for an offence punishable u/s.138 of the Act.
The Court observed that a combined reading of sections 1, 11, 12 and 134 to 137 of the Negotiable Instruments Act, 1881, makes clear that a cheque made/drawn in a foreign country on a drawee bank functioning in the foreign country and made payable therein shall be a foreign instrument and the law of the country wherein the cheque was drawn or made payable shall be the law governing the rights and liabilities of the parties and dishonour of the cheque. As such the payee cannot select a country and present it through a bank therein for collection to confer jurisdiction on a Court functioning therein. If the payee is given such a right to proceed criminally against the drawer by selecting the jurisdiction, the same will encourage forum shopping making the payees to go to a country wherein the dishonour of the cheque is made a criminal offence and wherein the law is more favourable to the payee enabling him to collect the amount covered by the cheque by way of fine or compensation by resorting to criminal prosecution. A person who is not a citizen of India for an act committed in a foreign country wherein it is not a punishable offence, cannot be prosecuted in India. In this case, none of the petitioners is a citizen of India. The acts constituting the offence, namely, issuance of the cheque, the dishonour of the cheque, the failure to make payment of the cheque after receipt of the statutory notice were all committed by them not in India, but in the USA. Therefore, they cannot be prosecuted in India for the said act as an offence punishable u/s.138 of the Negotiable Instruments Act, 1881.
The Court further observed that the place of issuance of notice shall not be the only criterion conferring jurisdiction on the Court. All the transactions were made in the USA. The cheques were drawn on a bank in the USA. The cheques were payable at Massachusetts branch, United States of America. That being so, the respondent, with a view to invoke the provisions of section 138 of the Negotiable Instruments Act, 1881 in order to have a short-cut method of collecting the cheque amount, has chosen to present the cheques in a bank at Anna Nagar, Chennai, Tamil Nadu for collection, issue notice from Adyar, Chennai and prefer the complaint on the file of the IX Metropolitan Magistrate, Saidapet. The said act on the part of the respondent not only amounts to forum shopping, but also is an example of abuse of process of the Court. Therefore, the Court in order to avoid miscarriage of justice, to prevent abuse of process of the Court and to render complete justice, in exercise of its inherent power u/s.482 Cr. P.C. quashed the criminal proceedings.
Now all Registrars of Companies have to first approve the above critical services before attending any other forms. The Ministry would also ensure that all other critical e-forms are also processed within the service delivery parameters as given in the citizen charter.
Similarly, the DIN 4 is also to be filed electronically.
Refer F. No. 02/01/2011-CL V dated 26th March 2011 and Circular No. 11/2011 dated 7th April 2011.
Such directors should not be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without their knowledge and without their consent or connivance or where they have acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the director was authorised to receive as a director of the Board as per the decision of the Board.
The Circular also specifies compliances to be verified by the Registrar of Companies before taking penal action against directors.
Also the list of persons who can be treated as Officers in default has been listed for prosecution u/s.209(5), 209(6), 211 and 212 is given.
For the complete text of the Circular visit
http://www.mca.gov.in/Ministry/pdf/Circular_08-2011 _25mar2011.pdf
The primary facts of this case as detailed by SAT are as follows. The appellants (husband and wife) had invested almost the whole of their life’s savings (about Rs.2.50 crores) in an open-ended Gilt scheme (called the ‘HSBC Gilt Fund’ or ‘the Scheme’) of the HSBC Mutual Fund (‘the Fund’). The appellants had chosen to invest in the Short- Term Plan which the offer document stated was suitable for investors seeking to obtain returns from a plan investing in gilts (including treasury bills) across the yield curve with the average maturity of the portfolio normally not exceeding seven years and modified duration of the portfolio normally not exceeding five years. The investment was made between October 2008 and November 2008.
In around February 2009, on receipt of the statement from the fund, they found that the Net Asset Value (NAV) had inexplicably and substantially depreciated by 10% and that too (as they later came to know) within a span of three days. On further inquiries, they came to know that the fund had wound up its ‘Long-Term Plan’ and modified the ‘Short-Term Plan’ by increasing the existing time frame of five to seven years to not exceeding 15 years. The benchmark index was also changed.
The appellants complained that these changes were changes in ‘fundamental attributes’ of the Scheme and were made without following the Regulations, which require informing the unit holders and, more importantly, giving them a chance to exit at the prevailing NAV before the proposed change. The relevant clause (5A) of Regulation 18 of the Regulations provides as follows:
“18. (15A) The trustees shall ensure that no change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out unless, —
(i) a written communication about the proposed change is sent to each unit holder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situated; and
(ii) the unit holders are given an option to exit at the prevailing NAV without any exit load.”
The unit holders were not informed through direct communication or through advertisement, nor were they given an option to exit at the prevailing NAV without any exit load.
The appellants, who feared further depreciation in the NAV, exited the Scheme and lodged complaints with the distributor, the fund, etc. and the Securities and Exchange Board of India (SEBI).
SEBI investigated the matter and passed an Order. Though the Order does refer to the complaints made by unit holders, the unit holders were not given an opportunity to be parties to the proceedings. Of course, the allegations made were violations of the Regulations and hence SEBI can proceed independently and directly against the person who allegedly violated them. However, this is emphasised, because when the appellants appealed against this Order of SEBI, the respondents — and even SEBI — claimed that the appellants did not have any locus standi to appeal!! Of course, SAT rejected this contention (as discussed later), but it is strange that even SEBI raised such a technical objection.
SEBI investigated the matter and heard the fund and its related parties. SEBI did find that there were substantial changes adversely affecting the unit holders. However, strangely, it took a stand that since it had issued a circular in 1998 explaining what fundamental attributes are and even gave a list of them, the fund is not guilty since the changes were not given in that list. This aspect is discussed in more detail later.
SEBI, however, did find the fund guilty on certain other charges and issued a warning to the fund, etc. to strictly comply with the law. This obviously left the appellants without any relief from their loss.
The appellants appealed against the Order of SEBI before the SAT. The fund — and even SEBI — as per the SAT Order, first raised a preliminary objection that the appellants had no locus standi to appeal. The SAT rejected these contentions firmly. I find it strange and even unjust that SEBI, after not having granting relief to the unitholders who suffered from the changes made to the Scheme, and after having passed such Order without directly hearing them, raises this technical objection that the appellants could not appeal against such Order! I wonder then who, if at all, would appeal against such Order?
Anyway, the more substantive issue was whether the changes made in the Scheme were changes to the ‘fundamental attributes’ of the Scheme. Also, even if they were, whether the changes can be limited only to those specified in a clarification by SEBI.
The term ‘fundamental attributes’ has not been defined in the Regulations. SEBI, however, had issued a circular dated 4th February 1998. In the circular, certain changes were specified as ‘fundamental attributes’, but apparently the changes made to the Scheme as per the facts in the present case were not specifically covered.
The SAT held that the changes made to the Scheme as discussed earlier were indeed changes to the fundamental attributes observing as follows:
“10. Having regard to the changes made in the scheme by which the duration of the investments therein was altered from five to seven years to a period not exceeding 15 years, we are of the considered opinion that this change is one which affects the fundamental attributes of the scheme and also modifies the same affecting the interest of the unit holders. The words ‘fundamental attributes’ have not been defined in the regulations and, therefore, they have to be understood according to their ordinary dictionary meaning. Fundamental is something which is basic or serves as a foundation or goes to the root of the matter. In the context of an investment scheme, one of the important factors that an investor looks at is the duration for which the investments are going to be made in that scheme. In this sense, the duration of the investment constitutes one of the fundamental attributes thereof. In the instant case when the scheme was launched it had two plans — short-term plan and long-term plan the duration of both was different and the investors took an informed decision in investing in one or the other plan . ….what respondents 2 to 5 did was…. they increased the duration of the short-term plan to a long-term without informing the investors. This was most unfair. Since the duration of the investments was substantially increased, we have no doubt in our mind that one of the fundamental attributes of the scheme was altered. Even the whole-time Member has recorded a finding in the impugned order that the change in the duration virtually modified the short-term plan into a long-term plan and this is what he has observed:
“The sudden change in investing substantial funds of the scheme in long-term gilt instruments from short-term instruments had in turn changed the average maturity and the modified duration of the scheme portfolio, drasti-cally varying them, so as to modify the scheme virtually into a Long-Term Plan.”
Interestingly, note also the following observations of the SAT with regard to the findings of SEBI itself in its Order:
“The whole-time Member himself has recorded a finding that the changes affect the interest of the unit holders of the scheme. It is pertinent to refer to this finding in his own words:
“The change in the duration of the scheme is a change which certainly affects the interest of the unit holders of the scheme. Any fund house making any changes so as to modify the scheme which affects the interests of the unit holders would be liable for the contravention of Regulation 18(15A) of the Mutual Funds Regulations, if they had effected such changes without complying with the procedure mentioned therein.”
Can SEBI limit the list of changes that amount to ‘fundamental attributes’ by means of a Circular? In any case, does the Circular limits the list? The SAT observed and held as follows:
“Having recorded the aforesaid findings, the whole-time Member holds that the aforesaid changes in the scheme did not alter its fundamental attributes merely because they did not fall within the clarifications issued by the Board as per its Circular of 4th February, 1998. We cannot agree with him. The Circular was issued giving clarifications in regard to some of the fundamental attributes of a scheme. What is elaborated therein is only illustrative and in the very nature of things it cannot be exhaustive. Apart from the attributes referred to in the Circular, there could be other fundamental attributes of a scheme like the duration of a scheme as in the present case. We agree with the learned senior counsel for the respondents that if the nature of the investments were to change, the fundamental attributes of a scheme would get altered. He was right in contending that if investments were to be made in equity or money market instruments instead of Government securities as originally stipulated, the fundamental attributes of a scheme would undergo a change. But those could not be the only fundamental attributes of a scheme. As already observed, there could be other attributes as well, depending upon the nature of the scheme.
11. We are really amazed that the whole-time Member after recording a finding that respondents 2 to 5 had changed the scheme which affected the interest of the unit holders without complying with Regulation 18(15A) of the Regulations failed to issue directions to these respondents for complying with the provision. The finding recorded in this regard has already been reproduced above and we agree with the whole-time Member that respondents 2 to 5 had brought about changes in the scheme which affected the interest of the unit holders. This being so they were obliged to comply with the provisions of Regulation 18(15A) which they have not and the grievance of the appellants is justified that the Board failed to issue appropriate directions in this regard.”
SEBI had also held that adverse directions against the fund could not be passed since, according to SEBI, no such allegation was made in the show-cause notice issued to the respondents. SAT, however, found otherwise and held as follows:
“The reason given by the whole-time Member for not issuing the necessary directions is that there was no such allegation in the show-cause notice dated 7th August, 2009 that was issued to the respondents. This reason, to say the least, is most untenable. The details of the changes made in the scheme have been elaborated in the show-cause notice and there is a clear allegation in para 16 thereof that the respondents had violated, among others, Regulation 18(15A) of the Regulations. It is this Regulation which required the respondents to give an exit route to all those who were the unit holders on the date of the change including the appellants. We are satisfied that the whole-time Member grossly erred in not issuing the appropriate directions in this regard.”
The final contention was that the disclosure was made in the offer document that the fund manager could make changes as market conditions warrant. The SAT held that such a disclosure does not permit making of fundamental attributes without following the prescribed procedure and giving the prescribed relief under the Regulations.
Accordingly, the SAT set aside the Order of SEBI and directed that, subject to due verification, etc. that the appellants be compensated for the loss suffered by them for the amount being the difference between the relevant NAV and the sale price of their units.
In my view, it is also sad though that no costs were given and the investors were merely restored to the NAV which they were otherwise entitled to. The investors had of course at stake a large loss of around Rs.25 lakh and could fight till SAT for relief. However, though their claims were clearly upheld, they had to bear the costs out of their pockets. The issue is: Is this fair?
Nature of BPT:
The Bombay Port Trust was first constituted under the Bombay Port Trust Acts of 1873 and 1879. BPT is an Authority constituted for the administration, control and management of the port in Mumbai (which was and is a major port of India). Subsequently, a nationwide Act, called the Major Port Trusts Act, 1963 (‘the Act’) was enacted for all the major ports of India. This Act was made applicable to the Bombay Port Trust in the year 1975. Hence, now BPT is governed by the Major Port Trusts Act. The property owned by BPT absolutely vests in the Board by virtue of the provisions of the Act.
BPT is a State within the meaning of Article 12 of the Constitution of India and hence, it cannot act in an arbitrary or unjust manner. Its actions must be reasonable and always taken in public interest. This principle has been laid down by a host of Supreme Court decisions, such as, Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay, (1989) 3 SCC 293, Maneka Gandhi v. UOI, (1978) 1 SCC 248, etc.
Land leased out by BPT:
As discussed earlier, BPT is involved in several disputes where it wants tenants to vacate in cases where lease is expiring or has expired. A majority of the disputes pertain to: whether BPT is bound to renew leases which have expired since it is a State and hence, it must act in public interest. Further, whether or not BPT can increase the rent significantly also forms a part of this dispute.
The decision of the Bombay High Court in the case of Omprakash Tulsiram Aggarwal, 1993 Mh LJ 1725 is significant in this respect. In this case, the renewal of the lease was refused by BPT. The lessees filed a writ stating that such a refusal was an arbitrary and unilateral decision of BPT and was not keeping with the conduct expected from a State. The High Court dismissed the writ petition and held that since BPT genuinely required the land for its own use, as was evident from its correspondences and it had also passed a resolution to that effect, there were ample reasons for refusal to renew the lease. Further, the acquisition was just fair and reasonable and did not suffer from the vice of Article 14, i.e., an arbitrary and unjust action. This judgment was subsequently affirmed by the Apex Court in Kumari Shri Lekha Vidyarthi v. State of UP, AIR 1991 SC 537.
In the case of Jayantilal Dharamsey, 2001 (1) Bom CR 44 it was held that BPT cannot act capriciously and arbitrarily and would have to fix the lease rent in accordance with fairness and reasonableness. This was a very path-breaking decision and ultimately went to the Supreme Court.
The Supreme Court in the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214 had an occasion to consider Jayantilal’s decision and a bunch of other cases, all of which dealt with the issue of whether or not BPT can increase the rent significantly and terminate leases in the case of illegal sub-letting by lessees. This famous decision of the Supreme Court laid down the all-important compromise proposal in this respect. BPT proposed a compromise formula to tide over the litigation and the same was accepted by the Supreme Court with some modifications. The important principles laid down by this decision were:
(a) After 1-4-1994, revision in rents shall be @ 10% for non-residential uses and @ 8% for residential uses; Interest chargeable by the Board of Trustees of the Port of Mumbai in respect of arrears of rent for the period commencing 1-4-1994 up to the date of actual payment shall be calculated @ 6% per annum.
(b) In the case of expired leases, fresh lease on new terms shall be at the sole discretion of the Board. The grant of fresh leases may be considered taking into account restructuring requirements for the City’s Development Plan, BPT’s Master Plan and the Development Control Regulations.
(c) Where a fresh lease is granted, arrears may be recovered in the form of premium at the applicable letting rate for respective use with simple interest at 15% per annum from the date of expiry of lease till grant of fresh lease.
(d) In the case of expired leases without a renewal clause, additional premium may be recovered at 12 months’ rent at the applicable letting rate.
(e) In the case of subsisting leases, assignments and consequent grant of lease on new terms would be at the prevailing letting rate at the relevant time and in relation to use. Where the lessee is already paying rent at the prevailing letting rate, assignment would be permitted on a levy of revised rent at 25% over the applicable letting rate or on levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.
(f) Subletting, change of user, transfer, occupation through an irrevocable power of attorney and any other breaches may be regularised by levy of revised rent at the applicable letting rate at the time of such breach from the date of breach. Where the lessee/tenant is already paying rent at the prevailing letting rate, such regularisation be permitted on levy of revised rent at 25% over the applicable letting rate or a levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.
(g) The Bombay Port Trust is an instrumentality of State and hence an ‘authority’ within the meaning of Article 12 of the Constitution. It is amenable to writ jurisdiction of the Court. The consequence which follows is that in all its actions, it must be governed by Article 14 of the Constitution. It cannot afford to act with arbitrariness or capriciousness. It must act within the four corners of the statute which has created and governs it. All its actions must be for the public good, achieving the objects for which it exists, and accompanied by reason and not whim or caprice.
(h) In the field of contracts, the State and its instrumentalities ought to so design their activities as would ensure fair competition and non-discrimination. They can augment their resources but the object should be to serve the public cause and to do public good by resorting to fair and reasonable methods. The State and its instrumentalities, as the landlords, have the liberty of revising the rates of rent so as to compensate themselves against loss caused by inflationary tendencies. They can and rather must also save themselves from negative balances caused by the cost of maintenance, and payment of taxes and costs of administration. The State, as landlord, need not necessarily be a benevolent and good charitable samaritan. However, the State cannot be seen to be indulging in rack renting, profiteering and indulging in whimsical or unreasonable evictions or bargains.
(i) The ‘Compromise Proposals’ so modified shall bind the parties and all the lessees, even if not parties to the proceedings before the Supreme Court.
Consequent to the above Supreme Court decision, the Estate Department of BPT issued a Circular in November 2006 which laid down the following important provisions:
(a) It is obligatory on the part of lessees/tenants to obtain prior consent in writing of BPT for any assignment/transfer, subletting, under letting in any manner or parting with possession of the premises or any part thereof whether on leave and licence basis or otherwise.
(b) Further, BPT was not bound to accord its sanction to a proposal for the above breaches which take place without its prior consent and if they proceed any further with such breaches, they shall be doing so at their own risk, cost and consequences.
(c) It fixed 10-3-2004 as the cut-off date for the purpose of regularising past breaches, subletting, etc. Breaches committed after 10-3-2004 would attract application of revised rent/compensation prospectively i.e., from 1-9-2006 calculated based on 6% per annum return on the rates prescribed in the Stamp Duty Ready Reckoner for the year 2006 with 4% per annum increase every October, pro rata to the area of breach.
(d) It was also decided by the Board that in future, changes in lease terms like additional construction, change of user, etc. should be with prior approval.
(e) In case of subletting/assignment without prior approval, the Board reserves the right to resume possession and failure to obtain prior approval will attract, in addition to revised rent/compensation, a penalty of 12 months’ rent/compensation at the revised rates for every year of delay without prejudice to the Board’s rights and remedies including eviction and recovery of arrears, etc.
Even after the above-mentioned Supreme Court decision, several lessees are yet locked in a fierce battle with BPT, since not all issues have been resolved. A very famous club in Mumbai is currently locked in a fierce litigation with BPT which may threaten its very existence if BPT wins the ultimate battle. Its lease expired in 1990. BPT has been demanding possession of the land and premises constructed thereon. Several lessees of South Mumbai have filed an appeal in the City Civil Court which is pending. By virtue of this appeal, BPT’s order demanding possession has been stayed. It is also challenging the levy of rent from 2006 to 2010 on the grounds that it tantamount to an exorbitant enhancement of rent.
Applicability of other laws:
Another issue which arises is whether the provisions of the Maharashtra Rent Control Act, 1999 apply to land leased by BPT?
In the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214, the Court held that the issue as to the applicability of the Maharashtra Rent Control Act, 1999 to the Port of Mumbai and the property held by it is left open to be decided in appropriate proceedings.
Section 3(1) of this Act provides that it does not apply to any premises belonging to the Government or a local authority. Under the previous Rent Control Act of 1947, the definition of local authority was not given in the Act and hence, various decisions such as Ram Ugrah Singh, (1983) Mah LJ 815 had held that the BPT is a local author-ity. However, now Section 7(6) of the 1999 Rent Act expressly defines the term local authority in an exhaustive manner and does not include BPT within its definition. Hence, now BPT is not a local authority and accordingly, it is not exempt from the provisions of the Rent Act.
The Public Premises (Eviction of Unauthorised Occupants) Act, 1971 would also apply to property held by BPT — Ashoka Marketing Ltd. v. PNB, AIR 1991 SC 855.
Auditor’s duty:
The Auditor should enquire of the auditee, in case the auditee is dealing in property which is under lease from the BPT, whether the covenants of the lease deed, such as rent increases, renewal, etc. have been duly complied. Non-compliance with this could have serious repercussions for the buyer/lessee.
By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.
Background:
In India since 2001, issue of DVR shares has been allowed. These can be used to thwart hostile takeovers, as for all practical purposes, they decouple economic interest and voting rights. Shares with DVR are mainly targeted at passive investors. In most cases, small or retail investors hardly exercise their voting rights, nor do they have an understanding of corporate affairs to an extent that they can influence corporate actions. They invest in shares only for economic returns. Therefore, they give away their voting rights in favour of those investors who run the company and have management control. Thus, this mode offers investors an avenue to acquire shares at lower prices with prospects of higher dividends in return for surrendering their voting rights.
Importance:
DVR shares offer investors an opportunity to earn better returns in lieu of surrendering their voting rights and also allow a company to dilute its equity without matching dilution in the promoters’ stake. At times companies issue DVR shares to fund new large projects. This also helps strategic investors who do not want control but are looking at a reasonably big investment in a company.
Legal requirement:
Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2002.
Conditions:
Rule 3 provides that every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if apart from specified procedural compliances, it conforms to the following:
Global perspective:
A large number of global giants have raised funds through DVR issues, prominent among them are Google, NewsCorp and Berkshire Hathaway.
Indian scenario:
While DVR is a well-accepted instrument used by blue-chip companies in international markets to raise funds, even after a decade of the government’s Notification, the concept is yet to gain wide currency in India.
Pantaloons Retail India Ltd. Bonus Issue:
In July 2008, PRIL, India’s leading retailer, was the first to issue bonus shares with a DVR option. The company made a bonus issue of 1: 10 shares with differential voting rights and 5% additional dividends as well. Although there is no fund-raising involved in a bonus issue of shares, the idea was to get the markets familiar with such instruments and create another alternative to raise funds in the future. “Differential voting rights (DVR) has become a widely used innovative instrument in global markets and by coupling a bonus issue with a DVR, we believe in enhancing alternatives for our shareholders,” Kishore Biyani, MD of PRIL had stated in a press release.
Gujarat NRE Coke Ltd. DVR:
In September 2009, the company issued B Equity Shares of the Company with Differential Voting Rights (DVR Shares) with lower voting rights (1/100th of the voting right of ordinary equity share). The same were issued as bonus shares in the ratio of 1 B equity shares for every 10 equity shares held.
The above illustrates the past one year relative performance of the ordinary equity share (512579) vis-à-vis the DVR share (GUJNREDVR) and the broader markets (BSE Sensex). We find that while both the ordinary as well as the DVR share have moved in a direction opposite to the BSE and have witnessed reduced share prices; the magnitude of the fall for DVR (29%) is less than that of the ordinary share (39%).
Tata Motors DVR:
In October 2008, Tata Motors became the first Indian company to make a rights issue of shares carrying differential voting rights (DVR) (issue size: Rs.1960.42 crores). DVR shares have 1/10th of voting rights of ordinary shares and offer a 5% higher rate of dividend over the normal shares. It issued these shares at Rs.305 i.e., about 10% lower than the issue of normal rights at Rs.340.
The diagram shown alongside illustrates the past one year relative performance of the ordinary equity share (500570) vis-à-vis the DVR share (TATAMTRDVR) and the broader markets (BSE Sensex). We find that while both the ordinary as well as the DVR
share have outperformed the BSE; the magnitude of the gain for DVR (39%) is less than that of the ordinary share (48%).
Conclusion:
For an investor, who believes in being a part of the company’s decision processes, DVR shares are not attractive due to limited voting rights.
However, if one is a minority investor and isn’t concerned much with voting rights per se, then investing in the DVR would certainly be an attractive proposition. DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVR and ordinary shares is large, providing good opportunity to investors. (Globally, the discount between shares with DVRs and ordinary shares is about 10%.) Not only does an investor stand to gain from capital appreciation in a scenario where the price difference between the ordinary and the DVR share reduces over a period as a result of rising awareness about the product, he will also be entitled to higher dividends. Furthermore, he can always invest back in ordinary shares by exiting DVRs once the differential narrows. Thus, the riskreward ratio of investing in DVRs looks somewhat skewed towards the latter. The only caveat is that before investing in a DVR, investors need comfort about the company’s fundamentals and prospects, and more importantly, its management.
(i) The transfer does not conform to the pricing guidelines as stipulated by the Reserve Bank from time to time; or
(ii) The transfer of shares requires the prior approval of the FIPB as per the extant Foreign Direct Investment (FDI) policy; or
(iii) The Indian company whose shares are being transferred is engaged in rendering any financial service; or
(iv) The transfer falls under the purview of the provisions of SEBI (SAST) Regulations. Similarly, transfer of shares from a Non-Resident to a Resident which does not conform to the pricing guidelines as stipulated by the RBI also requires prior approval of RBI.
This Circular provides that prior approval of RBI will not be required in the following cases:
A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met, provided that:
(i) The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.
(ii) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/substantial acquisition/ SEBI SAST, buyback).
(iii) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank. B.
Transfer of shares from Resident to Non- Resident:
(i) Where the transfer of shares requires the prior approval of the FIPB — provided that:
(a) The requisite approval of the FIPB has been obtained; and
(b) The transfer of share adheres with the pricing guidelines and documentation requirements as specified by the RBI from time to time.
(ii) Where SEBI (SAST) guidelines are attracted — subject to the adherence with the pricing guidelines and documentation requirements as specified by RBI from time to time.
(iii) Where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that:
(a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.
(b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, book building, block deals, delisting, exit, open offer/ substantial acquisition/SEBI SAST).
(c) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.
(iv) Where the investee company is in the financial sector provided that:
(a) NOC are obtained from the respective financial sector regulators/regulators of the investee company as well as transferor and transferee entities and such NOC are filed along with the form FC-TRS with the AD bank.
(b) The FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation etc., are complied with.
This Circular has relaxed the requirements as under:
FII:
(i) FII would, in addition to investment in infrastructure companies, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR1,545 billion.
(ii) The lock-in-period of three years for FII investment stands reduced to one year up to an amount of INR309 billion within the overall limit of INR1,545 billion. This lock-in-period shall be computed from the time of first purchase by FII.
(iii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by an FII.
QFI:
(i) QFI would, in addition to investment in Mutual Fund debt schemes, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR185 billion.
(ii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by a QFI.
This Circular has done away with the criteria of 1:1 ratio between metro and non-metro branches.
This Circular has extended the relaxation for a further period of one year i.e., up to September 30, 2012. Hence, export proceeds representing the full export value of goods or software exported, can be realised and repatriated to India within twelve months from the date of exports made up to September 30, 2012.
This Circular clarifies that:
(a) In terms of s.s 4 of section (6) of FEMA, 1999, a person resident in India is free 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:
(i) Acquired, held or owned by such person when he was resident outside India or
(ii) Inherited from a person who was resident outside India.
(b) An investor can retain and reinvest overseas the income earned on investments made under the Liberalised Remittance Scheme.
This Circular states that FCNR(B) accounts can now be opened in any freely convertible currency.
Powers and functions delegated to the Regional Directors for specified provisions of the Act — Supersession of Notification G.S.R. No. 288(E), dated 31-5-1991.
The Central Government vide Notification dated 17-3-2011, F. No. 5/07/2011-CL-V has delegated to the Regional Directors at Mumbai, Kolkata, Chennai, Noida and Ahmedabad, the powers and functions of the Central Government under the following provisions of the said Act, namely:
This Circular has increased this limit per transaction from INR30,902 to INR185,413 with immediate effect.
