By this Notification, taxable service of transportation of goods by air has been exempted to the extent of air freight included in the custom value of goods.
Notification No. 09/2011, dated 1-3-2011.
Category: Corporate And Other Laws
A.P. (DIR Series) Circular No. 25, dated 23-9-2011 — External Commercial Borrowings (ECB) for the Infrastructure Sector — Liberalisation.
Presently, repayment of existing Rupee loans is not a permissible end-use for ECB.
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.
A.P. (DIR Series) Circular No. 74, dated 30-6-2011 — FDI in India — Issue of equity shares under the FDI Scheme allowed under the Approval Route
Presently, an Indian company can, subject to compliance with certain guidelines, issue equity shares/preference shares to a person resident outside India, for consideration other than cash, against payment of royalty/lump sum fees for supply of technology/technical know-how under the Automatic Route.
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.
A.P. (DIR Series) Circular No. 73, dated 29-6-2011, Overseas Direct Investment — Liberalisation/Rationalisation.
This Circular restates and consolidates the existing guidelines relating to:
(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.
Supreme Court upholds depositors’ protection laws of States
The Supreme Court recently (K. K. Baskaran v. State rep. by its Secretary, Tamil Nadu & Ors., C.A. 2341 of 2011) upheld a fairly drastic, even if wellintended, State law for protection of depositors. This law was held to be unconstitutional by a Full Bench of the Bombay High Court and this decision has now been overturned by the Supreme Court. The importance of this decision for this column is particularly due to the fact that it applies to raising funds from the public in almost any form and not just in the form of ‘deposits’ as conventionally understood.
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.
Part A: PART A: ORDER of CIC
Section 24 and Schedule II and section 8(1)(g) & (h) and sections 4(i)(d), 10 and 22:
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]
Slum Redevelopment part I
Introduction
‘Roti, Kapda aur Makaan’ are the three basic necessities in everyone’s life. While a good number of people in India have been fortunate in obtaining these necessities, there are several who have not been so successful. This has led to India and especially Mumbai having the unique distinction of housing some of the largest slums in the world. Mumbai has over 2,000 slum clusters, each of them housing over 100 to several thousand shanties. Slums and skyscrapers existing cheek by jowl in Mumbai are a common scenario. Slums are a hazard to society, environment and health. Considering these problems, the Maharashtra Government enacted the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971 (‘the Act’). It is an Act to make a better provision for the improvement and clearance of slum areas in the State and for their redevelopment and for the protection of occupiers from forceful eviction. The shortage of land for development in Mumbai has forced developers to look at slum redevelopment as an active option. This has led to slum redevelopment schemes gaining popularity. According to a 2010 Research Report, 52% of the upcoming realty projects in Mumbai, spread over 8,600 acres, are slum redevelopment schemes. Another Research Report estimates the land value occupied by Mumbai slums to be Rs.1 lakh crore on a conservative basis.
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
Under the Act, the State Government appoints one or more persons as the Competent Authority for administering the Act in various areas. For instance, for area belonging to MHADA, MHADA is the Competent Authority, and the Additional Collector, Mumbai is the Competent Authority for all lands in Mumbai city. Similarly, Competent Authorities are appointed for different areas in the State.
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
Interestingly, the word ‘slum’ which is the edifice of this Act has not been defined under the Act. A slum rehabilitation area is an area declared to be one under a scheme. An area would be declared as a slum area if it fulfils the following conditions:
(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
On and after the 2001 Amendment Act, protected occupiers cannot be evicted from their dwelling structure. Protected occupiers can be evicted if the State Government is of the opinion that it is necessary to do so.
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.
(b) The final decision on whether to commence or abandon or modify/postpone the improve ment is that of the Competent Authority.
(c) Improvement of the slums may consist of laying of water mainlines/sewers/drains; provision for sanitation facilities, wid ening of roads, street lighting, landscaping, providing social infrastructure, such as playgrounds, parks, police station, hospitals, etc.
(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.
Right to appear and practice — General power of attorney holder is not entitled to appear and argue — Advocates Act, 1961.
[ Madupu Harinarayana v. The ld. 1st Addl. District Judge & Ors., AIR 2011 (NOC) 233 AP] A conspectus of Rules 1 and 2 of Order III of the Code of Civil Procedure, section 2(a) and sections 29, 30, 33, 34 of the Advocates Act, Rule 2 of Rules made by the High Court of Andhra Pradesh u/s. 34(1) of the Advocates Act and Code of Criminal Procedure would show that all the pleadings in a proceeding shall be made by the party in person, or by his recognised agent. A party in person, and a recognised agent, have to make an appointment in writing (vakalatnama) duly authorising the advocate to appear and argue the case. Only an advocate entered on the rolls of the Bar Council of Andhra Pradesh, who has been given vakalat and which has been accepted by such advocate, can have the right of audience on behalf of the party, or his recognised agent, who engaged the advocate. Sections 29 and 30 of the Advocates Act make it clear that advocates are the only recognised class of persons entitled to practise law, and such an advocate should have been enrolled as such under the Advocates Act. Section 32 of the Advocates Act empowers the Court to permit any non-advocate to appear in a particular case. This only means that any person has to seek prior permission of the Court to argue a case if he is not an advocate enrolled under the Advocates Act. Further, it is an offence for a non-advocate to practise under the provisions of the Advocates Act.
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.
IS IT FAIR TO EXTEND PRESUMPTIVE TAXATION TO ALL BUSINESSES ?
In a developing country like India, even after sixty years of independence a majority of the population still lives below poverty line. In their day-to-day life, they have to struggle for subsistence. Besides leading an impoverished life, a large number of people are illiterate. Till date, many of them cannot even write their own name. In this situation, the various constitutionally valid laws are nothing but “kale akshar bhains barabar” and cannot be comprehended by the people. In spite of this, it is binding on them to follow such unknown statutes. Any contravention, whether intentional or not, attracts harsh penalties.
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.
Organiser of business exhibition exempted for organising exhibition abroad — Notification No. 05/2011, dated 1-3-2011.
By this Notification, business exhibition services provided by an organiser of business exhibition for holding a business exhibition outside India has been exempted from whole of the service tax.
Air travel service tax enhanced for domestic and international passengers — Notification No. 04/2011, dated 1-3-2011.
Service tax rules amended — Notification No. 03/2011, dated 1-3-2011.
Service Tax (Amendment) Rules, 2011 notified by the Central Government effective from 1-4-2011 provide that:
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%.
Service tax Valuation Rules amended — Notification 02/2011, dated 1-3-2011.
By this Notification Service tax (Determination of Value) Rules, 2006 have been amended to prescribe in detail determination of value of services in relation to money-changing activity.
Erection, Commissioning & Construction Works Contract — CENVAT credit restricted to 40% when tax paid on the full value — Notification No. 01/2011, dated 1-3-2011.
By this Notification Works Contract (Composition Scheme for payment of Service Tax Rules, 2007) have been amended to provide that the CENVAT credit on taxable services of erection, commissioning and installation, commercial or industrial construction and construction of commercial complex shall be available only to the extent of 40% of the service tax paid when such tax has been paid on full value of the service after availing CENVAT credit on inputs.
Adjustment of Refund of F.Y 2010-11 to F.Y 2011-12 up to Rs.1 lakh — Trade Circular 6T of 2011, dated 15-4-2011.
By this Circular a dealer has been allowed to carry forward refund of F.Y 2010-11 to F.Y 2011-12 up to maximum of Rs.1 lakh. The dealer who has already filed the claim of refund can withdraw his claim by making application to the concerned refund audit officer and then he can adjust his refund claim against liability for the F.Y 2011-12.
Grant of Refunds against Bank Guarantee — Trade Circular 5T of 2011, dated 11-4-2011.
Part B of the Trade Circular No. 22T of 2010 is related to granting of refunds against bank guarantee subject to instructions. Now the instructions contained in the said Circular stand modified by this Circular. Accordingly, now refund against bank guarantee shall be granted any time for any period even after the due date of filing of audit form 704 is over. The condition of refund audit of previous period and major discrepancies will not be applicable in the bank guarantee cases. After granting refund against bank guarantee, if refund audit officer notices that the dealer is avoiding/delaying the process of refund audit, then the concerned joint commissioner shall encash the bank guarantee submitted by the dealer immediately.
VALUATION OF CUSTOMER-RELATED INTANGIBLE ASSETS
This article is in continuation to the earlier article on ‘Valuation of Intangible Assets’ published in the January 2011 issue of the Journal. In the January 2011 article we discussed about the five categories under which generally accepted intangible assets fall and got a brief background on the various methodologies that are often used to value these intangible assets. In this article, we will discuss exhaustively the customer-related category of intangible assets. I have selected this category to start with, because the results of various surveys (whether formally published or otherwise) carried out globally, show that customer-related intangible assets are the most often recognised intangible assets which get reported, by way of a purchase price allocation process and one of the primary value drivers for an acquisition.
The article is divided as follows:
Identification of customer-related intangible
assets
- Examples
- Definition
- Basis of identification
- Additional highlights
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
A Journey from a Family-owned to a Professionally Managed Listed Company
From a small-sized family-owned company to becoming a large professionally managed public listed company in the pharmaceutical industry, the journey was not an easy one for us. The Company leadership had to confront many challenges from time to time for the transition from an entrepreneur-driven company to a professionally managed company. The leadership had to undergo significant changes in terms of roles, orientation, business strategy, organisational culture, governance, systems, decisionmaking, structures and overall way of working.
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”.
Family managed companies in a globalising economy
The role of the family managed companies in a globalising economy that the Editorial Board of the BCA Journal has chosen for discussion is timely and opportune. It is timely because we are now living in a world that is getting increasingly interdependent. The natural barriers like mountains and oceans have ceased to be barriers for preventing the interdependence of nations. Now our currencies are linked, commerce is one and our fortunes are interdependent. What happens somewhere, matters everywhere. India and Pakistan acquiring capabilities to produce nuclear weapons are not only a matter of regional concern but are matters of concern across the globe.
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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(1.1) |
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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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(1.3) |
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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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Why must we consider both the measures, valued added per employee and the return on capital employed? Will it not suffice if we focus our attention only on the return on capital employed? The answer to this question is no. It is important that an organisation must achieve high value added per employee and a high return on capital employed10. The reason for this is that the value added per employee judges the organisation’s effectiveness in using its human resources. Similarly, the return on capital employed judges the organisation’s effectiveness in using the capital at its disposal. An organisation will not prosper in the long run if it does not effectively use its human capital and monetary resources. Is it possible for an organisation to earn a high return on capital employed but earn very low value added per employee? Unfortunately, the answer is yes. The dabbawalas of Mumbai provide an excellent example of an organisation that earns a high return on capital employed but earns very low value addition per employee. In Appendix I, we provide the details.
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.
Salient features of
Shiva Pharmachem Pvt. Ltd.’s financial statements
Shiva Pharmachem Pvt. Ltd.’s financial statements
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Units |
Year ending |
Year ending |
Percentage |
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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% |
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Capital employed |
Rs. |
317,443,961 |
193,143,180 |
39.16% |
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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% |
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per employee |
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per year |
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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 |
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India |
India |
China |
India |
China |
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(US$ bn) |
(%Share) |
(US bn) |
(%Share) |
(US$ bn) |
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(%Share) |
(US bn) |
(%Share) |
(US$ bn) |
(US$ bn) |
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1994 |
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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 |
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152 |
2.86 |
4.35 |
9.14 |
158 |
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2.60 |
4.11 |
15.19 |
8.47 |
37.97 |
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1996 |
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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 |
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156 |
3.37 |
5.26 |
8.88 |
178 |
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2.45 |
4.36 |
17.91 |
9.59 |
45.63 |
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1998 |
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150 |
3.04 |
4.56 |
8.55 |
186 |
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2.57 |
4.78 |
16.16 |
9.34 |
42.87 |
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1999 |
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146 |
3.48 |
5.08 |
8.92 |
185 |
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2.79 |
5.16 |
16.29 |
10.24 |
43.12 |
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2000 |
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159 |
3.78 |
6.01 |
10.17 |
198 |
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3.12 |
6.18 |
18.21 |
12.18 |
52.21 |
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2001 |
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149 |
3.6 |
5.36 |
11.27 |
194 |
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2.83 |
5.49 |
18.91 |
10.86 |
53.48 |
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2002 |
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156 |
3.87 |
6.04 |
13.19 |
206 |
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2.93 |
6.04 |
20.03 |
12.07 |
61.86 |
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2003 |
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175 |
3.92 |
6.86 |
15.41 |
234 |
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2.83 |
6.62 |
22.24 |
13.47 |
78.96 |
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2004 |
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196 |
3.58 |
7.02 |
17.1 |
261 |
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2.55 |
6.66 |
23.74 |
13.64 |
95.28 |
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2005 |
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205 |
4.13 |
8.47 |
20.01 |
278 |
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3.31 |
9.20 |
26.68 |
17.67 |
115.21 |
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2006 |
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219 |
4.27 |
9.35 |
22.27 |
311 |
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3.27 |
10.17 |
30.63 |
19.52 |
144.07 |
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CAGR |
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4.24% |
3.25% |
7.63% |
7.86% |
6.81% |
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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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(Source: http://stat.wto.org)
Appendix II
Pages reproduced from www.mydabbawala.com
ABOUT DABBAWALAS
Appendix II
Pages reproduced from www.mydabbawala.com
ABOUT DABBAWALAS
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.
10. “Productivity is the
prime determinant in the long run of a nation’s standard of living, for it is
the root cause of national per capita income. The productivity of human
resources determines their wages while the productivity with which capital is
deployed determines the return it earns for its holders.” Michael Porter, The
competitive advantages of nations (London and Basingstoke, 1990, The Macmillan
Press Ltd.) P. 6.
prime determinant in the long run of a nation’s standard of living, for it is
the root cause of national per capita income. The productivity of human
resources determines their wages while the productivity with which capital is
deployed determines the return it earns for its holders.” Michael Porter, The
competitive advantages of nations (London and Basingstoke, 1990, The Macmillan
Press Ltd.) P. 6.
11. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report 13 February 2006) P.
1
of family business’ (Bloomberg Businessweek special report 13 February 2006) P.
1
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.
In defence of Family Companies
The Credit Suisse Family Index, a composite index based on an universe of 172 large US and European family companies, has regularly outperformed other major global indices like MSCI, S & P 500, etc. There are, in fact, various surveys conducted from time to time which generally conclude that family managed companies perform better than non-family managed companies. In the Indian context, an Economic Times analysis published in their issue dated September 22, 2006, avers that there is no clear difference in the performance of family and non-family companies. Yet, public debates in the recent years have mostly depicted the former in a very poor light. This article attempts to examine whether family companies are indeed the villains of the corporate world.
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.
Modifications to form for availability/change of name and increase in fees effective 24th July 2011.
Vide notification dated 14th July 2011, the Ministry has made certain modifications to the Form 1A — Form for application for name of new company or change of name of existing company, if certified by a practising professional, it will be processed and examined electronically and the name will be approved online. The fees are now increased to Rs.1000.
Name Availability Guidelines, 2011 effective 24 July 2011.
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.
PAN to be updated by DIN and DPIN holders.
All DIN holders and DPIN holders need to intimate vide DIN4 their PAN by 30th September, 2011, failing which their DPIN/DIN will be disabled and they will also be liable for a heavy penalty.
Recovery of debt — DRT has no jurisdiction to prohibit borrower from leaving country without prior permission of Tribunal — Constitution of India, Article 21 — Debts Recovery Tribunal Act, 1993.
[ State Bank of India v. Prafulchandra V. Patel & Ors., AIR 2011 Gujarat 81]
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.
LIMITS ON SEBI’S POWERS — another decision of SAT
There is an impression — little exaggerated of course — that SEBI can punish anyone for any thing it deems wrong and in any manner it deems fit ! This belief seems to have its basis if one considers some of the amendments made and laws introduced over a period of time. This belief is further reinforced by decisions supporting these wide powers of SEBI.
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
Vide Notification dated 3rd June, 2011, the MCA has issued ‘The Companies (Cost Audit Report) Rules, 2011 which shall apply to every company in respect of which an audit of the cost records has been ordered by the Central Government under sub-section (1) of section 233B of the Act.
For further information:
http://www.mca.gov.in/Ministry/notification/pdf/ Revised_Report_Rules_03jun11.pdf
PART C: Information on & Arround
Information on Mr. Sharad Pawar’s traveling on private plane:
Says Mr. Eknath Khadse (BJP leader):
Says Mr. Eknath Khadse (BJP leader):
‘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
PART B: The RTI Act , 2005
From the minutes of the meeting of 22.03.2011 of the central information commission.
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.
Bombay Public Trusts Act
Introduction: In the State of Maharashtra, Public
Trusts are governed by the Bombay Public Trusts Act, 1950 (‘the Act’).
Under the Act, the Charity Commissioner is in charge of public trusts.
The State of Gujarat also has a law similar to the Bombay Public Trust
Act.
Trusts are governed by the Bombay Public Trusts Act, 1950 (‘the Act’).
Under the Act, the Charity Commissioner is in charge of public trusts.
The State of Gujarat also has a law similar to the Bombay Public Trust
Act.
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
International Arbitration — Jurisdiction of Indian Court ousted — Arbitration and Conciliation Act, 1996 section 37(2)(b).
[ Yograj Infrastructure Ltd. v. Ssangyong Engineering & Const. Co. Ltd., AIR 2011 (NOC) 189 (MP)]
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.
Guarantor — Recovery of loan — Corporation cannot sell out properties mortgaged to it by guarantors — State Financial Corporation Act — Section 29, section 31.
[Gunamani Swain & Ors. v. Orissa State Financial Corporation & Ors., AIR 2011 Orissa 83]
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.
Counsel — Withdrawal of Counsel — Permission of Court is necessary — Civil Procedure Code.
[Anabik Gupta & Ors. v. Swapan Saha, AIR 2011 Gauhati 100]
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.
Vide notification dated 23rd May 2011, the MCA has issued amendments to Schedule XII of the Companies Act, 1956 pertaining to remuneration of Managing Director or Whole-Time Director for a subsidiary of a listed company.
For further information:
http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf
Vide Notification dated 30th May 2011, the MCA has issued the Companies (passing of resolution by postal Ballot) Rules, 2011 to include voting by electronic mode and sending of notices through e-mail for listed companies for certain business as listed therein in Rule 5.
For further information:
http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf
Vide Notification dated 2nd June 2011, the MCA has issued ‘The Companies Director Identification Number (Second Amendment) Rules, 2011’ which are effective from 12th June, 2011 and wherein the Annexure I and II to the Din Forms 1 and 4 have been modified and the form can also be digitally signed by a Company Secretary in full-time employment of the company.
For further information:
http://www.mca.gov.in/Ministry/notification/pdf/ DIN_GSR_02jun2011.pdf
A.P. (DIR Series) Circular No. 32, dated 10-10- 2011 — Liberalised Remittance Scheme for Resident Individuals — Revised applicationcum- declaration form.
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.
SEBI Takeover Regulations, 2011— matters of regular compliance other than on open offer
Part 2
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.
Is it fair to apply section 314 of the Companies Act, 1956 to private limited companies?
Background
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.
PART C: Information on & Around and Part D : RTI & SUCCESS STORIES
PART C: Information on & Around
RTI activist stabbed in Ahmadabad:
Another Tragedy
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.
The gruesome murder has once again sparked off a controversy about policing in the state. Saiyed was also suspected of being a police informer. He is believed to have informed senior police officers that the people who were arrested following a recent incident in which a police vehicle was torched while trying to rescue cows brought for slaughter in Juhapura, were not the real culprits.
The sources said that because of Saiyed’s past of exposing criminals, the real motive behind the murder could be of eliminating him from Juhapura for good.
RTI Impact:
Chief Minister Prithviraj Chavan said that he does not take decisions in haste as, “I am aware that I have to face the Right to Information Act.”
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.
Post mortem Centre at JJ Hospital, Mumbai:
A STARTLING expose made by an ‘aam aadmi’ using the Right to Information Act, has revealed that the chief of postmortem centre at JJ Hospital has been neglecting his primary responsibility at the hospital and instead, has been running a private hospital in Badlapur. Moreover, he continues to derive benefits of the Non Practicing Allowance (NPA)while he is busy treating patients at his private hospital.
Fed up with the delay in securing an autopsy report of a deceased relative who was admitted at JJ hospital in April, Asad Patel, a resident of Jogeshwari, decided to investigate the reason for this delay.
Having decided to expose Rathod, Patel got admitted at the Rathod Hospital in Balapur on April 27, complaining of tension and chest pain. According to Patel, Dr. Rathod personally treated him and had carried out an ECG and a blood test. Patel was later discharged after paying Rs. 750.
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.
Following this revelation, Patel lodged a complaint against Dr. Rathod on August 24 with Health Minister Suresh Shetty, demanding action against the doctor.
“I have also learnt that Dr. Rathod visits the hospital just once a week and is bribing the clerks to mark his attendance for the remaining working days,” alleged Patel.
Penalty on PIOs:
The central Information Commission is handling babus with “Kid gloves” for not providing information within the prescribed timeframe or flouting rules of the Right to Information Act, statistics have revealed. Under the Act, the information commissioner can impose a penalty or order compensation and disciplinary action against erring public information officers.
Since 2006-07, the CIC has imposed penalties in only 648 cases (less than 1%) under the Act, even though it has disposed of 75,284 appeals/complaints out of 94,209 since 2006-07. Of these 648 cases, the CIC recovered penalties in only 532 cases in five years, amounting to around Rs.60 lakh. Thus, the CIC is yet to recover penalties in 18% cases.
The CIC sanctioned compensation in only 134 cases in six years. In 22 cases, disciplinary action against the chief public information officer (CPIO) was sanctioned.
Part D : RTI & SUCCESS STORIES
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.
Vicarious liability — Breach of contract — Damages for non-performances of contract — Contract Act.
[ Padam Chandra Singhi & Ors. v. P. B. Desai & Ors., 2011, Vol. 113(5) Bom. L.R. 3409]
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.
Unstamped document — Document not duly stamped not admissible even for collateral purpose — Stamp Act, 1899, section 35 — Public Document — Evidence Act, Section 74.
[ Smt. Mamta Awasthy & Ors. v. Ajay Kumar Shrivastava, AIR 2011, Madhya Pradesh 166]
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.
Damages — Goods carried at ‘Owners Risk’ — Carrier cannot escape from the liability to make good loss — Contract Act, section 151 and Carriers Act, 1865, section 9.
[ M/s. Sirmour Truck Operators Union (Regd.) v.National Insurance Co. Ltd., AIR 2011 (NOC) 389 (H.P.)]
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.
Daughter — Does not include ‘Step daughter’ — Hindu Succession Act, 1956, section 15(1)(a).
[ Raj Rani & Anr. v. Bimla Rani, AIR 2011, Delhi 170]
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.
Are Options an Option?
Introduction
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!”
Coastal Regulation Zone
Introduction
The Environment (Protection) Act, 1986 is a general Act which deals with the protection and improvement of the environment. It fixes responsibilities on persons carrying out industrial operations and also prescribes standards to control and prevent pollution arising from the same. Section 3 of the Act provides that the Central Government may provide for restriction of areas in which operations shall not be carried out or would be subject to certain safeguards. In pursuance of these powers, the Ministry of Environment and Forests has issued the Coastal Regulation Zone (‘CRZ’) Notification to protect coastal lines and regulate activities in these areas. In a country like India and more so in a city like Mumbai, which has a very long coastal line, regulations dealing with protection of this very valuable natural resource have an important role to play.
The Environment (Protection) Act, 1986 is a general Act which deals with the protection and improvement of the environment. It fixes responsibilities on persons carrying out industrial operations and also prescribes standards to control and prevent pollution arising from the same. Section 3 of the Act provides that the Central Government may provide for restriction of areas in which operations shall not be carried out or would be subject to certain safeguards. In pursuance of these powers, the Ministry of Environment and Forests has issued the Coastal Regulation Zone (‘CRZ’) Notification to protect coastal lines and regulate activities in these areas. In a country like India and more so in a city like Mumbai, which has a very long coastal line, regulations dealing with protection of this very valuable natural resource have an important role to play.
The Ministry had originally notified the CRZ Guidelines in 1991 vide Notification No. S.O. 114(E), dated 19th February 1991. These were amended and updated from time to time. 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:
- To provide a safe and decent dwelling to the slum-dwellers, the State Government may implement slum redevelopment schemes.
- The stake of the State Government should not be less than 51% in such redevelopment schemes which are in partnership with private sector.
- The FSI for such schemes should be in accordance with the existing regulations. Thus, an FSI of up to 4 can be availed depending upon the facts. This is a welcome move.
- All legally regularised tenants must be provided houses in situ or as per norms laid down by the State Government. Projects would be undertaken only after public consultation in which views of the tenants of such building would be obtained.
- Such schemes would be audited by the Comptroller & Auditor General.
- All redevelopment schemes would be subject to the Right to Information Act, 2005 in order to improve transparency.
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:
- They shall be allowed to be taken up even with private developers.
- The FSI shall be in accordance with prevailing norms.
- Suitable accommodation must be provided to the original tenants during the course of redevelopment.
- The Ministry may appoint Statutory Auditors empanelled with Comptroller & Auditor General to undertake performance and fiscal audit in respect of such redevelopment schemes.
- Projects would be undertaken only after public consultation in which views of the tenants of such building would be obtained.
- All redevelopment schemes would be subject to the Right to Information Act, 2005 in order to improve transparency.
(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’.
Precedent — Judicial discipline — Contradictory decisions by Co-ordinate Benches — Institutional integrity.
[Gammon India Ltd. v. Commissioner of Customs Mumbai, 2011 (269) ELT 289 (SC)]
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.
Compensation — Minor driving motorcycle without licence — Liability to pay compensation shifts on owner — Motor Vehicles Act 1988, section 168.
[ Jawahar Singh v. Bala Jain & Ors., AIR 2011 SC 2436]
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.
Liability of guarantor — After his death does not extinguish — Specific contract — Banker’s right of general lien — Contract Act, section 131.
[ State Bank of India & Anr. v. Mrs. Jayanthi & Ors., AIR 2011 Mad. 179]
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.
Power of attorney — Revocation by registered deed — Registration Act section 17(1)(b).
[Chandrama Singh & Ors v. Mirza Anis Ahmed, AIR 2011 Allahabad 114]
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.
Dishonour of cheque — Cheque drawn in foreign country — Accused cannot be prosecuted in India — Negotiable Instruments Act, 1881.
[ Pale Hourse Designs & Anr. v. Natarajan Rathnam, AIR 2011 (NOC) 274 (Mad.)]
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.
Improving service delivery time of approval of company’s registration and critical services (Registration in 24 hours)
The Ministry has given highest priority for the approval of the following e-forms: Form Nos. 1, 1A, 18, 32, 37, 39, 44 and 68 which are connected with incorporation services.
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.
Companies (Director Identification Number) Amendment Rules, 2011.
The Ministry of Corporate Affairs has with effect from 27th March 2011 simplified the procedure for issue of DIN. By this amendment now no physical documents are required to be sent. In the revised procedure the DIN 1 form has to be submitted electronically along with the scanned documents duly verified by a practising professional. Where the form is digitally singed by a practising Chartered Accountant, Company Secretary or Cost accountant, the number will be immediately given online. In other cases the application will be examined by the Central Government and disposed of in two to three days.
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.
Prosecution of Directors.
The Ministry of Corporate Affairs has issued a General Circular No. 2/13/2003/CL-V regarding the prosecution of independent directors of listed companies, nominee directors of the Central Govt. or of the public financial institutions. The circular states that the Registrar of Companies should take extra care in examining the cases where above directors are identified as officer in default.
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
SAT directs Mutual Fund to compensate unitholders — for loss in NAV on account of changes to Scheme
The essential issue raised recently was, if a mutual fund raises money under certain terms and then it changes them, what is the recourse available to the investor? What do the SEBI (Mutual Funds) Regulations, 1996 (‘the Regulations’) provide for this? When do such changes amount to change in ‘fundamental attributes’ which would require giving exit to the unit holder at the prevailing NAV? Can SEBI limit and define by a circular what are ‘fundamental attributes’? What are the implications of SEBI’s circular explaining what are ‘fundamental attributes’? If the mutual fund changes ‘fundamental attributes’ without following the prescribed procedure, what relief does the law provide to the investor? What if the mutual fund does not provide such relief? Is the only recourse available to investors to file a civil suit to obtain relief? These and other issues are dealt with in the recent decision of the Securities Appellate Tribunal (‘SAT’) in (Appeal No. 111 of 2010, decision dated 3rd May 2011, unreported but available on SEBI’s website).
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?
Port Trust Land
Introduction:
One of the largest landlords in the island city of Mumbai is the Board of Trustees of the Port of Mumbai or the Bombay Port Trust or the BPT as it is popularly known. BPT had let out large parcels of land (e.g., the Ballard Estate area of South Mumbai) on a rental basis. The area of land leased out by BPT is around 300 hectares. However, since the past few years, with real estate becoming a very scarce commodity in the city of Mumbai, there has been a spate of litigation between BPT as a landlord and the tenants on the other hand. In this scenario, it is important to understand the nature of the lease arrangement with BPT and the consequences of the same.
One of the largest landlords in the island city of Mumbai is the Board of Trustees of the Port of Mumbai or the Bombay Port Trust or the BPT as it is popularly known. BPT had let out large parcels of land (e.g., the Ballard Estate area of South Mumbai) on a rental basis. The area of land leased out by BPT is around 300 hectares. However, since the past few years, with real estate becoming a very scarce commodity in the city of Mumbai, there has been a spate of litigation between BPT as a landlord and the tenants on the other hand. In this scenario, it is important to understand the nature of the lease arrangement with BPT and the consequences of the same.
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’.
SHARES WITH DIFFERENTIAL VOTING RIGHTS — A USER’S PERSPECTIVE
Concept:
Shares with differential voting rights (DVR shares) are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend.
Shares with differential voting rights (DVR shares) are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend.
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:
- It has distributable profits in terms of section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares.
- It has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such shares.
- The issue of such shares cannot exceed 25% of the total issued share capital of the company.
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%).
(Source: Google Finance)
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%).
(Source: Google Finance)
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.
A.P. (DIR Series) Circular No. 43, dated 4-11-2011 —Foreign Direct Investment — Transfer of shares.
Presently, transfer of shares from a Resident to a Non-Resident requires the prior approval of RBI in the following cases:
(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.
A.P. (DIR Series) Circular No. 42, dated 3-11-2011 — Foreign investment in India by SEBI registered FIIs in other securities.
Presently, Foreign Institutional Investors (FII) are allowed to invest up to INR1,545 billion in in nonconvertible debentures/bonds issued by Indian companies in the infrastructure sector, provided the said instruments had a residual maturity of five years and the investments would have a lock-in-period of three years. Similarly, Qualified Foreign Investors (QFI) are allowed to invest in units of Mutual Funds debt schemes up to a limit of INR185 billion within the overall limit of INR1,545 billion for FII investment in non-convertible debentures/ bonds issued by Indian companies in the infrastructure sector.
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.
A.P. (DIR Series) Circular No. 41, dated 1-11-2011 — Memorandum of Instructions governing money changing activities.
Presently, applications from Authorised Money Changers for additional offices in metropolitan cities are considered only if the total offices in metropolitan and non-metropolitan cities (including proposed offices) of the applicant are in the ratio 1:1 i.e., the applicant has one non-metropolitan office for every office in a metro.
This Circular has done away with the criteria of 1:1 ratio between metro and non-metro branches.
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 invest<
Presently, the relaxation in period of realisation and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of exports was available for exports made up to September 30, 2011.
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.
A.P. (DIR Series) Circular No. 37, dated 19- 10-2011 — (i) Repatriation of income and sale proceeds of assets held abroad by NRIs who have returned to India for permanent settlement (ii) repatriation of income and sale proceeds of assets acquired abroad through remittances under Liberalised Remittance Scheme — Clarification.
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.
A.P. (DIR Series) Circular No. 36, dated 19-10-2011 — Opening Foreign Currency (Non-Resident) Account (Banks) Scheme [FCNR(B)] account in any freely convertible currency — Liberalisation.
Presently, FCNR(B) accounts can be opened in the following foreign currencies — Pound Sterling, US Dollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar.
This Circular states that FCNR(B) accounts can now be opened in any freely convertible currency.
Delegation u/s. 637 of the Companies Act by the Central Government of its powers and functions under Act — Powers and functions delegated to Registrars of Companies for specified provisions of the Act — Supersession of Notification G.S.R. No. 506(E), dated 24-6-1985.
The Central Government vide Notification [F.No. 5/07/2011-Cl-V], dated 17-3-2011 has delegated to the Registrars of Companies, the powers and functions of the Central Government under the following provisions of the Companies Act, namely:
- Section 21 pertaining to Change of Name of Company.
- Section 25 pertaining to Power to dispense with ‘Limited’ in name of Charitable or Other Company.
- Proviso to Ss.(1) of section 31 pertaining to change in the articles having effect of converting a public company into a private company.
- Ss.(1D) of section 108 relating to extension of period within which instrument of transfer is to be submitted to the company.
- Section 572 relating to change of name of a company seeking registration under Part IX of the Companies Act.
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:
- Section 22 relating to rectification of name of the company.
- Ss.(3), (4), (7) and clause (a) of Ss.(8) of section 224 relating to the appointment, remuneration and removal of auditors in certain cases.
- Proviso to section 297(1) Proviso relating to approval of the Central Government for contracts by a company with certain parties where paid up share capital of the company is not less than Rs. one crore.
- Section 394A pertaining to notice to be given of for applications u/s. 391 for compromise or arrangements with creditors and members and section 394 for reconstruction and amalgamation of companies.
- Section 400 relating to notice to be given of applications under sections 397 and 398 for relief in cases of oppressions and mismanagement.
- Second proviso to Ss.(5) of section 439 and Ss.(6) of the said section relating to applications for winding up.
- Clause (a) of Ss.(1) of section 496 and Clause (a) of Ss.(1) of section 508 relating extension of time for calling general meeting of company and of the creditors of the company by the liquidator at end of each year.
- Ss.(1) of section 551 relating to exemption from filing information as to pending liquidations.
- Clause (b) of Ss.(7) of section 555 and the proviso to clause (a) of Ss.(9) of the said section relating to certain powers regarding unpaid dividends and undistributed assets to be paid into the Companies liquidation Account and claims in respect thereof.
- Provisos to Ss.(1) of section 610 relating to inspection, production and evidence of documents delivered to the Registrar with prospectus; and
- Section 627 relating to production and inspection of books where offences suspected.
A.P. (DIR Series) Circular No. 35, dated 14-10-2011 — Processing and settlement of export-related receipts facilitated by Online Payment Gateways — Enhancement of the value of transaction.
Presently, banks are permitted to offer the facility of repatriation of export-related remittances up to INR30,902 per transaction by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP).
This Circular has increased this limit per transaction from INR30,902 to INR185,413 with immediate effect.
Integration of Director’s Identification Number (DIN) issued under Companies Act, 1956 with Designated Partnership Identification Number (DPIN) issued under Limited Liability Partnership (LLP) Act, 2008.
The Ministry vide General Circular No. 44/2011, dated 8th July 2011, has decided to avoid the duplication of issuing DIN and DPIN by integrating them with effect from 9th July 2011. Further, now no fresh DPIN will be issued and the DIN allotted shall be used as DPIN for all purposes under the Limited Liability Partnership Act, 2008 and vice versa. If a person has been allotted both DIN and DPIN, his DPIN will stand cancelled and his DIN will be used as DPIN.
Examination of Balance Sheets by ROC’s
The Ministry of Corporate Affairs has vide General Circular No 37/2012 dated 06-11-2012 has informed that Registrars shall routinely scrutinise the Balance Sheets of the following Companies:
a) Of Companies against whom there are complaints
b) Companies that have raised money from public through public issue of shares or debentures
c) Cases where auditors have qualified their reports
d) Where there is default in payment of matured deposits and debentures
e) References received from regulatory authorities pointing out violations/irregularities calling for action under the Companies Act, 1956
Appointment of cost auditor by companies
The Ministry of Corporate Affairs has, vide circular No. 36/2012 dated 06-11-2012, made the following changes for appointment of Cost Auditor, in continuation to Circular No. 15/2011 dated 11-04-2011,
a) Companies are required to inform within 30 days from the date of approval of the MCA of Form 23 C ( i.e. Form for approval of Government for Appointment of Cost Auditor) with a formal letter of Appointment to the Cost Auditor, as approved by the Board.
b) The cost Auditor needs to file the prescribed Form 23D along with the letter of Appointment from the Company within 30 days of the date of formal letter.
c) In case of change of cost auditor caused by death of existing cost Auditor, the fresh e-form 23C is to be filed without additional fee within 90 days of the date of death.
d) Change of Cost Auditor for reasons other than death then fresh Form 23C to be filed with applicable fee and additional fee unless supported by relevant documents for the change.
Time Limit for Filing of Form 23D extended to 16th December 2012
Vide Circular No. 35/2012, dated 05-11-2012, the Ministry of Corporate Affairs, Cost Audit Branch, has noted the default of filing of Form 23D by many Cost Auditors and has requested that cost auditors appointed by the Companies vide filing of applications by Form 23C, to file the delayed form 23D by 16th December 2012. In case of further default, the names of the defaulting members would be sent to the Institute for Disciplinary Proceedings under the Cost and Works Accountants Act, 1959. Further, in case of Companies that have failed to issue formal letter of Appointment to the Cost Auditor, they shall do so within 15 days of this Circular to enable the cost Auditor to file Form 23 D within the extended time limit.
Extension of time limit for filing XB RL Form 23 AC/ACA to 15th December 2012
Vide Circular No. 34/2012 dated 25-10-2012, the Ministry of Corporate Affairs has extended the time limit for filing the financial statements in the XBRL Mode without any additional fee/penalty upto 15th December 2012 or within 30 days from the date of AGM of the Company, whichever is later. The other terms and conditions of the General Circular No 16/2012 dated 06-07-2012 remain the same.
A. P. (DIR Series) Circular No. 51 dated 15th November, 2012
Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 Money changing activities.
This circular has modified certain KYC requirements as under: –
A. P. (DIR Series) Circular No. 50 dated 7th November, 2012
Memorandum of Instructions governing Money Changing Activities
Presently, all single branch authorised money changers (AMC) having a turnover of more than $ 100,000 or equivalent per month and all multiple branch AMC are required to institute a system of monthly audit.
This circular has modified the above procedure in respect of multiple branch AMC. As a result, multiple branch AMC are required to put in place a system of Concurrent Audit, which will cover 80 % of the transactions value-wise under a system of monthly audit and rest 20 % of the transactions value-wise under quarterly audit.
Filing fees on Form 23B.
The Ministry vide Circular No. 14/2012, dated 21-6-
2012 had imposed fees on Form 23B (Information by auditor to Registrar)
w.e.f. 22-7-2012. The last date for filing the Form 23B without fee has
been extended for two weeks. Fee shall be charged on any eForm 23B
filed on or after 5th August, 2012.
2012 had imposed fees on Form 23B (Information by auditor to Registrar)
w.e.f. 22-7-2012. The last date for filing the Form 23B without fee has
been extended for two weeks. Fee shall be charged on any eForm 23B
filed on or after 5th August, 2012.
A. P. (DIR Series) Circular No. 49 dated 7th November, 2012
Money Transfer Service Scheme – List of Sub Agents
Presently, authorised persons (AP), who are Indian Agents under the Money Transfer Service Scheme (MTSS), are required to submit a list of their subagents to the Foreign Exchange Department (FED), Central Office (CO) of RBI on a half yearly basis.
This circular provides that, since the list of subagents is already placed on RBI website (www.rbi. org.in), AP are no longer required to submit a list of their sub-agents to BI on a half-yearly basis. AP are now required to inform immediately any change/ addition/deletion to the list of their sub-agents to the Regional Offices of FED of RBI. AP are further required to verify the correctness of the list from the RBI website and intimate the same to RBI either through a letter or by e-mail within 15 days of the end of each quarter.
A. P. (DIR Series) Circular No. 48 dated 6th November, 2012
External Commercial Borrowings (ECB) Policy – ECB by Small Industries Development Bank of India (SIDBI)
This circular states that SIDBI has been added as an eligible borrower for availing of ECB upto $ 500 million per financial year for on-lending, for permissible end uses, to the Micro, Small and Medium Enterprises (MSME) sector, subject to the following conditions: –
(a) On-lending must be done directly to the borrowers, either in INR or in foreign currency (FCY): –
(i) Foreign currency risk must be hedged by SIDBI in full in case of on-lending to MSME sector in INR; and
(ii) on-lending in foreign currency can only be to those beneficiaries who have a natural hedge by way of foreign exchange earnings.
(b) ECB, including the outstanding ECB, upto 50% of owned funds, can be availed under the automatic route and ECB beyond 50% of owned funds, can be availed under the approval route.
A. P. (DIR Series) Circular No. 47 dated 23rd October, 2012
Export of Goods and Services – Simplification and Revision of Softex Procedure
Presently, the simplified & revised procedure for submitting Softex Form is applicable/available only to units in Software Technology Parks of India (STPI) at Bengaluru, Hyderabad, Chennai, Pune and Mumbai.
This circular states that the said simplified and revised procedure for submitting Softex Form is now applicable/available to units in all STPI in India.
The circular further provides that a software exporter, whose annual turnover is at least Rs.1000 crore or who files at least 600 SOFTEX forms annually on all India basis, can now submit a statement in excel format as detailed in A. P. (DIR Series) Circular No. 80 dated 15th February, 2012.
A. P. (DIR Series) Circular No. 46 dated 23rd October, 2012
Supply of Goods and Services by Special Economic
Zones (SEZs) to Units in Domestic Tariff Areas (DTAs) against payment
in foreign exchange
Zones (SEZs) to Units in Domestic Tariff Areas (DTAs) against payment
in foreign exchange
Presently, units in the DTA can make
payment in foreign currency to units in SEZ against supply of goods by
the unit in SEZ to the unit in DTA.
This circular permits units in the DTA to make payment in foreign currency to units in SEZ against supply of services by the unit in SEZ to the unit in DTA. However, care should be taken to ensure that the Letter of Approval issued to the SEZ unit by the Development Commissioner of the SEZ contains a provision permitting the SEZ unit to supply goods /services to units in DTA and consequent receipt of payment from units in DTA in foreign currency.
A. P. (DIR Series) Circular No. 45 dated 22nd October, 2012
Facilities for Persons Resident outside India – FIIs
Presently, FII are permitted to hedge the currency risk on the market value of their entire investment in equity and / or debt in India, as on a particular date, only with designated bank branches.
This circular permits FII to hedge the currency risk on the market value of their entire investment in equity and / or debt in India, as on a particular date, with any bank, subject to certain conditions. However, when the FII undertakes hedge with a non-designated bank branch, the same has to be settled through the Special Non-Resident Rupee A/c maintained with the designated bank through RTGS / NEFT.
Release of Publication on Digest of Full Bench Decisions of Central Information Commission
BCAS Foundation jointly with Public Concern for Governance Trust (PCGT) released the publication on 26th June, 2012 at Kitab Khana, Mumbai at the hands of Ratnakar Gaikwad, State Chief Information Commissioner. The publication is the result of joint efforts by Ambrose Jude D’Cruz, Anil K. Asher, Advocate and Notary and Narayan K. Varma, Chartered Accountant.
Also present at the occasion were Pradip Thanawala and Pradeep Shah, Trustees, BCAS Foundation and Julio Ribeiro, Chairman, PCGT along with other well-wishers of BCAS Foundation and PCGT.
The publication will help the RTI applicants/activists to better equip themselves and will benefit the society at large. The book is available for sale at BCAS office. L to R: Ambrose Jude D’Cruz, Pradip Thanawala (President), Ratnakar Gaikwad (State Chief Information Commissioner), Julio Ribeiro, Pradeep Shah and Anil Asher.
In March 2010 two NGOs viz. Public Concern for Governance Trust and BCAS Foundation published a book under the title ‘Right To Information – A Route To Good Governance’. All 2,000 copies printed are exhausted. I have a desire to revise the same and publish a revised and an enlarged edition of it, especially because the book is being appreciated by many who went through the same. However, due to my ill health since last ten months, I have not been able to progress on it. Hopefully, I shall soon do it. Many citizens are filing applications under the RTI Act. As PIOs and FAAs are still reluctant to part with the information, many Second Appeals are being filed before the CIC and SCIC. Many aspects of the law are not settled. Important law points are referred to a full bench for decision. Thus these decisions have a persuasive value. Hence in the meantime, above two NGOs decided to publish this “Digest of Full Bench Decisions of CIC”.
Idea to publish this Digest was given to me by RTI activist and The Central Information Commissioner, Mr. Shailesh Gandhi. We then requested Mr. Ambrose Jude D’Cruz, Government Law College student to prepare this digest. He has taken lot of pain and had lot of interaction with Mr. Anil K. Asher and me. Finally he handed over the text for publication early this month. Mr. Anil K. Asher, advocate and RTI activist who, with his sister, Mrs. Hema Sampat and Narayan Varma runs RTI Clinic at BCAS on the 2nd, 3rd and 4th Saturday every month since 2004, has thoroughly gone through the text, given good comments and revised text, drafted Head notes and notes wherever necessary.
I have glanced through the text more than twice and final copy and prepared the contents. Full Bench decisions have been digested in a simple manner for easy understanding. An attempt has been made to compile these decisions for better appreciation of the provisions of the RTI Act. Where any party has filed writ petition in High Court / Supreme Court suitable note at the end of the case digested has been added. Any reader who may like to peruse the relevant full decision may do so on website www.cic.gov.in as per case reference given at the end of each case.
51 Decisions of full bench of CIC delivered from 2007 to 2011 have been digested in this publication. There is not a single F.B. decision on CIC website in 2012 till this date. We have also digested one full bench decision of Maharashtra State Information Commission, [Case No.52] wherein a very important law point was raised before the Maharashtra State Information Commission.
On CIC website there are 60 decisions listed. 9 of them are not digested here for the reasons printed elsewhere in this publication. Thus, digested cases number 52.
Playing cards have 52 cards (excluding Jokers). Our number of Digest of CIC decisions is also 52. But these are not playing cards, these are “paying” cards (decisions). On behalf of two NGOs and myself, we record our appreciation to Mr. Ambrose D’Cruz and Mr. Anil K. Asher for the pains taken by them to prepare this Digest of CIC’s Full Bench decisions. As noted by Mr. Shailesh Gandhi, the decisions of Full Bench of CIC shall have lot of persuasive value to the RTI applicants for submissions before PIO, FAA and the Commissioner. Each decision appears on fresh page.
Blanks at the end of many decisions may be used to update by the readers for making Notes. In case if any decision is confirmed or reversed by the courts subsequently, same may be noted.
We are confident that this publication will be useful not only to the RTI activists, Public Information Officers and First Appellate Authorities and various Public authorities, but also to Information Commissions in proper understanding of the various provisions of the Right to Information Act and quick disposal of the cases. Suggestions and opinions will be highly appreciated and duly acknowledged. We shall feel amply rewarded if the publication containing the digest of full bench decisions of the CIC succeeds in changing the mindset of Indian bureaucracy and help RTI activists in guiding the citizens in procuring the information. I am happy to note that both NGOs publishing this book have agreed to fix price to cover the cost incurred by them. I hope this book enhances the achievement of RTI objectives. R2i jai ho! Narayan Varma
Message of Shailesh Gandhi, Central Information Commissioner
PCGT and BCAS are two of the leading organizations which have consistently supported Right to Information. I congratulate them on coming out with a very useful publication for all RTI users. They are publishing the digest of full bench decisions of the Central Information Commission, which could prove a very useful reference for users and Information Commissioners. Decisions given by Information Commissions have great persuasive value. RTI users could use these to persuade PIOs, First Appellate Authorities and Commissions to part with information. Full bench decisions of the Commission are generally accepted when they define certain principles, and over the next few years we will have built enough precedence in favour of transparency. I am aware Shri Narayan Varma has put in a lot of his commitment and time to getting this project together. He is one of the stalwarts of the RTI movement. I wish this project all success and am sure we will see many more useful contributions from PCGT and BCAS to further RTI. Love Shailesh All my emails are in Public domain. Mera Bharat Mahaan…Nahi Hai, Per Yeh Dosh Mera Hai.
Message of Ratnakar Gaikwad, State Chief Information Commissioner
I am extremely happy to know that PCGT and BCAS Foundation are to release publication “Digest of FULL BENCH DECISIONS OF Central Information Commission” on 26th June, 2012. Undoubtedly, PCGT and BCAS Foundation have been doing pioneering work in the spread of RTI. Since, there are still many grey areas in RTI, it is in fitness of things that a publication containing Digest of FULL BENCH DECISIONS OF Central Information Commission is being released. This publication I am sure it will go a long way in throwing light and bringing clarity on many issues for various stake holders in the field of RTI. I would like to place record my high appreciation for the tremendous contribution being made by Shri Narayan Varma, and it is mainly due to his initiative that this project has materialized. I wish this unique initiative all the success and look forward to many such initiatives and contributions from PCGT and BCAS in the field to RTI. n
Special Marriage Act
Introduction
The Special Marriage Act, 1954, as the name suggests is an Act to provide for a special mode of marriage. Any person in India can marry under this Act, irrespective of their religion or faith. They can also get married according to any religious ceremonies or customs which they prefer, but if they wish to be governered by the Act then they need to get their marriage registered under this Act. However, in addition to providing for a special form of marriage, this Act also changes certain conventional succession patterns. It provides a very important deviation from the generally understood testamentary and nontestamentary succession for people married under this Act. That is what makes this Act important.
Earlier, the Act also had provisions for registering the marriages of Indian citizens residing abroad. However, by virtue of the enactment of the Foreign Marriage Act, 1969, those provisions have been deleted from the Special Marriage Act.
Applicability of the Act
This Act applies to:
(a) Any person, irrespective of religion.
(b) Hindus, Buddhists, Jains, Sikhs, who get their marriage registered under the Act.
(c) Muslims, Christians, Parsis or Jews who get their marriage registered under the Act.
(d) Inter-caste marriages registered under the Act. For instance, a Hindu marrying a Muslim or a Parsi marrying a Jain. Conditions for Special Marriage A marriage can be registered under this Act irrespective of anything contrary contained in any other law relating to marriages.
The following conditions must be fulfilled:
(a) Neither party must have a living spouse. Thus, bigamy is not permissible.
(b) Each of the parties:(i) must be capable of giving a valid consent to the marriage and must be of sound mind. (ii) though capable of giving such valid consent, must not suffer from mental disorder which would render the person unfit for marriage and the protection of children. (iii) must not be subject to recurrent attacks of insanity.
(c) The male must be of at least 21 years and the female must be of at least 18 years.
(d) One of the important conditions for registering a marriage is that the parties must not be related to each other within degrees of prohibited relationship. The Act lays down a list of relatives in relation to a person who are treated as within degrees of prohibited relationship. For instance, a man and his mother’s sister’s daughter (i.e., his cousin sister) cannot get married. However, if a custom governing at least one of the parties permits a marriage between the degrees of prohibited relationship, then the marriage may be permissible. For instance, in some religions, a person is permitted to marry his/her cousin.
All the above conditions are cumulative.
Process of Special Marriage
Whoever intends to get his marriage solemnised under the Act, must first give a Notice to the appropriate Marriage Officer. The Marriage Officer shall record the Notice received by him and enter a copy of the same in the Marriage Notice Book maintained by him.
If any person has any objection to the marriage, then he can object only on grounds that one of the conditions (specified above) are not fulfilled.
The marriage can be solemnised after 30 days from the Notice. The Marriage Officer shall issue a Certificate of Marriage which is conclusive evidence that the marriage has been solemnised under the Act and that all formalities specified therein have been complied with.
Any marriage which has been performed by a ceremony in any other form, e.g., marriage between two Hindus or two Muslims, etc., may also be registered under the Act. Thus, already married couples can get their marriages registered under this Act. Once they get their marriage so registered, it would be deemed to be a marriage solemnised under the Act and all children born after the date of marriage ceremony shall be deemed to always have been legitimate children. The names of such children are also required to be entered into the Marriage Register Book. Effect of marriage on HUF Section 19 of the Act prescribes that any member of a Hindu Undivided Family who gets married under this Act automatically severs his ties with the HUF. Thus, if a Hindu, Buddhist, Sikh or Jain gets married under the Act, then he ceases to be a member of his HUF. He need not go in for a partition since the marriage itself severs his relationship with his family.
He cannot even subsequently raise a plea for partitioning the joint family property since by getting married under the Act he automatically gets separated from the HUF.
However, this provision of section 19 should be read subject to section 21-A of the Act. This section provides that where the marriage solemnised under this Act takes place between a person of Hindu, Buddhist, Sikh or Jaina religion with a person who is also of Hindu, Buddhist, Sikh or Jain religion, then section 19 shall not apply. Thus, the severance from an HUF would take place only if a Hindu marries a non- Hindu.
Succession to property
Section 21 of the Special Marriage Act is by far the most important provision. It changes the normal succession pattern laid down by law in case of any person whose marriage is registered under the Act. It states that the Act overrides the provisions of the Indian Succession Act, 1925 with respect to its application to members of certain communities. The succession to property of any person whose marriage is solemnised under the Act and to the property of any child of such marriage shall be regulated by the Indian Succession Act, 1925. Thus, it removes the bar imposed by the Indian Succession Act, 1925, not only for the couple married under the Act, but also for the children born out of such wedlock.
Wills by Muslims
The biggest impact of section 21 is in the case of Muslims. The Muslim Law prevents a Muslim from bequeathing his whole property in a will and allows him to make a will only qua 1/3rd of his estate. He can bequeath more than 1/3rd of his property if his heirs give consent to the same. However, the impact of a Muslim getting married under this Act is that the Indian Succession Act would apply to all cases of testamentary succession (i.e., through will) or intestate succession (i.e., without will) of such a Muslim. Hence, by merely solemnising or registering an already conducted marriage under this Act, a Muslim couple can bequeath their entire property in accordance with their wishes and not be bound by their personal Muslim Law restriction of 1/3rd or property.
This view has been upheld by the Bombay High Court in the case of Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7. In this case, a Muslim couple got married as per Mohammedan Law. They once again got their marriage solemnised under the Act after a few years. On the death of the husband an issue arose amongst his heirs as to whether the succession should be as per Muslim Law? A single Judge of the Bombay High Court held that because the marriage of the deceased was registered under the Act, all succession would be as per the Indian Succession Act, 1925 and not as per the Muslim Law. It also held that such a person is entitled to bequeath his entire property and not just 1/3rd as per Muslim Law. This view was also held by the Bombay High Court in the case Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, RP No. 41 of 2010 (Bom). It held that intestate succession of a Muslim marrying under the Act would be governed by sections 31-40 of the Indian Succession Act, whereas his testate succession would be governed by sections 57-58 of the Indian Succession Act.
Does a will of a Muslim require a probate?
Another question before the High Court in Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7 was whether the will of such a Muslim requires a probate? It held that once the Indian Succession Act applies to a Muslim, then all the provisions of the Act would apply with equal force. Section 57 of this Act provides that any will by Hindus, Buddhists, Sikhs, Jains in the places within the local jurisdiction of the High Courts of Bombay, Calcutta and Madras requires a probate. However, since the Special Marriage Act removes all restrictions for people married under the Act, the High Court held that the will of a Muslim requires a probate.
However, in the case of Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, R.P. No. 41 of 2010 (Bom.), another Single Judge of the Bombay High Court has taken an exactly contrary view after considering the earlier judgment. The Court referred to section 58 of the Indian Succession Act which states that section 57 requiring a probate shall not apply to property of any Mohammedan. It also referred to section 213 of the Indian Succession Act which provides that an executor or a legatee cannot establish any right in a Court for which probate is not granted. However, section 213(2) exempts Muslims from this section. The Judge held that section 21 of the Special Marriage Act and sections 57, 58, 213(2) of the Indian Succession Act must be read together and reconciled. Since section 213(2) exempts Muslims from probates, there is no need for a Muslim to get a probate even if he is married under the Special Marriage Act.
Thus, there is a judicial controversy over whether or not a Muslim’s will needs a probate. However, since the second decision is later and has considered the earlier decision, reliance may be placed upon the same.
Role of a CA/Auditor
Normally, a CA in his capacity as an Auditor is not directly involved with wills and succession issues. Nevertheless, an Auditor can provide value added services to his clients if he is aware of the law in this respect. He can be of great assistance to his clients in cases of succession planning and estate planning.
Will — Evidence — Genuineness of will — Attesting witness — Requirement of law — Evidence Act, section 68.
[ Bahadur Singh v. Pooransingh & Ors., AIR 2012 Rajasthan 74]
In an application for grant of probate of the will, the issue arose as to genuineness of the will. The respondent Pooran Singh through his father and natural guardian Shishupal Singh had filed an application before the Trial Court seeking probate of the will executed by Joothar Singh in favour of Pooran Singh. It was submitted before the Court that so far as genuineness of the will was concerned, it created a suspicion, since most of the witnesses were illiterate, they did not know the contents of the will and that they being either relatives or acquaintance of the said Shishupal Singh, the possibility could not be denied that they had put their thumb marks below the said writing at the instance of Shishupal Singh. The Court observed that concerned witness Shri Tarachand in whose handwritings the said will was written had specifically stated in his evidence that he had written as per the direction of Joothar Singh and in presence of the witnesses Hari Singh, Raghunath Singh, Shishupal Singh and others.
He had also stated that after the writing was over, he had read over the same to Joothar Singh and thereafter Joothar Singh and the witnesses had put their thumb marks. Apart from the fact that other witnesses Hari Singh, Brij Singh, Raghunath Singh and Shishupal Singh have corroborated the said version, no such suggestion was put to them in their respective cross-examination that the thumb mark of Joothar Singh was obtained on plain paper and the writing thereon was made subsequently by Tarachand or Shishupal Singh and thumb marks of other witnesses were also put subsequently.
There is no requirement of law that the attesting witness should know the contents of the will. The only requirement is that the testator of the will should put his signature or thumb mark, as the case may be, in presence of two or more witnesses and that the said witnesses also should put their signatures in presence of the testator.
In the instant case, the said witness had stated that Joothar Singh had put his thumb mark below the said writing of the will and they had also put their respective thumb marks and signatures on the said will. Therefore, in absence of any substantial defence put up in the evidence by the defendants, the suspicion raised in the present appeal could not be said to be well founded.
Will — Settlement deed or Will — Joint Will or Joint Mutual Will — Succession Act, 1925 — Section 2(4).
[ Narayani & Anr. v. Sreedharan, AIR 2012 Kerala 72]
The issue arose for consideration in the matter as to whether the document in question was a will or a settlement. The Court observed that if by execution of the document right is transferred in praesenti, it can only be treated as a settlement deed.
On the other hand, if no right is transferred in praesenti and by execution of deed, provision is made only for transfer of the right, after the death of either or both of the executants, it could only be treated as a will. Where two executants of the deed who were husband and wife and it was provided in the deed that it was jointly agreed by the executants that they shall jointly possess the properties and enjoy them jointly during their lifetime and that, on the death of any one of them the properties are still available, then the surviving executant shall possess the same absolutely with the right of alienation and that if on the death of the surviving executant, the properties are available, they shall go to their children, the deed was a will and not settlement deed. Though the deed provided that the properties shall ultimately go to the children, there was no transfer of right, in praesenti in their favour. So also though it was provided that on the death of one of the executants, properties shall go to the surviving executant, it is subject to the availability of the properties on the death of either of the executants. There was no transfer of the right of one of the executants, during his/her life time to the other.
Thus, there was no transfer of any right in praesenti on the other executants. The Court further observed that a joint will is a single testamentary instrument constituting or containing the will of two or more persons based on an agreement to make a conjoint will. Two or more persons can make a joint will, which, if properly executed by each so far as his property is concerned, is as much his will. That will comes into effect on his death. Joint wills are revocable at any time by either of the testators during the life of either or after the death of one of them by the survivor. If the joint will is executed in pursuance of an agreement or contract between the executants to dispose of their property to each other or to a third person in a particular mode or manner and reciprocal in their provisions, it is a joint and mutual will. In a mutual will there is an agreement that neither of the testator shall have power to revoke it.
The surviving testator receives benefits from the document under the mutual will and hence the survivor is not entitled to revoke the will after the death of the testator as the deceased had agreed in pursuance of the agreement and hope and trust that the will be adhered to by the survivor. As the will takes effect only on the death of the testator, both the testators during their lifetime together can revoke or modify the mutual will. But on the death of one of the testators, the surviving testator is not competent to revoke the mutual will.
Where recitals in the will showed that though it was executed jointly by the husband and wife, there was no mutual agreement between them to divest their individual right and to vest his or her right in the other and it only provides that during their lifetime the properties shall be jointly possessed and enjoyed together and that on the death of one of the executants, if the properties are available, they shall go to the surviving executant to be enjoyed absolutely with even the power of alienation, it would be a joint will and not joint and mutual will, because it was clear that there was no divesting of the rights of the other executant and vesting of that right on first executant. It was more so as the will did not provide that executants have no right of revocation.
Transfer — Transfer for benefit of unborn person — Transfer of Property Act, section 13.
[ Sridhar & Anr. v. N. Revanna & Ors., AIR 2012 Karnataka 79]
The appellants were minors when they instituted the suit through their natural guardian, their paternal grandmother. The case of the plaintiffs was that the suit properties were the self-acquired properties of their great-grandfather, Muniswamappa. He had, by three separate registered gift deeds dated 5-6-1957, one executed in favour of his wife Akkayamma and two in favour of his grandson Revenna (R) defendant in the suit, gifted the suit properties. It was further stated that the properties were in the occupation of tenants. Muniswamappa and his wife Akkayamma expired in the year 1960 and 1961, respectively. It is the case of the plaintiffs that under the gift deeds, neither Akkayamma nor Revanna had any right to alienate the suit properties as they were conferred with a limited interest to enjoy the properties during their lifetime and thereafter the properties were to devolve on the plaintiffs. Notwithstanding this limitation, the defendant No. 1
— Revanna had proceeded to alienate the suit properties under sale deeds in favour of the defendant Nos. 2 to 5. It is the case of the plaintiffs that such alienations were void and did not bind the plaintiffs. It was their case that they had a vested right immediately on their birth. The first plaintiff was born prior to the said sale deeds. The plaintiffs, therefore, alleged that the defendant Nos. 2 to 5 in collusion with the tenants in occupation of the suit properties were seeking to occupy the properties and to illegally demolish the same and therefore the plaintiffs would be deprived of their legitimate right and had proceeded to file a civil suit.
The Court observed that where the suit property was bequeathed by virtue of a gift deed by the donor in favour of his grandson ‘R’ and his unborn brothers and thereafter property was to devolve upon the male children of the grandson ‘R’, it could be said that gift deed created a life interest in favour of ‘R’ and since he did not have a brother, the property absolutely devolved upon the male children of ‘R’ i.e., the plaintiffs. Further ‘R’ had only life interest in the suit property and he had no right to alienate the same.
As soon the plaintiffs were born, ‘R’ would lose the right to alienate the property as an interest is created in favour of the plaintiffs under the gift deeds which would be a prohibition for ‘R’ to alienate the property. The fact that ‘R’ had executed the sale deed in favour of the defendants would be immaterial. Plaintiffs were born prior to the sale transaction. If that be so, the property stood vested in the plaintiffs on their birth. Thus the property devolved on the plaintiffs immediately after the lifetime of ‘R’ since there were no other persons, who were capable of deriving such interest. The plea that ‘R’ and defendant purchasers had acted on the basis of the same would not absolve the defendants of their conduct as being illegal, since it was clearly against the law and there can be no estoppels against statute, nor can the defendants plead equity on that ground. The condition against the alienation imposed in the gift deed was not void. The plaintiffs consequently were held entitled to sale consideration received by ‘R’ under the sale deeds. The Court however declined the claim of the plaintiffs to recover the property.
Tax on land and building — Towers for wireless communication system cannot be construed as building — Karnataka Municipal Corporation Act, (14 of 1977) section 2(1A).
[Wireless — TT Info Services Ltd. v. State of Karnataka & Ors., AIR 2012 (NOC) 180 (Kar.)]
The appellants herein who are the licensees under the provisions of the Telegraph Act, 1885 for providing telecommunication services to the general public had approached the Court by writ petitions. The petitioners had called in question the demands raised against the petitioners by the respective local bodies. The demands had been raised in respect of the erection of the base trans-receiver station. The contention on behalf of the petitioners therein was that the municipal authorities/local bodies have no authority to make physical demand in respect of the telecommunication towers installed.
The Court observed that the ‘structure’ which is the subject-matter in the instant case is considered, it is a metal pole or tower to which the antenna is attached and has the backup system at its base. No doubt, it would have to be fastened to the roof of the building or embedded to the land with concrete base, nuts, bolts and the height of the pole may vary from case to case. Such structure though may suggest an element of permanency, it does not belong to the genus of the type previously mentioned in the section defining the building. If the phrase used was ‘other structures’, the term would have been wider to include other structures without reference to the first part of the section. But when it states ‘other such structure’, the structure in question will have to be of nature of the items mentioned in the first part of the section. Therefore, the tower/post which is not relatable to the items mentioned in the first part cannot be construed as a building to bring it within the sweep of section 94 of the Karnataka Municipalities Act 1964, section 103(b) (i) of the Karnataka Municipal Corporations Act, 1976 and section 64 of the Karnataka Panchayath Raj Act, 1993.
The above provisions indicate that apart from the other specific items for which power to tax has been provided, the power is also to impose tax on land and building alone. In fact, in the Karnataka Municipalities Act, 1964, the provision for tax on advertisements is exhaustive and includes ‘post’ and ‘structure’ and the term ‘structure’ has been explained further, but it only relates to advertisement. This in fact indicates that the telecommunication structure has not been indicated separately, nor does it get included in the definition of ‘building’. Therefore, the Court held that the telecommunication tower/post was not liable to tax under the existing power available to impose tax on ‘land’ and ‘buildings’.
Succession — Female Hindu dying intestate — Heirs related to an intestate by full blood shall be preferred to heir related to half blood — Hindu Succession Act, 1956, sections 15 and 18.
[Heera Lal v. Smt. Tijiabai (since deceased) by L/ Rs, AIR 2012 (NOC) 189 (M.P)]
One Dwarka Prasad and plaintiffs Smt. Tijiabai and Smt. Dipiyabai were born out of the wedlock from the first wife of Ramratan. From the second wife of Ramratan the defendant No. 1 Heera Lal (step brother) was born, the defendant No. 2 Vinod Kumar is the son of defendant No. 1 Heera Lal.
The suit of the plaintiffs which was filed long back on 5-12-1985 is that the suit property was owned by Dwarka Prasad who had died in the year 1938 and after his death his widow Kalawati possessed the suit property and on coming into force of the Hindu Succession Act, 1956 Kalawati became the absolute owner. No child was born out of wedlock of Dwarka and Kalawati and after the death of Kalawati, the plaintiffs who are the sisters of Dwarka Prasad became Bhumiswami of the suit property because the property in dispute devolved on them. Further, it had been pleaded by the plaintiffs that the defendant Heeralal was making yearly payment of the agricultural produce, but the same had been stopped by him with effect from 1978. Thereafter the plaintiffs submitted necessary application to get their names mutated in the Revenue record to which the objections were submitted by the defendants 1 and 2. However, the Revenue Court directed to mutate the names of plaintiffs in the Revenue record which was assailed by defendants by filing appeal, but it was also dismissed. Hence a suit for possession had been filed by the plaintiffs.
The Court observed that the disputed property fell in the share of Dwarka Prasad in the family partition which took place during lifetime of their father Ramratan. Thus, Dwarka Prasad was the sole owner of the suit property till he died in the year 1938.
The plaintiffs are the real sisters of Dwarka Prasad and the defendant No. 1 Heera Lal is his step-brother. Since admittedly Kalawati (widow of Dwarka Prasad) having died leaving behind no issue, according to section 16 of the Act of 1956, her right would devolve under Rule 1 among the heirs specified in s.s (1) of section 15. Since Kalawati and Dwarka Prasad did not have any sons, daughters including children of any predeced son or daughter and Dwarka Prasad already having died during the lifetime of Kalawati, the right in the disputed property would devolve in the heirs according to Rule 2 of section 16. But, in the present case there is no heir in terms of Rule 2, hence the devolution of property would take place in accordance to Rule 3 of section 16. According to this rule, the property of the intestate female Hindu would devolve upon the heirs referred to in clauses (b), (d) and (e) of s.s (1) and s.s (2) of section 15 of the Act of 1956, which shall be in the same order and according to the same rules as would have applied if the property had been the father’s or the mother’s or the husband’s, as the case may be, and such person had died intestate in respect thereof immediately after the intestate’s death.
The property in dispute was of Dwarka Prasad and Kalawati inherited the disputed property from her husband and since there is no heir of Kalawati mentioned in the category 15(1)(a) of the Act of 1956, the property would devolve upon the heirs of her husband. If section 16(3) and section 15(1) (b) and class II of the Schedule to section 8 are kept in juxtaposition to each other and are read conjointly on the touchstone and anvil of the settled position of the law, the plaintiffs being the real sisters of Dwarka Prasad, the entire property in dispute of Kalawati would devolve on them.
It is true that the defendant No. 1 Heera Lal is the step-brother of Kalawati’s husband Dwarka Prasad but he is half blood brother of plaintiffs. Section 18 of the Act of 1956 provides that the heir of full blood have preferential right over half blood. According to this section the heirs related to an intestate by full blood shall be preferred to heir related by half blood, if the nature of relationship is the same in every other respect and therefore the plaintiffs being the real sisters of Dwarka Prasad have preferential right over the defendant No. 1 Heera Lal who is the heir related by half blood of Dwarka Prasad.
Commodity Markets
Introduction
Strange as it may sound, the Indian commodity markets are older than the securities markets, however, very little is known about these markets to the common man. The various commodity markets in India clocked a turnover of over Rs.92 trillion for the period ended April to December 2011. Commodity markets have various components, such as bullion, metals, grains, energy, oil and oilseeds, petrochemicals, pulses, spices, plantation products, etc. and span over 100 commodities. In the recent past, gold and silver have given excellent returns and that is why now there is a sustained interest in the commodity markets. Let us take a bird’seye view of the regulatory aspect of this market, the types of contracts which can be executed, the tax treatment of these contracts, etc.
Forward Contracts (Regulation) Act
One more strange fact, for such a large market, there is only one statute — the Forward Contracts (Regulation) Act, 1952 (FCRA). As compared to this, the securities market has a plethora of regulations which one needs to deal with. Bills for amending the FCRA have lapsed twice. A third attempt is being made to amend the Act.
The FCRA regulates the forward contracts in commodities. As the name suggests, it does not apply to spot delivery contracts. It is somewhat similar in nature to Securities Contracts (Regulation) Act, 1956.
Forward Market Commission
The FCRA amongst other aspects, provides for the establishment of a regulator for the forward markets, known as the Forward Market Commission of India (FMC). The FMC has been established u/s.3 of the FCRA. The FMC is a statutory body and functions under the administrative control of the Ministry of Consumer Affairs, Food & Public Distribution, Department of Consumer Affairs, Government of India. Its role may be equated with that of the SEBI in the securities market, although, the FMC does not have as wide powers as SEBI. The Bill for amending the FCRA would give more powers to the FMC and make it an autonomous body, like the SEBI.
Types of contracts
Types of contracts
Under the FCRA there can be two types of contracts in commodities:
(a) Ready Delivery Contracts — Contracts where delivery and payment must take place immediately or within a maximum period of 11 days. These are similar to the spot delivery contracts which one comes across under the SCRA. If a commodity contract is settled by cash or by an offsetting contract and as a result of that the actual tendering of goods is dispensed with, then it is not an Ready Delivery Contract. These contracts are outside the purview of the Forward Markets’ Commission. The Amendment Bill seeks to increase the duration from 11 to 30 days.
(b) Forward Contracts — These are contracts for the delivery of goods and are not a Ready Delivery Contract. The FMC regulates these Contracts. Commodity derivatives are also a type of Forward Contract. Thus, a contract which is settled by cash or by an offsetting contract and as a result the actual tendering of goods is dispensed with becomes a Forward Contract.
Forward Contracts can be of three types:
(a) Specific Delivery Contract — It is a Forward Contract which provides for the actual delivery of specific qualities of goods. The delivery must take place during a specified future period at a price fixed/to be fixed. Further, the names of the buyer and seller must be mentioned in the contract. The Amendment Bill proposes to add that such contracts must also be actually performed by actual delivery.
Specific Delivery Contracts cannot be settled by paying the difference in cash or by an offsetting contract. They can be executed on an off-market basis also. Specific delivery contracts are contracts entered into for actual transactions in the commodity and the terms of contract may be tailored to suit the needs of the parties as against the standardised terms found in futures contracts.
Specific Delivery Contracts, in turn, can be of two types — Non-Transferable (NTSDC) and Transferable (TSDC). Non-transferable are those contracts which are only between a defined buyer and a seller and cannot be transferred by either party, whereas ‘transferable contracts’ may be transferred from one person to another till the actual maturity of the contract or delivery date.
(b) Forward contracts other than specific delivery contracts are what are generally known as ‘Futures Contracts’, though the Act does not specifically define the term futures contracts. Such contracts can be performed either:
- by delivery of goods and payment thereof or by entering into offsetting contracts and payment; OR
- by cash settlement, i.e., receipt of amount based on the difference between the rate of entering into contract and the rate of offsetting contract.
Thus, the main difference between Specific Delivery Contracts and Futures is that while Specific Delivery Contracts must be performed by delivery, futures can be cash settled also. Futures contracts are usually standardised contracts where the quantity, quality, date of maturity, place of delivery are all standardised and the parties to the contract only decide on the price and the number of units to be traded. Futures contracts must necessarily be entered into through the Commodity Exchanges.
(c) Option Agreements —
The Amendment Act proposes to add a third category — options in commodities. This would mean an agreement for the purchase or sale of a right to buy and/or sell goods in future and includes a put and call in goods. These must be entered into through the Commodity Exchanges.
Commodity exchanges
The FCRA also provides for recognised associations for the regulation and control of forward contracts or options in goods. These associations are popularly known as commodity exchanges.
Currently, permanent recognition has been granted to three national-level multi-commodity exchanges, Multi-commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), and National Multi-commodity Exchange of India Limited (NMCE) Ahmedabad. These national commodity exchanges have permission for conducting forward/futures trading activities in all commodities, to which section 15 of the FCRA is applicable.
Members of commodity exchanges are commodity brokers.
Trading in forward contracts
U/s.15 of the FCRA, forward contracts can be entered into only between members of, through members of or with members of a recognised commodity exchange. Futures trading can be conducted in any commodity subject to the approval/recognition of the Government of India. Further, it must be in accordance with the bye-laws of the commodity exchange. Any forward contract entered into in contravention of the byelaws is illegal.
Nothing contained in section 15 applies to Specific Delivery Contracts, whether transferable or non-transferable. However, the Central Government is empowered u/s.18(3) to notify such classes of Specific Delivery Contracts to which the provisions of section 15 would also apply.
Regulation of commodity brokers
Trade from India by commodity brokers on foreign commodity exchanges requires prior approval of FMC. Trading without the approval is illegal and persons entering into such contract are punishable under the Forward Contracts (Regulation) Act, 1952. The FMC has, in the past, suspended brokers found to be indulging in futures trading on online foreign commodity exchanges.
Commodity brokers cannot provide advisory services to clients for investment in commodities futures contract. Portfolio advisory services, portfolio management services and other services are not permissible in the Commodity Derivative Markets. The FMC has not formulated any guidelines for investment advisory services by any entity and hence, these activities are not permitted to the brokers.
Client Code Modification (CCM) facility is an important issue which the FMC strictly regulates. The CCM facility is permitted only for carrying out corrections of genuine punching errors during the specified time of the trading day. The penalty for CCM is 1% of the value of trade in respect of which the client code has been modified. The penalty is 2% of the value of trade in respect of which client code has been modified if it is more than 5% of the trading done by the Member during that day. A minimum penalty of Rs.25,000 is levied for client code modifications irrespective of the value of trade. Commodity Exchanges are however authorised to waive the above penalty in cases of genuine punching errors.
Trading in overseas commodities exchanges and setting up joint ventures/wholly-owned subsidiaries abroad for trading in overseas commodity exchanges is reckoned as financial services activity under the FEMA Regulations and requires prior clearance from the FMC. Any investment in a JV/WOS for such a purpose would have to comply with the requirements for overseas direct investment in a financial service as specified under Rule 7 r.w. Rule 6 of the FEMA Notification No. 120/2004.
FDI in commodity brokerages
Neither the Consolidated FDI Policy issued vide Circular 2/2011, nor the Regulations issued under the FEMA, 1999 contain any specific provision for foreign direct investment in a commodity brokerage. Hence, any FDI in a commodity brokerage would require prior FIPB approval. The FIPB has given approvals to several such FDI proposals.
However, it may be noted that the RBI does not permit foreign banks to invest in commodity brokerages, whether directly or indirectly. Hence, any proposal for FDI by a foreign bank in a commodity broker would not be permissible. It is for this reason that the takeovers of IL&FS Investmart by HSBC and Geojit Securities by BNPI were held up by the RBI till such time as the commodity broking arms were hived-off/restructured. FDI in commodity exchanges is allowed up to 49% (FDI & FII). Investment by Registered FIIs under the Portfolio Investment Scheme (PIS) is limited to 23% and investment under the FDI Scheme is limited to 26%.
Taxation of commodity contracts
Taxation of commodity derivative contracts is one of the issues facing investors and traders in commodities. The first question to be considered is whether the assessee is an investor or a trader and hence, whether his gain is taxable as capital gains or as business income. The various tests, judgments, controversies, etc., which one comes across while dealing with this issue in the case of securities would be applicable even to commodities.
Secondly, in the cases where they constitute a business, the question arises whether they constitute a speculative business. Section 43(5) of the Income-tax Act grants a specific exemption to derivatives traded on stock exchanges. However, there is no specific exemption for contracts traded on commodity exchanges. Hence, one would have to ascertain whether a commodity contract falls under any of the other exemptions specified u/s.43(5).
Further, the losses from speculative commodity businesses can only be set off against speculative commodity businesses. They cannot be set off against profits from delivery based commodity transactions or capital gains or profits from security derivatives transactions.
Stamp duty on contract notes
Stamp Duty on commodity transactions is a State subject and the duty incidence would depend upon the location of the broker’s office which issues the contract note. For instance, under the Bombay Stamp Act, 1958, the State of Maharashtra levies a duty @ 0.005% of the value of the contract for the purchase or sale of any commodity, such as cotton, bullion, spices, oil seeds, spices, etc. Similarly, any electronic or physical contract note issued by a commodity broker, whether delivery based or non-delivery based attracts a duty @ 0.005%.
Maharashtra levies one of the highest incidences of stamp duty on commodity broker notes. Earlier, such contracts were charged with minimum duty of Rs.100 per document.
Section 10B of the Bombay Stamp Act, provides that it is the responsibility of the commodity exchange to collect the stamp duty due on brokers’ notes by deducting the same from the brokers account at the time of settlement of such transactions.
Penalties under FCRA
Any violation of the FCRA is a criminal offence inviting imprisonment and/or a fine. The Bill proposes to make the penalties for violating the FCRA more stringent, for example, violation of some of the provisions would carry imprisonment up to one year and/or a fine ranging from Rs.25000 to Rs.25 lakh. The Bill also seeks to introduce penalties for insider trading similar to what is found under the SEBI Act.
Auditor’s responsibility
Just as a compliance audit of stock brokers requires a knowledge of the securities markets, an audit of commodity brokers requires knowledge of the commodity markets on the part of the auditor. This would include a knowledge of the various applicable Regulations, relevant Exchange Circulars, Compliance Forms, etc.
An auditor of a market intermediary should be well-versed with the important laws in this respect which affect the functioning and the existence of the entity. For instance, in case of the intermediaries, non-compliance with the regulations could result in cancellation of the registration certificate and this would affect the very substratum of the entity.
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 as a result of improperly stamped or unregistered mortgage deeds. 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’.
PART A: SUPREME COURT Decisions
In BCAJ of October 2012, I had reported the Order of the Supreme Court in the writ petition in the matter of Namit Sharma vs. Union of India decided on 13-09-2012.
The said order had annihilated RTI operations in India. It was criticised by a large number of RTI activists, many retired judges and also by the Government itself. In BCAJ of November 2012, I had reported that the Government has applied for its review. Mr. Shailesh Gandhi and Mrs. Aruna Roy had intervened in this review petition.
Now the said review petition has been heard and the judgment dated 03-09-2013 (of 55 pages) is delivered by two judges, Justice A. K. Sikri and A. K. Patnaik (who was also one of the two judges in the writ along with Justice S. P. Sampath Kumar).
The Supreme Court held as under:
32. Under Order XL of the Supreme Court Rules, 1966 this court can review its judgment or order on the ground of error apparent on the face of record and on an application for review can reverse or modify its decision on the ground of mistake of law or fact. As the judgment under review suffers from mistake of law, we allow the Review Petitions, recall the directions and declarations in the judgment under review and dispose of Writ Petition (C) No. 210 of 2012 with the following declarations and directions:
(i) We declare that sections 12(5) and 15(5) of the Act are not ultra vires the Constitution.
(ii) We declare that sections 12(6) and 15(6) of the Act do not debar a Member of Parliament or Member of the Legislature of any State or Union Territory, as the case may be, or a person holding any other office of profit or connected with any political party or carrying on any business or pursuing any profession from being considered for appointment as Chief Information Commissioner or Information Commissioner, but after such person is appointed as Chief Information Commissioner or Information Commissioner, he has to discontinue as Member of Parliament or Member of the Legislature of any State or Union Territory, or discontinue to hold any other office of profit or remain connected with any political party or carry on any business or pursue any profession during the period he functions as Chief Information Commissioner or Information Commissioner.
(iii) We direct that only persons of eminence in public life with wide knowledge and experience in the fields mentioned in sections 12(5) and 15(5) of the Act be considered for appointment as Information Commissioner and Chief Information Commissioner.
(iv) We further direct that persons of eminence in public life with wide knowledge and experience in all the fields mentioned in sections 12(5) and 15(5) of the Act, namely, law, science and technology, social service, management, journalism, mass media or administration and governance, be considered by the Committees u/s. 12(3) and 15(3) of the Act for appointment as Chief Information Commissioner or Information Commissioners.
(v) We further direct that the Committees u/s. 12(3) and 15(3) of the Act while making recommendations to the President or to the Governor as the case may be, for appointment of Chief Information Commissioner and Information Commissioners must mention against the name of each candidate recommended, the facts to indicate his eminence in public life, his knowledge in the particular field and his experience in the particular field and these facts must be accessible to the citizens as part of their right to information under the Act after the appointment is made.
(vi) We also direct that wherever Chief Information Commissioner is of the opinion that intricate questions of law will have to be decided in a matter coming up before the Information Commission, he will ensure that the matter is heard by an Information Commissioner who has wide knowledge and experience in the field of law.
[Review petition (C) No. 2309 and (c) No. 2675 of 2012 in Writ Petition (C) No. 210 of 2012: State of Rajasthan & Anr vs. Namit Sharma, decided on 03-09-2013]
Transfer of property — Adverse possession — Transfer of Proper for Act section 53A
[ M. Gopal & Anr. v. K. Jangareddy & Ors., AIR 2011 (Andhra Pradesh) 185]
The original owner of the suit property (the defendant No. 1) with a view to sell away the land, had put it to private auction in which the second defendant was the highest bidder. On the same day the plaintiff offered to purchase the said land for which the both defendants agreed and an unregistered sale deed was executed.
The plaintiff’s version was that he had been in continuous possession of the schedule lands having been put in possession of the same under the private sale deed and has been raising seasonal crops. Thus, he asserts that after his purchase, he has been in possession of the schedule lands and the said fact is known to each and every body in and around the village, including the defendants. He also pleaded that by continuously remaining in possession and upon asserting his title to the knowledge of the defendants he perfected the title to the schedule property by adverse possession.
The defendants No. 3 and 4 alleged that the sale deed are sham and bogus documents and the property was coparcenery property, therefore the defendant No. 1 could not have sold the same.
The issue that arose was whether the plaintiff was entitled to protect his possession under law on the ground that since he remained in possession of the property for more than the period of 12 years and that he had perfected his title by adverse possession.
The Court observed that person who obtained the possession of the property under executory terms of contract of sale, cannot ask for declaration of his title on the ground that he remained in possession of the property for more than 12 years period and contending that his possession is adverse to the real owner. The Apex Court in Achal Reddi v. Ramakrishna Reddiar & Ors., AIR 1990 SC 553 held that possession of a purchaser is under a contract of sale, his possession cannot be adverse and he cannot set up the plea of adverse possession. Therefore, the Trial Court erred in declaring the title of the plaintiff holding that he perfected his title to the schedule mentioned property by adverse possession against the defendants.
However, by virtue of the doctrine of part performance embodied in section 53A of the Transfer of Property Act, the plaintiff can protect his possession from defendants 1 and 2 who sold the property to him under the simple sale deed, so also he can protect his possession from defendants 3 and 4 who had the knowledge of the earlier sale transaction in his favour under a sale deed. Further it is true that section 53A only operates as a bar against the defendants in the present case from enforcing any rights against the plaintiff other than those which were provided under simple sale deed. Although the section does not confer title on the person who took possession of the property in part performance of the contract, the law is now well settled that when all conditions of the section are satisfied as in the present case, the possession of the person must be protected by the Court whether he comes as a plaintiff or defendant. The only embargo is that section 53A cannot be taken in aid by the transferee to establish his right as owner of the property. But the transferee can protect his possession having recourse to section 53A, either by instituting a suit for injunction as a plaintiff or by defending the suit filed by the transferor or subsequent purchasers as a defendant. It is also well settled that the transferee can very well file a suit for injunction to protect his possession even though his remedy to file a suit for specific performance of contract is barred by limitation.
Part performance of Contract — Conditions — The Limitation Act does not extinguish the defence, it only bars the remedy — Section 53A does not confer a title on transferee in possession — Transfer of Property Act, section 53A.
[ Rajpal & Anr. v. Harswaroop, AIR 2011 (Del.) 203]
The suit of the plaintiff seeking possession of the suit property had been dismissed. The case of the plaintiff was that the defendants had entered into an agreement to sell dated 13-11-1992 with the father of the plaintiff, namely, Sh. Mangat Ram for the purchase of the aforenoted suit property; total consideration was Rs.2,80,000; a sum of Rs.1,05,000 was paid to Sh. Mangat Ram; the defendants agreed to pay the balance consideration on or before 13-9-1993. The balance amount was not paid. The defendants requested Sh. Mangat Ram to cancel the agreement; the defendants had agreed to vacate the property within three to four months. Sh. Mangat Ram expired on 21-4-1997. In spite of requests of the plaintiff to the defendant to vacate the suit property as also the legal notice dated 22-12-2001, the defendants failed to adhere to the said request. Thereafter the suit seeking possession of the suit shop as also damages at the rate of Rs.5,000 per month was claimed. The defendant took defence of part performance of contract u/s.53.
The Court observed that the conditions necessary for making out the defence of part performance to an action in ejectment by the owner are:
(a) That the transferor has contracted to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty;
(b) That the transferee has in part performance of the contract take possession of the property or any part thereof, or the transferee, being already in possession continues in possession in part performance of the contract;
(c) That the transferee has done some act in furtherance of the contract; and
(d) That the transferee has performed or is willing to perform his part of the contract.
The provision does not confer a title on the transferee in possession; it only imposes a statutory bar on the transferor. In the instant case, it is not in dispute that an agreement to sell dated 13-11-1992 had been executed by Mangat Ram (the father of the plaintiff) qua the disputed shop in favour of the defendant.
The essential ingredients of the doctrine of part performance had been made out entitling the defendant to seek shelter and protection under this statutory provision. Admittedly in terms of the agreement the defendant was put in possession of the suit shop. The defendant had been given possession of the suit shop; it has also been proved on record that a sum of Rs.2,15,000 had been paid by the defendant to the plaintiff in part performance of the contract; he was also ready and willing to perform his part of the contract and in fact his case was that the balance consideration had also been paid by him to the plaintiff. The case of the plaintiff on the other hand was that this amount had been returned back and a sum of Rs.80,000 had been paid. This document was rightly disbelieved; it did not even bear the signatures of Mangat Ram. In view of agreement to which there was no denial the defendanttransferee is entitled to protect his possession over the suit property taken in part performance of the contract even if the period of limitation to bring a suit for specific performance has expired. The Limitation Act does not extinguish the defence; it only bars the remedy.
Limited Liability Partnership (Winding up and Dissolution) Rules, 2012.
Limited Liability Partnership (Winding up and Dissolution) Rules, 2012 have been notified in supersession of the Limited Liability Partnership (Winding Up and Dissolution) Rules, 2010 and the same will come into force on the date of publication in the official Gazette.
Limitation — Date of judgment or date of communication of order.
[ Prontos Steerings Ltd. v. Commissioner of C. Ex — Chandigarh-I, 2011 (274) ELT 218 (Trib.) (Del.)]
The dispute in the present case was in regards to refund claim, the relevant date for computing limitation period should be counted from the date of order of the Commissioner (Appeals), which was dispatched on 10-1-2007 and received on 27-1-2007 by the assessee or the limitation period will start from the date of communication of order.
The Commissioner (Appeals) upheld the order of the Asst. Commissioners observing that as per the records, the order had been handed over to the postal authority at GPO on 10-1-2007 and, hence, the same has to be taken as the date of dispatch and the words ‘date of the order’ in clause (ec) of the Explanation (B) to section 11B of Central Excise Act mean the date of dispatch and not the date of communication of the order.
On appeal, the Delhi Tribunal observed that the limitation period prescribed u/s.11B for filing the refund claim is one year from the relevant date. Unlike the judgments of the Courts or Tribunal which are either dictated in the open Court or are pronounced in the open Court and thus the date of the pronouncement and the date of communication to the affected parties are the same, in case of adjudication of any dispute by the Departmental adjudicating authorities or the Commissioner (Appeals), the judgments are not pronounced or dictated in presence of the parties but are sent by post and, thus, there would be a time gap between the date on which the order has been signed, the date of dispatch and the date on which the order is received by the assessee. The point of dispute, thus, in the case was as to whether the words ‘date of such judgment, decree order or direction’ used in clause (ec) of explanation (B) to section 11B refer to the date of signing of the order or date of dispatch order or the date of actual communication of the order to the assessee. It is clear that when some order of Court or an authority affects as assessee, the limitation would start from the date on which the order was communicated to the assessee or the date on which it was pronounced or published so that the party affected by it has reasonable opportunity of knowing the passing of such order and what it contains. The Apex Court in the case of CCE v. M. M. Rubber Co., 1991 (SS) ELT 289 (SC) held that the limitation period would start from the date of the communication of the order and not the date of signing of the order or the date of dispatch and as such with regard to the order passed by the Dept. adjudicating authority or the Commissioner (Appeals) the words ‘date of judgment’ have to be interpreted as the date of communication of the order. Thus, the refund claim was within time and the impugned order rejecting the same as time-barred, was not sustainable.
Evidence — Proof of execution of document — Will — Evidence Act, section 68.
[Alok Kumar Mallick v. Janardan Mahadani & Anr., AIR 2011 Jharkhand 146]
The appellants’ application for grant of letter of administration had been dismissed on the ground that the Will had not been proved, therefore the same could not be looked into.
On appeal it was observed by the High Court that a will is required to be attested by two witnesses. Section 68 of the Evidence Act lays down the procedure for proof of a document, which is required by law to be attested. Section 68 of the Evidence Act reads as follows:
“Proof of execution of document required by law to be attested. If a document is required by law to be attested, it shall not be used as evidence until one attesting witness at least has been called for the purpose of proving its execution, if there be an attesting witness alive, and subject to the process of the Court and capable of giving evidence.”
Thus in view of the aforesaid provision, if a Will (which is required under the law to be attested by witness) is not proved by adducing evidence of attesting witness, the same cannot be looked into evidence, unless the appellant shows that the said attesting witnesses are not alive and/or not capable to give evidence. In the instant case, both attesting witnesses of the Will were alive. Under the said circumstance, it was held that the Will had not been proved in accordance with law and therefore the same cannot be looked into.
PART A : Decision of the C.I.C.
Sub: Section 8(1)(j) of the RTI Act
Following was the information sought by the Appllicant and the reply given by the PIO.
The PIO has refused to give the information claiming exemption under Section 8(1)(j) of the RTI Act. An appeal was filed. The PIO (the respondent) stated that third party information could not be disclosed without taking the views of the third party and relied upon the case of Suhash Chakma vs. CIC in W.P.(C) No. 9118 of 2009. The respondent also stated that the present whereabouts of the third parties are not maintained by the Ministry.
The Commission ruled that if the third party’s address could not be located it did not mean the citizen’s right to information would disappear. Section 11 is a procedural requirement that gives third party an opportunity to voice an objection in releasing the information.
The Commission then held that in section 11(1) it is clearly stated that submission of third party shall be kept in view while taking a decision about disclosure of information. Section 11(1) dealt with the information ‘which relates to or has been supplied by a third party and has been treated as confidential by that third party’. Thus the procedure of Section 11 comes into effect if the PIO believes that the information exists and is not exempt, and the third party has treated it as confidential. The PIO must send a letter to the third party within 5 days of receipt of the RTI application. It only gives the third party an opportunity to voice its objections to disclosing information. The PIO has to keep these objections in mind and the denial of information can only be on the basis of exemption under Section 8(1) of the RTI act. As per Section 11(3), the PIO has to determine whether the information is exempt or not and inform the appellant and the third party of his decision. If the third party wishes to appeal against the decision of the PIO, he can file an appeal under Section 19 of the Act as per the provision of Section 11(4).
The Commission then explained whether the information sought was exempt u/s 8(1)(j). As per the Commission, two points need to be satisfied for the information to qualify for exemption:
(i) It must be Personal Information.
The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have been given in the course of a public activity.
Various Public authorities in performing their functions routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a Public authority as an employee, or asks for a permission, licence or authorisation or passport, all these are public activities. Also, when a citizen provides information in discharge of a statutory obligation, that too is a public activity.
(ii) To check ‘whether the State invades the privacy of an individual’.
According to the Commission, where the State routinely obtains information from citizens, this information is in relationship to a public activity and will not be an intrusion on privacy.
The Commission noted that the Parliament has not codified the right to privacy so far, hence in balancing the Right to Information of citizens and the individual’s Right to Privacy the citizen’s Right to Information would be given greater weightage. The Supreme Court of India has ruled that citizens have a right to know about charges against candidates for elections as well as details of their assets, since they desire to offer themselves for public service. It is obvious then that those who are public servants cannot claim exemption from disclosure of charges against them or details of their assets. Given our dismal record of mis-governance and rampant corruption which colludes to deny Citizens their essential rights and dignity, it is in the fitness of things that the Citizen’s Right to Information is given greater primacy with regard to privacy.
In view of above, the Commission did not accept the PIO’s contention that information provided by an applicant when applying for passport was exempt under Section 8(1)(j) of the RTI Act. [Mr. Anand Narayan Devghare vs. PIO, Regional Passport Office, Mumbai: CIC/SG/ A/2012/000794/18743 dated 4th May 2012.]
Merger — Review of High Court Order — SLP against the same dismissed by SC — No Review possible — Constitution of India Act, 136 and 226.
[ Sri Ambal Mills P. Ltd. v. Commissioner of C. Ex. Coimbatore, 2011 (274) ELT 186 (Mad.)]
The applicant filed a review petition seeking to review the order passed by a Division Bench of the High Court. Against the said order SLP was preferred to the Apex Court, but the same was dismissed by SC. Subsequently, review of the order of High Court was sought.
The Court while dismissing the review petition held that it is not possible to review the order of the High Court which has been confirmed by the SC. The review petition was not maintainable.
Hindu Adoption Act
Introduction
The Hindu Adoptions and
Maintenance Act, 1956 (‘the Act’) is not a commercial or corporate
legislation, but its importance in today’s business world is being felt
because of succession issues, family separations and family feuds
becoming the order of the day. With an increasing number of families
adopting children, the question often arises as to whether the adopted
child is entitled to succeed the father in the business, property, etc.
In several cases, questions, such as whether the adoption was valid,
what happens if the adopted father has subsequently a natural child,
etc., are raised. Hence, it becomes essential to examine this Act. This
is all the more true in a country such as India where a great number of
businesses are family owned or controlled.
Although a great deal
of the Hindu Law is based on customs and usages, certain portions have
been codified. The Act is one such instance of codified law. It would
hence, overrule any text, custom, usage of Hindu Law.
Application
The Act applies to:
(i) Any person who is a Hindu, Jain, Sikh or Buddhist by religion.
(ii) Any person who is not a Muslim, Christian, Parsi or a Jew.
(iii) Any person who becomes a Hindu, Jain, Sikh or Buddhist by conversion or reconversion.
(iv)
A legitimate/Illegitimate child whose one or both parents is a Hindu,
Jain, Sikh or Buddhist by religion. However, in case only one parent is a
Hindu, Jain, Sikh or Buddhist by religion, then the child must be
brought up by such parent as a member of his community, family, etc.
(v)
Any child, legitimate or illegitimate, who has been abandoned both by
his father and mother or whose parentage is not known and who in either
case is brought up as Hindu, Buddhist, Jain or Sikh. This is a very
important clause which was added by the Amendment Act of 1945. The
reason for this Amendment was that only a Hindu can be adopted. As the
religion of an abandoned child or of a child whose parentage is not
known or cannot be ascertained, the explanation to section 2(1) of the
Act was amended to the effect that a child, legitimate or illegitimate
who has been abandoned by both of his parents or whose religion is not
known, but who in either case is brought up as a Hindu, will be a Hindu
by religion.
The Act does not apply to members of Scheduled
Tribes unless the Government so directs. Manner of making adoption Any
adoption by or to a Hindu must be made in accordance with the provisions
of the Act. It is interesting to note that in case the adoption is not
in accordance with the Act, then it shall be void. The consequences of a
void adoption are:
(a) it does not create any rights in the adoptive family in favour of the adopted child; and
(b) his rights in the family of his natural birth also subsist and continue.
Thus,
in a case of a void adoption, the adopted child would not be entitled
to any inheritance or succession benefits in his adopted family. The
pre-requisites of a valid adoption u/s.6 are as follows:
(a) the adopter is capable of and has a right of adopting under the Act;
(b) the adoptee is capable of being taken in adoption under the Act;
(c) the person giving the adoptee is capable of doing so under the Act; and
(d) all other conditions specified under the Act have been fulfilled.
Capacity of adopter
A male Hindu is capable of adopting a son or daughter:
(a) if he is of sound mind;
(b) if he is a major, i.e., he is above 18 years of age;
(c)
if he has a wife, he shall not adopt except with the consent of his
wife, unless she has renounced the world or ceased to be a Hindu or has
been declared to be of unsound mind. If he has more than one wife, then
the consent of all wives is required.
The wife’s consent must be
obtained before the adoption and not after it. The proviso mandates the
consent as a condition precedent to adoption and hence subsequent
consent cannot validate the adoption.
In Kashibai W/O Lachiram
v. Parwatibai W/O Lachiram 1995 SCC (6) 213, has held that the wording
is mandatory and an adoption without wife’s consent would therefore be
void.
Now a Hindu can adopt a son or a daughter. Under the old
law, adoption of a daughter was invalid except where it was customarily
accepted among certain parts of India.
A female Hindu is capable of adopting a son or daughter:
(a) if she is of sound mind;
(b) if she is a major, i.e., above 18 years of age;
(c)
if she either is not married or her husband is dead or has been
declared of unsound mind or has renounced the world or has ceased to be a
Hindu or her marriage has been dissolved.
Thus, a Hindu married
woman whose husband does not suffer from any of the disabilities
specified above would not be able to adopt a child on her own even with
her husband’s consent. This is a unique position and a departure from
the earlier position under the uncodified Hindu Law. This principle has
also been laid down by the Bombay High Court in the case of Dasharath
Ramachandra Khairnar v Pandu Khairnar, (1977) 79 Bom LR 426. The Court
held that elaborate provisions are made in the Act setting out
circumstances under which a wife could have a capacity to adopt and the
consent of the husband to enable the wife to adopt is not one of the
enabling circumstances under the provisions.
Capacity of adoptee
A person may be adopted if:
(a) he is a Hindu;
(b) he has not been already adopted;
(c) he has not been already married, unless a custom or usage permits married people to be adopted; and
(d)
he must be below 15 years of age, unless a custom or usage permits
persons above 15 years to be adopted. The above conditions equally apply
to females. One of the most relevant conditions to be borne in mind is
that the adoptee must be below 15 years of age.
Capacity of person giving in adoption
The person giving the child in adoption can do so if he fulfils the following conditions:
(a) Only the natural father or mother or the guardian of a child can give him in adoption.
(b) The natural guardian can give consent for adoption to any person including himself, under the following situations:
(i) the natural father and mother are dead, have renounced the world, abandoned the child, been declared of unsound mind, etc.;
(ii) the City Civil Court has granted permission for the same
(iii) before granting permission the Court will have to be satisfied about the welfare of the child and other factors.
Conditions for a valid adoption
The additional conditions for a valid adoption are as follows:
(i)
If the adoption is of a son/daughter, the adoptive father or mother by
whom the adoption is made must not have a Hindu son/daughter,
grandson/granddaughter or great grandson/ granddaughter (whether by
legitimate blood relationship or by adoption) living at the time of
adoption; (where there is a child, adoption cannot be done even with the
consent of the child.)
(ii) If the adoption is by a male and
the person to be adopted is a female, the adoptive father is at least 21
years older than the person adopted;
(iii) If the adoption is
by a female and the person to be adopted is a male, the adoptive mother
is at least 21 years older than the person to be adopted;
(iv) The same child may not be adopted simultaneously by two or more persons;
(v) The child to be adopted must be actually given and taken in adoption by the parents or guardians concerned or under their authority with intent to transfer the child from the family of its birth or in the case of an abandoned child or a child whose parentage is not known, from the place or family where it has been brought up, to the family of its adoption.
Effect of adoption
From the date of adoption the child will be considered to be the natural child of the adoptive family and all the ties with the original family are severed. The three exceptions to this Rule are:
(i) The child cannot marry any person whom he could not have married had he continued in the original family of his birth;
(ii) The adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family, subject to any obligations arising from such vesting of the estate; and
(iii) The adopted child shall not divest any persons in the adoptive family of any estate vested in that person prior to the date of adoption. For instance, a Hindu widow absolutely inherits property on her husband’s death. Thereafter, she adopts a son. He cannot challenge the alienation made by the widow on the grounds that now he has an interest in such property since the property had already vested in the widow and the adoption does not relate back — Joti v. Mankubai, AIR 1988 Bom. 348/ Banabai v. Wasudeo, (1980) 82 Bom. LR 388.
(iv) A valid adoption by a Hindu female operates as a valid adoption even by her husband. The principle has been laid down in Sawan Ram v Kala Wanti, 1967 AIR 1761 (SC). The Supreme Court held that “it is well-recognized that, after a female is married, she belongs to the family of her husband. The child adopted by her must also, therefore, belong to the same family. On adoption by a widow, therefore, the adopted son is to be deemed to be a member of the family of the deceased husband of the widow. ………… thus, itself makes it clear that, on adoption by a Hindu female who has ‘been married, the adopted son will, in effect, be the adopted son of her husband also.”
A valid adoption once made cannot be cancelled by the adoptive father or mother or any other person. Further, the adopted child also cannot renounce his adopted parents and return back to his natural family. If the adoption process has been properly followed, the consequences of the same cannot be undone and then the motive of the adoption has no relevance — Devgonda Patil v. Shamgonda Patil, AIR 1992 Bom. 189.
In the case of Chandan Bilasini v. Aftabuddin Khan, (1996) 7 SCC 13, the legal effects of an adoption have been well summarised:
“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family. As a consequence, when a widow adopts a child, the child not merely acquires an adoptive mother but also acquires other relationships in the adoptive family, unless there is anything to the contrary in the Hindu Adoptions and Maintenance Act.
This position is reinforced by section 14(4) which sets out that where a widow or an unmarried woman adopts a child, any husband whom she marries subsequently shall be deemed to be the step-father of the adopted child. In other words, the family relationship gets crystalised as at the date of adoption. The child will be deemed to be the child of the parent who adopts the child and the existing or deceased spouse of that parent (as the case may be), if any, will be considered the child’s father or mother. A spouse subsequently acquired by the adoptive parent becomes the step-parent of the adopted child. The adopted child, however, cannot divest any person of any property already vested in that person [section 12(c)].”
The Supreme Court in Smt. Sitabai v. Ramchandra, AIR 1970 SC 343, referred to the scheme of the Hindu Adoptions and Maintenance Act and held:
“………. the child adopted is tied with the relationship of sonship with the deceased husband of the widow. The other collateral relations of the husband would be connected with the child through that deceased husband of the widow. For instance, the husband’s brother would necessarily be the uncle of the adopted child. The daughter of the adoptive mother (and father) would necessarily be the sister of the adopted son, and in this way, the adopted son would become a member of the widow’s family, with the ties of relationship with the deceased husband of the widow as his adoptive father.”
The Act also empowers the adoptive parents to dispose of their property either by way of sale, gift, exchange, etc., or by way of a will. Thus, merely because they have made an adoption that by itself is no bar on them from disposing of their properties in any manner as they deem fit.
Adoption and other Acts
Under the Income-tax Act, 1961, the definition of a child expressly includes an adopted child. Hence, clubbing provisions applicable to a minor child would also apply to an adopted child. An interesting issue would arise u/s.56(2)(vii), viz. would a gift of money/ property received by an adopted child from his or her parents be exempt? Would an adopted child be a lineal descendant of an adoptive parent? The Andhra Pradesh High Court had an occasion to consider a similar issue in the context of the Estate Duty Act, 1953, in the case of Estate of Nuli Lakshminarayana, 116 ITR 739 (AP). The Court held that the expression ‘lineal descendant’ takes in an ‘adopted son’. It is submitted that the ratio of this decision should be extended to section 56(2)(vii) also.
Section 6 and Schedule IA to the Companies Act, 1956 define the term relatives. The Schedule states that the term ‘son’ includes a step-son. However, it is silent as to whether an adopted son is included. The Department of Company Affairs in a clarification given at a meeting with Chamber of Commerce has stated that on adoption a person cannot be regarded as a relative of the persons who are relatives in his natural family. A corollary to this should mean that an adopted son is a son for Schedule IA.
The Bombay Stamp Act, 1958 provides a concessional rate of stamp duty @ 2% in case of a gift to any lineal ascendant/descendant of the donor. Again the term ‘lineal ascendant/descendant’ has not been defined. It is submitted that reliance may be placed on the decision of the Andhra Pradesh High Court explained above for concessional duty in case of a gift to/by an adopted child.
The definition of the term ‘immediate relative’ in the SEBI (Issue of Capital & Disclosure Requirement) Regulations and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 state that the term includes the child of a person. However, it does not expressly state whether an adopted child is included. It is submitted that in the light of the above discussion, an adopted child should also be treated as an immediate relative of a person.
How can a CA help?
Normally, an Auditor/CA is not directly involved with succession issues. Nevertheless, he can provide a lot of value -added services to his clients if he is aware of the law in this respect. Disputes on inheritance impact the operations of a corporation even in case of listed companies, especially, where an adopted child is to become the successor to the business/properties. A CA can be of great assistance to his clients in cases of such family feuds and on succession planning.
A.P. (DIR Series) Circular No. 66, dated 13-1- 2012 — (I) Scheme for Investment by Qualified Foreign Investors in equity shares — (II) Scheme for Investment by Qualified Foreign Investors in Rupee Denominated Units of Domestic Mutual Funds — Revision.
(I) Scheme for Investment by Qualified Foreign Investors (QFI) in equity shares
This Circular permits QFI (non-resident investors, other than SEBI-registered FII and SEBI-registered FVCI, who meet the KYC requirements of SEBI), from jurisdictions which are FATF compliant and with which SEBI has signed MOUs under the IOSCO framework, to purchase on repatriation basis equity shares of Indian companies, subject the following terms and conditions. Some of the important terms and conditions are:
(i) QFI can invest through SEBI-registered Depository Participants (DP) only:
(a) In equity shares of listed Indian companies through recognised brokers on recognised stock exchanges in India
(b) In equity shares of Indian companies which are offered to public in India in terms of the relevant and applicable SEBI guidelines/regulations.
(ii) QFI can also acquire equity shares by way of rights shares, bonus shares or equity shares on account of stock split/consolidation or equity shares on account of amalgamation, demerger or such corporate actions.
(iii) QFI are allowed to sell the equity shares so acquired by way of sale:
(a) Through recognised brokers on recognised stock exchanges in India; or
(b) In an open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or
(c) In an open offer in accordance with the SEBI (Delisting of Securities) Guidelines, 2009; or
(d) Through buyback of shares by a listed Indian company in accordance with the SEBI (Buyback) Regulations, 1998.
(iv) A separate single rupee pool bank account must be maintained by the DP with an AD Category-I bank in India for QFI investments under this scheme.
(v) The individual and aggregate investment limits for the QFI will be 5% and 10%, respectively of the paid-up capital of an Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the Portfolio Investment Scheme for foreign investment in India. However, wherever there are composite sectoral caps under the extant FDI policy, these limits for QFI investment in equity shares shall also be within such overall FDI sectoral caps.
(vi) QFI can remit foreign inward remittance through normal banking channel in any permitted currency (freely convertible) directly into single rupee pool bank account of the DP maintained with AD Category-I bank. Similarly, sale proceeds/dividends of equity shares will also be received in this single rupee pool bank account of the DP and must be repatriated to the designated overseas bank account of the QFI within five working days (including the date of credit of funds to the single rupee pool bank account by way of sale of equity shares) of having been received in the single rupee pool bank account of the DP, provided it is not reinvested within this period of five days.
(vii) Pricing of all eligible transactions and investment in all eligible instruments by QFI must be in accordance with the relevant and applicable SEBI guidelines only.
(II) Scheme for Investment by Qualified Foreign Investors in Rupee Denominated Units of Domestic Mutual Funds
This Circular has modified the Scheme for QFI investment in rupee denominated units of Domestic Mutual Funds under the Direct Route as follows:
1. The time period for which funds (by way of foreign inward remittance as well as by way of credit of redemption proceeds of the units of Domestic Mutual Funds) can be kept in the single rupee pool bank account of the DP under the scheme is five working days (including the day of credit of funds received).
2. Similarly, dividend received by QFI in the single rupee pool bank account must be remitted to the designated overseas bank accounts of the QFI within five working days (including the day of credit of such funds to the single rupee pool bank account). Dividend so received can be also utilised by the QFI, within these five working days, for fresh purchases of units of Domestic Mutual Funds under this scheme.
A. P. (DIR Series) Circular No. 43 dated 13th September, 2013
Export of Goods and Services–Simplification and Revision of Declaration Form for Exports of Goods/ Software
Presently, every exporter of goods or software has to give declaration in one of the forms (GR/PP/SDF/ SOFTEX/Bulk SOFTEX) and submit the same to the specified authority for certification.
This circular prescribes a common form called “Export Declaration Form” (EDF) for declaring all types of export of goods from Non-EDI ports and a common “SOFTEX Form” to declare single as well as bulk software exports. The EDF will replace the existing GR/PP form used for declaration of export of goods and as to be used on and from 1st October, 2013. Further, all exporters will have to declare all the export transactions, including those less than $25000, in the applicable form. The procedure relating to the exports of goods through EDI ports will remain the same and SDF form will be applicable as hitherto. The EDF and SOFTEX form have been given in Annex I and Annex II respectively. RBI will extend facilities to exporters for online generation of SOFTEX Form No. (Single as well as Bulk) for use in offsite software exports, in addition to EDF Form No. (Present web-based process of generation of GR Form No. gets replaced) through its website www.rbi.org.in. The specimen of online form and the advice are given in Annex III. Exporters have to complete the EDF/SOFTEX Form using the number so allotted and submit them to the specified authority first for certification and then to AD for necessary action as hitherto.
A. P. (DIR Series) Circular No. 42 dated 12th September, 2013
Notification No.FEMA.284/2013-RB dated 27th August, 2013 notified vide G.S.R.596 (E) dated 6th September, 2013
Foreign Investment in India–Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies
This circular has amended condition at (d) regarding downstream investments by an Indian company which is not owned and/or controlled by resident entity/entities. The amended condition is given in the table below:
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c.f. Annex to A.P.(DIR Series) Circular No. 1 dated 4th July, 2013 |
Earlier Condition |
Revised Condition |
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ParaE 6 (ii) (d) |
For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This: would, however, not preclude downstream operating companies from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company engaged only in activity of investing in the capital of another Indian company/ ies, subject to the provisions above and as also elaborated below: |
For the purpose of downstream investment, the Indian companies making the d o w n s t r e a m investments would have to bring in requisite funds from abroad and not use funds borrowed in the domestic market. This would, however, not preclude d o w n s t r e a m operating companies from raising debt in the domestic market. Downstream investments through internal accruals are permissible by an Indian company, subject to the provisions of clause 6(i) and as also elaborated below: |
A. P. (DIR Series) Circular No. 41 dated 10th September, 2013
Overseas Direct Investment–Amendment
This circular has modified condition of clause (b) relating to obtaining prior permission under the Approval Route from the RBI for providing corporate guarantee by an Indian Party on behalf of second generation or subsequent level step down operating subsidiaries. The original and revised provisions are in the table:
This circular has modified condition of clause (b) relating to obtaining prior permission under the Approval Route from the RBI for providing corporate guarantee by an Indian Party on behalf of second generation or subsequent level step down operating subsidiaries. The original and revised provisions are in the table:
Table regarding Overseas Direct Investment
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Original Provision |
Revised Provision |
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(b) Further, it has also been decided that issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party directly or indirectly holds 51% or more stake in the overseas subsidiary for which such guarantee is intended to be issued. |
(b) Further, it has also been decided that issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party indirectly holds 51% or more stake in the overseas subsidiary for which such guarantee is intended to be issued. |
A. P. (DIR Series) Circular No. 40 dated 10th September, 2013
Notification No.FEMA.286/2013-RB dated 5th September, 2013 notified vide G.S.R.No.595 (E) dated 6th September, 2013 Overseas Foreign Currency Borrowings by Authorised Dealer Banks– Enhancement of limit
This circular permits banks to borrow funds, subject to certain conditions, from their Head Office, overseas branches and correspondents and overdrafts in Nostro accounts up to a limit of 100% of their unimpaired Tier-I capital as at the close of the previous quarter or $10 million (or its equivalent), whichever is higher, as against the existing limit of 50% (excluding borrowings for financing of export credit in foreign currency and capital instruments).
Further, banks can up to 30th November, 2013, enter into a swap transaction with the RBI in respect of the borrowings raised as above at a concessional rate of 100 basis points below the market rate for all fresh borrowing with a minimum tenor of one year and a maximum tenor of three years, irrespective of whether such borrowings are in excess of 50% of their unimpaired Tier I capital or not. Although banks are free to borrow in any freely convertible currency, the swap is available only for conversion of US $ equivalent into INR and the US $ equivalent shall be computed at the relevant cross rate prevailing on the date of the swap.
A.P. (DIR Series) Circular No. 65, dated 12-1-2012 — Foreign Exchange Management Act, 1999 — Export of Goods and Services — Forwarders Cargo Receipt.
Presently, banks are permitted to accept Forwarder’s Cargo Receipts (FCR) issued by IATA-approved agents, in lieu of bill of lading, for negotiation/collection of shipping documents, in respect of export transactions backed by letters of credit, only if:
1. the relative letter of credit specifically provides for negotiation of FCR in lieu of bill of lading and
2. the relative sale contract with the overseas buyer provides that FCR can be accepted in lieu of bill of lading as a shipping document.
This Circular has relaxed the above conditions, and provides that:
1. Banks can accept FCR issued by IATA-approved agents, in lieu of bill of lading, for negotiation/ collection of shipping documents, in respect of export transactions backed by letters of credit, if the relative letter of credit specifically provides for negotiation of this document in lieu of bill of lading even if the relative sale contract with the overseas buyer does not provide for acceptance of FCR as a shipping document, in lieu of bill of lading.
2. Banks can, at their discretion, also accept FCR issued by shipping companies of repute/IATAapproved agents (in lieu of bill of lading), for purchase/ discount/collection of shipping documents even in cases, where export transactions are not backed by letters of credit, provided the ‘relative sale contract’ with overseas buyer provides for acceptance of FCR as a shipping document in lieu of bill of lading.