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Category: Corporate And Other Laws

Gift – Acceptance of gift – Between father and daughter Transfer of property Act 1882, section 54 & 122:

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Chaudhary Ramesar vs. Smt. Prabhawati Phool Chand AIR 2012 Allahabad 173 (High Court)

The plaintiff was the brother of one Mohan. Mohan neither had a son nor a daughter and that during his lifetime his wife Smt. Tirthi had died. It was alleged that the defendant got a gift-deed executed through an imposter of Mohan, which was liable to be cancelled on the grounds: that Mohan did not at all execute the gift-deed; that the statement in the gift-deed that the defendant was daughter of Mohan was incorrect; that the gift-deed was executed without a mental act of the donor; that there was no valid acceptance of the gift; that the defendant did not enter into possession of the property.

The defendant contested the suit by denying the allegations and claiming that she was the only daughter of Mohan and that Mohan had no son or other issue. It was claimed that the gift was voluntarily executed by Mohan, which was duly attested by the witnesses and registered in accordance with the law of registration; and that the gift was duly accepted by her and that her name was duly recorded in the revenue records pursuant to the gift-deed. It was also claimed that the suit was barred by limitation as also by principles of estoppel and acquiescence.

The Trial Court came to the conclusion that the gift-deed was validly executed, the execution of which was proved by its attesting witness – that the defendant was the daughter of Mohan, that the death certificate produced by the plaintiff to the effect that Mohan died on 25.5.1991, that is prior to the execution of the gift-deed, was not reliable, whereas from the evidence led by the defendant it was clear that Mohan had died on 10.8.1991; and that the name of the defendant was also mutated in the revenue records. With the aforesaid findings the suit was dismissed. The finding recorded by the Courts below that Dr. K. Shivaram Ajay R. Singh Advocates Allied laws Prabhawati (defendant) was the daughter of Mohan had not been subjected to challenge.

The Hon’ble Court observed that from a perusal of the photocopy version of the gift-deed, it appeared that bhumidhari land was gifted whereas Rs. 40,000/- has been mentioned as the valuation of the property donated and not as consideration. The valuation has been mentioned, obviously, for the purpose of payment of stamp duty. Accordingly, the first contention was not acceptable. Thus, a composite reading of the deed clearly disclosed that it was a gift of immovable property and not a sale.

On the question of valid acceptance of the gift, the learned counsel for the appellant contended that the defendant was a minor on the date of the execution of the gift-deed, therefore, in absence of any proof of valid acceptance by a guardian or next friend on her behalf, the gift would not be complete.

The Court observed that the age of Smt. Prabhawati has been disclosed as 28 years, which translates to 21 years on the date of execution of the gift-deed. In the plaint, however, it has been mentioned that from the impugned deed, acceptance is not established. In the gift-deed, there is a clear recital that the donor was transferring his possession over his bhumidhari land and that the gift has been accepted by the donee i.e. Prabhawati and that she was entitled to get her name mutated in the revenue records. This recital in the gift-deed raises a presumption about the acceptance of the gift by the donee. The trial Court while deciding issue No. 1 has taken note of the statement of Prabhawati, wherein she had stated that on the same day she entered into possession of the land and continues to remain in possession. Thus, it cannot be said that there was no acceptance of the gift. Even otherwise, assuming that actual physical possession remained with the father, then also, the gift could not have been invalidated considering the relationship of father and daughter. In the case of Kamakshi Ammal vs. Rajalaksmi and others, AIR 1995 Mad 415 (para 21) it was held that where a father made a gift to his daughter and on its acceptance by her, she allowed her father to enjoy the income from the properties settled in view of the relationship of father and daughter between the donor and donee, it could not be said that there was no acceptance of gift by the donee, even assuming that the donor continued to be in possession and enjoyment of the property gifted.

Further, even if it is assumed that the defendant was minor on the date of execution of the giftdeed, the gift would not be invalidated for lack of acceptance by another guardian or next friend, as acceptance can be implied by the conduct of the donee.

The appeal was dismissed.

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Greedonomics

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It is said that there is no end to Greed. The Free Dictionary defines “Greed’ as an excessive or rapacious desire, especially for wealth or possessions”.

Though, I am not an Economist but a sceptical man, I see the current economic growth driven by first spending to create demand and then instigating people to spend. This instigation, is from various mediums, such as advertising, social status, etc. This gradually becomes a habit, which will lead to the need for money. To earn money, a person will do various types of jobs and then spend the money earned on his habits. People slowly get into the trap of spending and increasing demand, which then leads to inflation.

“Our economy is based on spending billions to persuade people that happiness is buying things, and then insisting that the only way to have a viable economy is to make things for people to buy so they’ll have jobs and get enough money to buy things.” ? Philip Elliot Slater

Management Gurus and Economists may explain this phenomenon as growth. For economies, money is the root for growth, more the money circulation more is the growth. But what is the limit of growth or is there any ideal growth rate?

As a thought, if people in economies that are growing at less than 1% can live a good life, then why should we increase at 8% or even higher!! It is like we all are in a race to grow fast. But wait, is it growth or are we going towards depletion of resource at a fast pace. If the existing resources would say last for next 100 years, why do we want to deplete them in 50 years?

“Worldwide, compared to all other fossil fuels, coal is the most abundant and is widely distributed across the continents. The estimate for the world’s total recoverable reserves of coal as of January 1, 2009 was 948 billion short tons. The resulting ratio of coal reserves to consumption is approximately 129 years, meaning that at current rates of consumption, current coal reserves could last that long.” – US Energy Information Administration (www.eia.gov)

There is a law of Diminishing Marginal Utility (DMU). The law of DMU states that other things being equal, the marginal utility derived from successive units of a given item goes on decreasing. Hence, the more we have of a thing; the less we want of it, because every successive unit gives less and less satisfaction. However, there is an exception to this law for a particular thing i.e. money.

For example, when a person is hungry, the first bite of food will give the most satisfaction, then the second. Thus, the hunger is satisfied by the last bite. However, it is reverse in case of money, with every increase in earnings, the greed to have more, increases.

This concept of DMU is used in business, to increase the sale of products by fixing a lower price. Since consumers tend to buy more to equate their utility (i.e. value for money) with price, the manufacturer can expect a rise in sale and thus, increase its margin by increase in volume. Indian mythology carries many examples around Greed and Deed. Lord Krishna said, “Karma kar, phal ki chinta mat kar” meaning “perform your duty with generosity without expecting any outcome from it. However, in reality, the way the businesses are run, is purely based on profit i.e. outcome. Kenneth Allard, a former army colonel and an adjunct professor in the National Security Studies Program at Georgetown University, holding a PhD from the Fletcher School of Law and Diplomacy and an MPA from Harvard University, has written a book named “Business is War”. He was dean of students of the National War College from 1993 to 1994.

He writes “A 21st-century business strategy for succeeding in a tough global economy. To succeed in today’s turbulent business environment operating in a ‘business as usual’ mode will no longer work. Conflict and competition can come from anywhere. In tough economic times, survival is a matter of waging war, and people are looking for proven strategies to solve all types of problems..”

Thus, it can be seen that the modern philosophy of business is changing. I would quote Mahatma Gandhi which sounds paradoxical to the latest business strategies, “Earth provides enough to satisfy every man’s needs, but not every man’s greed.”

How businesses are affected by Greed:
Take an example of Satyam Computers, who in their greed to grow over its competitors and derive higher valuations, constantly showed better results and increase in earnings per share. The fact was that, there were no real customers, the invoices raised were not realised in real and the money in fixed deposits was no more than paper. There is an increasing tendency of businesses competing with each other in the race to have higher valuations, which in turn depends on higher earnings. The thing to bear in mind is that “greed is good.” That is, it’s good for a business, but perhaps not for the society in which the business survives. Unrestrained greed in the business can lead to cruelty and malpractices. A business dominated by greed will often ignore the harm their actions can cause to others. Child labour, sweat shops, unsafe working conditions and destruction of livelihoods are all consequences of businesses whose personal greed overcame their social consciences.

Greed and Society
From a macro point of view, a society that bans individual greed may suffer. It is greed that makes people want to do things, since they will be rewarded for their efforts. It is a carrot and stick approach that can yield better results. Remove the reward and it may lead to reduction in incentive to work.

“The former Soviet Union provides an example of this: the collective farms provided no individual incentive to strive, and thus produced an insufficient supply of food. The individually owned and run truck farms, however, with the possibility of selling the produce and keeping the proceeds, grew a far greater harvest per acre than the collective farms. The “greed” of American farmers has allowed them to grow food for the world, since the more they produce the more money they make.”

Nonetheless, however you regard it, unrestrained greed is detrimental to the society; unrestrained disapproval of greed is detrimental to the society. People attempt to find a balance between personal and social necessity.

“If it weren’t for greed, intolerance, hate, passion and murder, you would have no works of art, no great buildings, no medical science, no Mozart, no Van Gough, no Muppets and no Louis Armstrong.” ? Jasper Forde, The Big Over Easy

To conclude, the strange fact as understood is that, once a person generates earnings, earnings originate greed. Then slowly, the earnings that gave birth to greed, gets to the back seat and greed governs the level of earnings. Thus, there is no limit to the desire to grow earnings, because, there is no end to Greed. Here, I remember a quote from the twenty-first verse in the Sixteenth Chapter of the Bhagavad-Gita, where Lord Krishna says:

“tri-vidham narakasyedam dvaram nasanam atmanah kamah krodhas tatha lobhas tasmad etat trayam tyajet” “Give up kama, krodha, lobha i.e. lust, anger, and greed. If you become influenced or affected by them, then you will open your door to hell.”

In this Contemporary World, it is very difficult to completely give up Greed, so this New Year, let us resolve one thing, Let us Rationalise our Greed…

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International Arbitration — Jurisdiction of Indian Court — Parties agreed for final settlement of disputes under International Chamber of Commerce.

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[Progressive Construction Ltd. v. The Louis Berger Group Inc. & Ors., AIR 2012 AP 38]

The appellant, namely, M/s. Progressive Construction Ltd., is a Public Limited Company. It is engaged in the business of and carrying out construction activities throughout the world, including India. The appellant stated that the Government of Sudan received assistance from the United States Agency for International Development under Sudan Infrastructure Services Project, which was being administered by respondent No. 1, namely, M/s. Louis Berger Group Inc. For execution of the said project, the respondent No. 1 issued notification inviting applications.

The respondent No. 1 invited bid by dividing the contract into packages. Thereafter, the respondent No. 1 entered into an agreement with the appellant on 30-4-2009 for execution of contract work. According to the appellant, the respondent No. 1 to cover up its latches and to avoid payment to the appellant has resorted to issuing the impugned notice of expulsion dated 21-10-2009 expelling the appellant from the site. The appellant, pending initiation of arbitration proceedings, filed the petition u/s.9 of the Arbitration & Conciliation Act, 1996 to declare the action of the respondent No. 1, in issuing notice of expulsion dated 21-10-2009 to the appellant and the consequences following therefrom as illegal and arbitrary, and to grant injunction restraining the respondent No. 1 from issuing letter of demand to the respondent Nos. 3 and 4 (Banks) in order to invoke/encash the bank guarantee and also restrain them from demanding any amount from the appellant pursuant to invocation of bank guarantee.

The respondent Nos. 1 and 2 having received the notice in the petition, filed counter inter alia stating that as per Clause 67.3 of the agreement, the parties have agreed to settle the disputes arising out of the agreement finally under the rules of American Arbitration Association. Therefore, the Civil Courts in India, which includes the Courts at Hyderabad, have no jurisdiction to entertain petitions in respect of the disputes arising out of the agreement. It was contented by the appellant that since it is an International arbitration, and as part of cause of action has arisen at Hyderabad, the appellant was entitled to invoke the jurisdiction of the Courts at Hyderabad in India. The lower Court granted status quo to be maintained, however ultimately dismissed the petition.

On appeal the High Court observed that the arbitration proceedings u/s.9 of the Act cannot be equated with proceedings in a regular suit. The application u/s.9 is legislated to protect the interest of parties before initiation of arbitration proceedings or during the pendency of the proceedings. It is never the intention of the Legislature to by-pass the arbitration clause totally. While determining the application u/s.9 of the Act, it is required to determine the need to protect the property pending before the arbitration. Once the Court finds that it has no territorial jurisdiction to entertain the matter, the only course open to the Court is to reject the application to enable the parties to go before the competent Court, instead of making a decision on merits. In case it proceeds and records the findings on merits, it would affect the rights of the parties on merits. The law is well settled that any finding or observations made by a Court, which has no jurisdiction to entertain a suit or application, would be Coram non judice (a Court which has no jurisdiction to decide the matter). In view of the above, the findings recorded by the lower Court that the appellant has no prima facie case in his favour for grant of interim relief u/s.9 of the Act and other findings recorded on merits, cannot be sustained and accordingly was set aside.

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Hindu law — Gift of undivided share by coparcener — Held to be void.

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[Subhamati Devi (Smt.) & Ors. v. Awadhesh Kumar Singh & Ors., AIR 2012 Patna 45]

The plaintiffs had filed the suit for declaration that the deed of gift dated 27-1-1989 executed by Ambika Singh in favour of the defendants was an illegal document and not binding upon the plaintiffs. One Bharosa Singh had executed a gift of deed in favour of Rashari Singh who was the predecessor of the plaintiffs. As the said gift of deed of the year 1919 was exclusively in the name of Rashari Singh, the plaintiffs asserted that Ramdhari Singh and his son Ambika Singh did not acquire any right, title and interest in the property covered by the said gift deed. The plaintiffs also stated that Ambika Singh had filed title suit No. 10 of 1989 for partition of the joint family property, including the properties covered by the gift of deed of 1919, and simultaneously he had executed a gift deed dated 27-1-1989 in favour of defendant Nos. 1 to 7, which is a void document as a coparcener in his status as such he could not have executed or alienated the joint family property by way of gift. However, the defendants have contended that there was separation and Ambika Singh had separated from the joint family in the year 1982-83 and as such he was fully competent to execute the gift deed in question.

The Trial Court after considering the evidence had come to the finding that the gift deed dated 27-1-1989 by Ambika Singh was a valid and legal document. However, in appeal by the plaintiffs, the Appellate Court reversed the finding of the Trial Court and came to hold that the gift deed of Ambika Singh, who was a coparcener, was not a valid document with regard to coparcenary property.

On further appeal the Court observed that a mere assertion of separation is not sufficient to entitle a coparcener to alienate the coparcenary property by gift. In the present case this aspect is further fortified by the admitted fact of filing of title suit No. 10 of 1989 for partition by Ambika Singh accepting unity of title and jointness of possession over the suit land between parties to the suit in which the defendant/respondents of the present appeal were defendants and the property subject-matter of the gift deed had also been included in the suit property. The said suit was abandoned as per the submission of the counsel for the appellants, after the death of Ambika Singh. There is no evidence on record to establish the partition in the joint family of the appellant and the respondents. The Apex Court in (T. Venkat Subbamma v. T. Rattamma) AIR 1987 SC 1775 after taking notice of the authoritative texts on Hindu law and different decisions on the issue has affirmed the view and held:

“There is a long catena of decision holding that a gift by a coparcener of his undivided interest in the coparcenery property is void.”

For the reasons it was held that Ambika Singh had no right to gift the joint family property and as such has rightly reversed the decree of the Trial Court.

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Chartered Accountants can practice in LLP Format

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Limited Liability Partnership Concept

The Limited Liability Partnership Act, 2008 (LLP Act) was passed by the Parliament in December, 2008. Some sections of this Act came into force on 31-3- 2009. Some of the other sections have come into force on 31-5-2009. The LLP Rules, 2009, have come into force on 1-4-2009. Limited Liability Partnership (LLP) is a new form of statutory organisation which is gaining its importance and opening new opportunities for practising Chartered Accountants. Section 3 of the LLP Act provides that LLP formed under the Act is a body corporate and is a legal entity separate from its partners. It is also provided that LLP shall have perpetual succession and any changes in its partners will not affect the existence, rights or liabilities of the LLP. In other words, the concept of LLP is akin to a partnership firm with the liabilities of the partners being limited to the amount of capital contributed by the partners. It is a better alternative to a private limited company. The status of the LLP under the Income-tax Act is that of a ‘Firm’. After the amendment of the Chartered Accountants Act, w.e.f. 1-2-2012, the status of LLP formed by Chartered Accountants in practice is also that of a ‘Firm”. Government Notification dated 23-5-2011 provides that for the purposes of section 226(3)(a) of the Companies Act, LLP formed by Chartered Accountants in practice will not be considered as a corporate body. In this article the features of the LLP Act with special reference to eligibility of Chartered Accountants to use LLP format for their audit and tax practice are discussed.

Formation of LLP

Any two or more persons can form an LLP for the purpose of carrying on any business, profession or occupation. Even the LLP can also be a partner in another LLP. It is necessary that at least one of the partners in LLP should be a resident in India. Every LLP should have two designated partners who are individuals, one of whom should be a resident in India. The restriction of 20 partners which is applicable to a partnership firm does not apply to LLP. In other words, LLP with any number of partners can be formed for carrying on any business or profession. It may be noted that u/s.10 (23) of the Income-tax Act the definition of ‘Firm’ includes LLP and all the provisions relating to a partnership firm apply to LLP.

The partners of LLP will have to select a name and apply to the Registrar of Companies (ROC) in Form No. 1 with prescribed fees for approval of such name. The ROC will approve the name only if it is not the same or similar to the name of a limited company, an LLP or a firm. After getting the approval for a name, the partners will have to file the following Forms with ROC with the prescribed fees and follow the following procedure for incorporation of LLP.

(i) Form No. 2 — Form of incorporation document to be signed by all partners who have to join LLP as partners.

(ii) Form No. 3 — Form for filing LLP Agreement. For this purpose LLP agreement will have to be executed.

(iii) Form No. 4 — Notice of appointment and cessation of partners, designated partners, consent of partners/designated partners or any changes in their particulars to be filed by LLP with ROC.

(iv) Form No. 6 — Particulars of names and addresses of partners or changes therein to be intimated by partners to LLP.

(v) Form No. 7 — Application for allotment of Designated Partner Identification Number (DPIN).

(vi) Form No. 9 — Consent to act as designated partner to be filed by such partner with LLP.

(vii) When the above forms are submitted to ROC, he will give certificate of incorporation in Form No. 16. The LLP will be deemed to have been incorporated on that day. It can start its business or profession from that date.

Relationship of partners

Upon registration of LLP, the partners will have to enter into a partnership agreement in writing. This agreement will determine the mutual rights and duties of the partners and their rights and duties in relation to the LLP. Persons who have signed the incorporation document as partners along with other partners, if any, can execute this partnership agreement. The information of this partnership agreement is required to be filed with ROC with Form No. 3. Whenever there are changes in the terms and conditions of the partnership, LLP has to file the details of the change in Form No. 3 with ROC and pay the prescribed fees for the same. If the partnership agreement is executed before registration of LLP, the partners will have to ratify this agreement after incorporation of LLP and file the details in Form No. 3 with ROC.

If the partners do not execute the partnership agreement, the relationship between the partners will be governed by the First Schedule to the LLP Act. This schedule provides that mutual rights and duties of partners of LLP shall be determined as stated in this schedule in the absence of a written agreement. Even if there is a written agreement, but there is no specific mention about any of the specified matters, such matters will be governed by the provisions of First Schedule to the LLP Act.

Any person may join the LLP as a partner if all partners agree to admit him as a partner. Similarly, a partner will cease to be a partner on his death, retirement or on winding up of the LLP in which he is a partner. For this purpose, the partners will have to execute a fresh partnership agreement recording the terms and conditions of the partnership with revised constitution. Intimation about admission of new partners or retirement of a partner will have to be given to the ROC in Form No. 3 and Form No. 4 within 30 days.

The rights of a partner to share profits or losses of LLP are transferable either in whole or in part. Such transfer will not mean that the partner has ceased to be a partner or that the LLP is wound up. Such a transfer will not entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP. Similarly, the transferee will not get right to any information relating to the transactions of LLP.

The partnership agreement may provide for payment of interest on amount contributed by partner in LLP or remuneration payable to the partners. Further, the agreement will have to provide the share of each partner in profits or losses of LLP. The partnership agreement should also provide for the voting rights of each partner. The conditions relating to payment of interest, remuneration or share in profits or losses can be changed by amendments in the partnership agreement. It may be noted that under the Income-tax Act interest and remuneration paid to the partners is allowable as deduction from business or professional income of LLP if it does not exceed the limits provided in section 40(b). The provisions of section 40(b) of the Income-tax Act are applicable to an LLP since its status under the Income-tax Act is that of a ‘Firm’.

 Limited liability of partners

A partner of LLP is not personally liable, directly or indirectly, for any debts or obligations of LLP. However, a partner will be personally liable for any liability arising from his own wrongful act or omission. If such liability arises due to wrongful act or omission of any partner, the other partners will not be personally liable for the same. Each partner of LLP will have to contribute such amount for the business of LLP as may be determined by the partnership agreement. The liability of each partner will be limited to the extent of the amount as specified in the partnership agreement.

Designated partners

As stated earlier, at least two partners (individuals) have to be appointed as designated partners. It is also necessary that at least one of the designated partner is a resident of India. Appointment of such partners will be governed by the partnership agreement. In the event of any vacancy due to death, retirement, or otherwise, LLP has to appoint another partner as a designated partner within 30 days. Particulars of designated partners or changes therein have to be filed with ROC in Form No. 4. If LLP does not appoint at least two designated partners or if the number of designated partners fall below two, all partners shall be considered as designated partners. It may be noted that the designated partner has to give consent in writing to the LLP in the prescribed Form No. 9 of his appointment. LLP has to file this consent letter with ROC in Form No. 4 within 30 days of his appointment.

The following will be the obligations of designated partners.

(i)    They are responsible, on behalf of LLP, for compliance with the provisions of the LLP Act and Rules, including filing of any document, return, statement, etc. as required by the Act and the Rules.

(ii)    They are liable for all penalties imposed on the LLP for any contravention of LLP Act and the Rules.

(iii)    Every designated partner will have to sign the annual financial statements and annual solvency statement.

(iv)    Each designated partner will have to obtain a ‘Designated Partner Identification Number’ (DPIN). For this purpose, the application is to be made in Form No. 7.


Accounts and audit

LLP has to maintain such books of accounts as prescribed in Rule 24 of the LLP Rules. These books should be retained for 8 years. Such books may be maintained either on cash basis or accrual basis of accounting. It may be noted that the accounting year of each LLP will have to end on 31st March. LLP cannot choose accounting year ending on any other date. LLP has to prepare a statement of accounts and a solvency statement on or before 30th September each year. These statements have to be signed by the designated partners of LLP. The accounts of LLP have to be audited by a Chartered Accountant in accordance with Rule 24 of the LLP Rules. Under this Rule, such audit is compulsory if the turnover of LLP exceeds Rs.40 lac or contribution of partners in LLP exceeds Rs.25 lac. Rule 24 provides for procedure for appointment, removal, resignation, remuneration, disqualification, change of auditors, etc. There is no specific form of Audit Report which is required to be given. ICAI will have to issue guidance in this respect. The particulars of statement of accounts and solvency statement have to be filed with ROC in Form No. 8 on or before 30th October each year with the prescribed fees. LLP has to file an annual return with ROC on or before 30th May each year in Form No. 11 with the prescribed fees.

Conversion of partnership firm into LLP

Section 55 of the LLP Act provides that an existing Partnership Firm (Firm) can be converted into LLP by following the procedure laid down in the Second Schedule. Briefly stated, this procedure is as under.

(i)    A firm may apply to convert into an LLP if and only if the partners of the LLP to which the firm is to be converted, comprise all the partners of the firm and no one else.

(ii)    The firm will have to comply with the provisions of the Second Schedule to the Act.

(iii)    The firm will have to follow the procedure for getting the name of LLP approved and procedure for incorporation of LLP as stated above.

(iv)    Further, the firm has to apply for conversion into LLP to ROC in Form No. 17 with prescribed fees. The firm has to attach documents listed in that Form.

(v)    The ROC will then give certificate of conversion into LLP in Form No. 19.

(vi)    Thereafter, the LLP will have to inform the Registrar of Firms about conversion of firm into LLP in Form No. 14. The Registrar of Firms will then remove the name of the firm from his records. Thus, the firm will be deemed to have dissolved.

Effect of conversion of firm into LLP

If an existing partnership firm is converted into a LLP and registered as such, as stated above, u/s.55 of the LLP Act, the effect of such registration shall be as under. This is provided in Second Schedule.

(i)    On and from the date of registration specified in the certificate of registration —

(a)    all tangible and intangible properties vested in the firm all assets, interests, rights, privileges, liabilities, obligations, relating to the firm and the whole of the undertaking of the firm shall be transferred and shall vest in LLP without further assurance, act or deed, and

(b)    the firm shall be deemed to be dissolved and removed from the records of the Registrar of Firms.

(ii)    If any of the above properties is registered with any authority, LLP shall, as soon as practicable, after the date of registration, take all necessary steps as required by the relevant authority to notify the authority of the conversion and of the particulars of LLP in such medium and form as the authority may specify. If any stamp duty is payable under the relevant law, the same will have to be paid.

(iii)    All proceedings by or against the firm which are pending in any court, tribunal or any authority on the date of registration shall be continued, completed and enforced by or against LLP.

(iv)    Any conviction, ruling, order or judgment of any court, tribunal or other authority in favour of or against the firm shall be enforced by or against LLP.

(v)    All deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements subsisting, immediately before the date of registration of LLP, relating to the firm or to which the firm is a party, shall continue in force on or after that date as if they relate to LLP and shall be enforceable by or against LLP as if LLP was named therein or was a party thereto instead of the firm.

From the above discussion, it will be noticed that a partnership firm, with unlimited liability of partners, can now be converted into limited liability partnership (LLP) by following the above procedure. Such partnership firm after such conversion will not be required to comply with the provisions of the Partnership Act.

Taxation of LLP

The Finance (No. 2) Act, 2009, provides for taxation of LLP. In the definition of the term ‘Firm’ and ‘Partnership’ in section 2(23) of the Income-tax Act, it is stated that the term ‘Firm’ or ‘Partnership’ will include any LLP w.e.f. 1-4-2009. Further, the definition of a ‘Partner’ will include a partner of LLP. Therefore, all the provisions for taxation of ‘Firm’ will apply to LLP. The tax will be payable by the LLP at 30% plus Education Cess. No surcharge will be payable by LLP from A.Y. 2010-11. In view of this provision, no Minimum Alternate Tax (MAT) will be payable by LLP. Similarly, no dividend distribution tax will be payable by LLP. As discussed above, the remuneration paid to working partners and interest to partners, subject to the limits prescribed in section 40(b), will be allowed in computing taxable income of LLP.

The return of income of LLP will have to be signed by a designated partner of LLP. If for some reason he is not able to sign the return, any partner can sign. New section 167 C is added to provide that each partner of LLP is jointly and severally liable to pay tax due from LLP if it cannot be recovered from LLP. If such partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of LLP, he will not be liable to discharge this liability. Similar provision exists in section 188A which applies to partners of a ‘Firm’. It may be noted that to this extent liability of partners LLP is unlimited.

Position under Chartered Accountants Act

The C.A. Act, 1949, has been amended by the Chartered Accountants (Amendment) Act, 2011 in December, 2011. This Amendment has come into force from 1-2-2012.

The following provisions are made by the Amendment Act.

(a) ‘Firm’ is defined in section 2(1)(ca) as under.

“(ca)    ‘Firm’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, and includes —

(i)    The Limited Liability Partnership as de-fined in clause (n) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008.

(ii)    The sole proprietorship registered with the Institute”

(b)    ‘Partner’ is defined in section 2(1)(eb) as under.

“(eb)    ‘Partner’ shall have the meaning assigned to it in section 4 of the Indian Partnership Act, 1932, or in clause (q) of s.s (1) of section 2 of the Limited Liability Partnership Act, 2008, as the case may be.”

(c)    ‘Partnership’ is defined in section 2(1)(ec) as under.

“(ec)    ‘Partnership’ means —

A.    a partnership as defined in section 4 of the Indian Partnership Act, 1932, or

B.    a limited liability partnership which has no company as its partner.”

(d)    Further, the Explanation to section 2(2) is amended to clarify that “a firm of such chartered accountants” shall include a firm or LLP consisting of one or more chartered accountants and members of any other professional body having prescribed qualifications.

Hitherto, the terms ‘Firm’, ‘Partnership’ or ‘Partner’ were not defined. The Amendment Act of 2011 now defines these terms. Therefore, LLP in which partners are Chartered Accountants holding CoP and members of other recognised professions, as may be prescribed, are also partners will be entitled to practice as Chartered Accountants if LLP is registered by ICAI. Such LLP can undertake any audit or attest function.

Conversion of a CA Firm into Limited Liability Partnership (LLP)

ICAI has issued detailed guidelines for conversion of CA Firm into LLP on 4-11-2011. These guidelines are published on pages 939-941 of CA Journal for December, 2011. Some of the salient features of these guidelines are as under.

(i)    All existing CA firms who want to convert themselves into LLPs are required to follow the provisions of Chapter-X of the Limited Liability Partnership Act, 2008 read with Second Schedule to the said Act containing provisions for conversion from existing firms into LLP.

(ii)    In terms of Rule 18(2)(xvi) of the LLP Rules, 2009, if the proposed name of LLP includes the words ‘Chartered Accountant’ or ‘Chartered Accountants’, as part of the proposed name, the same shall be referred to ICAI by the Registrar of LLP and it shall be allowed by the Registrar only if the Secretary, ICAI approves it.

(iii)    If the proposed name of LLP of CA firm resembles with any other non-CA entity as per the naming Guidelines under the LLP Act and its Rules, then the proposed name of LLP of CA firm which includes the word ‘Chartered Accountant’ or ‘Chartered Accountants’, in the name of the LLP itself, the Registrar of LLP may allow the same name, subject to compliance with Rule 18(2)(xvi) of LLP Rules as referred above.

(iv)    For the purpose of registration of LLP with ICAI under Regulation 190 of the Chartered Accountants Regulations, 1988, the partners of the firm shall apply in ICAI Form No. ‘117’ and the ICAI Form No. ‘18’ along with copy of name registration received from the Registrar of LLP and submit the same with the concerned regional office of the ICAI. These Forms shall contain all details of the offices and other particulars as called for together with the signatures of all partners or authorised partner of the proposed LLP.

(v)    The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options for LLP names subject to the provisions of the LLP Act, Rules and Regulations framed thereunder.

(vi)    There are provisions relating to seniority of firms.

(vii)    These guidelines will apply to conversion of proprietary firm into LLP.

(viii)    There are similar provisions for formation of new LLP by Chartered Accountants in practice.

Position for statutory audit under the Companies Act

In July, 2011 issue of CA Journal, the President has, in his letter to the members, specifically stated that LLP will not be treated as Body Corporate for the limited purpose of appointment of statutory auditors. Following is the extract from the President’s letter which clarifies that the Ministry of Corporate Affairs have clarified by Circular No. 30A of 2011, dated 26-5-2011 that LLP of Chartered Accountants will not be treated as Body Corporate and MCA has taken the view that LLP can be appointed as a statutory auditors of the company.

“Important Clarifications

LLP will not be treated as Body Corporate for Limited Purpose of Appointment as Statutory Auditors:

Limited Liability Partnership (LLP) has now become a new form of statutory organisation which is gaining its importance and opening up new opportunities for the practising Chartered Accountants. The practising Chartered Accountants can now take the advantage in forming/realigning their firms as Limited Liability Partnership. As per section 3(1) of the Limited Liability Partnership Act, 2008, since a limited liability partnership is a body corporate, it is precluded from appointment as Statutory Auditors of the company u/s.226(3)(a) of the Companies Act, 1956 which provides by way of disqualification for appointment of auditor of a company that a body corporate cannot be appointed as an Auditor. To remove this lacuna, on a representation made by us, the Ministry of Corporate Affairs has clarified vide its Circular No. 30/2011, dated 26-5-2011 that Limited Liability Partnership of Chartered Accountants will not be treated as body corporate and has taken the LLP out of the purview of the definition of Body Corporate u/s.2(7)(c) of the Companies Act, 1956 and therefore, LLP can be appointed as Statutory Auditors of the company.”

It may be noted that in the Companies Bill, 2011, which is pending before the Parliament, section 139 dealing with appointment of auditors provides that any individual Chartered Accountant holding CoP or any firm of Chartered Accountants can be appointed as auditors of a company. Explanation to section 139(4) clarifies that a firm of Chartered Ac-countants shall include LLP practising the profession of Chartered Accountants. In view of the above, it is now evident that with effect from 1-2-2012, when the C.A. (Amendment) Act, 2011, has come into force, Chartered Ac-countants can join as partners and practice in LLP format. Such LLP will be eligible to be appointed as statu-tory auditors of a company under the Companies Act. Similarly, such LLP can also undertake tax audit assignment u/s.44AB of the Income-tax Act. Such LLP can also undertake any attest function under other laws as the definition of ‘Firm of Chartered Accountants’ in the C.A. Act now includes ‘Limited Liability Partnership’ registered with the Institute.

Taxation on conversion of a C.A. firm in LLP

As stated earlier, the C.A. Act has been amended with effect from 1-2-2012 to permit Chartered Accountants to practise in LLP format. ICAI has issued guidelines on 4-11-2011 for conversion of C.A. Firms into LLPs. ICAI is making all efforts to encourage those in business or profession to adopt LLP form of organisation. However, the Income-tax Act does not contain any specific provision granting exemption from tax on conversion of a Firm into LLP.

Since ‘Partnership Firm’ and ‘LLP’ are separate entities, on conversion of C.A. Firm into CA LLP the tax authorities are likely to treat such conversion as transfer of assets of the Firm to LLP. The tax authorities may treat this as transfer, as the firm will stand dissolved u/s.55 read with Second Schedule of the LLP Act, as discussed above. They may invoke the provisions of section 45(4) dealing with transfer of firm’s assets on dis-solution of the firm and levy capital gains tax on the difference between the market value of the assets of the firm on the date of such conversion and the cost of the assets of the firm.

It may be noted that section 47(xiii) and 47(xiv) of the Income-tax Act provides for exemption from capital gains tax on conversion of a firm or a proprietary concern into a limited company, subject to certain conditions. Further, the Finance Act, 2010, has inserted section 47(xiiib) to provide for exemption from capital gains tax on conversion of an unquoted limited company into LLP, subject to certain conditions. No such exemption is provided in the Income-tax Act when a firm is converted into LLP.

Explanatory Memorandum attached to the Finance (No. 2) Bill, 2009, stated that since a partnership firm and LLP is being treated as equivalent, the conversion from partnership to LLP will have no tax implication, if the rights and obligations of the partners remain the same after conversion, and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of section 45 will apply and capital gains tax will be payable. This is a very vague statement and does not specify any conditions in clear terms. There is no specific provision made in the Income-tax Act for granting exemption when conversion of a partnership firm is made into LLP and all assets and liabilities of the firm are transferred to LLP.

It may be noted that the Standing Committee on Finance, while considering Clause 47 of the Direct Taxes Code, Bill, 2010 in para 4.14 of their report has recommended that the Ministry should modify this Clause so that conversion of a partnership firm into LLP does not attract any tax liability.

If the LLP format is to be made popular for Chartered Accountants and others, it is necessary that ICAI and various chambers, representing the business community, should strongly represent to the Government to amend section 47 of the Income-tax Act. This can be achieved by inserting a new clause similar to section 47(xiii), granting exemption from capital gains tax, to any firm, which is converted into LLP under the provisions of section 55 read with the Second Schedule of the LLP Act.

Succession – When claimant was born, there was neither joint Hindu family nor any property belonging to Joint Hindu Family. Will – Disproportionate bequest permissible – Hindu Succession Act 1956.

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The common ancestor to whom the parties trace their lineage was one Roop Narain, who was the perpetual lessee, as per perpetual lease of plot of land at New Delhi. He admittedly died intestate and was survived by two sons one of them is Amar Nath and four daughters. The other brother and the four sisters executed a relinquishment deed in favour of their brother Amar Nath, who thus inherited the perpetual lease hold rights in the property upon the death of Roop Narain. A residential building was inherited by Amar Nath. Amar Nath had two wives named Kamla Devi and Chand Rani both of whom pre-deceased Amar Nath. Dispute arose between the two sons of Amarnath – Prem Bhatnagar and his brother Daya Narain.

With respect to the property being ancestral in the hands of Amar Nath, case of the protagonist i.e. those who questioned the Will was that since Amar Nath inherited the property from his father Roop Narain, law imparted an ancestral character to the property. Secondly, that when Roop Narain died, the Hindu Succession Act, 1956 had been promulgated, as per Section 4 whereof the provisions of the Act expressly had overriding effect over any text, rule, custom or usage amongst Hindus which was contrary to the Act.

The Delhi High Court held that the text of Hindu Law is that a male Hindu, on birth, acquires an interest in the Joint Hindu family properties. If there was a Joint Hindu family property when Prem Bhatnagar was born, he could have possibly argued that he acquired an interest in the property by birth. But, when Prem Bhatnagar was born, there neither was a joint Hindu Family nor any property belonging to the joint Hindu family. The suit property was owned by his grandfather Roop Narain and parties are not at variance that Roop Narain acquired the property from his own funds. Thus, Roop Narain held the property as his individual property and not as joint Hindu family property. He died in 1957 by which date the Hindu Succession Act, 1956 was in operation. Thus, succession to the estate of Roop narain was as per Section 8 of the Hindu Succession Act, 1956 since Roop Narain died intestate.

The High Court further held that people making disproportionate bequest, is not an unknown thing in law. After all, one object of a Will is to alter the natural line of succession or a share in a property which may be inherited by devolution of interest. A disproportionate bequest by itself is not a suspicious circumstance. That relationship between a father and all his children was equally good and yet in spite thereof only one child is made the beneficiary is again not a suspicious circumstance by itself. The Will was registered before the Sub- Registrar the day next of his execution. The High Court finally held that the testator has written that the beneficiary i.e. Ravi Mohan would need the consent of Roop Rani before he could sell the property does not make Roop Rani an interest witness. She has no interest inasmuch as nothing has been bequeathed to her. The condition in the Will that if Ravi Mohan were to sell the property, he would need the permission from Roop Rani, is void, for the reason the bequest in favour of Ravi Mohan is absolute and since mode of enjoyment cannot be curtailed; a clause curtailing the same in the bequest is void.

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Succession – Right of property – Female Hindu converting herself to Christianity after death of her husband. Transfer of property Act section 54, Hindu Succession Act section 26.

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The appellants before the court were defendants before the trial court against whom the plaintiff/respondent had filed a suit for permanent injunction.

The defendants/appellants had filed first appeal, contending that the sale deed executed by one Poosammal dated 17.03.1995 in favour of the plaintiff cannot legally convey any saleable right since the said Poosammal had foregone her share in her husband late Pakkirisamy’s property after she converted into Christianity and married one Issac in the year 1956 and also got 5 children from the second husband Issac. Therefore, her conversion from Hinduism to Christianity, disentitles her from inheriting her deceased husband’s property and also her parents property who are Hindus. As this settled legal position was lost sight of by the trial court, defendants prayed for setting aside the decision. The First appellate court concurred with the judgment and decree of the trial court and dismissed the first appeal. As a result, the present second appeal was filed by the defendants.

The Honourable Court held that the original suit property was purchased by husband of the vendor. Though on the death of her husband the vendor had converted to Christian religion, same would not disentitle her from her right of inheritance of the property. Thus, vendor having right and title to suit property to convey same in favour of plaintiff, sale deed would be proper. It was further observed that she had converted to Christianity by marrying a Christian, therefore she would not lose her right of inheritance in property of her deceased husband by virtue of such conversion.

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Stay order – No opportunity of hearing – Strictures against Commissioner (Appeals):

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The issue involved in the writ petition was whether before passing any order u/s. 85 of the Finance Act, 1994 read with section 35F of the Central Excise Act, 1944, opportunity of hearing is required to be given to the petitioner, seeking waiver of condition of the pre deposit.

The petitioner had challenged the order passed by the Commissioner (Appeals) Central Excise and Service Tax, Ranchi, whereby the ld. Commissioner (Appeals) without affording any opportunity of hearing to the writ petitioner had decided the petitioner’s prayer for waiver of deposit of the duty and interest demanded and penalty imposed and for stay of the operation of the impugned order passed by the Addl. Commissioner of Central Excise, Jamshedpur. The ld. Commissioner (Appeals) C.E. and S.T. Ranchi was of the view that in view of the judgment of the Supreme Court delivered in the case of Union of India vs. M/s. Jesus Sales Corporation Ltd. (1996) (83) ELT 486 (SC) opportunity of hearing was not required before deciding the prayer for waiver of pre deposit condition provided under the proviso to section 35 for the Central Excise Act, 1944 and for passing the interim order of stay.

The petitioner submitted that there was gross indiscipline and judicial impropriety on the part of the Commissioner (Appeals), who even after decision of the Court in M/s. Panch Sheel Udyog had passed the ex parte order in the present case.

The Honourable Court observed that if Commissioner(Appeals), Central Excise & Service Tax, Ranchi was of the view that he had correctly understood the judgment of M/s. Jesus Sales Corporation Ltd (supra) and decided the matter without affording opportunity of hearing to the writ petitioner then, it was the heavy duty upon him to update himself with the laws as the said authority himself took the task of deciding the matter without the assistance of the applicant before him. The law laid down by the Honourable Supreme Court and which had already been interpreted by the various high courts should not have been ignored. The Commissioner ought to have updated his knowledge by reading the judgments referred above wherein the case of M/s. Jesus Sales Corporation Ltd has been considered and it has been held that M/s. Jesus Sales Corporation Ltd. case has not barred hearing of applicant seeking relief of waiver of condition of pre deposit. If the Commissioner (Appeals) C.E and S.T. Ranchi had no knowledge of those judgments, then he is certainly guilty of not keeping himself updated in the case where, according to him, he has been given power to decide application having civil consequences, without following principles of natural justice and finding out one old judgment ,i.e, the judgment delivered in the case of M/s. Jesus Sales Corporation Ltd which he interpreted in the manner in which he wanted to interpret. The interpretation given by the Commissioner (Appeals) Central Excise and Service Tax, Ranchi was certainly erroneous, in view of the reasons given in the other judgments, wherein the reasons have been given in detail to show that the case of M/s. Jesus Sales Corporation Ltd never laid down that opportunity of hearing is not required before passing any order under sec. 35F of the Central Excise Act, 1944 and that position has been fully explained by various High Courts.

There was clear direction of the Court in the one case of M/s. Panch Sheel Udyog to the same authority, to grant opportunity of hearing to the writ petitioner in the similar and identical facts and circumstances, yet Commissioner (Appeals) Central Excise & Service Tax, Ranchi, without giving any reference to the decision of this Court in M/s. Panch Sheet Udyog passed the impugned order, which may amount to gross contempt of this court.

The Court observed that such attitude of the Commissioner (Appeals) certainly reflects his attitude towards litigant.

In totality, it was held that order under challenge was absolutely illegal and contrary to law. The Commissioner (Appeals) had committed gross error of law in denying the opportunity of hearing to the writ petitioner.

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Precedent – Judgement of Supreme Court – High Court has to accept it and should not in collateral proceedings write contrary judgment: Constitution of India Article 141

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The hierarchy of the Courts requires the High Courts also to accept the decision of Apex Court, and its interpretation of the orders issued by the executive. Any departure therefrom would lead only to indiscipline and anarchy. The High Courts cannot ignore Article 141 of the Constitution which clearly states, that the law declared by this Court is binding on all Courts within the territory of India. As observed by the Court in para 28 of the State of West Bengal and others vs. Shivananda Pathak and others reported in 1998 (5) SCC 513:-

“If a judgment is overruled by the higher court, the judicial discipline requires that the judge whose judgment is overruled must submit to that judgment. He cannot, in the same proceedings or in collateral proceedings between the same parties, rewrite the overruled judgment “

In the same vein, it may stated that when the judgment of a Court is confirmed by the higher court, the judicial discipline requires that Court to accept that judgment, and it should not in collateral proceedings write a judgment contrary to the confirmed judgment. The Court referred to the observations of Krishna Iyer, J. in Fuzlunbi vs. K. Khader Vali and another reported in 1980 (4) SCC 125:-

“………No judge in India, except a larger Bench of the Supreme court, without a departure from judicial discipline can whittle down, wish away or be unbound by the ratio of the judgment of the Supreme Court.”

 Bihar State Govt. Secondary School Teachers Association vs. Bihar Education Service Association AIR 2013 SC 487

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Eviction – Tenancy – Replacement of Tin roof by concrete slab – Permanent structure – Means structure lasting till end of tenancy. Transfer of property Act., section 108:

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A residential premise comprising two rooms with a gallery situate at Calcutta and owned by Gauri Devi Trust of which the Appellants are trustees was let out to the Respondent-tenant on a monthly rental of Rs. 225/-. One of the conditions that governed the jural relationship between the parties was that the tenant shall not make any additions or alterations in the premises in question without obtaining the prior permission of the landlord in writing. Certain differences arose between the parties with regard to the mode of payment of rent as also with regard to repairs, sanitary and hygiene conditions in the tenanted property, which led the landlord-Appellant to terminate the tenancy of the Respondent in terms of a notice served upon the latter u/s. 106 of the Transfer of Property Act. The ground for termination was that the Respondent-tenant had illegally and unauthorisedly removed the corrugated tin-sheet roof of the kitchen and the store room without the consent of the Appellant-landlord and replaced the same by a cement concrete slab, apart from building a permanent brick and mortar passage which did not exist earlier. The trial Court accordingly held that it was the Defendant-tenant who had made a permanent structural change in the premises in violation of the conditions stipulated in the lease agreement and in breach of the provisions of Section 108 of the Transfer of Property Act. The trial Court further held that the tenant had not, while doing so, obtained the written consent of the landlord.

On appeal, the High Court held that since the replacement of the tin-sheet roof by cement concrete slab did not result in addition of the accommodation available to the tenant, the act of replacement did not tantamount to the construction of a permanent structure. The replacement instead constituted an improvement of the premises in question. On further appeal, the Honourable Supreme Court observed that no hard and fast rule can be prescribed for determining what is permanent or what is not. The use of the word ‘permanent’ in Section 108(p) of the Transfer of Property Act, 1882 is meant to distinguish the structure from what is temporary. The term ‘permanent’ does not mean that the structure must last forever. A structure that lasts till the end of the tenancy can be treated as a permanent structure. The intention of the party putting up the structure is important, for determining whether it is permanent or temporary. The nature and extent of the structure is similarly an important circumstance for deciding whether the structure is permanent or temporary within the meaning of Section 108(p) of the Act. Removability of the structure without causing any damage to the building is yet another test that can be applied while deciding the nature of the structure. So also the durability of the structure and the material used for erection of the same will help in deciding whether the structure is permanent or temporary. Lastly, the purpose for which the structure is intended is also an important factor that cannot be ignored.

Applying the above tests to the instant case, the structure was not a temporary structure by any means. The kitchen and the storage space forming part of the demised premises was meant to be used till the tenancy in favour of the Respondentoccupant subsisted. Removal of the roof and replacement thereof by a concrete slab was also meant to continue till the tenancy subsisted. The intention of the tenant while replacing the tin roof with concrete slab, obviously was not to make a temporary arrangement, but to provide a permanent solution for the alleged failure of the landlord to repair the roof. The construction of the passage was also a permanent provision made by the tenant which too was intended to last till the subsistence of the lease.

The concrete slab was a permanent feature of the demised premises and could not be easily removed without doing extensive damage to the remaining structure. Such being the position, the alteration made by the tenant fell within the mischief of Section 108(p) of the Transfer of Property Act and, therefore, constituted a ground for his eviction in terms of Section 13(1 )(b) of the West Bengal Premises Tenancy Act, 1956.

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PART A: Decisions of the Supreme Court

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Penalty on Chief State Information Commissioner

One Mr. Anbarasam filed an application u/s. 6(1) of the Right to Information Act, 2005 (Act) and sought certain documents and information from the Public Information Officer – Deputy Registrar (Establishment) of the High Court of Karnataka (hereinafter referred as Respondent No. 1). His prayer was for the supply of certified copies of some information/documents regarding guidelines and rules pertaining to scrutiny and classification of the writ petitions and the procedure followed by the Karnataka High Court in respect of Writ Petition Nos. 26657 of 2004 and 17935 of 2006. Respondent No. 1 disposed of the application of Mr. Anbarasam vide order dated 3-8-2007 and intimated him that the information sought by him is available in the Karnataka High Court Act and the Rules and he can obtain certified copies of the order sheets of the two writ petitions by filing appropriate application under High Court Rules.

Mr. Anbarasam filed complaint dated 17-1-2008 u/s. 18 of the Act before the Karnataka Information Commission (for short, ‘the Commission’) and made a grievance that the certified copies of the documents had not been made available to him despite payment of the requisite fees. The Commission allowed the complaint of Mr. Anbarasam and directed Respondent No. 1 to furnish the High Court Act, Rules and certified copies of order sheets free of cost.

PIO of the High Court of Karnataka challenged the order of Karnataka Information Commission before the High Court of Karnataka which was decided by a single judge. The Single Judge noted:

“Various information as sought by the respondent are available in Karnataka High Court Act and Rules made there under. The said Act and Rules are available in market. If not available, the respondent has to obtain copies of the same from the publishers. It is not open for the respondent to ask for copies of the same from petitioner. But strangely, the Karnataka Information Commission has directed the petitioner to furnish the copies of the Karnataka High Court Act & Rules free of cost under Right to Information Act. The impugned order in respect of the same is illegal and arbitrary.”

“According to the Rules of the High Court, it is open for the respondent to file an application for certified copies of the order sheet or the relevant documents for obtaining the same. (See Chapter-17of Karnataka High Court Rules, 1959). As it is open for the respondent to obtain certified copies of the order sheet pending as well as the disposed of matters, the State Chief Information Commissioner is not justified in directing the petitioner to furnish copies of the same free of costs. If the order of the State Chief Information Commissioner is to be implemented, then, it will lead to illegal demands. Under the Rules, any person who is party or not a party to the proceedings can obtain the orders of the High Court as per the procedure prescribed in the Rules mentioned supra.”

 “The State Chief Information Commissioner has passed the order without applying his mind to the relevant Rules of the High Court. The State Chief Information Commissioner should have adverted to the High Court Rules before proceeding further. Since the impugned order is illegal and arbitrary, the same is liable to be quashed.”

Mr. Anbarasam did not challenge the Order of the Single Judge. However, the Commission filed an appeal along with an application for condonation of 335 days’ delay. The Division Bench dismissed the application for condonation of delay and also held that the Commission cannot be treated as an aggrieved person.

On the said dismal of appeal, the Chief Information Commissioner (instead of the Commission) filed a petition to the Supreme Court. The Supreme Court noted and ruled:

“What has surprised us is that while the writ appeal was filed by the Commission, the special leave petition has been preferred by the Karnataka Information Commissioner. Learned counsel could not explain as to how the petitioner herein, who was not an appellant before the Division Bench of the High Court, can challenge the impugned order. He also could not explain as to what was the locus of the Commission to file appeal against the order of the learned Single Judge whereby its order had been set aside. The entire exercise undertaken by the Commission and the Karnataka Information Commissioner to challenge the orders of the learned Single Judge and the Division Bench of the High Court shows that the concerned officers have wasted public money for satisfying their ego. If Mr. Anbarasam felt aggrieved by the order of the learned Single Judge, nothing prevented him from challenging the same by filing writ appeal. However, the fact of the matter is that he did not question the order of the learned Single Judge. The Commission and the Karnataka Information Commissioner had no legitimate cause to challenge the order passed by the learned Single Judge and the Division Bench of the High Court. Therefore, the writ appeal filed by the Commission was totally unwarranted and misconceived and the Division Bench of the High Court did not commit any error by dismissing the same.”

“This petition filed by Karnataka Information Commissioner for setting aside order dated 15-6-2012 passed by the Division Bench of the Karnataka High Court in Writ Appeal No. 3255/2010 (GM-RES) titled Karnataka Information Commission vs. State Public Information Officer and another cannot but be described as frivolous piece of litigation which deserves to be dismissed at threshold with exemplary costs.”

“With the above observations, the special leave petition is dismissed. For filing a frivolous petition, the petitioner is saddled with cost of Rs.1,00,000/. The amount of cost shall be deposited by the petitioner with the Supreme Court Legal Services Committee within a period of two months from today. If the needful is not done, the Secretary of the Supreme Court Legal Services Committee shall recover the amount of cost from the petitioner as arrears of land revenue.”

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List of Companies and Directors under Prosecution

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The Ministry of Company Affairs has put up the list of Companies and Directors against which prosecution has been initiated on its portal.

The search can be through the name of the Company/ Company Identification No (CIN) or through the Name of Director/Director Identification No. (DIN). The Details of the Court Name, Violation of Sections, Dates of Hearing, Fine details and the Final Verdict are listed therein.

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Clarification with regard to applicability of provision of section 372A of Companies Act 1956

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The Ministry of Company Affairs has issued a General Circular No 18/2013 dated 19-11-2013 clarifying that section 372A of the Companies Act 1956, pertaining to intercompany loans shall remain in force till section 186 of the Companies Act 2013 is notified.
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Exemption of section 182(1) to Companies incorporated as Electoral Trusts

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Vide Notification dated 7th November 2013, the Ministry of Corporate Affairs has directed that Companies incorporated with the name containing “Electoral Trusts” and approved in accordance with the procedure laid down in the Electoral Trusts Scheme 2013, notified vide S O. 309 (E) dated 31st January 2013 and for which license was granted u/s. 25 of the Companies Act, 1956 shall be exempt from the provisions of section 293 A (1) (b) and (2) which has since been replaced by the provisions u/s. 182 (1) of the Companies Act 2013 now in force.
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Relaxation of last date and additional fee in filing of e-Form 23C for Appointment of Cost Auditor.

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Vide General Circular No. 17/2013, dated 1st November 2013 the Ministry of Corporate Affairs has further relaxed the last date of filing the e-Form 23 C for Appointment of Cost Auditor to 30th November, 2013 or within 30 days of the commencement of the Company’s financial year to which the appointment relates, whichever is later. Earlier the time limit was extended to 31st October 2013.
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A. P. (DIR Series) Circular No. 74 dated 11th November, 2013

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Foreign investment in India – participation by SEBI registered FIIs, QFIs and SEBI registered long term investors in credit enhanced bonds

This circular permits SEBI registered Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFI) and long term investors – Sovereign Wealth Funds (SWF), Multilateral Agencies, Pension/Insurance/ Endowment Funds, foreign Central Banks – to invest in the credit enhanced bonds, as per paragraph 3 and 4 of A.P. (DIR Series) Circular No. 120 dated 26th June, 2013, upto a limit of $5 billion within the overall limit of $51 billion earmarked for corporate debt.

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A. P. (DIR Series) Circular No. 73 dated 11th November, 2013

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Import of Gold by Nominated Banks/Agencies/ Entities

This circular clarifies the following:

1. Any authorisation such as Advance Authorization (AA)/Duty Free Import Authorization (DFIA) have to be utilised for import of gold meant for export purposes only and no diversion for domestic use will be permitted. However, for any AA/DFIA issued prior to 14th August, 2013 the condition of sequencing the imports prior to exports will not be insisted upon.

2. Entities/units in the SEZ and EOU, Premier and Star Trading Houses (irrespective of whether they are nominated agencies or not) can import gold exclusively for the purpose of exports only.

3. Exports towards fulfillment of obligation under AA/DFIA scheme will not qualify as export for the purpose of the scheme of 20:80.

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Court & Tribunal – Distinction – Revenue Tribunal – Is akin to Court – Appointment of its President has to be with Consultation of High Court: Gujarat Revenue Tribunal Rules, 1982

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State of Gujarat & Anr vs. Gujarat Revenue Tribunal Bar Association & Anr AIR 2013 SC 107

The High Court had allowed the writ petition filed by the Respondents striking down Rule 3(1)(iii)(a) of the Gujarat Revenue Tribunal Rules 1982 which conferred power upon the State Government to appoint the Secretary to the Government of Gujarat, as the President of the Revenue Tribunal constituted under the Bombay Revenue Tribunal Act, 1957 (the Act). His appointment was challenged by the Respondents, on the ground that the office of the Chairman, being a “judicial office” could not be usurped by a person who had been an Administrative Officer all his life.

The High Court, vide impugned judgment had held that the Tribunal was in the strict sense, a “court” and that the President, who presides over such a Tribunal could therefore, only be a “Judicial Officer”, a District Judge etc., for which, concurrence of the High Court is necessary under Article 234 of the Constitution of India. The State of Gujarat filed an appeal in the Supreme Court.

The Honourable Supreme Court observed that although the term ‘court’ has not been defined under the Act, it is indisputable that courts belong to the judicial hierarchy and constitute the country’s judiciary as distinct from the executive or legislative branches of the State. Judicial functions involve the decision of rights and liabilities of the parties. An enquiry and investigation into facts is a material part of judicial function. The legislature, in its wisdom, has created the tribunal and transferred the work which was regularly done by the civil courts to them, as it was found necessary to do so in order to provide an efficacious remedy and also to reduce the burden on the civil courts and further, also to save the aggrieved person from bearing the burden of heavy court fees etc. Thus, the system of tribunals was created as a machinery for the speedy disposal of claims arising under a particular Statute/Act.

A Tribunal may not necessarily be a court, in spite of the fact that it may be presided over by a judicial officer, as other qualified persons may also possibly be appointed to perform such duty. One of the tests to determine whether a tribunal is a court or not, is to check whether the High Court has revisional jurisdiction so far as the judgments and orders passed by the Tribunal are concerned. Supervisory or revisional jurisdiction is considered to be a power vesting in any superior court or Tribunal, enabling it to satisfy itself as regards the correctness of the orders of the inferior Tribunal. This is the basic difference between appellate and supervisory jurisdiction. Appellate jurisdiction confers a right upon the aggrieved person to complain in the prescribed manner, to a higher forum whereas, supervisory/revisional power has a different object and purpose altogether, as it confers the right and responsibility upon the higher forum to keep the subordinate Tribunals within the limits of the law. It is for this reason that revisional power can be exercised by the competent authority/court suo motu, in order to see that subordinate Tribunals do not transgress the rules of law and are kept within the framework of powers conferred upon them. In the generic sense, a court is also a Tribunal. However, courts are only such Tribunals as have been created by the concerned statute and belong to the judicial department of the State as opposed to the executive branch of the said State.

Tribunals have primarily been constituted to deal with cases under special laws and to hence provide for specialised adjudication alongside the courts. Therefore, a particular Act/set of Rules will determine whether the functions of a particular Tribunal are akin to those of the courts, which provide for the basic administration of justice. An authority may be described as a quasi-judicial authority when it possesses certain attributes or trappings of a ‘court’, but not all.

The present case is also required to be examined in the context of Article 227 of the Constitution of India, with specific reference to the 42nd Constitutional Amendment Act 1976, where the expression ‘court’ stood by itself, and not in juxtaposition with the other expression used therein, namely, Tribunal’. The power of the High Court of judicial superintendence over the Tribunals, under the amended Article 227 stood obliterated. By way of the amendment in the sub-article, the words, “and Tribunals” stood deleted and the words “subject to its appellate jurisdiction” have been substituted after the words, “all courts”. In other words, this amendment purports to take away the High Court’s power of superintendence over Tribunal. Moreover, the High Court’s power has been restricted to have judicial superintendence only over judgments of inferior courts, i.e. judgments in cases where against the same, appeal or revision lies with the High Court. A question does arise as regards whether the expression ‘courts’ as it appears in the amended Article 227, is confined only to the regular civil or criminal courts that have been constituted under the hierarchy of courts and whether all Tribunals have in fact been excluded from the purview of the High Court’s superintendence. Undoubtedly, all courts are Tribunals but all Tribunal are not courts.

Section 13(1) of the Act, provides that in exercising the jurisdiction conferred upon the Tribunal, the Tribunal shall have all the powers of a civil court as enumerated therein and shall be deemed to be a civil court for the purposes of sections 195, 480 and 482 of the Code of Criminal Procedure, and that its proceedings shall be deemed to be judicial proceedings, within the meaning of sections 193, 219 and 228 of the Indian Penal Code.

Taking into consideration various statutes dealing with not only the revenue matters, but also covering other subjects, make it crystal clear that the Tribunal does not deal only with revenue matters provided under the Schedule I, but has also been conferred appellate/revisional powers under various other statutes. Most of those statutes provide that the Tribunal, while dealing with appeals, references, revisions, etc., would act giving strict adherence to the procedure prescribed in the Code of Civil Procedure, for deciding a matter as followed by the Civil Court and certain powers have also been conferred upon it, as provided in the Code of Criminal Procedure and Indian Penal Code. Thus, it was held that the Tribunal is akin to a court and performs similar functions.

The Apex Court dismissed the appeal.

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Applicability of Regulation 17(6) in processing the work items.

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Vide Circular No 10/2013 dated 8th May 2013, the Ministry of Corporate Affairs has amended the Regulation 17(6) Of Companies Regulations, 1956 which read as “the Registrar shall not keep any document pending for approval and registration or for taking on record or for rejection or otherwise for more than 120 days from date of filing excluding the cases in which an approval from the Central Government or Regional Director or Company Law Board or any other competent authority is required.”

to

“with the approval of Competent Authority, henceforth under the provisions of Regulation 17(6) of the Companies Act, 1956, ad hoc work items may be created to extend the validity of the work beyond the time limits prescribed under the Regulation by the ROC concerned.

The ROC concerned shall record the specific reasons for creating the ad-hoc item. Details of the adhoc work items, reasons for creation shall be intimated to the RD every fortnight.”

For full version of the circularhttp://www.mca.gov. in/Ministry/pdf/General_Circular_10_2013.pdf

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A. P. (DIR Series) Circular No. 72 dated 11th November, 2013

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Foreign Direct Investment in Financial Sector –Transfer of Shares

Presently, a No Objection Certificate (NOC) is required from the respective financial sector regulator/ regulators of the investee company (if it is in the financial services sector) as well as transferor and transferee entities at the time of transfer of shares from Residents to Non-Residents. The NOC is to be filed along with Form FC-TRS with the bank.

This circular has done away with the requirement of obtaining NOC. As a result, no NOC needs to be filed along with Form FC-TRS. However, any ‘fit and proper/due diligence’ requirement as regards the non-resident investor as stipulated by the respective financial sector regulator will have to be complied with.

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Surety/Guarantor – State Financial Corporation – Taking possession of property mortgaged by guarantor – SFC Act 1951 section 29

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Shanti Sarap Sharma vs. State of Punjab & Ors AIR 2013 Punjab & Haryana 13

The case of the petitioner as pleaded was that the son of the petitioner Rupinder Kumar Sharma was the sole proprietor of industrial concern M/s Aditi Agro Mills, which had obtained a term loan of Rs. 40 lakh from the Corporation vide mortgage deed dated 31-3-1993. The house in question was the absolute ownership of Ved Parkash Sharma, father-in-law of the present petitioner and said Ved Parkash Sharma being the maternal grandfather of Rupinder Kumar Sharma in his capacity as surety/guarantor offered the said house as collateral security with respondent No. 2 for the purpose of raising loan and the same was, thus, mortgaged with the Corporation as per mortgage deed dated 31-3-1993. The properties belonging to the industrial concern as well as the factory building alongwith the machinery was also mortgaged. The said industrial concern M/s Aditi Agro Mills, started committing default from 15-3-1994 and accordingly, the Corporation took over the property u/s. 29 of the Act. The father-in-law of the petitioner Ved Parkash Sharma passed away on 4-2-2008 executing a will dated 13-11-2006 whereby he bequeathed the said residential house in favour of his son-in-law, on the basis of which the present petitioner has become owner of the property. The Corporation purportedly exercising its powers u/s. 29 of the Act has taken over the deemed possession of the house on 17-10-2002 in order to enforce the liability of the guarantor/surety.

It was further pleaded that proceedings u/s. 29 of the Act could not be invoked against the guarantor and the Corporation had a right u/s. 31(aa) for enforcing the liability of any surety and the claim of the Corporation was also time barred as default in repayment of loan was on 15-3-1994 and the last payment was due against the industrial concern on 15-3-2001.

On behalf of the respondents, it was pleaded that the liability of the principal debtor and the surety was co-extensive and the value of the property was highly insufficient to discharge the liability and since the principal debtor has committed default in not paying the amount so advanced with stipulated interest, the Corporation was justified in taking action u/s. 29 of the Act for recovery of the loan with interest by taking over possession of the residential house.

The court observed that section 29 of the Act specifically provides that whenever an industrial concern which is under liability to the Financial Corporation in pursuance to an agreement, makes any default in repayment of any loan or advance in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the Corporation shall have the right to take over the management or possession or both of the industrial concern and realise the property pledged, mortgaged, hypothecated or assigned to the Corporation. Similar matter came up for consideration before the Honourable Apex Court in Karnataka State Financial Corporation’s vs. N. Narasimahaiah & Ors AIR 2008 SC 1797, where while upholding the judgment of the Karnataka High Court, it was held that Section 29 confers an extraordinary power upon the Corporation and it is expected to exercise its statutory powers reasonably and bona fide. The powers of the Corporation u/s. 31 & 32G of the Act were also taken into consideration and it was observed that there would not be any default as envisaged in Section 29 of the Act by a surety or a guarantor and the power was granted to the Corporation against the surety only in terms of Section 31 of the Act and not u/s. 29 of the Act.

The Full Bench decision of this Court in Shiv Charan Singh v. Haryana State Industrial & Infrastructure AIR 2012 P & H 50. The question which was referred to the Full Bench was as under:-

Whether the parties can agree to confer jurisdiction to the financial Institution to proceed against the guarantor in exercise of the powers conferred u/s. 29 of the Act?

 After taking into consideration the provisions of the bond of guarantee and the judgment of the Apex Court in Karnataka State Financial Corporation’s case (supra), the Full Bench came to the conclusion that the parties could not confer jurisdiction under the statute which was not provided and accordingly, held that the Corporation has no right to proceed against the guarantor u/s. 29 of the Act and can only proceed against him u/s. 31 and 32G of the Act.

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A. P. (DIR Series) Circular No. 71 dated 8th November, 2013 Advance Category – I Authorised Dealer Banks

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Presently, advance remittance for import of rough diamonds into India can be made to nine mining companies without any limit and without Bank Guarantee or Standby Letter of Credit, by an importer (other than Public Sector Company or Department/ Undertaking of the Government of India/State Governments), subject to certain conditions.

This circular states that the names of two of the said nine companies have been changed as under:

i. De Beers UK Ltd to De Beers Global Sightholder Sales Proprietary Ltd.

ii. BHP Billiton, Belgium to Dominion Diamond Marketing.

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Ordinance Empowers SEBI Even More – and Brings Some Ambiguities

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An Ordinance was issued on 18th July, 2013 amending
securities laws such as the SEBI Act, etc. Some provisions have
immediate effect while certain others have retrospective effect from
different dates. Some amendments are technical and meant to clear
certain doubts/concerns or strengthen the validity of certain
provisions. A couple of others are a little serious. One grants special
powers of search and seizure to SEBI. Another gives wider powers to
gather information. Yet another provision grants powers to SEBI to
arrest and jail people for strange reasons—if he does not pay penalty,
does not refund monies, or a mere nonpayment of fees, etc. Others like
special courts are meant to expedite prosecution of offenders.

The
important amendments can be briefly described as follows. The Consent
Order process, which presently operates through Guidelines, has now been
given specific legislative sanction. Special Courts are now authorised
to be set up for speedy prosecution of offences. Powers to search and
seize without need for sanction by Magistrate are given to SEBI. Powers
to recover monies from defaulting parties are also given. Disgorgement
of proceeds of unlawful transactions/activities also now has legislative
sanction. The scope of provisions relating to collective investment
schemes (CIS) has been expanded and certain large Schemes are treated as
CIS by a deeming fiction. SEBI also can now collect information from
practically anybody and not from a limited set of persons as was the
position earlier.

Similar amendments are made in regard to some
of these aspects to other securities laws—the Securities Contracts
(Regulation) Act, 1956 and the Depositories Act, 1999.

Some important amendments are discussed in a little more detail.

Collective Investment Schemes
SEBI—as
early as 1999—made fairly stringent Regulations for registration and
regulation of Collective Investment Schemes (“CISs”). It may be
recollected that CISs are schemes that pool monies from the public and
invest in certain businesses. The profits, after expenses, of such
businesses are intended to be divided amongst the investors. Often,
specific assets are earmarked to individual investors so the returns
from such assets are identifiable. The best example of this is mutual
funds, which are of course specifically excluded from the definition of
CIS but are still a good example to understand the concept.

However,
in practice, numerous schemes were introduced for fancy businesses
(teak plantations, goat raising, etc.). Some of them gave false promises
of high returns. Some were simply loans raised but disguised as CISs to
avoid various restrictions of other laws on raising of monies from the
public. Many of these schemes were found, usually too late, to be
outright Ponzi schemes where, on one hand the funds were used to pay
hefty commissions to motivate agents to collect monies and on the other,
the rest of the monies were used to repay interest and principal on
earlier loans. By the time the scam was discovered, most of the recent
investors could recover nothing.

The amendments and Regulations
of 1999 did help in closure of many leading schemes. However, recent
scams, particularly in West Bengal, showed that they had merely
re-invented themselves and, strangely, they were operating fairly
openly. One wonders whether this is not clearly a failure of the
regulator. SEBI did pass some quick orders in such cases recently but it
appears that it was too late.

Nevertheless, this Ordinance
makes certain amendments strengthening the powers of SEBI. The
definition of CISs has been enlarged to include by deeming fiction
certain large-sized schemes. Any scheme/arrangement of pooling of funds
having a corpus of Rs. 100 crore or more is now deemed to be a CIS.
Thus, it will need prior registration and compliance with several
formalities.

However, schemes which are specifically excluded
from the list will remain excluded from this deeming provision also.
Thus, public deposits raised by companies under corresponding
Rules/Directions, funds raised by mutual funds, insurance companies,
etc. will not be treated as CISs.

This deeming fiction, however, appears
to be unduly wide. The requirements for a scheme to become such a CIS
are simple and minimal (i) it has to be a scheme/arrangement (ii) it
should involve “pooling” of funds (iii) the total “corpus” should be Rs.
100 crore or more.

Would it cover investment in capital of private
limited companies? What about Inter-corporate deposits (or even bank
borrowings)? These and several other types of pooling of funds appear
prima facie to be covered by the new definition.

A question had arisen
whether the restrictions of registration, etc. on CISs were applicable
only if the CIS was set up by a company or whether it was applicable if
set up by other persons too. In Osian Art Fund’s case, for example, this
contention was raised and SEBI held that it also applied to entities
other than companies. However, to put this issue beyond doubt, the word
“company” has now been replaced by the word “person” in the Act. This
now makes it clear that the requirement of registration shall also apply
to other entities. The amendment, however, is not retrospective.

Consent Orders
The Guidelines relating to consent orders issued in 2007
enabled numerous cases to be settled without lengthy penal proceedings.
Persons accused of violations of provisions of securities laws, or even
persons who anticipated such allegations, could approach SEBI for
settlement. By payment of a settlement amount and sometimes accepting
certain non-monetary restrictions like debarment, etc. the proceedings
could expeditiously come to an end. Further, the proceedings would end
without admission or denial of guilt by such person.

While the
settlement mechanism was fairly speedy and independent, it attracted
criticism too, part of which was met by recent issuance of the revised
Guidelines. However, serious concerns were expressed over the legal
basis of the consent order guidelines. A PIL was also filed before the
Delhi High Court. If the Guidelines were set aside by the Court as being
without legal basis, hundreds of consent orders passed till now would
have got overturned. A new provision now gives retrospective validity to
the consent order process permitting SEBI to pass such consent orders.
This amendment is effective from April 2007, when the original consent
order Guidelines were issued.

Strangely, the amended provisions
specifically provide that the consent orders shall be in accordance with
Regulations made in this regard. However, no Regulations have been
issued till date and the existing settlement scheme is in the form of
Guidelines. This puts a question mark over all consent orders passed
till date under Consent Order Guidelines. A question arises whether any
Consent Order can be passed till Regulations on Consent Orders are
issued.

It is also provided that consent orders cannot be appealed against. The amendment, being retrospective, will thus invalidate existing appeals or future appeals against any consent order. This may make sense because consent orders are by definition by mutual consent. However, at times, SEBI may reject an application for consent. Discretion remains with SEBI whether or not to accept an application for consent. The Guidelines state that certain types of violations cannot be settled. However, in other cases too, there is discretion with SEBI. Question is whether such discretion is exercised judicially and whether it can be challenged. The new provision, however, provides that no appeal shall lie against the order passed.

The party concerned of course does not lose the right of proceeding with the adjudication or other proceedings in the normal course.

Powers of search and seizure

Till now, SEBI could initiate search and seizure under persons being investigated by making an application to a Magistrate who had jurisdiction over the persons. Certain reporting was also required to be made to the Magistrate. This requirement to apply to and obtain order from the Magistrate has now been dropped. The SEBI Chairman can now issue directions for search and seizure against persons being investigated. The powers of search and seizure have also been made more elaborate.

Powers to collect records from other entities (including telephone records)

Till now, SEBI had powers to seek information from banks or other authorities, etc. for information relating to transactions under investigation. Now the powers have been widened to include “any person”.

Disgorgement of funds

Persons may engage in transactions in contravention with the Act/Regulations and thus make gains or avoid losses. For example, a person may engage in insider trading and make profits or avoid losses. There have been concerns raised whether SEBI has adequate powers to order disgorgement of such gains/losses and direct its use, say, for credit to the Investor Protection Fund.

An explanation now introduced declares that SEBI always had powers to direct disgorgement of profits/losses from persons who have made such profits or avoided losses in contravention of the Act/ Regulations. Further, the amount disgorged shall be credited to the Investor Protection Fund.

It must be noted that disgorgement is in addition to the penalty that can be levied.

Action in case of default in payment of refund, penalty, fees, etc.

In case a person delays or defaults in payment of various types of amounts as he has been ordered or is otherwise required to pay by way of penalty, disgorgement or refund the monies raised or even dues on account of fees payable to SEBI, specific powers to recover such amounts, by attachment and sale of properties have been given.

However, there is a strange power given to SEBI. The person concerned can be arrested and imprisoned for making such defaults. Since power to attach and sell properties is given, the power to arrest and detain seems a little drastic, particularly when they cover even regular dues like fees payable to SEBI.

Conclusion

Powers of search and seizure and arrest and detention are a little scary, particularly considering how widely they are worded. However, it appears strange that instead of examining how powers given in 1999 to regulate/restrict CISs have worked, more powers in broader provisions have been given to SEBI. Based on past experience, persons are scared that the amended provisions will be arbitrarily used especially when governance (implementation and enforcement) is an issue.

PART A: High Court Decisions

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[In the H.C. of Uttarakhand: writ petition No.1814 of 2006 decided on 23-04-2013: Uttaranchal Public Services Commission vs. Chief Information Commissioner & Ors: Citation: RTI III (2013)82]

  •  Section 8(1)(d) & (j) of the RTI Act :

Information sought:

i) To provide the criteria applied in the selection procedure of the candidates to the post of Lecturer-Biology in Inter College.

ii) How many candidates appeared in the written examination for the post of lecturer Biology in Intermediate College and how many candidates were selected and how many candidates have appeared for interview before the Interview Board?

iii) To provide the details of the marks obtained by the selected candidates in the written test along with their marks in the interview and the details of their experience, educational qualification etc. with their preference/marks obtained by them.

iv) To give the details of the marks obtained by Mohd. Asif Tyagi (129639) in written test interview, educational qualification and experience etc. for the post of Lecturer-Biology.

PIO gave information on (i) & (ii) above. As regards information under (iii) & (iv), same were rejected on the ground that the said information cannot be provided in view of the provisions of section 8(1)(d) & 8(1)(j) of the RTI Act. FAA dismissed the appeal. Hence, Uttaranchal Public Service Commission (UPSC) filed a writ petition before High Court of Uttarakhand.

The Court stated:
So far as the information on point no.3 is concerned, it is stated in para-10 of the writ petition that the respondent no.2 (Shri Jakir) has sought information with respect to one candidate Mohd. Asif Tyagi under the RTI Act. It is further stated in the writ petition that respondent no. 2 was neither the candidate in the screening examination nor in the interview. Further, as per provisions of section 8(1)(j) of the Act, the information sought by the respondent no.2 with respect to Mohd. Asif Tyagi, comes under the definition of third party as per the provisions of RTI Act and the provisions of sections 8(1)(d) clearly provides that the disclosure of such information would harm the competitive position of third party and the same has been exempted from disclosure under RTI Act.

The Court held:
By a perusal of the information sought by respondent no.2, it reveals that the information sought is of a general nature and the marks obtained in a competitive examination cannot be held to be an intellectual property of an individual. The petitioner cannot deny the information as to how many marks have been obtained by Asif Tyagi and the other selected candidates and their educational qualification and experience. In my opinion, this information is not covered u/s. 8(1)(j) of the Act and the learned Chief Information Commissioner has rightly directed the petitioner to give information on point nos.3 and 4.

For the reasons recorded above, the writ petition is devoid of merit and is liable to be dismissed. The writ petition is dismissed accordingly.

[Decision of High Court of Madras in the Registrar general, High Court of Madras, Chennai vs. K.Elango & Anr: W.P.No.20485 of 2012 And M.P.No.1 of 2012 decided on 17-04-2013 Citation: RTIR III (2013) 103 (Madras)]

• In this case The Tamil Nadu Information Commission passed an order by not accepting the argument “unwarranted invasion of privacy of individuals” and allowed the appeal by directing the Registrar General, High Court of Madras to furnish the details sought for by K. Elango.

To start with the High Court of Madras noted:

It is to be borne in mind that under the Right to Information Act, 2005 an authority has a rudimentary function to perform either to furnish the information or deny the information. As a matter of fact, there is no specific Article in the Constitution of India which provides for the citizens right to know. However, Article 19(1)(a) provides for freedom of thought and expression which indirectly includes right to obtain information. Further, Article 21 guarantees right to life and personal liberty to citizens. Undoubtedly, Right to Life is incomplete if basic human right viz., ‘Right to Know’ is not included within its umbrage.

K. Elango had sought from PIO of the High Court, Madras following information:

1. How may Subordinate Judges are there in service in the state of Tamil Nadu? The district-wise list may be furnished to me as per the hierarchy.

2. How many employees are serving in the judicial department in the whole of Tamil Nadu (including the Government servants on deputation)?

3. How many judicial officers, police officers and staffs are working in the Vigilance Department of the registry of Madras High Court?

4. Does your vigilance department have any branches in the district so as to receive the complaint from the general public against the judicial officer and court staffs?

5. Does your registry have any tie-up or coordination with the office of Vigilance and Anticorruption, Rajaannamalai Puram, Chennai 28 to trap the judicial officers or court staffs on the basis of the complaints from the affected persons?

6. Does your registry have a special team for trapping the corrupt judicial officers and court staffs?

7. Between 2001 to 2010, how many complaints have been received by your Registry and Vigilance Department, kindly give complaint-wise break-up figure (that is how many complaints against DJ, ADDLJ, SJ, DMC, FTC Judges, Magistrates and Court staffs)?

8. How many complaints ended in dismissal, suspension, issuance of memo and dropping of the case and conviction between the said 2001 to 2010?

9. Between 2001 to 2010 how many complaints against High Court staffs have been received relating to bribe and the fate of those complaints?

Both the sides in this case made elaborate submission and also cited number of courts’ decisions. The Court also cited number of courts’ decisions and further stated:

• In the decision of the Hon’ble Supreme Court in S.P. Gupta and others vs. President of India and others, [AIR 1982 Supreme Court 149], it is held that ‘the Right to know has been given a constitutional status by treating it as a part of speech and expression and thereby bringing this right within Art. 19(1)(a) of the Constitution of India.’
• It will be quite in the fitness of things to recall the Golden words of Thomas Jefferson, who rightly said that ‘Information is the Currency of Democracy’.
• In the words of Amartya Sen, ‘the Right to Information Act, 2005 is a momentous engagement with the possibilities of freedom.’ [vide Lawz January 2008 at page 40 special page 41]
• Befittingly, we recall the observation of Lord Goff in the decision Attorney General vs. Guardian Newspapers Limited and others(No 2) 1990 1 A.P. at page 109 which runs as follows:

“Although the basis of Law’s protection of confidence is that there is a Law, nevertheless the public interest may be outweighed by some other countervailing public interest which favours disclosure.”

• It is to be pointed out that the personal information and the information between persons in fiduciary relationship are exempted from disclosure under the Right to Information Act. Also, ‘Confidence’ may be outweighed by public interest in the matter of such disclosure.

The Court then concluded:

•    On a careful consideration of respective contentions and on going through the contents of the application dated 01-11-2010 filed by the 1st Respondent/Applicant this Court is of the considered view that the information sought for by him in Serial Nos. 1 to 9 pertaining to the internal delicate functioning/administration of the High Court besides the same relate to invasion of privacy of respective individuals if the information so asked for is furnished and more so, the information sought for has no relationship to any public activity or interest. Moreover, the information sought for by the 1st Respondent/Applicant, is not to a fuller extent open to public domain. It added further, if the information sought for by the 1st Respondent/Applicant, is divulged, then, it will open the floodgates/Pandora’s Box compelling the Petitioner/High Court to supply the information sought for by the concerned Requisitionists as a matter of routine, without any rhyme or reason/restrictions as the case may be. Therefore, some self restrictions are to be imposed in regards to the supply of information in this regards. As a matter of fact, the Notings, Jottings, Administrative Letters, Intricate Internal Discussions, Deliberations etc. of the Petitioners/High Court cannot be brought u/s. 2(j) of the Right to Information Act, 2005, in considered opinion of this Court. Also that, if the information relating to Serial Nos.1 to 9 mentioned in the application of the 1st Respondent/Applicant dated 01-11-2010 is directed to be furnished or supplied with, then, certainly, it will impede and hinder the regular, smooth and proper functioning of the Institution viz. High Court (an independent authority under the Constitution of India, free from Executive or Legislature). As such, a Saner Counsel/Balancing Act is to be adopted in matters relating to the application under the Right to Information Act, 2005, so that an adequate freedom and inbuilt safeguards can be provided to the Hon’ble Chief Justice of High Court [competent authority and public authority as per section 2(e)(iii) and 2(h)(a) of the Act 22 of 2005] in exercising his discretionary powers either to supply the information or to deny the information, as prayed for by the Applicants/Requisitionists concerned.”

•    “Apart from the above, if the information requested by the 1st Respondent/Applicant, based on his letter dated 01-11- 2010, is supplied with, then, it will have an adverse impact on the regular and normal, serene functioning of the High Court’s Office on the impact on the Administrative side. Therefore, we come to an irresistible conclusion that the 1st Respondent/Applicant is not entitled to be supplied with the information/details sought for him, in his Application dated 01-11-2010 addressed to the Public Information Officer of the High Court, Madras under the provision of the Right to Information Act. Even on the ground of (i) maintaining confidentiality; (ii) based on the reason that the private or personal information is exempted from disclosure u/s. 8(1)(j) of the Act,2005; and (iii) also u/s. 8(1)(e) of the Act in lieu of fiduciary relationship maintained by the High Court, the request of the 1st Respondent/Applicant, cannot be acceded to by this Court. Also, we opine that the 1st Respondent/Applicant’s requests, suffer from want of bona fides (notwithstanding the candid fact that Section 6 of the Right to Information Act does not either overtly or covertly refers to the ‘concept of Locus’)”

•    To put it differently, if the information sought for by the 1st Respondent/Applicant, is divulged or furnished by the Office of the High Court (on administrative side), then, the secrecy and privacy of the internal working process may get jeopardised, besides the furnishing of said information would result in invasion of unwarranted and uncalled for privacy of individuals concerned. Even the disclosure of information pertaining to departmental enquiries in respect of Disciplinary Actions initiated against the Judicial Officers/Officials of the Subordinate Court or the High Court will affect the facile, smooth and independent running of the administration of the High Court, under the Constitution of India. Moreover, as per section 2(e) read with section 28 of the Right to Information Act, the Hon’ble Chief Justice of this Court is empowered to frame rules to carry out the provisions of the Act. In this regards, we point out that the ‘Madras High Court Right to Information (Regulation of Fee and Cost) Rules, 2007’ have been framed and as amended in regard to the Name and Designation of the Officers mentioned therein, the same has come into force from 18-11-2008.

•    In the upshot of quantitative and qualitative discussions mentioned supra, Information Commission, Chennai, to prevent an aberration of Justice and to promote substantial cause of Justice, this Court interferes with the order dated 10-01-2012 in Case No.10447/ Enquirt/A/11 passed by the 2nd Respondent/ Tamil Nadu Information Commission, Chennai and sets aside the same, to secure the ends of Justice Resultantly, the Writ Petition is allowed. No. costs. Consequently, connected Miscellaneous Petition Is closed.

Heritage TDR

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Introduction

The city of Mumbai is filled with ancient structures of neo-classical design/art deco structures which probably are the city’s last connection with its glorious past. In such a scenario, it becomes necessary to preserve this past and all things associated with it. However, there is also a need to redevelop/repair certain old structures.

To strike a balance between these two seemingly conflicting objectives, R. 67 of the Development Control Regulations for Greater Mumbai (DC Regulations) provide for the conversion of listed buildings, areas, artefacts, structures and precincts of historical and/or aesthetical/architectural/cultural value. These structures are known as “heritage buildings and heritage precincts”. A precinct generally means a space which has formal or artificial boundary lines around it. Thus, it is like an imaginary carved out area. Mumbai is the first city in India to get heritage protection.

The State Government comes out with a List of such structures and they are known as Listed Buildings/ Heritage Buildings and Listed Precincts/Heritage Precincts. The List divides the structures into three Grades—Grade I, Grade II and Grade III with Grade I being the most important and valuable.

Development/Redevelopment/Repairs of Heritage Buildings/Precincts

Carrying out any of the following activities in relation to heritage buildings/precincts requires the prior permission of the BMC Commissioner:

• Development/redevelopment
• Engineering operation • Additions/alterations/repairs/renovation
• Painting of buildings, replacement of special features
• Demolition of whole or part or plastering of the structure

The BMC Commissioner would consult the Heritage Conservation Committee of the State Government for this purpose. He has powers to overrule the Committee’s recommendations in exceptional cases. The Heritage Conservation Committee and the BMC have often been at loggerheads on several issues and the matters have gone to Court, for instance, hoardings on heritage buildings and precincts was the subject matter of dispute in the case of Dr. Anahita Pandole vs. State, 2004(6) Bom. CR.246. Hoardings in Heritage Precincts have also been the subject of other litigations, such as, Mass Holdings P Ltd vs. MCGM, 2006(1) AIR Bom. 658.

If there are any religious buildings in the List, then any changes required on religious grounds which are mentioned in any sacred texts or as a part of any holy practices shall be treated as permissible. However, they must be in consonance and in accordance with the original structure and architecture, designs, aesthetics and special features.

The above restrictions apply only to Grade I and Grade II heritage buildings.

Changes in Regulations
After consulting the Heritage Committee and with the State Government’s approval, the BMC Commissioner can alter, modify or relax the DC Regulations if it is needed for the conservation, preservation or retention of the historical, aesthetical, cultural or architectural quality of the Heritage Buildings/ Precincts. However, before carrying out any such modifications, he must hear out any persons who will suffer undue loss due to such changes.

Heritage TDR
If any application for development is refused/modified under R. 67, and such act results in depriving the owner/lessee of any unconsumed FSI, then the aggrieved shall be compensated by the grant of a Development Rights Certificate (also known as “Heritage TDR”). TDR from heritage buildings in the island city (that is, up to Mahim) may also be consumed in the same ward in which it originated. The TDR Certificate shall be governed by R. 34 and Appendix VIIA of the DC Regulations.

Before granting the TDR, the Commissioner would determine the extent to which it is required after consulting the Heritage Committee and it requires the prior sanction of the Government.

Restrictions on Heritage Structures Structures must maintain the skyline in the precinct as may be existing in the surrounding area so as not to diminish or destroy the value and beauty of the said listed Heritage Buildings. For instance, a 40-storey tower would look out of place in a group of heritage structures, all of which are 2-3 storeys tall. The tower would spoil the entire skyline of such an area. The BMC has issued Notification No. DCR. 1090/3197/(RDP)/UD-11 dated 25-04-1995 for the height of buildings in A Ward. The height after reconstruction must be limited to the existing height of the buildings of similar age in the area. Even a new building must conform to the general height pattern. In the case of listed heritage buildings and in the case of all buildings within the Fort precinct, clearance is required from the Heritage Committee. However, this restriction does not apply to the Backbay Reclamation Blocks area. Restrictive covenants imposed by the

State/BPT/Collector/BMC, etc., shall be in addition to the conditions of R. 67. However, if there is any conflict, then R. 67 shall prevail. Non-cessed buildings included in the List must be repaired by their owners/lessees and cessed buildings can be repaired by the MHADA/co-operative society/owner/ occupiers.

Grading
Grading of buildings in the List into I, II and III are carried out. Listing does not prevent change or ownership or usage. Care must be taken to ensure that the development permission relating to these buildings is given without delay. The Grading and various conditions for each Grade are as follows:


Conclusion

This is an important legislation to preserve and protect our city’s cultural heritage. Recently, the BMC has proposed to add some more structures to the Heritage List, a move which has been sharply opposed by the real estate developers and residents of those structures. While the debate over what should and what should not be included in the List would rage on, there is no denying that sustainable development with an eye on the past and future is the need in a metropolis like Mumbai.

Succession – Joint Family Property – Sale by Co-parcener without consent of others – validity: Hindu Succession Act 1956 section 30:

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The plaintiff-appellant had filed an Appeal against the judgment and decree passed by learned Additional District Judge. The plaintiff-appellant- filed the aforesaid title suit for declaration that the registered sale deed dated 30-10-1998 executed by defendant No. 2-respondent No. 2 in favour of defendant No. 1-respondent No. 1 as inoperative, illegal, without consideration and not binding on the plaintiff.

The plaintiff claimed that the defendant No. 2 sold the suit property which is joint family property without the consent of the other coparceners.

The defendants filed the contesting written statement alleging that there had already been severance of status of coparcenary and there had already been separation in the family long ago. The suit property was in possession of the defendant No. 2, therefore, he sold the same to the defendant No. 1.

The trial court dismissed the suit finding that the defendant No. 2 had the authority to sell the property. On appeal, the Lower Appellate Court recording the same finding dismissed the title appeal.

The submission of the learned counsel was that although, there was separation between the parties but there had been no partition by metes and bounds, therefore, unless a consent is obtained by other coparcener/cotenant, the defendant No. 2 could not have transferred the property to the defendant No. 1. It may be mentioned here that in the case of Kalyani vs. Narayanan, AIR 1980 SC 1173, the Apex Court has held that partition is a word of technical import in Hindu law. Partition in one sense is a severance of joint status and coparcener of a coparcenery is entitled to claim it as a matter of his individual volition. In this narrow sense all that is necessary to constitute partition is a definite and unequivocal indication of his intention by a member of a joint family to separate himself from the family and enjoy his share in severalty. Such an unequivocal intention to separate brings about a disruption of joint family status, at any rate, in respect of separating member or members and thereby puts an end to the coparcenery with right of survivorship and such separated member holds from the time of disruption of joint family as tenant-in-common. In the present case, it is an admitted fact that the parties are separate. Therefore, there is no existence of coparcenery family. Now, therefore, even if it is held that there is no partition by metes and bounds accepting the submission of the learned counsel for the appellant, then also after coming into force of the Hindu Succession Act, 1956, section 30 which proves that any Hindu may dispose of by Will or other testamentary disposition any property, which is capable of being so disposed of by him or by her, in accordance with the provisions of the Indian Succession Act, 1925, or any other law for the time being in force and applicable to Hindus and in the explanation, it is specifically mentioned that the interest of a male Hindu in a Mitakshara coparcenery property be deemed to be the property capable of being disposed of by him or by her within the meaning of this section. Now, therefore, even if the property is held to be the joint property then also a coparcener has the right to dispose of the same i.e. his share. The relief claimed by the plaintiff is that because the property is coparcenery property, the coparcener could not have sold the property. This relief claimed by the plaintiff is contrary to the provision as contained in section 30 of the Hindu Succession Act, 1956. Further, in this case, separation has already been admitted. Whether there is partition or no partition is a matter that can be decided in properly constituted suit. Here, the question raised is as to whether a coparcener can sell his property or not?

In 2009(4) PLJR 225 SC (Gajara Vishnu Gosavi vs. Prakash Nanasahed Kamble & Ors.) the Apex Court has held that undivided share of a coparcener can be subject matter of sale/transfer. Therefore, the contention raised by the learned counsel for the appellant that the coparcener cannot transfer is concerned, has got no force in the eye of law.

Brij Kishore Chaubey vs. Ramkaran Singh Yadav AIR 2013 Patna 101

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Service of Notice – Termination of Tenancy – Service of Notice – 15 days notice send by Registered post – Agreement Stipulated 30 days – Suit filed after 30 days of deemed receipt of Notice – Transfer of Property Act section 106, General clauses Act 1897, section 27:

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The defendant was in occupation of one flat and a car parking area in a building on Camac Street. The rent last paid was Rs. 40,000 per month. The defendant entered this flat as a licensee of the plaintiff who was its owner. The licence agreement was dated 29th May, 2006. It was for an initial period of 11 months. It could be extended at the option of the licensee for two further periods of 11 months each. There is not much of a dispute that this licence for all practical purposes was treated as a tenancy. It was extended for two terms up to 28th February, 2009. It could be extended to the maximum extent up to this date. However, Clause 17 provided that before this period the tenancy was terminable at the option of the licensor or licensee. Either party had to give one month’s prior notice.

This option was exercised in 2007. By a notice dated 17th October, 2007 the defendants were asked to vacate the flat by November of that year. Thereafter, a suit was instituted by the plaintiff in the City Civil Court. The plaintiff withdrew that suit on 22nd April, 2010.

The plaintiff issued another notice to the defendant on 16th June, 2010. It was said to be sent by Registered post. A copy of the notice was also affixed on the entrance to the flat in the presence of two witnesses. The plaintiff asked the defendant to vacate the flat. This time he gave them 15 days’ notice treating the defendant as a tenant, u/s. 106 of the Transfer of Property Act, 1882. Thereafter, the suit and the Chapter XIII A Application were filed.

The Hon’ble Court observed that under Chapter XIIIA the plaintiff is entitled to a summary judgment if on the available evidence on affidavits the Court is in a position to form an opinion that the defendant has no defence to the claim of the plaintiff. If the defendant is able to bring out a prima facie defence, which is equivalent to raising a triable issue, the court grants him leave to defend. Even when the defendant is unable to disclose any defence the Court may, out of sympathy, grant him leave to defend, if it forms the opinion that at a later point of time when the suit is ready for hearing, he has a very outside chance of putting forward some defence. But in that case the Court grants leave to defend upon obtaining security.

A few points of defence have been put forward by the defendant. The first is that this notice was never served. Secondly, 15 days’ notice was inadequate in terms of Clause 17 of the Licence Agreement between the parties which provided for 30 days’ notice.

The licence or lease agreement dated 29th May, 2006 was an unregistered document. Any lease of over one year’s duration can be made only by a registered document. Therefore, the agreement did not affect the property according to section 49 of the Registration Act, 1908. In other words, the document is to be treated as non est.

If the document is non est no rights are created by it. Therefore, it cannot be said that the defendant was a lessee up to 28th February, 2009. For all purposes the lease was from month to month.

If the terms of the lease or licence agreement dated 29th May, 2006 were inoperative, there was no obligation to give any notice under those terms to determine the lease or tenancy. In those circumstances, section 106 of the Transfer of Property Act came into play.

The Court observed that the notice dated 16th June, 2010 was rightly given. Only 15 days’ notice was required to be given under that section. Therefore, the notice determining the tenancy was valid.

Each of the defendants was sent the notice dated 16th June, 2010 by registered post with acknowledgment due. Each notice was delivered at the post office on 17th June, 2010. On each of the postal documents to record receipt there is a remark by the post office that an intimation was left at the office of the defendants on 19th June, 2010. Each of the notices was not claimed.

U/s. 27 of the General Clauses Act, 1897, if a document is required to be served by post, service shall be deemed to be effected by properly addressing, prepaying and posting by registered post, a letter containing the document. Unless the contrary is proved, service is deemed to have been made at the time at which the letter would be delivered in the ordinary course of post. U/s. 106(4) of the said Act, the notice u/s.s. (1) is to be sent, inter alia, by post.

Hence it was held there was good service of the section 106 notice dated 16th June, 2010.

Ajay Kumar Singh vs. Dasa AIR 2013 Cal. 125

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Recovery – Realisation of income tax dues – Priority over secured debt – State Financial Corporations Act, 1951.

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The Petitioner, a State owned Corporation and a Financial Institution governed by The State Financial Corporations Act, 1951 (SFC Act) sanctioned a term loan of Rs. 1,25,00,000 to M/s. Veekay Developers Pvt. Ltd. to establish a Luxury Hotel on 13-09-1995, which term loan was transferred to V.K. Clubs and Homes Pvt. Ltd. By way of security, the borrower—M/s. V.K. Clubs and Homes Pvt. Ltd, created an equitable mortgage by deposit of title deeds, of the portion of land and building. By way of further security, the said borrower created equitable mortgage over freehold rights in three shops. Additional loan of Rs. 86,00,000 was also sanctioned.

The borrower, having failed to repay the amount due together with interest the petitioner invoked section 29 of the SFC Act and took over possession of the properties, mortgaged and furnished as security.

On 05-12-2000, the Tax Recovery Officer, the second respondent, passed an order attaching the immovable properties, including properties mortgaged of the petitioner invoking Rule 48 of II Schedule to the Income-tax Act, 1961 to recover Rs. 80,03,276 towards income tax dues, from Sri Vivian Kamath D’Souza, M/s. Veekay Developers Pvt. Ltd., M/s. Shalimar Constructions and M/s. Canara Builders. On 23-12-2000, he issued a public notice in Udayavani newspaper informing about the attachment of the immovable properties calling upon anybody who had any claim or right to the said properties, to furnish necessary documents in support of the claim.

On 05-01-2001, petitioner brought to the notice of the second respondent the sanction of the loan on 13-09-1995 and 20-03-1998; the mortgage of the immovable properties, as also taking possession of the said properties on 30-12-1998 and 25-02-1999, invoking section 29 of the ‘SFC Act’. This was followed by notice dated 06-05-2005 to the second respondent, in response to which, a letter dated 27-01-2006 was addressed by the Tax Recovery Officer requesting the petitioner to proceed with the sale of the immovable properties as it had the first charge and to treat the Income-tax Department as a second mortgagee and after appropriation of the sale proceeds, hand over the remainder if any, to hand over the same for appropriation towards income-tax dues. The question before the court was

“Whether realisation of income-tax dues from the assessee under the Income Tax Act, 1961 will have priority over the secured debt in terms of the State Financial Corporations Act, 1951?”

The Hon’ble Court referred to the Apex Court decision in Union of India and others vs. Sicom Limited and another (2009) 2 SCC 121, observing that under Article 372 of the Constitution, as also well settled principles of law, statutory provisions will prevail over the Crown debt, and coupled with the non-obstante clause in section 46-B of the SFC Act, it would not only prevail over contracts but also other laws. In other words, the ‘SFC Act’, having provided for recovery of debt in preference to all other debts under any other law, the Financial Corporations were entitled to appropriate the sale proceeds towards the discharge of debt due to it, at the first instance.

Regards the provisions of the State Financial Corporations Act, it is clear that a first charge on the property is created giving priority to the dues of the said statutory authority over all other charges on the property, on the basis of the mortgage. The Income-tax Act, 1961 does not provide for a priority to the statutory charge over all other charges including mortgage under the ‘SFC Act’. The order of the tax recovery officer attaching property mortgaged in favour of the petitioner is quashed and the incometax authorities are restrained from interfering with the process of sale of immovable properties subject matter of mortgage in favour of the Petitioner, for recovery of its dues.

Karnataka State Industrial Investment Development Corporation Ltd vs. CIT, AIR 2013 Karnataka 104.

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Extension of time limit for form 23 AC/ACA XBRL

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Vide General Circular number 01/2013 dated 15.01.2013, time limit to file financial statements in XBRL mode (for the financial year commencing on or after 01.04.2011) without any additional fee has now been extended upto 15th February 2013 or within 30 days of AGM of the company, whichever is later.

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Amendments to Form DIN1, DIN 4 and Form 18

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The Ministry of Corporate Affairs vide Notification G.S.R (E) dated 24th December, 2012 has amended e-forms DIN 1, DIN 4 and Form 18. The new e-forms are in effect from 25th December 2012. Some of the changes are as follows:

a) The Application for Directors Identification Number vide Form DIN 1 now requires the current occupation and Educational Qualification to be filled in and the Affidavit to be attached thereto needs to be on duly notarised non-judicial Stamp Paper of Rs. 10/-.

b) DIN numbers allotted by the Central Government, if not activated within 365 days from date of allotment, can be deactivated or cancelled.

c) DIN 4 being the form for changes to DIN 1 requires the verification by a Professional that they are satisfied of the identity of the Director or designated partner and that the person is personally known to the professional or that the professional has met the person alongwith the originals of the documents attached. In case where the applicant is residing outside India, the particulars have to be verified from the documents duly attested by the attesting authority as mentioned in the instruction kit.

d) A mandatory Clause 4(b) has been introduced to the Form 18 – Form for notification of Registered Office Address as follows: “(b) Registered Office is
• Owned by company
• Owned by Director (not taken on lease by company)
 • Taken on Lease by Company
• Owned by any other entity/Person (Not taken on lease by company)”

Form 18 now requires proof of Registered Office address as a mandatory attachment alongwith a No-objection certificate from director if Registered Office is owned by director (not taken on lease by company) or a proof that the Company is permitted to use the address as the registered office of the Company if the same is owned by any other entity/Person (not taken on lease by Company).

Additionally, a mandatory verification has been inserted that: “The company undertakes to file the form 18 for change of registered office address with the ROC within prescribed period.”

Also a certificate, certifying the personal visit by CA/ CS/CWA (whosoever is certifying the form) to new address is inserted which is as follows: “I further certify that I have personally visited the new address, verified it and I am of the opinion that the premises are intended to be at the disposal of the applicant company.”

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External Commercial Borrowings (ECB) Policy – Repayment of Rupee loans and/or fresh Rupee capital expenditure – $ 10 billion scheme

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Presently, only Indian companies, in the manufacturing and infrastructure sector, who are consistent foreign exchange earners, can avail of ECB for repayment of outstanding Rupee loan(s) availed of by them from the domestic banking system and/ or for fresh Rupee capital expenditure.

 This circular grants similar facilities to Indian companies in the hotel sector (with a total project cost of Rs. 250 crore or more). As a result, these companies can now avail of ECB for repayment of outstanding Rupee loan(s) availed of by them from the domestic banking system and/or for fresh Rupee capital expenditure.

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Reporting under Foreign Exchange Management Act, 1999 (FEMA)

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This circular states that corporates and individuals have, during the compounding process, attributed the delays in reporting to acts of omission and commission by their Banks. The circular further states that delay in reporting transactions relating to FDI, ECB & ODI affects the integrity of data and consequently the quality of policy decisions relating to capital flows into and out of the country. The circular advices Banks to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999 attributable to them do not occur and warns that RBI can impose a penalty on them for contravening any direction given by the RBI or failing to file any return as directed by RBI in terms of Section 11(3) of FEMA, 1999.

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Foreign Direct Investment (FDI) in India – Issue of equity shares under the FDI scheme allowed under the Government route

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This circular has amended the following conditions relating to issue of equity shares/preference shares under the Approval Route by conversion of import of capital goods, etc.: –

A. P. (DIR Series) Circular No. 74 dated 30th June, 2011

Earlier Condition

Revised condition

Para 3(I)

Import of capital goods/Machineries/ equipment (including secondhand machineries),

Import of capital goods/Machineries/ equipment (excluding secondhand machineries),

Para 3(I)(b)

There is an independent valuation of the capital goods/ machineries/ quipment (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;

There is an independent valuation of the capital goods/ machineries/ equipment (excluding 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;

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Uploading of Reports on FINnet Gateway

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This circular states that as FIU-IND has ‘gone-live’ from 20th October, 2012 authorized persons who are indian agents under MTSS must discontinue submission of reports in CD format after 20th October, 2012 and use only FINnet gateway for uploading of reports in the new XML reporting format. Any report in CD format received after 20th October, 2012 will not be treated as a valid submission by FIU-IND.

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Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Standards – Cross Border Inward Remittance under Money Transfer Service Scheme

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This circular states that FATF has updated its Statement on ‘Improving Global AML/CFT Compliance: on-going process’ on 19th October, 2012 and advices authorised persons who are Indian agents under MTSS and their sub-agents to consider the information contained in the said update.

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Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Standards – Money changing activities

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This circular states that FATF has updated its Statement on ‘Improving Global AML/CFT Compliance: on-going process’ on 19th October, 2012 and advices authorised persons and their agents/franchisees to consider the information contained in the said update.

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External Commercial Borrowings (ECB) Policy – Non-Banking Financial Company – Infrastructure Finance Companies (NBFC-IFCs)

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Presently, Non-Banking Finance Companies (NBFC) categorised as Infrastructure Finance Companies (IFC) can avail of ECB, including the outstanding ECB, up to 50% of their owned funds under the Automatic Route. ECB above 50% of their net owned funds can be availed of under the Approval Route. This circular has: – a. Raised this limit of 50% under to 75% and hence, permits IFC to avail of ECB, including the outstanding ECB, up to 75% of their owned funds under the Automatic Route. ECB above 75% of their net owned funds can be availed of under the Approval Route. b. Reduced the hedging requirement for IFC for currency risk from 100% of their exposure to 75% of their exposure.

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Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 Money changing activities.

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This circular provides that for KYC purposes, Authorised persons engaged in Money changing activities and their agents & franchisees can accept, where the address on the document submitted for identity proof by the prospective customer is same as that declared by him/her current address, the same document can be accepted as a valid proof of both identity and address. However, in cases where the address indicated on the document submitted for identity proof differs from the current address declared by the customer, a separate proof of address should be obtained.

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Foreign Court Decree – Order awarding costs would amount to decree – Execution – CPC section 35A, 44A

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The Defendant-Judgment Debtor challenged the order dated 15th April, 2011 passed by the learned District Judge-2, Nashik, rejecting the Petitioner’s Application for declaration that the recovery proceeding filed by the Respondents-original Plaintiffs be disposed of/dismissed for lack of jurisdiction or even otherwise on facts and further holding that the execution proceeding filed by Respondents being maintainable and the judgment and order dated 19th October, 2006 passed by High Court of Justice, Chancery Division, Patents Court was executable before District Court at Nashik. The Respondents-original Plaintiffs filed a Suit against the Petitioner-original Defendant in the High Court of Justice, Chancery Division, Patents Court in England. In the said Suit, the Petitioner preferred Application dated 11th May, 2006 for declaration that the High Court of Justice, Chancery Division, Patents Court, U.K. would have no jurisdiction to entertain the Claim. The said Application was rejected by the Hon’ble High Court of Justice, Chancery Division, by an order dated 19th October, 2006 and imposed a cost in the sum of £12,429.75 equivalent to Rs. 10,16,753.55 with interest at the rate of 8% per annum. Thereafter, the Respondents-original Plaintiffs filed Special (Civil) Darkhast in the Court of District Judge-2, Nashik for execution of the order passed by the Foreign Court, for recovery of sum of Rs. 10,16,753.55 towards decretal amount under Order dated 19th October, 2006 (costs) and Rs. 67,786/- towards interest at the rate of 8% per annum on the principal amount from the date of the order date i.e. 19th October, 2006 to 14th August, 2007 and further interest till the recovery of the amount. In the said Execution Petition, the Petitioner preferred on 1st March, 2008 an application for declaration that the Execution Application filed by the Respondents is not maintainable as the same is in respect of the costs imposed by a foreign Court. At the time of dismissing the Petitioner’s Interim Application, whereas, the main matter was still pending for hearing and final disposal. This Application for declaration was rejected by the District Judge-2, Nashik by impugned order dated 15th April, 2011 and hence, the Civil Revision Application was filed before the Hon’ble Court.

The Hon’ble Court observed that the explanation in section 44A of Code of Civil Procedure shows that the legislature has intentionally included the term judgment within the meaning of the term decree, for purpose of section 44A of CPC. The intention was to expand or enlarge the scope of term decree for the purpose of this section. Therefore, an order which may not amount to a decree but may amount to judgment would be a “judgment” for the purpose of section 44A of CPC. Thus, awarding costs would amount to decree within the meaning of section 44A and these can be recovered by executing order u/s. 44A of the CPC.

The issue of jurisdiction of the Court to execute order/decree of a country having reciprocal arrangement with our country was decided by the Division Bench of the Court in the matter of Janardhan Mohandas Rajan Pillai (deceased through Lrs.) & Anr. (2010) 4 AIR Bom R. 230. Therefore, the Execution Petition filed by the Respondents for execution of the order dated 19th October, 2006 passed by the English Court was maintainable.

Alcon Electronics P. Ltd vs. Celem S A AIR 2013 Bom 108.

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Minority Shareholder Squeezeout – Multiple, Conflicting, Loosely Drafted Provisions

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Companies Act, 2013

The Companies Act, 2013, (“the Act”) is gradually coming into force, with 98 sections duly notified and several set of draft rules circulated for feedback. The target for the Act to fully come into force by end of this financial year seems achievable. But how desirable is such speedy implementation? The common argument for quick implementation is that the new law has been in contemplation/consideration for too long and it is high time we have a modern law. The reality is that each successive version of the Bill has seen major changes/new provisions which, both in terms of drafting and implications, have been inadequately discussed. Worse, and that is one of the issues presented in this article, there are provisions that seem to overlap or are in conflict with other laws. In particular, for some reason, the lawmakers have sought to duplicate requirements that SEBI has already framed. These include provisions relating to Independent Directors, Audit Committee, bonus shares and many others. In subsequent issues, we will discuss such duplicate provisions. To begin with, the vexed topic of ‘Minority Squeeze-out’ is considered here.

What is buy-out vs. squeeze-out?

Simply described, minority Squeeze-out involves marginalising of and buying out of minority shareholders, often forced (hence the word “squeeze”) out of a lower value than fair value. As compared to buyouts which may be mandatory on the offers or but optional for the sellers, a squeeze-out gets greater publicity in case of listed companies though it is common in unlisted companies also. There was a time when companies sought to increase minority shareholding by issuing shares through a public issue. The process of listing ensured a higher issue price. Over a period, with increasing compliance and other requirements and depressed share prices, the status of listing can become burdensome. Worse, unscrupulous managements sometimes pursue acquisition of public (minority) shareholding at depressed value. Forced buybacks were thus seen in many companies (discussed earlier in this column) with minorities being bought off against their will and in many cases, at prices that were lower than fair value. The stratagem used was to carry this out through a court-approved scheme of arrangement/ reduction of capital where often the criteria for approval are different. The ignorant and scattered shareholders usually did not offer vigorous opposition. SEBI and stock exchanges took some belated inadequate action. Certain provisions such as requirement of pre-approval of schemes by stock exchanges were introduced. However, this was not enough and even circumvented.

Be as it may be, finally, the Act now makes certain specific provisions in relation to such minority squeeze-outs.

What do the new provisions in the Act provide?

Firstly, the new Act prohibits buyback of shares through schemes of reduction or arrangement. Thus, companies cannot buy back shares of shareholders through such schemes. Effectively, they will have to resort to the procedure for buyback of shares as prescribed in section 68 of the Act relating to ‘buyback of shares’. This means they will also have to follow the Rules that would be notified by the Central Government (for unlisted companies) and the Regulations as notified by SEBI (for listed companies). The provisions for buyback in the Act/ Rules/Regulations ensure that it cannot be forced upon unwilling shareholders. It is another issue that these provisions are not well drafted. Further, the provisions relating to buyback of shares suffer from several limitations, particularly the size of buyback. Hence, even genuine cases may face difficulties. Nevertheless, one abusive method will come to an end.

Secondly, there are two specific provisions that enable minority buy-outs. Essentially, they provide for purchase of shares of the minority shareholders when more than 90% of the shares are bought by a company or group. When minority shareholders are reduced to below 10%, they have minimal rights, except those provided generally by the Act or the articles of association. They have no powers to veto a general or special resolution. They also cannot file a petition complaining of oppression/mismanagement or initiate class action. The minority may thus want to have an opportunity provided by the majority shareholders to be bought out at a fair price, even if they did not avail of an earlier opportunity.

 Sections 235 and 236 deal with such situations. While section 235 is a slightly modified version of the existing section 395 of the Companies Act, 1956, section 236, though overlapping to an extent, provides for a different situation and procedure.

 Section 395, as may be recollected, provides for an opportunity and obligation both to an acquirer of 90% or more shares in a company to acquire the shares of the minority. The minority shareholders thus have a chance to exit the company.

Weak drafting

Section 235, however, continues the weak drafting of existing section 395 but with some modifications. It essentially provides that if a scheme or contract to acquire shares of a company is approved by more than 90% of shareholders (excluding shares held by acquirer company), then the shares of dissenting minorities may be acquired by the acquirer on the same terms. This section can be fairly dubbed as a squeeze-out provision since the acquirer can acquire the shares of the minority shareholders without the latter’s consent. The minority shareholders may, however, apply to the Tribunal and the Tribunal may give appropriate directions for relief. It appears that a window of negotiation for a higher price gets opened for the minority shareholders. The acquirer has the option, but not the obligation, to make such an offer to acquire shares of the minority shareholders. The minority shareholders, however, cannot force the acquirer to acquire their shares.

Section 236 is in many ways a variant of section 235 though with some important differences. Generally stated, it provides for an obligation for an acquirer/ persons acting in concert who have acquired 90% or more of the shares in a company to make an offer to the remaining shareholders. The offer has to be on the same terms and has to be valid for a prescribed period of time. Though the drafting is ambiguous at some places, it appears that the remaining shareholders are not under an obligation to sell their shares. Thus, it is not a squeeze-out. There is a provision that provides for negotiation by a specified section of the shareholders for a higher price. It is provided that in such a case, the higher price received by such shareholders will have to be distributed pro rata amongst the other shareholders who did not get such higher price. This is strange in one aspect. If a section of shareholders is given a higher price, the better course is to make the acquirer give such higher price to the other shareholders too.

Contrast with the SEBI Delisting Regulations Sections 235/236 apply to listed and unlisted companies. For listed companies, it is necessary to also consider the SEBI Regulations on delisting (SEBI (Delisting of equity shares) Regulations, 2009 or “the Regulations”). Simply put, the Regulations provide for procedure that Promoters/companies seeking to delist shares from stock exchanges need to follow. These Regulations are relevant in this context because the Promoters holding has to increase to at least 90% for delisting to be successful. The regulations also provide for the steps to be taken after the holding is increased to more than 90%. Some important steps relevant to the present context are as follows:

•    The proposed delisting has to be approved by a special resolution. Such special resolution has to be by a postal ballot thus giving all shareholders a better opportunity to participate.

•    Further, the resolution can be acted upon only if at least two-thirds of the non-Promoter share-holders approve delisting.

•    The Promoters have to make an offer to acquire the shares of non-Promoters.

•    A minimum benchmark offer price, based on recent prices and acquisitions by the Promoters, is fixed.

•    The offer needs to result in such number of acceptances that would make the holding of the Promoters higher of two figures. The first figure is 90% of the equity share capital. The second is the existing holding plus 50% of the non-Promoters holding. Thus, if the Promoters held 75%, then they should get at least 15% acceptances. If they held, say, 85%, then they should get at least 7.50% acceptances. If this minimum figure is reached, then the Promoters are entitled to delist the shares.

•    They are also required to make another offer and, in effect, keep it valid for the next one year, to acquire the remaining shares at the same price. The remaining shareholders have a right, but not an obligation, to offer their shares during this period. In other words, they may choose to remain shareholders, in the unlisted company.

If one compares these Regulations with section 235/236, clearly the Regulations give better protection to the minority shareholders, though they make it difficult for the Promoters to delist the company. The provisions of sections 235/236 and the Regulations are obviously not alternate to each other and both need to be complied with. Thus the stricter of the two provisions would apply. However, there may be a grey area as regards seemingly beneficial provisions. For example, if the provisions in the Act give a right to the acquirer to acquire the remaining shares, can the remaining shares be so acquired, though the Regulations do not provide such a right? One factor involved in interpreting this issue is whether a beneficial provision in the Regulations would override provisions in another enactment.

In any event, even for unlisted companies, section 235/236 are beneficial to those minorities who are reduced to such a number that their voice does not matter. The 90% majority acquirer also has an opportunity to acquire 100% control of the company so as to be able to run the company without any outside involvement. In the author’s opinion the provisions are worded in such a manner that the acquirer may escape from such obligation. Section 235 uses the term “transferee company” (including its nominees/subsidiaries) on whom such obligation is created. Thus, effectively, it will not apply if the acquirer is not a company or if the acquirer is more than one. This may even become a limitation on the acquirer if it seeks to acquire the shares in more than one entity. Section 236 is worded more broadly. However, several protections that are available in the regulations for listed companies are missing. Loose drafting is evident at several places.

Conclusion

To conclude, competition between two regulators to provide better protection to minority shareholders and generally other persons may seem commend-able. However, conflicting provisions may in the long run be counter productive and create hurdles for genuine transactions. Worse, unscrupulous companies may be found to resort to legislative arbitrage, seeking those provisions or methods that avoid both laws or use the ill-drafted one with lesser restrictions. The fact that the Act is carved in stone, in the sense of being very difficult to amend can only make matters more difficult. Ideally, SEBI, with its expertise, experience and resources, should be given a monopoly or at least a priority as far as listed companies are concerned.

When Can an Open Offer be Avoided? – Supreme Court Decides

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The Supreme Court recently had an occasion to
render an interesting decision (Nirma Industries Limited vs. SEBI
((2013) 33 Taxmann.com 333(SC), dated 9th May 2013) on the Takeover
Regulations. It examined the very rationale of the Regulations. In
particular, the question was when could a person taking over a listed
company avoid an open offer? More specifically, having already paid the
promoters for acquiring the controlling interest in a company, can the
acquirer avoid paying the public for their shares? Can the acquirer be
allowed to withdraw if he later finds that the value of the shares was
substantially lower than he was supposedly aware of?

This
decision has drawn a lot of controversy and criticism. It has been said
that the acquirer, having already suffered by getting over valued
promoters shares, should not be made to suffer again by being required
to acquire shares of the public. Partly this owes to certain peculiar
facts and legal interpretation on certain issues which the Court upheld.
Partly also because it is said that the law creates certain hurdles and
then punishes the acquirer for not being able to cross them. But mainly
on certain substantive grounds. I respectfully differ with contrary
views on certain aspects and submit that the Supreme Court has rightly
required the acquirer to comply with its obligations to the public. The
few areas of legal ambiguity have also been rightly interpreted by the
Court.

The facts are indeed peculiar and on a first glance raise
certain sympathy too. To summarise, certain lenders (collectively
referred herein as “Nirma”) granted certain loans to the promoters of a
listed company (“the Company”) against security of shares of the
Company. When there was default in repayment, Nirma exercised the pledge
and acquired the shares. This resulted in trigger of requirement of
open offer which Nirma initiated. However, on later investigation, Nirma
found that there were allegedly serious misappropriations, etc. in the
Company. Nirma applied to SEBI for grant of exemption from making an
open offer or other alternate reliefs. SEBI refused. The Securities
Appellate Tribunal (“SAT”) upheld this decision. On appeal, the Supreme
Court too upheld the decision. Now, let us consider the background of
the law, then the more detailed facts, the decision of the Supreme Court
and the areas of contention.

What do the Takeover Regulations provide?

The
Takeover Regulations, since their inception, are based on a particular
concept. Whoever acquires a listed company (control or substantial
shares in it) ought to also acquire further shares from the public. The
principle behind this is that members of the public invest in the shares
of such company based on the existing promoter group. If another group
replaces the existing group, the public should have a chance to exit
with them. The other objective is to provide the public shareholders an
opportunity to sell their shares at least at the same price as the
exiting promoters. Curiously, despite several rounds of amendments, the
public shareholders are given step-fatherly treatment in one important
aspect. While the Promoters can sell 100% of their shares at a
particular price, the public shareholders cannot. Only 26% (earlier 20%)
of the share capital needs to be acquired from the public.

What happened in this case?

Nirma
lent a certain sum of money to promoters (“the Promoters”) of the
Company against pledge of shares of the Company. The promoters
defaulted. Nirma exercised the pledge and acquired the pledged shares
that triggered the open offer requirements. Nirma made an open offer at
the prescribed price to the public. However, because of findings of
multiple audits, Nirma realised that there were allegedly huge
misappropriations, understatement of liabilities, etc. Consequently, the
value of the shares was far lower than the open offer price.

Nirma
requested SEBI that it should not be required to make the open offer to
the public. Alternatively, the open offer could be at a lower than the
prescribed price nearer to the actual valuation if the alleged
misappropriations, etc. were factored in the valuation.

SEBI
rejected this request. Nirma appealed to SAT which too rejected it.
Nirma appealed to the Supreme Court, which also dismissed the appeal on
grounds discussed in the succeeding paragraphs.

Grounds why Supreme Court rejected the plea for exemption

Nirma
raised several contentions. One set of them was on legal issues. It
contended that SEBI did have general powers to grant exemption that SEBI
said it did not have. The other set of contentions was that if SEBI had
powers, the facts of the case had enough merits that SEBI ought to have
granted the exemption. The Supreme Court rejected both the contentions.

The first contention was that SEBI did have generic powers to
grant exemption. The specific grounds listed in the Regulations were, it
was contended, not exhaustive and, further, SEBI did not have power to
grant exemption on grounds similar to the specified ones but had broader
powers. The Regulations provided for three grounds for withdrawal of
open offer. First was that statutory approvals for making of the open
offer were refused. Second was that the sole acquirer, being a natural
person, had died. The third clause was “such circumstances as in the
opinion of the Board merits withdrawal”.

The contention of Nirma
was that (since the first two grounds did not apply here) SEBI had wide
and unrestricted powers under the residuary powers under the third
ground. SEBI, however, contended that its powers were ejusdem generis
the earlier powers. The present circumstances were not such that could
place pari materia with the earlier grounds and hence exemption could
not be considered.

The Supreme Court noted that Regulation 27 first provides that “No public offer, once made, shall be withdrawn”.
The exceptions to this thus shall be strictly construed. It also held
that the residuary power to grant exemption had to be considered ejusdem
generis the earlier powers. Since such powers conceived of a practical
impossibility of the open offer going further, the residuary power of
SEBI has also to be restricted to those other situations where the there
was similar practical impossibility. It held that the present
circumstances did not have any such practical impossibility. Nirma had
contended that an earlier specific ground that was deleted ought to have
been considered. This deleted ground provided that the open offer could
be withdrawn in case there was a competing bid. However, the Court
rejected this contention too.

The Supreme Court observed as follows:-

“Applying the aforesaid tests, we have no hesitation in accepting the conclusions reached by SAT that clause (b) and (c) referred to circumstances which pertain to a class, category or genus, that the common thread which runs through them is the impossibility in carrying out the public offer. Therefore, the term “such circumstances” in clause (d) would also be restricted to situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board by the legislature realising that it is impossible to anticipate all the circumstances that may arise making it impossible to complete a public offer. Therefore, certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility as visualised under sub- clause (b) and (c). In the present case, we are not satisfied that circumstances are such which would make it impossible for the acquirer to perform the public offer. The possibility that the acquirer would end-up making loses instead of generating a huge profit would not bring the situation within the realm of impossibility.”

Even on the issue whether the facts warranted exemption on generic grounds, if SEBI indeed had such powers, the Supreme Court answered in the negative. The Court held that Nirma’s real reason for seeking withdrawal was for avoiding economic losses. However, such a ground could not be permitted at the cost of the public shareholders. The Court noted that there were several red flags in the Company such as litigations against the Company, etc. and Nirma took the decision to acquire the shares fully conscious of these. Hence, such ground was also rejected.

The other major ground on general legal principles that a fraud vitiated any contract or obligation was also rejected.

The Court also refused to grant downward revision of price nearer to the value had the alleged siphoning off/understatement of liabilities, etc. were taken into account.

Criticism and support of the decision

The decision has been criticised on certain grounds. It was suggested the Court ought to have interpreted the powers of SEBI broadly and not applied the principle of ejusdem generis. Even if this principle was applied, it ought to have taken a broader view and taken into account the deleted ground also. All in all, it should have held that SEBI did have powers to grant withdrawal.

On merits too, criticism was made that the offeror was already subjected to loss on account of having acquired the shares from the promoters through pledge. Forcing the acquirer to suffer further loss was unfair and also resulted in unintended benefit to the public shareholders. The acquirer was victim of fraud and should not have been victimised further.

It is also stated that the law does not permit extensive due diligence by acquirers because of restrictions in Regulations relating to insider trading. In such a situation where an acquirer is handicapped, he should not be forced to carry out an acquisition when later investigation does throw up a fraud that could have been found through earlier due diligence.

It is submitted that while the circumstances were peculiar, the acquirer cannot escape the liability of making an open offer. This was a case where the acquirer acquired control and not merely 3substantial quantity of shares. The directors representing the erstwhile promoters resigned and Independent Directors were appointed. Further, though the acquisition was really in the form of exercise of pledge, it was a conscious act. Though not specified, it appears to me that these shares could have been immediately sold in the market at the then prevailing higher market price. However, the acquirer proceeded to carry out further investigations that revealed the hidden losses.

Further, effectively, the acquirer acquired shares of the erstwhile promoters but did not want to carry out the inevitable next step of acquiring shares of the public. In effect, the promoters did get money through original lending and exercise of pledge. Having acquired the controlling interest, the acquirer could not avoid the open offer that came as a package deal with it.

It is submitted that permitting exemption from making an open offer would have been a bad precedent and opened litigation in future cases where acquirers would come before SEBI on several pretexts seeking exemption and even benefitting from the sheer delay. It would be extremely unfair to allow acquisition of a controlling interest without making the public offer.

One may also recollect that the public shareholders even otherwise suffer from an inequity in takeover of companies. The promoters get to sell all their shares while only 26% (earlier 20%) of the public shareholding is to be acquired under an open offer.

Perhaps what is needed is change in law relating to pledge of shares. It is true that pledges are subject to misuse since an acquisition may be disguised as a pledge. Usually, however, financial lenders are not interested in acquiring control of a company. Thus, there is a case for amending the law to give some relief. For example, an exemption could be granted in cases where pledge is exercised but the shares so acquired are sold by way of auction within a time frame. The acquirer of shares through such sale would be required to make an open offer. If the lender does not sell within the time frame, the lender should be required to make an open offer.

Land Acquisition Rehabilitation and Resettlement Bill, 2011

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Introduction
The Land Acquisition Act, 1894 (“the Act”) provides for instances when the Government can compulsorily acquire private land for public purposes and for companies. It also provides for the manner of compensation and other incidental matters in this connection. The provisions of the Act have been found to be inadequate in addressing certain issues related to the exercise of the statutory powers of the State for involuntary acquisition of private land and property. The Act does not address the issues of rehabilitation and resettlement of the affected persons and their families. The definition of the crucial term “public purposes” is very wide and is often the subject-matter of great dispute. There have been multiple amendments to the Land Acquisition Act, 1894 not only by the Central Government but also by the State Governments. Further, there has been heightened public concern on land acquisition, especially multi-cropped irrigated land and there is no central law to adequately deal with the issues of rehabilitation and resettlement of displaced persons. As land acquisition and rehabilitation and resettlement need to be seen as two sides of the same coin, a single integrated law to deal with the issues of land acquisition and rehabilitation and resettlement was necessary.

Accordingly, to have a unified legislation dealing with acquisition of land, to provide for just and fair compensation and make adequate provisions for rehabilitation and resettlement mechanism for the affected persons and their families, the Land Acquisition Rehabilitation and Resettlement Bill, 2011 (“the Bill”) was introduced in Parliament. The Bill thus provides for repealing and replacing the Land Acquisition Act, 1894 with broad provisions for adequate rehabilitation and resettlement mechanism for the project affected persons and their families. An important milestone was crossed by the Bill when the Government managed a broad all-party consensus on this crucial legislation. Hence, let us look at some of the salient provisions of this very important Law relating to land acquisition.

Applicability of the Bill

The provisions relating to land acquisition, rehabilitation and resettlement, shall apply, when the Government acquires land,—

(a) for its own use, hold and control; or

(b) with the purpose to transfer it for the use of private companies for public purpose (including Public Private Partnership projects but not including national or state highway projects); or

(c) on the request of private companies for immediate and declared use by such companies of land for public purposes.

The provisions relating to rehabilitation and resettlement shall also apply in cases where,—

(a) a private company purchases or acquires land, equal to or more than 100 acres in rural areas or equal to or more than 50 acres in urban areas, through private negotiations with the owner of the land;

(b) a private company requests the Government for acquisition of a part of an area so identified for a public purpose:

The Bill does not apply to certain land acquisition Acts, such as:

(a) The Ancient Monuments and Archaeological Sites and Remains Act, 1958
(b) The Atomic Energy Act, 1962
(c) The Metro Railways (Construction of Works) Act, 1978
(d) The National Highways Act, 1956
(e) The Special Economic Zones Act, 2005
(f) The Electricity Act, 2003
(g) The Railways Act, 1989

Determination of Social Impact and Public Purpose

Whenever the Government intends to acquire land for a public purpose, it shall carry out a Social Impact Assessment study in consultation with the Gram Sabha in rural areas or an equivalent body in urban areas, in the affected area in such manner and within such time as may be prescribed.

Public Purpose has been defined to include the provision of land for:

(a) strategic defence purposes/national security /safety of the people;

(b) railways, highways, ports, power and irrigation purposes for use by Government and public sector companies or corporations;

(c) project affected people;

(d) planned development of villages or any site in the urban area or provision of land for residential purposes for the weaker sections or the provision of land for Government administered educational, agricultural, health and research schemes or institutions;

(e) residential purposes to the poor or landless or to persons residing in areas affected by natural calamities, or to persons displaced by reason of the implementation of any Government scheme

(f) the provision of land in the public interest for any other use or in case of PPPs (Public Private Partnership) projects with the prior consent of at least 80% of the project affected people

(g) the provision of land in the public interest for private companies for the production of goods for public or provision of public services with the prior consent of at least 80% of the project affected people. However, if public sector companies want the land for similar uses then the 80% consent condition does not apply.

To ensure food security, multi-crop irrigated land shall be acquired only as a last resort. An equivalent area of culturable wasteland shall be developed, if multi-crop land is acquired. In districts where net sown area is less than 50% of the total geographical area, no more than 10% of the net sown area of the district will be acquired. The Social Impact Assessment study shall include all the following:

(a) assessment of nature of public interest involved;

(b) estimation of affected families and the number of families among them likely to be displaced;

(c) study of socio-economic impact upon the families residing in the adjoining area of the land acquired;

(d) extent of lands, public and private, houses, settlements and other common properties likely to be affected by the proposed acquisition;

(e) whether the extent of land proposed for acquisition is the absolute bare-minimum extent needed for the project;

(f) whether land acquisition at an alternate place has been considered and found not feasible;

(g) study of social impact from the project

It remains to be seen whether such a Study delays the land acquisition process. The Study should be evaluated by an independent multi-disciplinary expert group constituted by the Government.

If the land sought to be acquired is 100 acres or more, then the Government must constitute a Committee to examine the land acquisition proposals. It would be headed by the Chief Secretary of State/ Union Territory. The role of the Committee would be to ensure the following:

(a) there is a legitimate and bona fide public purpose for the proposed acquisition which necessitates the acquisition of the land identified;

(b) the public purpose referred shall on a balance of convenience and in the long term, be in the larger public interest so as to justify the social impact as determined by the Social Impact Assessment that has been carried out;

(c) only the minimum area of land required for the project is proposed to be acquired;

(d) the Collector of the district, where the acquisition of land is proposed, has explored the possibilities of—

(i) acquisition of waste, degraded or barren lands and found that acquiring such waste, degraded or barren lands is not feasible;

(ii) acquisition of agricultural land, especially land under assured irrigation, is only as a demonstrable last resort.

Acquisition Process

Whenever it appears to the Government that land in any area is required or likely to be required for any public purpose, a preliminary notification to that effect along with details of the land to be acquired in rural and urban areas shall be published.

The notification shall also contain a statement on the nature of the public purpose involved, reasons necessitating the displacement of affected persons, summary of the Social Impact Assessment Report and particulars of the Administrator appointed for the purposes of rehabilitation and resettlement.

No person shall make any transaction or cause any transaction of land specified in the preliminary notification or create any encumbrances on such land from the date of publication of such notification till such time as the proceedings under this Chapter are completed.

Where a preliminary notification u/s. 11 is not issued within 12 months from the date of appraisal of the Social Impact Assessment report submitted by the Expert Committee, then, such report shall be deemed to have lapsed and a fresh Social Impact Assessment shall be required to be undertaken prior to the acquisition proceeding.

Where no declaration is made u/s. 19 within twelve months from the date of preliminary notification, then such preliminary notification shall be deemed to have been rescinded.

Any person interested in any land which has been notified, may object within 60 days from the date of the publication of the preliminary notification.

The decision of the Government on the objections made shall be final.

Upon the publication of the preliminary notification by the Collector, the Administrator for Rehabilitation and Resettlement shall conduct a survey and undertake a census of the affected families.

The Administrator shall, based on the survey and census, prepare a draft Rehabilitation and Resettlement Scheme as prescribed, which shall include particulars of the rehabilitation and resettlement entitlements of each land owner and landless whose livelihoods are primarily dependent on the lands being acquired. The same shall be open to suggestions /objections in a public hearing. The Administrator shall, on completion of public hearing submit the draft Scheme for Rehabilitation and Resettlement along with a specific report on the claims and objections raised in the public hearing to the Collector.

The Collector shall review the draft Scheme submitted by the Administrator with the Rehabilitation and Resettlement Committee at the Project level. He shall submit the draft Rehabilitation and Resettlement Scheme with his suggestions to the Commissioner Rehabilitation and Resettlement for approval of the Scheme.

When the Government is satisfied that any particular land is needed for a public purpose, a declaration shall be made to that effect, along with a declaration of an area identified as the ‘resettlement area’ for the purposes of rehabilitation and resettlement of the affected families. The declaration shall be conclusive evidence that the land is required for a public purpose and, after making such declaration, the appropriate Government may acquire the land in such manner as specified under this Act.

The Collector shall thereupon cause the land to be marked out and measured, and if no plan has been made thereof, a plan to be made of the same. The Collector shall also make an award of—

(a)    the true area of the land;

b) the compensation as determined along with Rehabilitation and Resettlement award as determined; and

(c)    the apportionment of the said compensation among all the persons believed to be interested in the land.

The Collector shall make an award within 2 years from the date of publication of the declaration and if no award is made within that period, the entire proceedings for the acquisition of the land shall lapse.

Market value of land

The Collector shall adopt the following criteria in assessing and determining the market value of the land, namely:

(a)    the minimum land value, if any, specified in the Indian Stamp Act, 1899 for the registration of sale deeds or agreements to sell, as the case may be, in the area, where the land is situated; or

(b)    the average sale price for similar type of land situated in the nearest village or nearest vicinity area. The average sale price shall be determined taking into account the sale deeds or the agreements to sell registered for similar type of area in the near village or near vicinity area during immediately preceding 3 years of the year in which such acquisition of land is proposed to be made. For this purpose, 50% of the sale deeds in which the highest sale price has been mentioned shall be taken into account.

whichever is higher:

The market value calculated as per sub-section (1) shall be multiplied by a specified factor. For instance, it is 2 in rural land, 1 in urban area land, etc. Thus, only value in rural areas is doubled.

The Collector having determined the market value of the land to be acquired shall calculate the total amount of compensation to be paid to the land owner (whose land has been acquired) by including all assets attached to the land. For determining the market value of the building and other immovable property attached to the land, the Collector may use the services of an Engineer/Other Specialists. Similarly, for assessing the value of crops, trees, plants, attached to the land, the Collector can use the services of an experienced person in the field of agriculture, etc.

The Collector having determined the total compensation to be paid, shall, to arrive at the final award, impose a ‘Solatium ’ amount equivalent to 100% of the compensation amount. The solatium amount shall be in addition to the compensation payable to any person whose land has been acquired. Thus, it is like an additional compensation.

The provisions of the Income- tax Act are also relevant in this respect. Section 45(4) of the Act provides that where capital gains arises from the compulsory acquisition of a capital asset under any law, then the compensation awarded in the first instance shall be taxable in the year of award. If the same is enhanced subsequently, then the enhancement amount would be taxable in the year of receipt by the assessee.

R&R Provisions

The Bill contains provisions for Rehabilitation and Resettlement of Project Affected People (PAP) in case of an acquisition.

The Government may appoint an Administrator for carrying out the R&R provisions. The Government may also appoint a Commissioner for R&R. He may be appointed for supervising the formulation of R&R Schemes and for their proper implementation.

In case the land is purchased privately and is more than or equal to 100 acres within rural areas or is more than or equal to 50 acres in urban areas, then the permission of the Commissioner is required. Thus, the obligation to rehabilitate for private acquisition is only if the area acquired is 50 acres or more.

A Land Acquisition and Rehabilitation and Resettlement Authority would be established for settling any disputes relating to acquisition, compensation and R&R. This would be headed by a sitting/retired High Court Judge.

Temporary Acquisition

Whenever it appears to the Government that the temporary occupation and use of any waste or arable land are needed for any public purpose, or for a company, the appropriate Government may direct the Collector to procure the occupation and use of the same for such terms as it shall think fit, not exceeding 3 years from the commencement of such occupation.

The compensation may be either in a gross sum of money, or by monthly or other periodical payments, as shall be agreed upon in writing between him and such persons respectively.

In case the Collector and the persons interested differ as to the sufficiency of the compensation or apportionment thereof, the Collector shall refer such difference to the decision of the Land Acquisition and Rehabilitation and Resettlement Authority

Other Important Provisions

Any award for land acquisition is exempt from stamp duty.

If any land or part thereof acquired remains unutilised for a period of 10 years from the date of taking over the possession, the same shall return to the Land Bank of the Government by reversion. Whenever the ownership of any land acquired under this Act is transferred to any person for a consideration, without any development having taken place on such land, 20% of the appreciated land value shall be shared amongst the persons from whom the lands were acquired or their heirs, in proportion to the value at which the lands.

Comparison with the Act

A broad comparison of the Act vis-à-vis the Bill reveals the key differences as shown in the table:

Conclusion

The Bill is one of the most important recent laws in the real estate sector. It would have far reaching implications and consequences. Hence, it becomes essential to carefully study and understand this Law.

Service of Notice – Presumption Rebuttable – Endorsement as “Refused” – The respondent as the plaintiff filed suit alleging that the defendant was a monthly tenant. [Section 114 (e) Evidence Act]

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Kanak Pramanik vs. Indrajit Bandopadhya AIR 2013 Calcutta 60

Defendant defaulted in payment of rent and accordingly plaintiff sent a notice u/s. 106 of the Transfer of Property Act under registered post with A/D asking the defendant to quit and vacate the suit premises on expiry of the month of Agrahayan 1395 B. S. The defendant refused to accept such notice and did not also vacate the suit premises. Accordingly, the suit for ejectment and recovery of khas possession with consequential reliefs was filed.

The Appellant/defendant contested the said suit by filing a written statement denying the material allegations of the plaint and contending inter alia that the defendant was a tenant under the plaintiff’s father Haripada Banerjee and that on the death of Haripada Banerjee, all his heirs became joint landlords and that the plaintiff was not the sole landlord and had no authority to file said ejectment suit as the sole landlord. It was further alleged that defendant did not receive any notice and that plaintiff managed to obtain a postal endorsement “refused” in collusion with postal peon.

The Trial Court framed several issues including an issue as to whether there was relationship of landlord and tenant between the parties and whether the notice u/s. 106 of the Transfer of Property Act was legal, valid and sufficient and was duly served upon the defendant. After hearing the Trial Court decreed the suit for ejectment observing that the defendant was a tenant under the plaintiff and that the notice u/s. 106 of the Transfer of Property Act was legal, valid and sufficient and that on account of refusal on the part of the defendant to accept the same it amounted to good service.

The Hon’ble Court observed that now it is settled law that once a notice is sent under registered post with A/D with proper stamp and proper address and is returned with an endorsement of the postal peon “refused” then there is a presumption of tender and refusal amounting to a good service of notice. However, said presumption is rebuttable. If the addressee denies said tender and alleged refusal on his part in his pleadings as well as in his evidence and the same is found believable to the Courts then the presumption of service will be deemed to be sufficiently rebutted. In that case, the onus will shift back to the addressor for proving such alleged tender and refusal by calling the postal peon to the witness box.

In the case in hand, admittedly the appellant tenant took specific plea not only in his written statement but also in his evidence that there was no tender of said notice to him by the postal peon and as such there was no question of refusal on his part to accept the same. The Courts below, however, refused to accept his version on the ground that he did not file any document to show that he was present in his office on that day. The respondent landlord has also admitted that the appellant tenant was an employee of the Government mint at Alipur. It also came out from evidence that the defendant remained absent from the suit shop room during the working period of the working days and that a barber shop was run therein through his employee Gour Chandra Pramanik. A Government employee is expected to be in his office during the office hours in a working day, in absence of any evidence to the contrary. Neither of the parties produced any evidence to show that on the relevant date of alleged tender or alleged refusal the appellant tenant was present in the said suit shop by not going to his office.

During hearing the learned counsel for the appellant tenant drew the attention of the Court to the cross-examination of the appellant landlord wherein he categorically stated that the postal peon told him that he went to the defendant’s shop room but he did not meet with him. According to the counsel, said admission of the plaintiff coupled with denial on the part of the appellant tenant belied the story of alleged tender by the postal peon to the defendant or refusal on the part of the defendant.

Section 106 of the Transfer of Property Act requires that notice to quit has to be sent either by post to the party or be tendered or delivered personally to such party or to one of his family members or servants at his residence/place of business or if such tender or delivery is not practicable, it be affixed to a conspicuous part of the property. In the case in hand, only one notice to quit was sent to the appellant tenant under registered post with A/D. It returned with the endorsement of the postal peon “refused”. The appellant tenant took specific plea not only in his written statement but also in his evidence that the postal peon did not tender any notice to him and accordingly there was no question of refusal on his part to accept the same. It also came out from evidence that the suit premises is a barber shop being run by appellant tenant through an employee Gour Chandra Pramanik. As such even in the absence of the appellant tenant if the postal peon tendered the notice to his employee Gour Chandra Pramanik to be refused to be accepted by Gour still it might amount to refusal on the part of the tenant treating it to be good service of notice. But there is no evidence to that effect also from the side of the respondent landlord. Rather the appellant tenant also examined said employee Gour Chandra Pramanik who categorically stated that on the relevant date i.e. 17-10-1988 postal peon did not visit said barber shop for service of the notice nor to speak of tendering the same to him. Said evidence remained unshaken in spite of cross-examination. In view of the aforesaid evidence on record it is palpable that the appellant tenant was able to rebut the presumption of due service in view of postal endorsement “refused” on the envelope of notice and that it was a duty of the respondent landlord to produce the postal peon on the dock to discharge the burden of proving the service of the notice.

Proper service of notice to quit is the very backbone of a suit of ejectment filed under the Transfer of Property Act. In this case, the deemed service of notice in view of postal endorsement “refused” is found to be not acceptable. As such, the Ejectment Decrees passed by learned Courts below banking on said deemed service of notice were not sustainable in law. As a result, the appeal was allowed.

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Partnership firm – Legal entity – Income-tax Return (Income Tax Act, 1961 Section 184)

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PBR Select Infra Projects, Rep by Partner vs. Commissioner of Tenders and Anr. AIR 2013 NOC 126 AP

The Hon’ble Court observed that for the limited purpose of the Act, a firm is conferred legal recognition as an entity and the Act made its assessment compulsory. But, I do not find any conceivable reason why the Income-tax returns of such a firm shall not be made use of by its partners for the purpose of satisfying the prequalification criteria of a tender document. Even if individual partners are liable for getting their individual incomes separately assessed u/s. 10 of the Act, in the absence of any legal bar under the provisions of the Act, there can be no reason for preventing a partner of a partnership firm from filing the Income-tax returns of the firm for the purpose of showing his turnover, financial capacity and other requirements as prescribed by the tender conditions.

The Court observed that the fiction introduced in section 184 of the Act, whereby a legal status is conferred on a partnership firm, cannot be extended to destroy the legal relationship between the partners and the firm. Such a water-tight compartment can be presumed only when the question of compliance with the requirement of section 184 of the Act arises. For instance, where a firm was not assessed under the Act and its partners who got their individual incomes assessed separately plead that the assessments in their individual capacity shall be deemed to be the assessment of the firm, section 184 can be pressed into service to negate such stand of the partners. But once the firm is assessed under the Act, such assessment would, enure to the benefit of its partners for the purposes such as the present one, where proof of assessment of the tenderer is required.

With regard to the second submission, respondent No. 3 filed the VAT clearance for the immediately preceding year in which the tender was called. However, along with the VAT clearance certificate dated 21-01-2011, respondent No. 3 has filed the VAT Returns Report dated 27-01-2012 of the Commercial Tax Department for the period from December 2010 to December 2011. This Report needs to be read along with the VAT clearance certificate dated 21-01-2011. None of the respondents have disputed the authenticity of the VAT Returns Report, which were up to December 2011, i.e., a couple of months prior to the issuance of the tender notification. In this view of the matter, the tender conditions is duly satisfied and hence the technical bid of respondent No. 3 is not liable for rejection on a hyper-technical ground that the formal latest VAT clearance certificate was not filed by him.

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Foreign Judgement – Insolvency proceedings – Initiation of in India directly without any testing or filtration provided in CPC for execution of foreign decree in India – Not permissible: [Code of Civil Procedure 1908 section. 13, 14, 44A].

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Abraaj Investment Management Ltd vs. Neville Tuli & Ors. AIR 2013 (NOC) 91 (Bom.)

The CPC provides specific provisions for execution of the decree passed by the court in reciprocating territory. The reciprocating territory means the territory as is defined u/s. 44-A of the CPC. It is clear even from the specific provision that any foreign judgment or decree cannot be put for execution unless there is reciprocating agreement or treaty as contemplated. The national or international treaties and or conventions and or agreements have their own value for the purposes of inter-border transactions and various such jurisdictional aspects. Everything is under control of the respective provisions of the respective States and the countries. Nothing is free and or no one can take any steps in any country without the sanction/ permission and or the filtrations so contemplated under the respective acts of the country. Section 13 of CPC contemplates when a foreign judgment shall be conclusive so that appropriate suits and or proceedings can be initiated by the concerned court/ parties in India. It provides the procedure to be followed before accepting the foreign judgment’s conclusiveness. It also means the merits of such judgments. Section 14 of CPC contemplates presumption so far as the foreign judgments are concerned. Section 114 of the Evidence Act deals with the presumptive value, even of the foreign judgment. The concept of presumption itself means that it is always rebuttable if a case is made out. Therefore, merely because it is a foreign judgment and or decree, that itself is not conclusive judgment for the purpose of final execution in India. Both required pre-testing or pre-filtrations as provided under the CPC and other relevant laws and rules. There are no provisions whereby any party/person can directly invoke the insolvency Act, based upon such foreign ex-parte judgment/decree. Even the foreign award cannot be executed in such fashion in India. It is also subject to the procedural filtration and the challenge.

The concept of execution of any decree and or order is different than initiation of the insolvency action based upon the decree or order. If these two concepts are totally different then it is difficult to accept the submission that for the initiation of the insolvency proceedings, no steps or permission and or the filtrations is necessary, as there are no specific boundaries or rules to restrict the same.

Once the insolvency notice is issued and if not complied with, the consequences are quite disastrous. The Insolvency Act provides various consequences in case the party in spite of service of insolvency notice failed to comply with the same. The act of insolvency in the commercial world has its own effect to destroy and or hamper the name, fame and the market and the business. Once the act of insolvency is committed, the declaration will be “for all the debtors” though action was initiated by the party for recovery of their respective monetary claims. The concept of “action in rem” and its effect just cannot be overlooked even at this stage, while considering the scheme of the insolvency Act.

In view of the Insolvency Act, the officer/official assignee based upon the averments made by the decree holder and believing the certified copies and or copies of the foreign judgment and or decree thought it to be correct and binding even on merit and issued the insolvency notice. The debtor after receipt of the same if failed to comply with the same, asked to face the consequences. For execution of a foreign decree, the filtration is provided and it is difficult for the party to execute the foreign judgment and or decree in India without following the procedure of law how the official assignee can initiate insolvency notice straightway on the basis of such foreign judgment by treating the same to be a final decree or order passed by the foreign court. Admittedly, there is nothing under the Insolvency Act and or CPC which permit and or entitles any one to put such foreign decree or judgment as the basis for initiating the insolvency proceedings in such fashion. If there are no provisions there is no permission. The Indian Court under the Insolvency Act is not empowered and or authorised to initiate insolvency proceedings in such fashion directly on the basis of the foreign judgment and or order.

The Court observed that such initiation of insolvency proceedings based upon a foreign judgment and or decree directly without any testing and or filtration as available for execution of the foreign decree in India will create more complications because of its various multifaceted problems and the situations. The initiation of such proceedings itself is not sufficient.

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Shareholder Agreements — Bombay High Court Decides

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Shareholder groups of listed companies and even public companies often face a nagging problem. Many of them enter into agreements giving rights to each other of different kinds over the shares held by them. These may be in the form of restrictive or pre-emptive rights or rights to purchase the shares under certain terms and conditions. The concern that keeps bothering them is whether such rights and terms are valid under law or void or, even worse, whether these are illegal.

A recent decision of the Bombay High Court (MCX Stock Exchange Limited v. SEBI and Others, WP No. 213 of 2011, dated March 14, 2012) partially sets at rest — at least to the extent a High Court decision can — the concern whether an agreement giving certain options to purchase/sell shares is void and illegal being agreements for futures under the provisions of the Securities Contracts (Regulation) Act, 1956 (SCRA). This should help shareholders and investors of various hues who have entered into such contracts with other shareholders and faced the possibility that they may be held illegal/ void. As will be seen later though, a related issue has been kept open and so the question is not yet fully answered. Also, needless to emphasise, the decision is on facts of the case and one would have to see whether the agreements and surrounding circumstances in each case are such that the ratio of the decision may apply.

 To elaborate the issue further, before we go into the facts of the case, the SCRA, to simplify a little, was enacted mainly to regulate stock exchanges and trading on it. For this purpose, it was desired that trading in securities should take place only in regulated stock exchanges. Options, futures, etc. being securities were also required to be traded on stock exchanges. To ensure that parties do not carry out private transactions in such securities including by way of options and futures, such private transactions, subject to specified exceptions, were declared illegal and void. Stock exchanges provide a transparent mechanism for carrying out such transactions in securities also giving safety to counter parties and at the same time, other objectives such as control of undue speculation could be achieved. Hence, transactions through such exchanges were intended to be encouraged.

However, the manner in which the relevant provisions were worded resulted even in a very common set of private agreements being put to question. For example, major shareholders — particularly strategic investors — often enter into agreements whereby one or both are given an option to buy or sell the shares under certain circumstances. Such agreements are rarely assignable to third parties, are not standardised and have unique terms and conditions attached, are not generally severable into small units, etc. In other words, they do not resemble the typical options or futures that are traded on stock markets. However, the conservative view — and often endorsed by SEBI — was that such agreements amount to options/futures and hence may be held to be void and illegal.

The other provision that such private agreements fell foul of was the provisions relating to free transferability of shares. While the essence of private limited companies was restricted transferability of shares, public companies (including listed companies) required free transferability of shares. This, inter alia, enabled buyers of shares being freely able to buy shares — on and off the stock exchanges — without worrying about any restrictions the transferor may be facing. It also ensured that even the company was bound to register the transfer of the shares. Such private agreements providing for options, in a sense, created a restriction on the transfer of the shares. The question once again was whether such agreements fell foul of the law providing for free transferability of shares.

Arguably, the regulator and the law-makers had other reasons too to restrict agreements. These reasons went beyond the above purposes of ensuring trading in securities took place on stock exchanges only or to ensure that there is free transferability of shares for benefit of parties. Restrictions helped achieve other objectives such as limits on foreign holding, avoidance of benami holding of shares, etc. The problem was these provisions of SCRA which had other objectives to serve were also used and applied for such purposes. Thus, instead of making specific provisions to deal with specific concerns, they used the widely framed provisions of the SCRA. This thus resulted in bona fide and fairly common private agreements being subjected to the risk of being held illegal and void.

Coming to the Bombay High Court decision, a Company was formed by a Promoter Group for enabling trading in securities, etc. and thus required registration with the Securities and Exchange Board of India. Since a recognised stock exchange serves certain public purposes and it is not in the pubic interest that the ownership of such stock exchange is concentrated, the law provides that a group of persons acting in concert should not hold more than 5% of the share capital of such company. The relevant Regulations are in fair detail and various issues concerning it were the subject-matter of the Court decision. However, since the focus here is on the issue of validity of certain agreements relating to shares between shareholder groups, the other matters dealt with by the Court are not considered here.

 It appears that the Promoter Group originally held significantly more than 5% of the share capital of the Company. To ensure that it is in compliance with the law, a complex restructuring scheme was carried out. To simplify the matter to help focus on the issue of law, the restructuring can be explained as follows. The share capital of the Company was reduced under a court-approved scheme and further shares were issued to persons other than the Promoter Group. Further, certain shares held by the Promoter Group were transferred to other parties. The Promoter Group had entered into an agreement with certain parties holding shares in the Company whereby certain shareholders had an option to sell their shares to the Promoter Group under certain terms and conditions.

The issue was whether such an agreement amounted to options/futures and thus illegal and void. The Court analysed the nature and essence of the agreements and also the law on the subject matter. Firstly, it held that the agreements did not amount to contract of futures. Contract of futures necessarily involved agreements where the agreement to purchase/sale was concluded but only the payment and delivery was postponed. In the present case, since there was an option to sell, there was no current concluded transaction of purchase/sale. In fact, the transaction of purchase/ sale may not even arise in the future if the party did not exercise its option. Thus, the Court held there was no agreement of futures. The Court, however, did not deal with the issue whether the agreement amounted to an option, because this was not part of the allegations under the Notice issued to the aggrieved party. The Court asked SEBI, if it desired to raise that issue, to give an opportunity to the aggrieved party first.

Let us consider some extracts from the decision of the Court to consider the matter in context.

The Court described the nature of the agreements between FTIL (the Promoter) and PNB/ILFS (the counter parties) in the following words:

“The buy -back agreements furnish to PNB and IL&FS an option. The option constitutes a privilege, the exercise of which depends upon their unilateral volition. In the case of PNB, the buy-back agreements contemplated a buy-back by FTIL after the expiry of a stipulated period. But, in the event that PNB still asserted that it would continue to hold the shares, despite the buy-back offer, FTIL or its nominees would have no liability for buying back the shares in future. In the case of IL&FS, La -Fin assumed an obligation to offer to purchase either through itself or its nominee the shares which were sold to IL&FS after the expiry of a stipulated period. In both cases, the option to sell rested in the unilateral decision of PNB and IL&FS, as the case may be.”

Does the agreement amount to a contract of future so as to be violative of the law and hence illegal and void? The Court further analysed and observed as follows:

“In a buy-back agreement of the nature involved in the present case, the promisor who makes an offer to buy back shares cannot compel the exercise of the option by the promisee to sell the shares at a future point in time. If the promisee declines to exercise the option, the promissor cannot compel performance. A concluded contract for the sale and purchase of shares comes into existence only when the promisee upon whom an option is conferred, exercises the option to sell the shares. Hence, an option to purchase or repurchase is regarded as being in the nature of a privilege.
…

77.    The distinction between an option to purchase or (repurchase and an agreement for sale and purchase simpliciter lies in the fact that the former is by its nature dependent on the discretion of the person who is granted the option, whereas the latter is a reciprocal arrangement imposing obligations and benefits on the promisor and the promisee. The performance of an option cannot be compelled by the person who has granted the option. Contrariwise in the case of an agreement, performance can be elicited at the behest of either of the parties. In the case of an option, a concluded contract for purchase or repurchase arises only if the option is exercised and upon the exercise of the option. Under the notification that has been issued under the SCRA, a contract for the sale or purchase of securities has to be a spot delivery contract or a contract for cash or hand delivery or special delivery. In the present case, the contract for sale or purchase of the securities would fructify only upon the exercise of the option by PNB or, as the case may be, IL&FS in future. If the option were not to be exercised by them, no contract for sale or purchase of securities would come into existence. Moreover, if the option were to be exercised, there is nothing to indicate that the performance of the contract would be by anything other than by a spot delivery, cash or special delivery. Where securities are dealt with by a depository, the transfer of securities by a depository from the account of a beneficial owner to another beneficial owner is within the ambit of spot delivery.”

Finally, it concluded, with the following words, that the agreement was not in the nature of a futures contract:

“80. In the present case, there is no contract for the sale and purchase of shares. A contract for the purchase or sale of the shares would come into being only at a future point of time in the eventuality of the party which is granted an option exercising the option in future. Once such an option is exercised, the contract would be completed only by means of spot delivery or by a mode which is considered lawful. Hence, the basis and foundation of the order which is that there was a forward contract which is unlawful at its inception is lacking in substance.”

The next issue whether the agreements “would amount to an option in securities and, therefore, derivatives which were neither traded nor settled at any recognised stock exchange, nor with the permission of Securities and Exchange Board of India and therefore in violation of SCRA”. The Court noted that this allegation did not form part of the original notice and thus parties were not given an opportunity to reply to SEBI. Thus, SEBI was required to first give such an opportunity and then give its decision and then the question of appeal may arise.

The decision gives relief to parties who have entered into or propose to enter into such agreement at least from the concern that such agreement may amount to a futures agreement. Needless to emphasise, the decision was on facts. The other concern, though, remains open and that is whether such an agreement may amount to an option which is prohibited under law. It will have to be seen what course of action SEBI takes and whether the matter goes back to the Court.

However, it is time that the law-makers and even SEBI take the initiative and resolve the controversy. It does not seem that there can be any objection to such private agreements between two groups of shareholders where most of the elements of standardised over the counter futures/options contracts are absent. Such private agreements should be explicitly exempted and if desired, the specific areas where the law-makers have concern can be duly regulated.

A.P. (DIR Series) Circular No. 97, dated 28-3- 2012 — Overseas Investments by Resident Individuals — Liberalisation/Rationalisation.

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This Circular has proposed the following three changes:

(1) Acquiring qualification shares of an overseas company for holding the post of a Director A resident individual can now remit funds, within the overall ceiling prescribed from time to time under the Liberalised Remittance Scheme, for acquiring qualification shares for holding the post of a Director in the overseas company up to the extent required by the laws of the host country where the company is located.

(2) Acquiring shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration General permission is granted to resident individuals to acquire shares of a foreign entity in part/ full consideration of professional services rendered to the foreign company or in lieu of Director’s remuneration. However, the value of such shares must be within the overall ceiling prescribed from time to time under the Liberalised Remittance Scheme.

(3) Acquiring shares in a foreign company through ESOP Scheme Permission has been granted to resident employees or Directors of an Indian company to accept shares offered under an ESOP Scheme in a foreign company, irrespective of the percentage of the direct or indirect equity stake of the foreign company in the Indian company, provided:

(i) The shares under the ESOP Scheme are offered by the issuing company globally on a uniform basis,

(ii) Annual Return is submitted by the Indian company to the Reserve Bank through the AD Category-I bank giving details of remittances/ beneficiaries, etc.

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A.P. (DIR Series) Circular No. 96, dated 28- 3-2012 — Overseas Direct Investments by Indian Party — Rationalisation.

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This Circular has proposed the following six changes:

1. Creation of charge on immovable/movable property and other financial assets

A charge can be created, under the Approval Route within the overall limit fixed (presently 400%) for financial commitment, on the immovable/movable property and other financial assets of the Indian Party and their group companies by way of pledge/ mortgage/hypothecation. However, a ‘No objection’ letter needs to be obtained from lenders to the entities on whose assets the charge is being created.

2. Reckoning bank guarantee issued on behalf of JV/WOS for computation of financial commitment

For calculating the financial commitment of the Indian Party to its overseas JV/WOS, henceforth, bank guarantee issued by a resident bank on behalf of the overseas JV/WOS of the Indian party will also be considered if the same is backed by a counter guarantee/collateral from the Indian Party.

3. Issuance of personal guarantee by the direct/ indirect individual promoters of the Indian

Party General permission is now granted to indirect resident individual promoters of the Indian Party to also give a Personal Guarantee on behalf of the overseas JV/WOS of the Indian Party.

4. Financial commitment without equity contribution to JV/WOS

An Indian Party can undertake, under the Approval Route, financial commitment by way of guarantee/ loan, without equity contribution, in the overseas JV/WOS if the laws of the host country permit incorporation of a company without equity participation by the Indian Party.

5. Submission of Annual Performance Report
In cases where laws of the host country do not prescribe mandatory audit of the books of account of the overseas JV/WOS, the Indian Party can submit the Annual Performance Report on the basis of unaudited annual accounts of the overseas JV/ WOS, if:

(a) The Statutory Auditors of the Indian Party certify that the unaudited annual accounts of the JV/WOS reflect the true and fair picture of the affairs of the overseas JV/WOS.

 (b) The un-audited annual accounts of the overseas JV/WOS have been adopted and ratified by the Board of the Indian Party.

6. Compulsorily Convertible Preference Shares (CCPS)

Henceforth, Compulsorily Convertible Preference Shares (CCPS) will be treated on par with equity shares (and not as loans) and the Indian Party will be allowed to undertake financial commitment based on the exposure to overseas JV/WOS by way of CCPS.

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A. P. (DIR Series) Circular No. 113 dated 24th June 24, 2013 External Commercial Borrowings (ECB) for low cost affordable housing projects

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Presently, Developers/Builders, Housing Finance Companies (HFC) & National Housing Bank (NHB) can avail of ECB for financing low cost affordable housing under the Approval Route.

This circular has modified the guidelines as under: –

General
The aggregate limit for ECB under the low cost affordable housing scheme for the financial years 2013-14 and 2014-15 has been fixed at $1 billion per year. This limit will be reviewed thereafter.

Developers/Builders
i. Developers/builders must have at least 3 years’ experience in undertaking residential projects (as against the earlier requirement of 5 years’ experience) and must also have a good track record in terms of quality and delivery.

ii. The ECB availed of must be swapped into Rupees for the entire maturity on fully hedged basis.

National Housing Bank (NHB)
NHB must decide the interest rate spread after taking into account cost and other relevant factors. However, NHB has to ensure that interest rate spread for HFC for on-lending to prospective owners’ of individual units under the scheme is reasonable.

Housing Finance Companies (HFC)
Henceforth, HFC are required to have minimum Net Owned Funds (NoF) of Rs. 300 crore for the past three financial years only, as the condition requiring a minimum paid-up capital of not less than Rs. 50 crore, as per the latest audited balance sheet has been withdrawn by this circular. HFC while making the application for ECB must:

i. Submit a certificate from NHB that ECB is being availed for financing prospective owners of individual units for the low cost affordable housing.

ii. Ensure that the cost of such individual units does not exceed Rs. 30 lakh and loan amount does not exceed Rs. 25 lakh.

iii. Ensure that the units financed have a maximum carpet area of 60 square metres.

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Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 – Cross Border Inward Remittance under Money Transfer Service Scheme

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Authorised persons engaged in Money transfer services and their agents & sub-agents can accept, where the address on the document submitted for identity proof by the prospective customer is same as that declared by him/her current address, the same document can be accepted as a valid proof of both identity and address. However, in cases where the address indicated on the document submitted for identity proof differs from the current address declared by the customer, a separate proof of address should be obtained.

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A. P. (DIR Series) Circular No. 50 dated 20th September, 2013

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Opening of Trading Office/Non-Trading Office/ Branch Office/Representative Office abroad

Presently, banks are required to submit, on halfyearly basis, a statement in Form ORA with the Regional Offices of RBI containing particulars of approvals granted for opening of Trading Office/ Non-Trading Office/Branch Office/Representative Office overseas.

This circular has done away with the requirement of filing Form ORA with the Regional Offices of RBI. However, Banks are required to maintain records of approvals granted by them for opening of Trading Office/Non-Trading Office/Branch Office/Representative Office overseas.

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US Decision Giving Relief to Satyam Directors – Implications for Independent Directors in India

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The recent US Court decision to give relief to Satyam independent directors/audit committee members has raised both – concerns and hopes. Concerns on corporate governance are indeed ineffective in practice and impossible to enforce, as has long been the suspicion. Hopes are that SEBI’s actions against independent directors and others in several recent cases, are perhaps unwarranted or probably even without legislative sanction.

Recently, the independent directors/audit committee members of Satyam Computers Limited were given relief in a class action suit filed against them in USA, for their alleged recklessness (it may be recollected that, as widely reported, in 2009, in settlement of class action claims, Satyam had paid INR7,797 million and the Auditors had paid INR1,591 million). Would the latest decision change SEBI’s approach ? Will independent directors in India be also treated with the same standards by SEBI or will they continue to be punished, as they have been punished in several recent cases, for alleged negligence, connivance, etc.?

First of all, what does the US decision say? It will be beyond the competence of this author to comment on what the scheme of provisions is in the US in this regard nor is it relevant significantly here. But a summary of some aspects apparent on the face of the decision can be made.

The decision is related to many issues, apart from the role of independent directors, such as whether the US courts had jurisdiction if shares of an Indian company was acquired on Indian stock exchanges. However, the relevant issue for discussion here is whether the independent directors (including audit committee members) could be held liable for loss caused to the investors.

The allegations in Satyam may be recollected. The company falsified its records and showed fictitious revenues, profits and assets. Further, it showed fictitious expenditure through which monies were channeled out in group companies. Loans from related parties were shown to have been taken in Satyam to compensate for the cash shortage. Such funds diverted were used in a related party – Maytas – to acquire huge amounts of immovable properties. Such fictitious amounts rose over the years and in a last ditch effort to cure the fraud, it sought to merge the related party into Satyam and show that the fictitious assets were used to acquire immovable properties and that too at an inflated price. Though this alleged fraud was carried out over several years, neither the independent directors, the Audit Committee members, nor the auditors detected or reported it. The question in the US decision was whether independent directors (including audit committee members) could be held liable for the fraud?

It needs to be noted that the US decision was not given on merits – that is — where the facts of the case were examined in great detail and decision given. The decision was on whether the class action could be dismissed on preliminary grounds that the facts, as alleged, were insufficient to determine reasonable scienter or state of mind/knowledge. The standards for this decision were simple. Are the facts – as merely alleged and not even proved – sufficient to reach the standards of scienter or a guilty state of mind, in terms of recklessness, connivance, etc.?

Thus, the plaintiffs were required to have alleged a certain level of facts which, assumed to be wholly true, should show a level of scienter/recklessness on the part of the independent directors. Several facts were alleged. That the fraud was so huge that it could not have escaped scrutiny of such competent people. That the auditors raised certain red flags in the form of certain internal control systems not being followed. That the independent directors approved the Maytas purchase without sufficient scrutiny. That though the auditors were paid huge amount for “other services”, the independent directors did not question this properly and grasp why the auditors were engaged for ‘other services’. That the norms of corporate governance in India required several things to be done by the independent directors/audit committee members who failed in performing. And so on.

The Court found that these alleged facts were not sufficient to establish scienter/recklessness. Hence, the class action was dismissed. More specifically, it was even observed that the independent directors were more likely the victims of a sophisticated fraud themselves rather than its perpetrators. The Court observed, “The majority of the allegations in the FACC concern an intricate and well-concealed fraud perpetrated by a very small group of insiders and only reinforce the inference that the AC Defendants were themselves victims of the fraud. The strength of this competing inference outweighs the inference of scienter asserted by lead plaintiffs.”

The Court dismissed the case, stating as follows:-

“Having considered the FACC in its entirety, the Court finds that lead plaintiffs have failed to plead sufficient facts to raise a strong inference of recklessness on the part of the AC Defendants that is at least as compelling as the non-fraudulent inference reasonably drawn from the allegations.”

There are some important points to note here. Firstly, this was a private action for damages, and not an action by a regulator against persons having certain statutory obligations. Secondly, certain actions were already taken against the company and its auditors and settlement for compensation was made. Arguably, the provisions of law and standards of proof required for fraud/negligence/recklessness, etc. are different in the US as compared to India, even though some of the obligations of the independent directors in the Satyam case were traced to Indian laws. Further, what are the obligations of persons under US law and how are they deemed to be contravened are also different. The specific allegations made in the class action is also to be seen in this context.

Nevertheless, it makes a difference that the actions/ omissions of the independent directors were held as not to constitute recklessness/scienter and it has some relevance in general times in India too. This is because, unless it is alleged and found that the independent directors did not comply with specific obligations under law, the issue before the Indian regulator would be similar – and that is, did the independent directors do their duties correctly? Interestingly, to the best of the author’s knowledge, there are no findings made as of today for any of such independent directors in the Satyam case. And it would be interesting to see whether what finding SEBI makes against the same independent directors who are given relief by the US Court.

However, it is also noteworthy for comparable or even lesser levels of manipulations in several cases, SEBI has taken stringent actions against independent directors, members of audit committee, CFOs, etc. For example, in several cases (Bharatiya Global Infomedia Limited, Pyramid Saimira, Tijaria Polypipes Limited, etc. as also discussed earlier in this column), independent directors and audit committee members (and even CFOs/CSs) have been strongly acted against by SEBI. The question that will be relevant is whether such actions were correct in context of the US decision. Or whether, in India, even the Satyam independent directors would be held liable.

On balance, this author submits that the US decision should be taken in its context and will result in change in India’s approach

Having said that, there are some basic wrong things that exist in the Indian framework for corporate governance. Firstly, and perhaps most importantly, they are contained in Clause 49 of the listing agreement, which is not a law, but an agreement. Moreover, it is an agreement between the stock exchange and the company. Of course, recently, violation of the listing agreement has been made punishable. However, still, it is a legally bad place to be for a provision that is meant to have such significance.

Secondly, while a significant level of obligations are laid down on independent directors in Clause 49, their rights are fairly marginal and difficult to enforce, particularly when one compares the powers of auditors under the Companies Act, 1956. Often, the only recourse left for an independent directors is to resign or otherwise report what he has already found to be objectionable.

Thirdly, this weak basis of law making causes problems even for SEBI. It really does not have any specific powers – as it has for various other ills – for taking action against errant companies, independent directors, etc. Thus, it uses its generic powers – which are meant to be used in exceptional cases – and debars them. While it is true that SEBI as an expert body needs certain wide and discretionary powers to take action in the face of newer and innovative types of market manipulations, corporate governance is fairly old now for resorting to such actions.

Finally, the scheme of law leaves the investors uncompensated. Whether it is Satyam, Pyramid or other cases, it was the investors who were left stranded with their shares devalued, as they assumed that SEBI had put in an effective system of corporate governance, where there are responsible persons to carry out the safeguards. The weak basis of law which, at best, punishes the independent directors by debarring them, does not help the investors recover their losses.

There is another dimension too. The general principles and even the concept of corporate governance are borrowed from the West where the management is with executives whose total holdings is usually in single digits. In comparison, in India, companies are promoter controlled, usually families and who often hold 35-50% and even more of the company. The concept of independent directors, etc. are relevant where shareholders holding 90% can appoint such people to safeguard their interests. While in India, if such concepts are blindly introduced for similar purposes, they would be – and indeed they are often – defeated by promoters, having full power to appoint people who are favourably disposed to them and the inherent power to remove them.

In the end, it seems that a transparent, effective, and comprehensive scheme of law governing corporate governance relevant to Indian realities, is needed. In this context, then, it is sad that neither the concept paper on corporate governance recently issued by SEBI nor the Companies Bill 2011 addresses these fundamental issues. The result then is likely to be a false sense of security, which would often be taken away by scams and which would be acted against by SEBI using its discretionary and arbitrary powers.

Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule).

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Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule). Shrikrishna (S) – Arjun, I rang your office. They told me you are not attending for the last three days. Somebody said you were at home only. Arjun
(A) – Yeah! While doing duniyabharka work, our own family’s work remains pending.

S – What was pending?

A – My brother’s all the returns are pending. Tax audit as well as VAT audit! 15th January was the last date. Now everything is done. Great relief!

S – VAT I can understand. But tax audit date has gone long back.

A – Agreed. But my experience is that while doing VAT audit, many ‘lochas’ in tax audit are revealed! That is why, in some cases, I prefer to do it together!

S – But then, you should prepone VAT audit, rather than postponing tax audit.

A – True. But who has time to do VAT audit in the September pressure! Continuously, firefighting is going on in our office. S – Anyway, I hope, your brother’s audit is done by somebody else.

A – Why? Mere bhaika audit doosre ko kyo doo?

S – Arey baba, you cannot certify the financial statements of your relatives. It is a misconduct!

A – Yes. But I make it clear in the report that the person whose audit I am signing is my relative. That’s what we learnt when we did our CA

S – That was the position long ago! Prior to 2006. But your CA Act was amended in 2006. Are you not aware?

A – We recognise only Income Tax Act. All other Acts are of no relevance to me!

S – Then remember. As I mentioned to you, you cannot sign the financial statements of any business or enterprise where you have a substantial interest.

A – Baap Re! It doesn’t talk of mere relative?

S – No. Not only that. Even if your firm or any of your partner has a substantial interest, that also you cannot attest.

A – So wide! That means I cannot sign the balance sheet of even my partner’s wife!

S – This is only to ensure your independence. If you are interested in something how can you be impartial?

A – This is strange !

S – Otherwise, people will always believe that you have ‘accommodated’ the relative. Your credibility is in doubt.

A – But I make a disclosure of interest?

S – That won’t suffice. Previously, it was permitted. But now they have deleted the words – ‘unless he discloses the interest also in his report’. Thus, that exception is a thing of the past now !

A – Oh. I never knew.

S – Your Council has issued further guidelines on 8th of August of 2008 – Date is easy to remember – 8-8-8 !

A – And what it says?

S – It says – not only your own interest – But even if one or more persons who are your relatives have a substantial interest in a concern, then that also you cannot audit.

A – Ah – But relative is a very narrow concept in Income Tax, section 2(41) only talks of parents, spouse, brother and sister !

S – Listen carefully. It is not ‘relative’ under tax act; but under the Companies Act. Section 6!

A – Oh My God! That will cover many persons. And that again I have to check in respect of my partners also!

S – Yes, my dear. Don’t take it lightly. A – And what is substantial interest?

S – For that, you need to refer to your CA Regulations. – In that, Appendix (9).

A – But it would be 20%, I believe.

S – Yes. But read it at least once! See, the Council feels that you should err on safer side; and not merely adhere to the words of law. Try to understand the spirit of it. Otherwise you may lose or compromise your independence.

A – You mean, there should not be conflict of interest and duty. Right?

S – Exactly. Therefore, as an employee of an organisation, you cannot sign as auditor. Not only that, even if you are an employee of a group concern under the same Management, then also you cannot sign.

A – What if I am a part-time lecturer in a college – and I want to sign the audit of the college? S – Even that is not allowed. For that matter, if your partner is a trustee or employee of a trust, that trust’s audit also you cannot sign.

A – Where shall I get all this to read? And who has time to read? After all who is going to see even if I sign?

S – Remember. In the Mahabharata, I supported you because you were on the right side of law. If you are casual and don’t take your rules seriously, I cannot side with you. Then you be prepared to suffer.

A – I believe, apart from our CA Act, there is some prohibition in the Company Law also.

S – Of course, yes. Section 226 of Companies Act directly states the disqualifications of auditors.

A – I will have to read it again. What other things should I see?

S – I am sure, you are not writing the accounts of any client and also signing them.

A – Ah! That I know. Therefore, I give the accounts writing invoice in my wife’s name. Sometimes in Draupadi’s name, sometimes in Subhadra’s. Advantage of having two wives!

S – But do they know what is accounting? They have learnt only classical dancing. Take care. You may invite trouble.

A – You are giving me shock after shock. Ultimately then how to practice?

S – One more thing. Just as you cannot audit the books which you have written, same way you cannot sign statutory audit where you have also done internal audit. I feel, an internal auditor should also not sign a tax audit.

A – Well, you have told me so many things. I cannot remember all this. I’d better get the literature and read it myself.

S – I can see that you have become nervous after hearing all these. But if you see the provisions of the Companies Bill, 2012, they are even more stringent and wider.

A – Oh my God!
The above dialogue is with reference to Clause 4 of Part I of the Second Schedule which reads as under:

Clause (4): expresses his opinion on financial statements of any business or enterprise in which he, his firm or a partner in his firm has a substantial interest; Further, readers may also refer to the following: – Chapter IV of Council General Guidelines, 2008 dated 8th August, 2008 (refer page nos. 313 – 323 of the Code of Ethics publication January 2009 edition or the website of ICAI). – pages 239 – 244 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

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A. P. (DIR Series) Circular No. 14 dated 22nd July, 2013

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Export of Goods and Software – Realisation and Repatriation of export proceeds – Liberalisation

This circular clarifies that exporters are required to realise and repatriate the full value of goods or software exported upto 30th September, 2013 within nine months from the date of export i.e. the provision will be applicable for exports undertaken between 1st April, 2013 and 30th September, 2013. However, there are no changes in the provisions with respect to period of realisation and repatriation of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to warehouses established outside India.

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Relief for Shareholders Agreements – SEBI Notifies Long-overdue Relaxations

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SEBI finally resolves an age-old self-created problem SEBI has finally set at rest, substantially though not fully, a controversy that affected for decades some core issues in Shareholders Agreements and related agreements/structures. An age old provision in the form of a circular existed that was meant to prevent certain ills but ended up affecting innumerable agreements between two or more groups of shareholders and others. A brief introduction of the issue is first necessary to understand what the problem was and what SEBI has now provided.

What was the problem?

Take an example of a situation where such a provision created hurdles. When two or more groups get together in a company, to control and run it together, it is common and even inevitable that they will agree that one group will not exit without the other having a say. Thus, if Group A wants to sell its shares, Group B would want certain safeguards/rights. It would require Group A to give what is known was Right of First Refusal. This means that if Group A is getting an offer to acquire its shares at say, Rs. X per share, then Group B would have right to buy the shares at the same price. In other words, it has a right of pre-emption. Of course, Group B could choose not to buy and let the shares be sold to the offering party. At times, they may agree that on completion of certain conditions, one group (or a third party, say an executive) would have a right to acquire a certain number of shares. One could go on with more such examples but, in essence, rights are given over to one person to acquire another person’s shares in the future. Similar rights could be given to a person to sell its shares.

The law makers had a certain concern on an entirely unrelated issue. Considering the evils of unregulated trading in shares (including what is known as dabba trading in common parlance) it was decided that trading in securities otherwise than on regulated and recognized stock exchanges should not be permitted. Thus, trading – or even contracting to buy/sell – securities except on a recognised stock exchange was made null and void. Thus, such a contract was not enforceable. The only real exception (apart from certain territorial exceptions) to was “spot transactions”. This covered a contract of purchase and sale of securities where the delivery/payment was spot – which was effectively defined to be that the delivery of shares and payment was to be made within one day of the contract.

The law as so framed ensured that forward/futures/ options trading in securities could not be carried out without being regulated. However, a simple transaction of private sale and purchase of shares and other securities on ready payment/delivery basis was exempted.

The wording of this law, however, had a peculiar consequence. It meant that no contract of sale/ purchase of securities could be entered into unless it fell into the very narrow exempted category. For most practical purposes, one could not enter into a valid agreement to buy/sell shares in the future. Or enter into an agreement where involving postponement of the payment of consideration and/or delivery of the securities beyond one day. As joint ventures, private equity, co-promoted companies, etc. became increasingly common, this became a serious concern. Parties entering into such agreements could not bind each other with such basic commercial safeguards. This was despite the fact that almost all of such agreements could not even remotely affect public interest, being entered into by informed parties on a negotiated basis without any intention of trading.

In practice, this problem was dealt with parties by often being in denial or half-baked structuring or even sheer ignorance. Some legal counsels even opined that, structured in a particular way, the notification did not apply to private agreements. The reality, however, was that even in the most optimistic scenario, often, there was concern that, if put to test, many of such clauses in agreements may not be held valid. Thus, what was referred to euphemistically as a “calculated risk” was taken. The fact that Supreme Court, other courts and SEBI held many of such agreements to be unenforceable worsened matters (the various decisions and their legal basis can be subject for a separate detailed article).

The matter became more complicated when this issue spilled over to other laws including laws regulating foreign exchange.

SEBI’s recent circular gives relief – with some conditions

Finally, on 3rd October 2013, SEBI issued a circular withdrawing the earlier notification and allowing parties to enter into agreements for purchase/sale of shares, though with certain conditions which are fairly reasonable. Let us consider which of such contracts are exempted and under what conditions.

The first two exemptions are as expected and continuing ones. “Spot Delivery Contracts” are exempted. Purchase or sale of securities/derivatives on stock exchanges in accordance with law and bye-laws, etc. of such exchanges are also exempted.

Next exempted category is “contracts for preemption including right of first refusal, or tag-along or drag- along rights contained in shareholders agreements or articles of association of companies or other body corporate”. Thus, all contracts of pre-emption are exempted, including the specified ones such as right of first refusal, etc. These may be contained in the agreements between shareholders and/or incorporated in the articles of association of the company.

Then come certain “options” in agreements between shareholders (or contained in the articles of association). Such options provide a right to one person to buy or sell shares. On exercise of such options, the actual purchase/sale of shares is effected. Such agreements are also exempted, subject, however, to certain conditions. Firstly, the securities underlying such options should have been held continuously for at least one year by the selling party. This is effectively a lock-in period. Secondly, the price/consideration for such purchase/sale of shares should be in compliance with prevailing laws. Finally, the contract, i.e., the purchase/sale is settled by actual delivery of the underlying securities.

The circular makes it clear that the contracts will continue to have to adhere to FEMA and Regulations/Rules issued thereunder. FEMA has other policy considerations and hence such agreements particularly with parties across the border would require such compliance.

Will the relaxations apply to existing agreements?

An interesting provision is made for agreements for purchase/sale of shares existing on the date of this circular. It is clarified that this circular shall neither affect nor validate agreements existing immediately prior to the date of the circular. In other words, all such existing agreements shall continue to be subject to the earlier law. Only those contracts having such clauses and which are entered into on or after the date of this circular would benefit from the relaxations made in it, subject of course complying with the conditions stated therein.

There have been views expressed that parties could merely re-execute such contracts as of a date after the date of such circular. This sounds like a fairly simple solution to the thousands of agreements existing as on such date, though one wonders whether it is simplistic too. The practical hurdle is whether all the parties concerned would readily agree to re-execute such past agreements. In practice, often relations may have soured between the parties who may want to re-negotiate certain terms of the agreement if it has to be re-executed. Obviously, though the party entitled to the rights may be keen, the party who is subject to the obligations may not readily agree. Then there is a commercial reality that was often observed in practice. Many parties entered into some version of such agreements knowing quite well that they are likely to be unenforceable. Hence, they considered the likelihood of being required to act upon it fairly remote and considered that if at all such transactions were to be executed, the parties could consider the offered terms and generally the reality at that time. The party entitled to the rights too may not have really believed that it would actually get them. Clearly, these parties never intended such agreements to have unqualified binding force and they may not agree to re-execute them to give them such force. Thus, the parties would want to re-negotiate the contract instead of merely printing out a copy and re-executing the same today.

Applicability to other laws for certain contracts

The circular also clarifies that as far as government securities, gold related securities, money market securities, contracts in currency derivatives, interest rate derivatives and ready forward contracts in debt securities entered into on the stock exchange are concerned, they shall be in accordance with various specified laws such as securities laws, banking laws, FEMA, etc.

Anomalous provision in Companies Act, 2013

In this context, it is necessary to discuss a strange provision in the recently notified Companies Act, 2013. Section 194, which incidentally has been notified as to have come into effect, prohibits certain contracts by directors/key managerial persons of companies. The specified contracts are rights (or a right exercisable at option of such person) to call for delivery or make delivery of a specified quantity of shares/debentures, at a specified price and within a specified time. It appears that the intention is to prohibit contracts of futures/options. While this is consistent with the existing provisions under the SEBI Regulations relating to prohibition of insider trading, this provision is too widely worded. The SEBI Regulations are intended to prohibit directors/officers/designated employees from entering into derivatives transactions of their companies. However, the scope of section 194 is very broad. It is a blanket ban on all agreements giving any right or option to acquire/sell shares. Further, the section applies to all companies – listed, unlisted or even private. It does not even give exemption to employees’ stock options. Thus, despite the relaxation by the circular, this ill-advised provision in the Act can present problems. On the other hand, it applies only to directors/key managerial persons and not others including other promoters or promoter companies.

Curiously, the Explanation to this section seems to modify its scope. Firstly, it states that it would apply to those shares/debentures where the concerned person is a whole -time director and not merely a director. Secondly, the shares/debentures may be of the employer company or its holding company or its subsidiary. Even more curiously, the initial part of the section refers also to “associate” companies. Further, the ban in the section is on “buying” such rights and one thus wonders whether such rights granted to employees or otherwise forming part of contracts are also covered. The section is an example of bad drafting. To summarise, however, this provision will create hurdles in case of whole-time directors/key management persons in entering into agreements to buy/sell shares in the future or acquire options for such buy/sell of shares.

To conclude, SEBI has finally provided relaxation to genuine contracts between parties that faced the possibility of being treated as impermissible under SEBI regulations though they did not affect public interest.

Challenge to Arbitration Award issued in foreign country should be in the country where award is published

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In the present case, the parties agreed that the arbitration would be held at Geneva, Switzerland. Hence, the Swiss law could be the curial law. The parties agreed, rules framed by ICC, Paris would be the appropriate procedure. In any event, Indian law would have no role to play when the parties expressly agreed that they would have sitting of arbitration abroad where Indian law would have no force.

When there was no express designated venue, the law applicable to the seat of arbitration would be the curial law.

If a contracting party feels, his counterpart in contract committed any breach, place of committing of breach would be ordinarily place where he should ventilate his grievance. Similarly, when arbitration is held in a particular place and losing party feels, the Tribunal did not decide issue in the way it ought to have, he has to approach the Court where arbitration was held and/or award was published unless parties mutually agree to be guided by another law or law of place where contract was performed.

Coal India Ltd vs. Canadian Commercial Corporation AIR 2013 (NOC) 265 (Cal.)

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NEW BANKING LICENSES-THE WAY FORWARD

1. Objective and Evolution of Global Banking

The word “bank” was borrowed from Middle French “banque”, from Old Italian “banca”, from Old High German “banc” which means “bench, counter”. Benches were used as desks or exchange counters during the Renaissance by Florentine bankers , who used to make their transactions atop desks covered by green tablecloths. Today, Industrial and Commercial Bank of China Limited (ICBC) the world’s largest bank , has about $2.43 trillion of deposits, which is almost higher than the nominal GDP of India, Italy, Russia, France and the UK.

Section 5 (c) of the Banking Regulation Act, 1949 defines a bank as “a banking company which transacts the business of banking in India”. Further, section 5 (b) of the Act defines banking as “accepting, for the purpose of lending or investment, or deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.”

Typically, the provision of deposit and loan products normally distinguishes banks from other types of financial firms. The core activity of banks is to act as intermediaries between depositors and borrowers. However, several banks have successfully leveraged this relationship with depositors and borrowers (channel) to provide all sort of financial services ranging from core services (ATM, Cards, project finance) to ancillary services (Bancassurance, Investment banking, Wealth Management, etc.) to complex & structured solutions (Mortgage Backed Securities, Collateralised Debt Obligation, etc.). For example, other income (non-funded revenues) of Axis Bank was at ~20% of total revenues in FY13.

Conversely, non-financial entities having eminent distribution networks have migrated to the role of providing banking services. For example, Japan Post Bank which is owned by Japan Post Holdings Co., has the largest public deposit in Japan ($1.81 trillion) garnered through a nationwide network of post offices. However, the bank primarily invests its money in government bonds and acts merely as a savings bank. In India, the Department of Posts has applied for a banking license and perhaps is pursuing a similar model.

Banks can create new money when they make a loan. New loans throughout the banking system generate new deposits elsewhere in the system. The money supply is usually increased by the act of lending, and reduced when loans are repaid faster than new ones are generated. In the United Kingdom between 1997 and 2007, there was a big increase in the money supply, largely caused by much more bank lending, which served to push up property prices and increase private debt. The amount of money in the economy in the UK went from £750 billion to £1700 billion between 1997 and 2007, much of the increase caused by bank lending. In fact in many European countries, bank assets dwarf the size of the local economy and are far in excess of other regions in the world as per Table 1.

Excessive or risky lending can cause borrowers to default, the banks then become more cautious, so there is less lending and therefore less money so that the economy can go from boom to bust as happened in the UK and many other Western economies after 2007. Consequently, European banks’ profits have plummeted from 46% to 1.58% in the Top 1000 bank profits list whereas Asia’s banks have increased their profits from 19% to 56%.

2.    Evolution of Banking in India and need for new banking licenses

While global banking has seen regional disproportional growth due to country specific economic and regulatory requirements, India has its own model for financial development and its regulations. To a great extent, the conservative approach adopted by the Reserve Bank of India (RBI) has helped insulate the domestic banks from global crisis; on the other hand, none of the Indian banks have become global in size.

India has 168 Scheduled Commercial Banks (SCBs) and 82 cooperative banks. Of the 168 SCBs, 82 are Regional Rural Banks and 26 are Public Sector Banks. Thus, only 60 banks are private of which, 40 are foreign banks. According to RBI’s quarterly statistics on deposits and credit of scheduled commercial banks in March 2012, PSBs accounted for approximately 75% per cent of the aggregate deposits. This lopsided structure, where all the eggs are in the same basket, increases the risks to the economy and erodes financial stability while adding a lot of stress on the public banks to increase financial Inclusion. Further, Indian banks will have to bring in additional capital of Rs. 5 lakh crore to meet Basel III norms. The government on its part has to infuse Rs. 90,000 crore into the PSBs to maintain majority shareholding under Basel III.

RBI has as a strategy, since the economic liberalisation in 1991, has followed the cycle of permitting new bank licenses once every decade—in 1993, 2003 and 2013. This permits RBI to regulate the growth and stability of the banking system as well as the new entrants.

The key economic environment under which new banking licenses will be awarded in 2013 could be summarised as below:

•    Overall economic growth

We are in a situation where economic growth has collapsed, industrial output has stagnated for two years, jobs are being shed, consumer inflation is close to 10%, the current account deficit (CAD) in the balance of payments is nearly 5% of GDP at last count, investment is fleeing abroad, external debt maturing in the current fiscal year exceeds $170 billion and the rupee is touching new lows against the dollar each week. While the RBI and the Government are intervening with short-term measures, longer term initiatives are imperative.

As per the discussion paper on the entry of new banks into the private sector (Discussion Paper): “It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that for growth to be truly inclusive requires broadening and deepening the reach of banking. A wider distribution and access of financial services helps both consumers and producers raise their welfare and productivity.”

There are three fundamental reasons for this cor-relation: (1) the banking system creates a more stable employment environment and provides more business opportunity, (2) it helps enlarging the per capita GDP as it brings the unaccounted sector into its fold and (3) it brings additional capital to the banking system, which has a snowball effect.

•    Financial Inclusion

As per the census of India about 59% of households had access to banking services in 2011 and the all-India average population per bank branch was 12,500 in 2012. The majority of India’s 6,50,000 villages do not have even one bank branch, and just 3.5 of every 10 Indians have access to formal banking services in the country, according to a 2011 World Bank survey. Only 37,471 branches were operational in rural India, as of March 2012, while the total banking outlets in villages (including branches, business correspondents and other modes) number just 1,81,753.

While the existing banks also function as per the same mandate (one rural branch out of every four branches), the entry of new players, with a specific and deeper financial inclusion as a license condition, should augment the overall rural presence.

•    Efficiency and Competition

While the overall efficiency of banks in India is increasing, there exists a lot of scope to improve the efficiency of the public sector banks. Net impaired assets (net NPAs + restructured assets) have increased rapidly in FY12 and FY13. Net impaired assets to net worth ratios are now at alarming levels, particularly for PSU banks. Barring BOB and SBI, for all other PSU banks, net impaired assets are almost equal to or even more than 1Q14 net worth. However, for private sector banks, stress levels are very much under control and manageable. Net impaired assets as a percentage of net worth is ~10% for private sector banks (except for Axis Bank at 14% and ICICI Bank at 12%).

Even for private banks, bringing in fresh competition from well-managed business houses, having proven track record in both profitability and setting up pan-India networks (e.g. telecom), will improve the competition and bring in innovation into the system which will only benefit the consumer. Currently, since there are only 3-4 private banks which have pan-India presence, entry of larger business houses will provide competition and much required depth to the financial system in India.

3.    New banking license guidelines

RBI granted licenses to 10 private players between 1993 and 2003. The players were ICICI Bank, HDFC Bank, UTI Bank (now Axis), Global Trust Bank (GTB), IDBI Bank, Times Bank, Centurion Bank, Bank of Punjab, IndusInd Bank, and businessman CR Bhansali, who was accorded an in-principle approval but the bank never materialised. Of the 10, four were promoted by financial institutions and the remaining six by individual banking professionals. As it turned out, all those promoted by individuals either failed or merged with other banks, (viz., GTB with Oriental Bank of Commerce and Times Bank, Bank of Punjab and Centurion Bank with HDFC Bank).

The central bank become more cautious, and be-tween 2004 and 2010 granted licenses only to Kotak Mahindra Bank and Yes Bank.

The failures/mergers were essentially due to (1) weak corporate governance/frauds (CR Bhansali and GTB) and (2) lack of promoter interest or deep pockets (Times Bank, Bank of Punjab and Centurion Bank). RBI also noted that the experience of the Local Area Banks have also not been encouraging due to small size and concentration risk. Similar is the situation with RRBs.

The discussion paper thus notes: “The experience of the Reserve Bank over these 17 years has been that, only those banks that had adequate experience in broad financial sector, financial resources, trust-worthy people, strong and competent managerial support could withstand the rigorous demands of promoting and managing a bank.”

Further, Indian regulators have also learnt that during the 2008 crisis, it was the strength of the Indian JV partner which helped sustain the business, for example, an entity like Tata AIG. Further, RBI also learnt that only domestic banks (unlike foreign banks) have been able to penetrate the country and support financial inclusion.

In light of the macroeconomic situation and experiences both domestically and internationally (Lehman Brothers collapse, etc), RBI has come out with guidelines for issuance of new banking licenses. The table below attempts to summarise the key conditions of the guidelines and rationale for the same:

While the objective tests have been laid down as above, RBI has retained subjectivity in the allotment of banking license to give itself flexibility in decision making. It is expected that the RBI may consider the following and perhaps more, while evaluating each of the applications:

•    Industrial and business houses having a long history of building and nurturing new businesses in highly regulated sectors such as Telecom, Power,

Automobiles, Defence, infrastructure projects like Airports, Highways, Dams, Ports probably may be considered favourably as industrial and business houses with presence across various sectors would face a higher reputational risk compared to a pure individual promoter or financial services player.

•    Background of promoter, directors and top executives. No objection certificate of the promoter’s credentials, integrity and background will probably be taken from banks, other regulatory agencies and also from investigating agencies.

•    Corporate governance standards in the corporate entity, extent of financial activities carried out by the industrial/business house, comfort with the corporate structure within the group, whether ownership is diversified and separate from management and the source of promoters’ equity.

4.    Applicants and way forward

Unlike an NBFC License, a banking license is controlled with an occasional window which opens briefly, once in a decade. Essentially, some sort of excitement is expected over the number of applicants. In 1993, 13 applications were received out of which 10 were awarded the license. In 2003, 100+ applications were received out which license was awarded only to two. When the current guidelines of 2013 were announced, media reports expected over 100 applications to be received by RBI before the cut-off date of 1st July, 2013. To everyone’s surprise, only 26 applicants were received. Expected big names like Mahindra & Mahindra Financial Services Ltd opted not to apply citing that the new rules may be too hard for businesses to implement.

Of course, each applicant would have done his cost benefit analysis before applying. The apparent benefits, amongst others, would be

(1)    Scalability and stability of business,

(2)    Better cost of capital due to access to public deposits,

(3)    Distribution network so as to improve the fee based income (eg- Bancassurance), and

(4)    Return on investments. Table 2 indicates the share price performance of new banks commenced since 1993.

The key challenges for setting up the bank would, amongst others, be

(1)    Stringent regulations, not just for the bank, but for all financial regulated entities in the Applicant group and

(2)    Cost on account of priority sector lending, branch expansion and financial inclusion.

The bigger issue arises from the fact that the conditions are expected to be complied with from day one of the commencement of the bank business. RBI has emphasised that it will not deviate from the guidelines while allotting licenses and thus, will not grant any exemptions.

The list of applicants along with a possible classification, and RBI’s potential key consideration for that bucket is tabled below.

RBI is now expected to set up a committee to screen and shortlist the applicants who will be called for interviews and discussion on the business plan. The in-principle approvals for the licenses are expected to be issued anywhere before the election next year and most probably between January to March 2014. It also needs to be seen if Mr Raghuram Rajan, the new RBI Governor (and former IMF chief economist) who was not in favour of the government giving banking licenses to industrial houses, has a decisive role to play in the grant of the banking licenses. His opinion has been that existing peers, like NBFCs and MFIs, should be given preference over corporates owing to their experience in this business. According to Mr Rajan, “If corporates are given license, the regulator needs to ensure there is no inter-company lending, proper risk management processes are followed and there is enough transparency.”5

Of the number of applicants, RBI will now be required to address several critical questions, including:

•    How many banking licenses should be issued, assuming the industry is likely to consolidate?

•    Will players with pan-India focus be given preference over regional players? Or whether both the categories of applicant will be considered?

•    Whether large industrial houses with experience in setting up pan-India networks like telecom, automobiles, etc., will get preference?

* The authors are senior officials of a well-known financial company. The views expressed in the article are their personal views.

1Medici Bank

2The Bankers Top 1000 World Banks Ranking – July 2013

5http://articles.economictimes.indiatimes.com/2011-04-02/ news/29374475_1_banking-licence-corporate-houses-raghuram-rajan

A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

21. A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

Foreign investment in India by SEBI registered FIIs in Government Securities and Corporate Debt

This circular has revised, with immediate effect, the guidelines relating to investment in Government Securities & Corporate Debts by removing/merging the sub-limit in each category into a single limit. The details of the said revision are as under: –

The above limits are not applicable to Non-Resident Indians and they can invest without any limit in Government Securities as well as corporate debt.

E-filing of tax returns goes to the next level

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Readers would be aware of the e-filing requirements with reference to income-tax returns. These were brought onto the statute long back and, by now, most of us are well versed in the process of e-filing of the ITR forms. We also have the e-filing requirements under Company Law whereby we have been filing documents electronically with the MCA. For the past few years, ever since the e-filing of returns was made mandatory, we have had a situation where the audited accounts, the tax audit report, the MAT certificate etc., have not been submitted to the tax department unless specifically called for during a scrutiny. This, in my opinion, has inadvertently led to a bit of leniency being shown by many of our members in terms of timely closure of documentation and filing.

Background:
Section 139 requires certain categories of persons to file tax returns in India. Section 139(1) states that the returns need to be in prescribed form. Rule 12 lays down the prescribed forms. Proviso to Rule 12(3) as amended vide Notification No. 37/2011/F. No. 149/68/2011-SO(TPL) dated 01-07-2011 makes it mandatory for some of these categories of return filers to e-file their returns mandatorily. For others, there is an option to e-file the returns (section 139(1B)) but only if they are assessable in specified cities. Section 139(1B) empowers the Government to formulate a scheme for e-filing. In pursuance of this power, the “Furnishing of Return of Income on Internet Scheme 2004” was notified on 30-9-2004. Then, this scheme was superseded by the “Electronic Furnishing of Return of Income Scheme 2007” vide notification No. SO 1281 (E) d. 27-70-2007.

As per Rule 12 (2), ITR-1, 2, 3, 4, 4S, 5 & 6 are not required to be accompanied by any documents. For A.Y. 2009-10, vide Circular No. 3/2009 d. 21-05-2009, the TP reports were to be filed physically before the due date. Thereafter, we have not had any such similar circulars but the practice of filing the TP reports on or before the due date for filing the returns has continued.

Recent notifications:
Now, on 1st May, 2013, the CBDT issued a Notification (No. 34/2013/F. No. 142/5/2013-TPL) which made amendments to Rule 12 whereby, the following proviso has been inserted in sub Rule (2) w.e.f. 1st April, 2013:

“Provided that where an assessee is required to furnish a report of audit under sections 44AB, 92E or 115JB of the Act, he shall furnish the same electronically.”

It is on account of this amendment that now, tax payers who are subject to a tax audit or a transfer pricing audit or who have to pay MAT, are now required to file the respective reports electronically.

Subsequent to the abovementioned notification, another notification has been issued on 11th June, 2013 (Notification No. 42/2013/ F.No.142/5/2013-TPL) which amended the proviso to Rule 12(2) which was inserted by the earlier notification dated 1st May. Now, the amended proviso reads as under:

“Provided that where an assessee is required to furnish a report of audit specified under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10, section 10A, clause (b) of sub-section (1) of section 12A, section 44AB, section 80-IA, section 80-IB, section 80-IC, section 80-ID, section 80JJAA, section 80LA, section 92E or section 115JB of the Act, he shall furnish the same electronically.”

As a result of the above amendment, now, many more reports are required to be filed electronically.

Another interesting amendment that was made vide the notification dated 11th June is the insertion of second proviso to sub rule (3) of Rule 12. The newly inserted proviso reads as under:

“Provided further that a person who is required to furnish any report of audit referred to in proviso to sub-rule (2) electronically, other than a person to whom clause (aaa) or clause (ab) of the first proviso is applicable, shall furnish the return, in Form as applicable to him, in the manner specified in clause (ii) or clause (iii).”

The cumulative impact of all the amendments is that any taxpayer who is subject to any audit will have to file the audit report electronically and, in addition, also have to file its tax return electronically.

The new e-filing regime:
Before we look at the details of the new e-filing regime, a quick look at the changes in type of tax return forms that can be filed for A.Y. 2013-14:

 Form No.

 Change applicable from A.Y. 2013-14

 ITR-1 (Sahaj) 

 Cannot be used by an individual having:
i. A loss under IFOS
ii. A claim for foreign tax credit/relief under section 90/90A/91
iii. Exempt income exceeding Rs. 5,000

 ITR-4S (Sugam)

 Cannot be used by an individual/HUF having:
i. A claim for foreign tax credit/relief under section 90/90A/91
ii. Exempt income exceeding Rs. 5,000

Similarly, the amended position regarding how the tax returns can be filed with effect from A.Y. 2013-14:

Registration of Chartered Accountant on e-filing portal:

Significantly, the onus of uploading the tax audit report, transfer pricing report, MAT certificate, trust audit report etc., has been cast on the concerned Chartered Accountant who signs such a report/certificate. As a result, the process of e-filing of such reports would begin with the concerned CA having to register himself/herself on the e-filing portal. It may be noted that many CAs would already be registered with the said portal and would have been filing their personal tax returns electronically. However, even such CAs would still need to register themselves once again on the portal. For this, one would need to visit www. incometaxindiaefiling.gov.in and register on the site under the sub-category of “Chartered Accountants” under the main category of “Tax Professional”.

While registering, the CA will have to provide his ICAI Membership Number and date of enrolment with the ICAI. We need to be careful with this data since I am informed by a Regional Council Member of ICAI that this data is cross-verified by the portal with the ICAI records. While this information is not verified by me, if it is true, then even a small mistake may lead to problems in registration. Once the CA is registered successfully, he/she would get a notification by email and on a mobile (so, both these fields are mandatory and we will have to provide a valid email ID and a valid mobile number while registering). The activation link received through email has to be activated and then the registration would be completed. The CA would then get a new login name which is based on this ICAI Membership Number as opposed to the PAN-based login ID that we are generally accustomed to.

Once the CA registers on the site, his client will then need to register the CA as the signatory to the respective report/certificate. So, for example, in case of a taxpayer XYZ Pvt. Ltd., the tax audit report will be signed by CA Mr. A, the transfer pricing report will be signed by CA Ms. B and the MAT certificate will be signed by CA Mr. C, then the said company will have to log onto the e-filing portal and register each of these CAs for the respective report/ certificate. When this is done, the concerned CA will get a mail informing that a particular taxpayer has registered the CA as its signatory. The message contains the following line:

Dear AMEET NAVINCHANDRA PATEL,

User AAXXXXXX1B has added you as the CA for FORM3CA, FORM3CB for 2013-14.

Filing of tax returns only after uploading other reports:

It may be noted that it is no longer possible for a taxpayer to file the ITR form unless the various applicable audit reports (tax audit, transfer pricing, trust, MAT) are uploaded electronically. In the ITR form, the date of uploading of each such document has to be mentioned.

Actual uploading of tax audit reports:

Once the CA has registered himself/herself and the client has also registered the CA as the tax auditor, the uploading of the tax audit report (TAR) can be done. This has to be done by the concerned CA. It may be noted that in case of partnership firms who are appointed as the tax auditors, it is the individual partner who has to register himself/herself and not the firm. Also, the same partner will also need a Digital Signa-ture Certificate (DSC) to be able to upload the TAR.

For uploading the TAR, a CA would need to download the utility provided by the tax department on their portal. Once the utility is downloaded onto a local computer, the CA can start feeding in the data. This is offline preparation of the form. The CA also has the option of going online and preparing the form and submitting it immediately thereafter. However, considering the various issues that have already been faced by the CAs who have tried to use the utility, and also considering that this is the first year of e-filing of the TAR, one would need to be very courageous to attempt an online preparation and submission.

A very important feature of the utility provided by the tax department on their site is that it is NOT MS Excel based. This is one of the biggest drawbacks of the said utility. The utility is not user friendly and requires every bit of data to be manually entered by the CA. Also, it does not allow a user to “cut-paste” from any other file. So, if you thought that you could keep an Excel sheet open and then cut from there and paste the data into the utility, you have a shock in store for you. Many CA firms use private software for preparing the computation of income and also the ITR forms. Such firms will need to decide whether they would like to use the utility provided by the Government for uploading the TAR or whether their private software vendors will provide the utility. This article refers to the utility provided by the Government. For running this utility, you will require your computer to have Java Runtime Environment Version 7 Update 6 or above (32 bit) installed in it.

Once the data is entered into the utility, the entire file needs to be validated (on similar lines as the validation required for ITR forms). Upon successful validation, the CA needs to generate a .XML file. The .XML file then has to be uploaded onto the portal with the help of a DSC (which can be either in the form of a .pfx file or a USB token). Once this is done by the CA, the ball then moves to the court of the concerned taxpayer who will get a notification that his CA has uploaded the TAR for his (taxpayer’s) approval. The taxpayer will then have to review the TAR and “Approve” or “Reject” the same. If for any reason, the assessee rejects the TAR, then the concerned CA would need to resolve the difference that the assessee has and then once again generate a fresh .XML file and upload it. The assessee would then again need to log in and “Approve” the same. Once the assessee approves the TAR with the help of a DSC, the same gets officially filed with the Income-tax department and an e-acknowledgement gets generated. This closes the e-filing procedure as far as the TAR is concerned.

Uploading of financials:

Quietly, along with the e-filing of the TAR, the Government has also simultaneously made it mandatory for the tax auditor to also upload the scanned copies of the audited accounts. Fortunately, the tax auditor does not need to feed in the balance sheet and P&L items all over again but merely scan the accounts and upload the same. This has to be done at the time of uploading the TAR. The scanned documents can be either in .TIFF format or in .PDF format. The overall size of the files cannot exceed 20MB. It appears that this limit stands increased to 50MB as per the General Instructions in the utility. However, the main screen where the said accounts are to be uploaded continues to show the size restriction as 20MB.

Actual uploading of other reports:

The same procedure as is adopted for uploading the TAR has to be followed for other forms as well. Thus, whether it is the Transfer Pricing Report in Form 3CEB or the MAT certificate in Form 29B or the audit reports of trusts, the same procedure of uploading data by the CA, validating the file, generating .XML file, uploading the said .XML file with the help of a DSC and then approving of the same by the assessee with the help of his DSC has to be followed. Upon successful “approval” of each report by the assessee, a separate e-acknowledgement gets generated.

Issues currently being faced:

There are a number of hardships that CAs are facing in the context of e-filing of the various audit reports. Some of the important ones (on which the BCAS has already made a representation) are:

1.    After the notification, the forms and the utility files were hosted on the e-filing website in the month of July, 2013 and have undergone several changes. After each change, an assessee, who has partly filled in a report but has not uploaded it, is required to re-feed the entire data, verify and then upload in the latest version, for the report to be furnished on the website. As a result, all the work-in-progress is wasted.

2.    It is not clear as to whether the financial statements to be attached have to be a scanned copy of the manually signed statements or even a PDF file digitally signed will be treated as sufficient compliance. Also, it is unclear as to where the notes to account, the auditor’s report, director’s report and the schedules are to be uploaded. In the portal, there are only the following fields for uploading the accounts:

a)    Balance Sheet

b)    Profit & Loss Account

3.    In respect of several clauses of the Form 3CD, it is normal practice for CAs to give appropriate comments. But in the e-filing utility, there is no space provided for such comments/notes/ remarks/disclaimers etc. In such a situation, would it be legally valid for the assessee/tax auditor to keep the appropriate comments/remarks/explanation in the hard copy and in the utility, mention either “Yes”/”No”/”0” etc. as the case may be? Here the real question is whether an assessee can have two sets of 3CD—one that is uploaded electronically and another one that is signed physically? My personal view is that this would not be correct. However, considering the problem at hand, one needs a written clarification from the Government. The other option that a tax auditor may consider is of putting all comments/remarks/ disclaimers etc. in the 3CA/3CB. However, there seems to be an overall limit on the number of characters that one can feed into the 3CA/3CB. So, in many cases, this option may not work. Also, whether doing such a thing results in the report being perceived to be a qualified report is also a question that needs pondering over.

4.    In the clause relating to depreciation on fixed assets, there is no column to give details of additional depreciation. Further, it appears that date-wise details of all the minor items of additions to fixed assets are also required to be given. This data could run into a few thousand entries for many businesses, and would take substantial time to re-enter.

5.    In the clause relating to quantitative details, often, such data is not available. In such cases, the tax auditor simply reports “Information Not Available”. Now, in the e-filing utility, it is not possible to give such a comment. What does one do in such a situation? In the same clause, in case of manufacturing assessees, if the yield is more than 100%, the utility does not accept the figure. On a lighter vein, does it indicate that the Government does not expect taxpayers to be extra-efficient?

6.    In the clause relating to ratios, in case of service industry or professionals, normally the tax auditor states that “since the activity of the assessee is neither trading nor manufacturing, such ratios are not applicable.” In the e-filing utility, there is no space for such a comment. In this situation, can a tax auditor simply skip this clause?

7.    If one sees the Income-tax Rules, in Form 3CD, Annexure II is still a part thereof despite the fact that from A.Y. 2010-11, the provisions of FBT are made ineffective. The e-filing utility does not provide this Annexure II. It is not clear as to what the exact position is. Can an e-filing utility override the statutory forms prescribed?

8.    In the clause relating to payments covered u/s. 40(A)(2)(b), it appears that every payment so made is required to be reported. Hitherto, the tax auditor used to report only the total amount for each type of transaction with a particular party. Now, it seems that the date-wise transaction details are to be given. This will cause a lot of hardship to the tax auditor while filling in the data.

9.    In the clause relating to loans taken or repaid, one has to give the PAN of the party reported. It appears that the utility matches this PAN with the Government’s PAN records and if the name and PAN do not match exactly then the file does not get validated. If this is true, then this is likely to cause tremendous slowdown in the preparation of the reports.

Thus, as can be seen from the above paragraphs, filing of returns and tax audit and other reports for A.Y. 2013-14 is going to be a very cumbersome and difficult process and unless the tax department comes up with solutions to the numerous problems very soon, we are very clearly headed for an extremely stressful month of September and then later, November. One hopes that the CBDT will read the representations sent by professional bodies like BCAS and act expeditiously.

Clarification on Multi Brand Retail Trading Dated June 6, 2013

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Paragraph 6.2.16.5 of ‘Circular 1 of 2013-Consolidated FDI Policy’

The
Department of Industrial Policy & Promotion (DIPP) has issued a
clarification in the form of FAQ on queries of prospective
investors/stakeholders on FDI policy for multi-brand retail trading.
These clarifications are in respect of Paragraph 6.2.16.5 of ‘Circular 1
of 2013-Consolidated FDI Policy’.

A. P. (DIR Series) Circular No. 108 dated June 11, 2013

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Press note 2 (2013 Series) – D/o IPP F. No. 5/3/2005-FC.I Dated June 03, 2013

A. P. (DIR Series) Circular No. 107 dated June 4, 2013

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Import of Gold by Nominated Banks / Agencies

Presently, banks can import gold on consignment basis only to meet the genuine needs of exporters of gold jewellery.

This circular provides that, with immediate effect: –

1. Along with banks, all nominated agencies/premier /star trading houses can import gold on consignment basis only to meet the genuine needs of exporters of gold jewellery.

2. Except in the case of import of gold to meet the needs of exporters of gold jewellery, all Letters of Credit (LC) opened by banks/nominated agencies for import of gold under all categories will only be on 100 % cash margin basis and all imports of gold have to be compulsorily on Documents against Payment (DP) basis.

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A. P. (DIR Series) Circular No. 106 dated May 23, 2013

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Liberalised Remittance Scheme for Resident Individuals – Reporting

Presently, banks are required to submit LRS data in hard copy as well as through the Online Returns Filing System (ORFS) of RBI.

This circular provides that henceforth, i.e. LRS data for 30th June, 2013 and subsequent months have to be uploaded in ORFS on or before the 5th of the following month. Where there is no data to be furnished, banks must to upload ‘nil’ figures in the ORFS system.

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A. P. (DIR Series) Circular No. 105 dated May 20, 2013

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Export of Goods and Software – Realisation and Repatriation of export proceeds – Liberalisation

Presently, exporters were permitted to realise and repatriate the full value of goods or software exported up to 31st March, 2013 within twelve months from the date of export.

This circular provides that exporters are required to realise and repatriate the full value of goods or software exported up to 30th September, 2013 within nine months from the date of export. However, there are no changes in the provisions with respect to period of realisation and repatriation of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to warehouses established outside India.

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Export of Goods and Services – Simplification and Revision of Softex Procedure at SEZs

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This circular provides that the revised Softex procedure which was applicable only to software exporters in Software Technology Parks of India (STPI) will, with immediate effect, be applicable to all software exporters whether in SPTI/SEZ/EPZ/100% EOU/DTA.

As per the revised procedure, a software exporter whose annual turnover is at least Rs. 1,000 crore or who files at least 600 SOFTEX forms annually on all India basis, will be eligible to submit statements in the revised excel format sheets as per formats Annexed to this circular.

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Investor Education and Protection Fund ( Uploading of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012

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The Ministry of Finance vide Investor Education and Protection Fund (Uploading of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012 dated 10-05-2012, requires every Company to file Form 5INV the details regarding unclaimed and unpaid dividends as per provisions of section 205 of the Companies Act, 1956. This information is required to be filed every year within a period of 90 days after holding the AGM or the date on which it should have been held as per the provisions of section 166 of the Act and every year thereafter till completion of the 7 years period.

E-mails have been sent to Companies not complying with the same alongwith the note that in case the amounts lying unpaid is NIL, the same is to be submitted at the following link http://www.iepf.gov. in/IEPFWebProject/jsps/iepf/SubmitDetails.jsp.

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Power of ROCs to obtain declaration/ affidavits from subscribers/first directors at the time of incorporation

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Vide Circular No. 11/2013 dated 29th May 2013, the Ministry of Corporate Affairs has given the power to the ROC to obtain declaration/affidavits from subscribers/ first Directors at the time of incorporation to ensure that Companies raise monies in accordance with provisions of Companies Act/Deposit Rules. The affidavits/declarations may also be asked when Company changes its objects Clause to the effect that Company/Directors shall not accept deposits unless the applicable provisions of Companies Act, 1956, RBI Act, 1934 and SEBI Act, 1992 and rules/ directions/regulations made thereunder are duly complied.
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Audit & Auditors under the Companies Bill, 2012

The Companies Bill 2012 (the Bill) was tabled in
the Parliament on 18th December, 2012. The Bill has been undergoing
reviews prior to that and may shortly become an Act. Clauses 139 to 148
under the Chapter X of the Bill deal with “Audit and Auditors”. It would
not be out of place to mention here that the new provisions regarding
Auditing and Auditors will materially change our professional
responsibilities. This article attempts to discuss the criticalities and
the key issues relating to the Chapter in the Bill that deals with our
profession.

Appointment of Auditors [Clause 139]

Key
Provisions The Bill provides that a company will appoint an individual
or a firm as an auditor at its first AGM. Such auditor shall hold the
office till the conclusion of its sixth AGM and thereafter till the
conclusion of every sixth Annual General Meeting. Though the appointment
is for five years, ratification of such appointment is necessary at
every AGM. [Clause 139(1)]

In case of listed companies and
certain other classes of companies to be prescribed compulsory rotation
of audit is provided for a) In case of Individual auditor, after one
term of five years; and b) In case of a firm, after two terms of five
years [Clause 139(2)].

The auditor, after completion of his
term/s, will not be eligible for reappointment for a period of five
years. Also, a firm, which has common partners with the outgoing audit
firm on the date of appointment, cannot be appointed as the auditor of
the company. [Clause 139(2)]

Every company will need to comply
with these requirements within three years from the date when these
provisions come into force. [Clause 139(2)]

Members of the
company may also decide that a) Audit Partner and audit team shall be
rotated after certain interval or b) Audit shall be carried out by joint
auditors. [Clause 139(3)]

RBI and IRDA have powers to regulate
the banking/ insurance companies respectively under the relevant Acts.
Being regulators, these institutions have issued guidelines for
appointment and rotation of auditors. The rotation and the joint audit
requirements enacted by IRDA and RBI, being stricter and by virtue of
special powers given to them in this regard, will prevail over the
provisions of the Bill. In such a case, the appointment criteria will
continue to be as per their respective norms.

An audit firm
(including an LLP) eligible to be appointed should have majority
partners practicing in India qualified for appointment. However, only a
qualified chartered accountant partner will be eligible to sign the
audit report. [Clause 141(2)] Eligibility of an LLP for being appointed
as an auditor is now a part of the Bill. [Clause 139(4)] Under the
Companies Act, 1956 (the Act) a notification was issued to the effect
that an LLP will not be considered as a body corporate for the purpose
of Section 226(3)(a) of the Act. However, doubts were expressed whether
that was sufficient for an LLP to be appointed as an auditor of a
company.

A company may remove the auditor before the expiry of
five year term by passing a special resolution and obtaining prior
approval of the Central Government. [Clause 140(1)]

An auditor
may resign. However, he has to file a statement with ROC and also with
the CAG in case of a company where the appointment of the auditor has
been made by CAG, giving facts and reasons for the resignation [Clause
140(2)].

Comments
Prior to the Bill, the Government
had published the Voluntary Corporate Governance Guidelines in December
2009. According to these Guidelines, rotation of audit firm after five
years was suggested and it provided for compulsory rotation of audit
partner after three years. This entire thought process was aimed towards
providing strict norms of corporate governance and enhancing investor
confidence. However, compulsory rotation of audit partner and
appointment of joint auditors have been left to the discretion of the
members of the company in the Bill. Also, the Bill mandates two terms of
5 years where auditor is a firm as against one term under the above
Guidelines. To that extent, there is dilution from the original
corporate governance norms.

A study of regulatory framework with
regard to appointment of auditors prevailing in various countries shows
that there exists a joint audit system in different forms in many
countries. Joint audit is common in countries like Denmark, Germany,
Switzerland and France. In France, joint audit became a legal
requirement in 1966. All publicly listed companies in France and Denmark
that prepare consolidated (group) financial statements are required to
be audited jointly by two independent auditors and a single audit report
is to be issued. Some mandatory provisions in the Bill in this regard
would have only given boost to the investor sentiments.

Further,
in case of listed companies which have long term audit relationships,
it would be a challenge to cope with a sudden rotation. The new auditor
will have no time for understanding the intricacies of business of the
company. This, in fact, enhances the need for joint audit system prior
to rotating out the existing audit firm and would have provided
continuity and at the same time helped more quality audit firms to
emerge in the country. Nevertheless, the corporate world and auditing
community can come together to take advantage of voluntary provision of
joint audit to overcome these challenges.

As regards the
appointment/reappointment clause in the Bill, existing companies are
required to comply with the regulation within three years. However, the
wording of the clause providing for transition is not clear. Presently,
an auditor is appointed annually. After the enactment of the Bill, the
appointment will take place for 5 years. Hence, the audit firm may be
considered as eligible for appointment for two terms after the
provisions become applicable, since the audit firm will not have
completed the `term’ under clause 139(2)(b) of the Bill though the firm
may have been the auditor of the company for 10 years or more. However,
if we were to go by the spirit and the intent of the Bill, it seems that
the fact that companies are given transition period for three years,
indicates that the firm will not be eligible to be reappointed after
three years post the enactment of the Bill if it has already been the
auditor for 10 years or more.

A question remains whether an
audit firm, which has been the auditor of a company for more than 5
years when the provisions come into force, can be appointed as the
auditor of the company for 5 years at all after? Such appointment will
result in the firm being auditor of the company for more than 10 years
after the transition period. It may be noted that there is no provision
in the Bill to appoint auditor for a period shorter than 5 years. Can
the audit firm, in such a case, issue eligibility certificate under the
Bill?

Considering this, one is not clear how these provisions are going to be implemented in the initial years.

Eligibility, Qualification & Disqualifications of the Auditors [Clause 141]

Key Provisions

A person will not be eligible for appointment as auditor if he, his
relative, or his partner holds any security of or interest in or is
indebted to the company, its subsidiary, holding or associate company or
subsidiary of such holding company.

A person or an audit firm
will be disqualified for appointment if he/it has direct or indirect
business relationships with all types of entities mentioned above.

A
person whose relative is a director or key managerial person by
whatever designation in the company is not eligible for appointment.

A person who is auditor in more than 20 companies will also not be eligible for being appointed as the auditor.

A
person who is convicted by a court of an offence involving fraud is not
eligible for the appointment as auditor for 10 years from the date of
such conviction.

Comments

It is significant to note
that the term used in this clause is “Person”. This term is not defined
in the Bill. In only case of “Business relationship” the term “firm” is
also used. However, in clause 139 the Bill uses the terms “Individual
auditor” and “firm”. Going by the spirit, in my opinion, term “person”
in the context means each individual partner of the firm.

Considering
this, going by the wording of the provisions, it is not clear whether
to attract disqualification to the firm should itself hold any security
or interest etc. in the company? Also, if a partner or his relative is
holding security, whether the firm will be disqualified? Clarification
may be needed on this. Also, where one partner is individually holding
appointment as auditor in more than 20 companies, whether his firm will
be disqualified? Going by the spirit of the clause, this does not seem
to be the case, though the drafting is susceptible to such
interpretation.

Keeping track of whether any relative is holding
any security above rupees one thousand (or the prescribed amount) or is
indebted to the auditee company is going to be extremely difficult. In
case of strained relationship with any of the relatives, a member will
find himself on helpless ground if any of the relatives decides to make
him ineligible for appointment or complains after the signing of audit
report that he was ineligible.

Surprisingly, a person or a
partner whose relative has a business relationship with the auditee
company or its subsidiary, associate etc. is not disqualified. Also, the
clause does not refer to `partner of the firm’ but only to the firm.
Does it mean a partner of a firm can have business relationship with the
company in his individual capacity without the firm attracting
disqualification?

The existing limit of undertaking audit of 20
companies per partner though continues under the Bill, this limit will
now apply while appointing auditors of private companies as well. Under
the Act, this limit is not applicable to private companies. The Bill has
also done away with the sub-limit 10 companies where the paid up share
capital of the company is Rs. 25 lakh or more. It is not clear from the
text of the Bill whether signing of consolidated financial statement in
addition to the stand alone financial statements of the company would be
construed as a separate audit assignment to be covered under the limit
of 20 companies.

The intent of the legislation seems good.
However the drafting of the Clause 141 is highly vulnerable to varied
interpretation (or misuse) . Overall, this clause will require great
amount of deliberations especially from the point of view of severity of
the punishments for violating any of the provisions.

Powers, Duties, Auditing Standards and Reporting Formalities [Clause 143,145,146]

Key Provisions

The
Bill provides that the auditor of a holding company will have right of
access to the records of all its subsidiaries so far as it relates to
consolidation of financial statements.

The Bill also requires the
auditor to report whether he has any reasons to believe that an offence
involving fraud is being or has been committed by any of its officers
or employees. The auditor will have the responsibility to report the
matter to Central Government within the time and manner as may be
prescribed.

At present, the auditor is required to report any
observation with any adverse effect on the functioning of the company in
bold/italics in the audit report. The Bill mandates that such
observation/comments should read at the AGM and can be inspected by any
member.

Currently auditor is required to comment on the internal
control matters and whether such system is commensurate with the size of
the company and nature of its business in respect of purchase of
inventory, fixed assets and for the sale of goods and services. The Bill
requires auditor to comment whether adequate internal financial control
is in place and whether it is operating effectively.

The Bill specifically provides that it is the duty of the auditor to comply with the auditing Standards. [Clause 143(9)].

The
Bill provides for mandatory attendance of auditor’s authorised
representative who is qualified to be appointed as an auditor at the AGM
of the company.

Comments

The right of access to
the auditor to the records of all subsidiaries of the auditee company
for the purposes of consolidation may create certain issues among the
auditors in case the auditor of the subsidiary is different from the
auditor of the holding company.

Requirement of adherence to
auditing standards under the Bill (which was hitherto requirement of
ICAI alone) coupled with the penalties attached for non compliance has
substantially increased the auditors’ responsibility. The cost of audit
will increase and small audits may become unaffordable to both the
company and the auditor.

The scope of audit is materially
broadened with the reporting responsibility on the existence of a fraud.
As per SA240 that deals with the “Auditor’s responsibility relating to
frauds in an audit of financial statements”, the primary responsibility
of prevention and detection of fraud rests with management together with
those charged with governance of the entity. Fraud detections require
an attitude which is inherently different from the at-titude required
for the purpose of an audit. Further, in India in case of audit of
banks, the regulator has prescribed the fraud reporting responsibilities
on the statutory auditor. However, the regulator has given clear
directions with regard to the materiality and corresponding reporting
responsibility to various authorities. The Bill does not state any
materiality limits for the fraud reporting. All these indicate that
auditor has to inform all frauds detected/suspected during course of
audit to the Central Government.

Reporting on effectiveness of
internal control is highly subjective. Any comment thereon in the report
may impact the entity significantly. This will increase the
professional responsibility as well as the liability of the audit firm
very significantly.

Further in respect of reporting on fraud, in
the absence specific guidelines, there is a possibility of difference of
opinion whether any offence involving fraud has taken place. For
example, any strategic investment made by the company that is managed by
relatives of the top management or the Board, or divestment of
investment below market value but much above the cost of acquisition to a
company that is substantially influenced by the relatives of top
management or the board members may be construed to be a fraud. Such
interpretational issues may have to be dealt with very carefully
considering the penalties involved in non compliance of reporting
requirement.

Prohibition of undertaking certain services [Clause 144]

Key Provisions

The
Bill provides stringent norms for independence of the auditors. Under
the Bill, an audit firm will not be able to provide certain services
directly or indirectly to a company where it is appointed as the auditor
or to its holding company or subsidiary

companies. (Clause 144) The prohibited services are as under: –

1.    Accounting and book keeping services

2.    Internal Audit

3.    Management services

4.    Design and implementation of any financial sys-tems

5.    Actuarial services

6.    Rendering of outsourced financial services

7.    Investment banking or advisory services

It
is important to note that the restrictions of undertaking the above
mentioned prohibited services apply not only to the firm undertaking the
audit but to all other connected entities of the firm namely:

i)  All its partners;

i)    Its parent, subsidiary or associate entity; and

ii)   
Any other entity in which the firm or any of its partners has (or can
exercise) significant influence or control or whose name, trade-mark,
brand is used by the firm of any of its partners.

The auditor
will have to comply with the above restrictions before the end of the
first financial year after the enactment of the Bill.

Comments

The
Bill uses term “Management Services” for one of the prohibited
services. Under ICAI standard, the term “Management Consultancy
Services” is used for indicating prohibited service. The term
“Management Consultancy Services” used by ICAI at present specifically
excludes Tax services. In my opinion, though there is minor difference
in the terminology used in the Bill and by ICAI, an auditor will be able
to render services related to Direct Taxes and Indirect Taxes.

Punishment for contraventions [Clause 147]


Key Provisions
If
there are any contraventions of any of the provisions relating to audit
and auditor by the company then the company and every officer in
default will be punishable with a minimum fine of Rs. 10,000 and maximum
of Rs. 5 lakh and/or imprisonment extending up to 1 year. [Clause
147(1)]

In a case the auditor contravenes provisions of clauses
139 or 143 to 145 of the Bill, the auditor may become liable to a
minimum fine of Rs. 25,000, which may extend to Rs. 5 lakh. However, if
it is proved that the contraventions have taken place knowingly or
wilfully with the intent to deceive the company, its shareholders, its
creditors, or tax authorities, the auditor will be punishable with
imprisonment for a term up to one year and minimum fine of Rs. 1 lakh
which may go up to Rs. 25 lakh. [Clause 147(2)]

In the event the
auditor is convicted of intentionally deceiving the company,
shareholder, creditors or tax authorities he will be liable to refund
the remuneration received by him to the company and incur liability to
pay damages to all such persons/ authorities for loss arising out of
incorrect or misleading statements made in his audit report. [Clause
147(3)]

Further, if proved that partner or partners of the audit
firm have acted in a fraudulent manner or abetted or colluded in fraud
then the liability for such act will be that of the firm and the
concerned partners jointly and severally. [Clause 147(s) and Explanation
to Clause 140(5)]

Members or depositors or any class of them are
entitled to claim damages, compensation or demand any suitable action
from/or against audit firm for any improper or misleading statement made
in the audit report. [Clause 245(1)(g)(ii)]

Comments

The
Bill rests a heavy responsibility on the audit profession and the
provisions are open to abuse. Eventually, even if the auditor is able to
prove that his actions were not fraudulent or that he had sufficient
evidence to support his comment in the report he has submitted, the
audit firm carries the risk of damage to reputation on account of
accusations. It is necessary to provide sufficient defense measure for
the auditing community at large.

National Financial Reporting Authority [Clause 132]

The
discussion in regard to audit and auditors cannot be complete without
mentioning the immergence of the new authority National Financial
Reporting Authority (NFRA). The existing advisory committee under the
Act known as NACAS will be replaced by NFRA with much wider powers. It
will a) Make recommendation on formulation and laying down accounting
and auditing standards; b) Monitor and enforce the compliance of
accounting and auditing standards; c) Oversee the quality of service of
the professions associated with ensuring compliances with standards and
suggest measures required for improvement in the quality of service; and
d) Perform such other functions as may be prescribed.

NFRA has
been also entrusted with wide powers such as to investigate suo moto or
on reference made by the Central Government into matters of professional
or other misconduct committed by a chartered accountant or a firm of
chartered accountants. Once NFRA commences investigation, ICAI or any
other body cannot initiate or continue proceedings in such matters. NFRA
will have the same powers as vested in a civil court under Code of
Civil Procedures.

For proven misconduct, NFRA will have power to
levy penalty amounting to not less than Rs. 1 lakh but which may extend
to five times the fees received in a case of an individual and not less
than Rs. 10 lakh but which may extend to ten times in case of a firm.

NFRA
will also have the authority to debar a firm or a member from engaging
in practice as a member of ICAI for a minimum period of six months or
such higher period not exceeding 10 years as may be decided by NFRA.

Comments

NFRA
is authorised to act as a regulator for members registered under the CA
Act. This means it may also take action against the company officials
if they are chartered accountants. With constitution of NFRA, powers of
ICAI in regulating members’ conduct will be diminished.

Excessive Powers to Make Rules

In
spite of having in the Bill stringent regulations relating to the audit
and auditors, the Bill has given powers to the Central Government to
prescribe rules at as many as 19 places in Chapter X alone (in the
entire Bill at 346 places). A summary of provisions where powers to
prescribe rules have been given is as under:

Procedure for selection of auditors [Clause 139(1)]

Eligibility conditions for appointment as auditor [Clause 139(1)]

Classes of companies that require rotation of auditor [Clause 139(2)]

Approval from Central Government for removal of auditor [Clause 140(1)]

Statement by the auditor to be filed with ROC in case of resignation [Clause 140(2)]

The value of security that my be held in auditee company [Clause 141(3)(d)(i)]

Amount up to which auditor may be indebted to auditee company [Clause 141(3)(d)(ii)]

Amount of guarantee that may be given to the company in respect of any third person [Clause 141(3)(d)(iii)]

Nature of business relationship with the company [Clause 141(3)(e)]

Information to be included in the “financial Statements” [Clause 143(2)]

Matters that an audit report should include [Clause 143(3)(j)]

Duties and powers of auditors in respect of branches outside India [Clause 143(8)]

Time limit and manner of reporting of fraud to the Central Government [Clause 143(12)]

Prohibited services by an auditor [Clause 145]

Class of companies that need to maintain Cost re-cords [Clause 148(1)]

Items of cost that should be included in books of account [Clause 148(1)]

Net worth or turnover of the companies that require Cost audit [Clause 148(2)]

Manner of calculating remuneration of a Cost Audi-tor [Clause 148(3)]

Conclusion

It
is necessary for all of us to take serious cognizance of all these
provisions in the Bill. We need to understand the entire direction in
which the legislation is moving and be ready to build necessary
professional expertise as well as safeguards in the interest of the
profession.

Right of Privacy – Instruction issued by Election Commission empowering its officer to randomly and indiscriminately search any vehicle on road – Ultra Vires – Constitution of India Art. 21.

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A Writ Petition (PIL) was filed at the instance of a registered N.G.O. substantially challenging the provisions of Chapters 4 and 5 of the Instructions on Election Expenditure Monitoring (2012) issued by the Election Commission of India under the purported exercise of power under Article 324 of the Constitution of India. According to the Instructions, various teams, such as, flying squad, static surveillance team, expenditure monitoring cell, etc. have been constituted. The teams which have been constituted have been empowered to intercept and search indiscriminately any vehicle or any person/individual at any time. On search, if any cash of more than Rs.2.5 lakh or any other articles, such as, gold, diamonds, etc. are found from the possession of such a person, then the members of the said team have been empowered to interrogate the particular person, and if unexplained cash, without proper documents is found in the possession of any person and is suspected to be used for bribing the voters, it would be seized and action would be taken under the provisions of the law. The Instructions further provide that if cash found is more than Rs.2.5 lakh and no criminality is suspected, i.e., without any election campaign material and no party functionary or worker of the contesting candidates/parties are present in the vehicle, to prove the nexus, then the members of the team would intimate about the recovery of such cash to the Assistant Director of Income Tax in charge of the district. The Assistant Director would depute the Inspector or he himself would reach at the spot for taking appropriate action according to the provisions of the Income Tax Laws.

The Honourable Court observed that powers vested in the Election Commission under Art. 324 (1) of the Constitution of India are wide in nature. The exercise of powers is, however, not without a check. The power has to be exercised with legal circumspection. It is rather more to supplement to the grey areas where no law or legislation is existing and it is necessary to issue directions or pass orders to ensure free and fair poll. The power is complementary and supplemental. It cannot be exercised contrary to the provisions of law, nor should it violate the existing laws.

Action of the authorities in intercepting vehicles indiscriminately on the road at random and then carrying out the search in the hope or nurturing a doubt that the vehicle may contain a cash of more than Rs.2.5 lakh or other articles, without establishment of prima facie grounds or without there being any basis or subjective satisfaction on the part of the authorities would definitely be a violation of the right to privacy of such citizens. If there is a concrete information with the authorities that a vehicle is to pass through a particular route carrying a large amount of currency or other articles like liquor, arms, etc. likely to be used in the election process, then perhaps the authorities may be justified in intercepting the same and effecting the seizure of the same. In the present case, a very unique mode is being adopted. Even if the authorities are satisfied that the cash recovered from a particular individual is not to be used for any election purpose, but still the authorities would inform the Income-tax officials regarding the same for taking appropriate action. This amounts to direct intrusion on the powers of the Income-tax authorities as laid down under Income-tax Act, 1961.

The Honourable Court held that the instruction issued by the Election Commission insofar as it empowers its officers to randomly and indiscriminately search any vehicle on the road and seize cash of Rs.2.5 lakh, if recovered from the vehicle or an individual or a person, as ultra vires being violative of Article 21 of the Constitution and also beyond the powers conferred on the Election Commission. The Court directed the Election Commission that the instructions shall not be implemented and there shall not be any indiscriminate or random search or seizure of any vehicle, unless there is any reliable or credible information with the Election Commission reduced into writing.

Bhagyoday Janparishad (Reg. NGO) through President vs. State of Gujarat thro. CS & Ors. AIR 2013 Gujarat 14

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Recovery of tax – Company in liquidation – First charge – Conflict between State legislation and Central legislation – Central legislation must prevail : Companies Act Section 529A & 530.

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This appeal was directed against the order of the Official Liquidator wherein the present appellant (Commercial Tax, Government of M.P.) had been ranked as a preferential creditor. The appellant contended that in terms of the provisions of section 33C of the Madhya Pradesh General Sales Tax Act, 1958 and section 53 of the M.P. Commercial Tax Act, 1994, any amount of tax/penalty/interest payable by a dealer or other Person under this Act shall be first charge on the property of the dealer or Such person and as such he be treated pari passu with the secured creditors. The claim of the appellant is in the sum of Rs. 1,40,60,422 ; they are sales tax, Central tax and entry tax dues payable by the company (in liquidation) for its Morena unit and Gwalior unit. The appellant is aggrieved by the finding returned by the Official Liquidator that he be ranked as a preferential creditor and not a secured creditor.

The Court observed that the statutory mandate contained in this provision is clear. It starts with a non obstante clause. It clearly states that notwithstanding any thing contained in any other provision of this Act or any other law for the time being in force, the dues of the workmen and debts due to the secured creditors to the extent that such debts rank under clause (c)of the proviso to s/s. (1) of section 529 shall be paid pari passu and in priority to all other debts.

The claims made by the appellant relate to his tax dues which as per his submission would categorise u/s. 53 of the M.P. Commercial Tax Act, 1994. Section 53 of the M.P. Commercial Tax Act,1994 clearly stipulates that this provision is subject to the provision of section 530 of the Companies Act,1956. Section 530 deals with the dues of the company to a Central or a State or a local authority of Revenue, taxes, cesses, etc.

Provisions of section 529A of the Companies Act (a Central legislation) have to override the provisions of section 53of the M.P. Commercial Tax Act of 1994 (a State legislation). Even otherwise section 53 of the Act of 1994 (under which the appellant is claiming his right) clearly specifies that the tax liability will be subject to the provisions of section 530 of the Companies Act; section 530 of the Companies Act has to be read subject to the provisions of section 529A of the said Act. There appears to be no conflict between the State Act and the Central Act. That apart, even if there is a conflict between a State legislation and a Central legislation, the Central legislation must prevail.

Commissioner, Commercial Tax, Government of M.P. vs. Official Liquidator (2012) 56 VST 335 (Del.) (High Court)

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Nomination – Nominee Director – Withdrawal to take effect immediately – Resignation to take effect moment letter is sent: Companies Act, 1956:

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The first accused “M/s. Subhiksha Trading Services Ltd” is a company incorporated under the Companies Act of 1956. The complainant is a banking company. A complaint was filed against a company and its directors for an offence punishable under sec. 138 of the Negotiable Instruments Act, 1881. The petitioner, who was one of the accused, filed a petition u/s. 482 of the Code of Criminal Procedure, 1973, contending that (i) she was a nominee director who had submitted her resignation prior to issuance of the cheque which had been dishonoured; (ii) that the shareholder company which had nominated her to the board of directors of the accused – company had sent the letter of withdrawal to the accused company as well as to the Registrar of Companies, which was acknowledged; (iii) that she had also intimated her resignation to the board of directors of the accused company; and (iv) that there was absence of specific averments as to how she was in charge of day to day affairs of the company;

The Honourable Court observed that under the articles of association, the shareholder company had the right to withdraw its nominee. The moment the nomination was withdrawn, the withdrawal became effective and the nominee director ceased to be a director of the company. From the letter of withdrawal sent to the first accused company and the letter of information sent to the Registrar of Companies, it had been prima facie proved by means of unimpeachable documents that the petitioner was not a nominee director of the first accused company on or after 8th January, 2009. Therefore, she was not liable for punishment u/s. 138 of the 1881 Act for the offence said to have been committed by the company subsequent to the date of withdrawal. The Court further observed that resignation of a director will take effect from the moment the resignation letter is sent and it is later on acknowledged by the company.

The question of resigning from the office of director will arise, only if, the person happens to be a director and not a nominee director. If he is a nominee director, he is primarily responsible for the company which nominated him. He may send his resignation to the company which nominated him and even without any such resignation letter, the company which nominated him will be at liberty to withdraw his nomination. In either event, if a resignation letter is submitted by a nominee director to the company which nominated him, thereafter it is for that company to act upon it and to withdraw the nomination of the nomination of the nominee director. As there is no provision for resignation by the director, there is no provision for withdrawal also in the Companies Act, 1956. But such withdrawal is governed by the memorandum and articles of association.

Renuka Ramanath vs. Yes Bank Ltd. (2012) 174 Comp. Cas 465 (Mad.)

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License or lease – Determination – Distinction : Transfer of Properly Act Sec. 105

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The Petitioner, a Publisher-cum-Chief Editor of a local news paper published from Tirupathi, challenged the legality and validity of the orders passed by the second respondent on 16.03.2012 declining to extend the period of license and requesting the petitioner to vacate the premises under his occupation within three days.

In accordance with the terms of the license, the petitioner was granted permission to carry on the business. Condition No. 5 thereof required the licensee to pay the license fee by the 5th of every succeeding month and non-payment of the license fee entailed cancellation of the license apart from the levy of penalty of 24% p.a. on the arrears of the license fee till the date of payment in full. Condition No. 10 thereof set out that the licensee shall not act to the detriment of the interests of the Devasthanams in any manner. Condition No. 13 reserved the right of access and entry into the licensed premises and to carry out inspection by the Officers and Staff of the T.T.D. Condition No. 15 set out that the license was liable to be cancelled for violation of any of these terms and conditions of the license. The writ petitioner quietly entered upon the demised premises on 04-08-2008 and he was entitled to remain in possession thereof for a period of three years, which was to expire on 03-08-2011, subject of course to his payment of the monthly license fee of Rs. 4,535/-.

The Court observed that section 52 of the Indian Easements Act, defined “license” as, where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property. It is manifestly clear that every license originates in a grant made by one person in favour of another or a definite number of other persons. By implication a license cannot be granted to a fluctuating body of persons who will not be answering the expression of definite number of other persons. Most importantly, what has been granted was only to do something which would in the absence of such grant be unlawful to be done by the other persons. Equally important to notice is the fact that the person to whom the grant is made, does not acquire any right whatsoever, including easementary right or any interest in the property. It can, therefore, be deduced that a grant, which is called license merely authorised the person or persons to whom the grant is made, a right of possession for enjoyment and hence such a right is not juridical possession but amounts to mere occupation.

Possession being a legal concept, one of the most essential ingredients of it is the specification of the actual period of time granted for such occupation. Therefore, a bare license, without anything more is always revocable at the will of the licensor, since the grant itself is limited by a period of time, and the payment of license fee does not by itself create an interest in the licensed property. Consequently, mere acceptance of the license fee even for the periods subsequent to the revocation of the license would not amount to acquisance of the possession of the licensee. It merely amounts to fictional or unreal extension of the period of license without in any manner affecting the rights of the owner from securing eviction of the person or persons to whom the grant is initially made. In law, grantor or the licensor is always liable to be treated to be in possession of the land in question all through the subsistence of the license and even beyond. Hence, it would be open to the licensor to re-enter the premises and reinstate himself once the period of license granted by him expires. This power to re-enter or to reinstate himself is conditioned by not using more force than is actually necessary. As per Section 54 of the Easements Act, the grant of a license may be express or implied from the conduct of the grantor, and Section 60 of the said Act sets out the circumstances when a license can be revoked and Section 61 sets out that such a revocation can be express or even implied. Section 62 listed out nine circumstances when a license is deemed to be revoked.

Of them, Clause (c) clearly discloses that a license is deemed to be revoked when it has been granted for a limited period and the said period expired. Thus, it becomes evident that a license granted for a limited period is deemed to have been revoked upon expiry of the period of grant. Section 63 recognised that, where a license is revoked, the licensee is entitled to a reasonable time to leave the property affected thereby and to remove any goods which he has been allowed to place on such property. What would be the reasonable time required for achieving these objectives is therefore dependent upon the facts and circumstances prevailing in each case. No hard and fast rule can be prescribed in this regard. Section 64 recognised the right of the licensee, when he was evicted without any fault of his by the grantor before he has fully enjoyed, under the license, the right which he was granted, to recover compensation from the grantor, for the breach of the grant.

The term ‘Lease’ has been defined in Section 105 of the Transfer of Property Act, 1882. The expression ‘lease’ normally connotes the preservation of the demised estate put in occupation and enjoyment thereof for a specified period or in perpetuity for consideration; the corpus user thereof does not disappear and at the expiry of the term or on successful termination the same is handed over to the lessor subject to the terms of the contract, either express or implied (see State of Karnataka and others vs. Subhash Rukmayya Guttedar and others (1993) Supp 3 SCC 290).

In juxtaposition, a license confers a right to do or continue to do something in or upon immovable property of grantor which but for the grant of the right, may be unavailable. It creates no estate or interest in the immovable property of the grantor. Thus, the distinction between the ‘lease’ and license’ lies in the interest created in the property demised. It is therefore essential to gather the intention of the parties to an instrument from the terms contained therein and also by scrutinising the same in the light of the surrounding circumstances. The description ascribed by the parties to the terms may, evidence the intention but may not be very decisive. The crucial test, therefore, is whether the instrument is intended to create or not to create an interest in the property which is the subject matter of agreement between the parties. If it is in fact intended to create an interest in the property, it becomes a lease and if it does not, it is a mere license. In determining whether the agreement creates a lease or a license, the test of exclusive possession, though not decisive, is of great significance. Thus, there is no readily available litmus test to distinguish a ‘lease’ as defined in Section 105 of the Transfer of Property Act, from a ‘license’ as defined in Section 52 of the Easements Act, 1882, but the nature and character of the transaction, the terms settled by the parties and the intent of the parties hold the key. Therefore, if an interest in the immovable property entitling the transferee to enjoyment is created it becomes a lease, and if mere permission to use without right to exclusive possession is alone granted, it becomes a license.

The conditions of the grant leave no doubt that the parties have only intended the transaction to be a mere license but not a lease. Particularly, condition No. 13, which reserved the right of entry into the licensed premises and to carry out inspection by the officers and staff of the T.T.D any time during the subsistence of the license makes the position clear that the possession of the licensed premises remained with the second respondent – Devasthanam, all through, and the writ petitioner has only been granted a license to use the premises. Further, the monthly fee, which formed the consideration for the grant, was called as license fee. Right to recall the grant for violation of the terms and conditions, prematurely, is another pointer.

In view of the above it was held that Suit premises was not leased out but granted on license only.

Clarification issued by Board – Binding on officers: Central Excise Tariff Act, 1985

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The petitioners were engaged in the business of manufacturing of plain particle boards and prelaminated particle boards popularly known as ‘Bagasse boards’, which are goods falling under Chapter 44 of the First Schedule to the Central Excise Tariff Act, 1985.

According to the petitioners, bagasse is remains of sugarcane after the juice has been extracted by pressure between rolls of a mill. The Central Government issued a notification u/s. 5A of the Central Excise Act dated 1st March 2006, thereby granting exemption as well as concessional rate of duties for various goods. At Serial No. 82 of the Table of this Notification, “Bagasse boards” are classified at clause (vi) and rate of duty prescribed for these goods is nil.

The petitioner company came to know from the Association that the goods in question were chargeable to nil rate of duty and that other members of the Association at Kolhapur, State of Maharashtra, were allowed to clear these goods at nil rate of duty. Petitioner wrote a letter dated 1st June 2006 requesting the Assistant Commissioner for clarification whether Bagasse boards manufactured by the petitioner were chargeable to nil rate of duty or not. The petitioner did not receive any response from the excise authorities. As there was no reply at the end of the Assistant Commissioner or from any other excise authorities, the petitioner started clearing their goods, namely, bagasse boards at nil rate of duty.

Ultimately, the Additional Commissioner of Central Excise issued a show-cause notice dated 20th June 2007, proposing to recover a sum of Rs. 28,75,624/- as excise duty on the quantities of Bagasse boards cleared by the petitioner company on the ground that the goods were covered under another Notification dated 1st March 2006.

In the course of hearing of Writ Petition, it was pointed out three clarification were issued by the Government of India and the Board, two letters of the C.B.E. & C. addressed to the Chief Commissioner, Hyderabad and the Chief Commissioner, Pune are specifically relied upon by the Commissioner, Central Excise, Pune while allowing benefit to one M/s. Eco Board Industries Limited.

It had been clarified by the Government of India through the Board that benefit of Notification was available to pre-laminated bagasse board, such clarification is binding to all Central Excise Officers and no officer of the Central Excise could take a contrary view, more so, when the Central Excise Officers of Patna, Lucknow, Sholapur, Kolhapur, Pune, Hyderabad, etc. have followed the clarifications and allowed the benefit of exemption for similar products, namely, pre-laminated bagasse board, to manufacturers within their jurisdiction.

The Court observed that firstly, any clarification issued by the Board is binding on the Central Excise Officers who are duty-bound to observe and follow such circulars. Whether Section 37B is referred to in such circular or not is not relevant. The Court quoted the observations made by the Supreme Court in the case of Ranadey Micronutrients vs. Collector of Central Excise 1996 (87) ELT 19 (SC), wherein a circular which was in favour of the assessee issued by the Board was sought to be repudiated by the Central Excise Department on the ground that it was only a letter and not an order issued u/s. 37B. The Apex Court observed in paragraph 13 of the judgment as under:

“There can be no doubt whatsoever, in the circumstances, that the earlier and later circulars were issued by the Board under the provisions of Section 37B, and the fact that they do not so recite does not mean that they do not bind Central Excise Officers or become advisory in character. There can be no doubt whatsoever that after 21st November, 1994, Excise duty could be levied upon micronutrients only under the provisions of Heading 31.05 as “other fertilisers”. If the later circular is contrary to the terms of the statute, it must be withdrawn. While the later circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid.”

Therefore, the submission that the letters issued by the Board in the present case were communications answering queries raised by the Commissioners of particular areas and hence, such letters were not binding because they were not issued u/s. 37B is not the correct proposition as canvassed by the Counsel appearing for the Revenue.

When other Central Excise authorities of equal and higher rank have followed and acted as per the clarifications, the Commissioner, Surat, could not have taken a contrary view on the assumption that the clarifications were only letters and not orders u/s. 37B.

If Excise authority of a particular Commissionerate or State refuses to allow benefit of exemption to manufacturers located in that Commissionerate or State but other manufacturers located elsewhere are allowed such exemption, then the same would be in violation of Article 14 of the Constitution of India and also of Article 19(1)(g)of the Constitution of India.

Darshan BoardLam. Ltd vs. UOI 2013 (287) E.L.T. 401 (Guj.)

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A.P. (DIR Series) Circular No. 58, dated 15-12-2011 — Risk management and interbank dealings.

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This Circular has, with immediate effect, made the following changes:

(1) Under contracted exposures — Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

(2) Under probable exposure based performance:

(a) For importers availing of the above past performance facility, the facility stands reduced to 25% of the limit as computed above, i.e., 25% of the average of the previous three financial years’ (April to March) actual import/ export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised/reduced limit, no further bookings may be allowed under this facility.

(b) All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, must not be passed on to the customer.

(3) All cash/tom/spot transactions can be undertaken for actual remittances/delivery only and cannot be cancelled/cash-settled.

(4) Hedging by FII — Forward contracts booked by the FII, once cancelled, cannot be rebooked. The forward contracts may, however, be rolled over on or before maturity.

(5) Treasury functions of authorised dealers

(a) Net Overnight Open Position Limit (NOOPL) to be reduced across the board.

(b) Intra-day open position/daylight limit must not exceed the existing NOOPL approved by RBI.

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A.P. (DIR Series) Circular No. 57, dated 13-12-2011 — Foreign Exchange Management Act, 1999 (FEMA) — Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) — Compounding of Contraventions under FEMA, 1999.

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Presently, all applications for compounding are received and processed by the Compounding Authority at RBI Central Office at Mumbai.

This Circular has decentralised compounding contraventions in respect of the following at its Regional Office:

(i) Delay in reporting of inward remittance,

(ii) Delay in filing of form FC-GPR after allotment of shares, and

(iii) Delay in issue of shares beyond 180 days.

All applications must be made to the Regional Offices at:

(i) Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Jaipur, Jammu, Kanpur, Kochi, Patna and Panaji for amount of contravention below Rupees one crore (Rs.10,000,000).

(ii) Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi for amount of contravention without any limit.

All applications other than those dealt with by the Regional Offices will continue to be dealt with by the Compounding Authority at RBI Central Office at Mumbai.

Also, annexed to this Circular are formats required to be submitted along with the compounding application in respect of the following contraventions :

(1) Details to be furnished along with application for compounding of contravention relating to Foreign Direct Investment in India.

(2) Details to be furnished along with application for compounding of contravention relating to External Commercial Borrowing.

(3) Details to be furnished along with application for compounding of contravention relating to overseas investment.

(4) Details to be furnished along with application for compounding of contravention relating to branch/liaison office in India.

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A.P. (DIR Series) Circular No. 56, dated 9-12-2011 — Foreign investment in pharmaceuticals sector — Amendment to the Foreign Direct Investment Scheme.

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This Circular, based on Press Note 3 (2011 Series), dated November 8, 2011, has amended FDI policy for pharmaceuticals sector as under:

(i) FDI, up to 100%, under the Automatic Route, would continue to be permitted for greenfield investments in the pharmaceuticals sector.

(ii) FDI, up to 100%, would be permitted for brownfield investment (i.e., investments in existing companies), in the pharmaceutical sector, under the Approval Route.

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A.P. (DIR Series) Circular No. 55, dated 9-12-2011 — Foreign Direct Investment (FDI) in India — Issue of equity shares under the FDI scheme allowed under the Government route.

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Presently, companies are permitted to issue equity shares/preference shares under the Approval Route by conversion of import of capital goods/ machineries/ equipment (including second-hand machineries) and pre-operative/pre-incorporation expenses (including payments of rent, etc.), subject to terms and conditions.

This Circular has modified two of the conditions as follows:

 

 

 

A.P.
(DIR Series)

Earlier
condition

Revised
condition

Circular
No. 74,

 

 

 

 

 

dated
30-6-2011

 

 

 

 

 

 

 

 

Para 3(I)(d)

All
such conversions of import payables for

Applications
complete in all respects, for

 

capital
goods into FDI should be completed

conversion
of import payables for capital

 

within
180 days from the date of shipment of

goods
into FDI being made within 180 days

 

goods.

from
the date of shipment of goods.

 

 

 

Para 3(II)(d)

The
capitalisation should be completed within

The
applications complete in all respects,

 

the
stipulated period of 180 days permitted for

for
capitalisation being made within the

 

retention
of advance against equity under the

period
of 180 days from the date of in-

 

extant
FDI policy.

corporation
of the company.

 

 

 

 

 

 

CAS-14 — Cost Accounting Standard on pollution control cost.

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The Institute of Cost Accountants of India has issued the Cost Accounting Standard CAS 14 on ‘Pollution Control Cost’ and it deals with principles and methods of determining the pollution control costs. This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of cost of product or service, and the presentation and disclosure in cost statements. It is issued with the objective of bringing uniformity and consistency in the principles and methods of determining the pollution control costs with reasonable accuracy. It is to be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of pollution control costs including those requiring attestation.

Full version of the same can be accessed at
http://casbicwai.org/CASB/docs/CASB/CAS_14_Pollution_ Control_Final.pdf

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A. P. (DIR Series) Circular No. 118 dated June 26, 2013

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Export of Goods and Services – Project Exports

Presently, exporter undertaking Project Exports and Service contracts abroad are required to submit form DPX1, PEX-1 and TCS-1 to the Approving Authority (AA) i.e. Bank/Exim Bank/Working Group, within 15 days of entering into contract for grant of post-award approval.

This circular has extended the said period to 30 days from the present 15 days, Hence, exporter undertaking Project Exports and Service contracts abroad can now to submit form DPX1, PEX-1 and TCS-1 to the Approving Authority (AA) i.e. Bank/Exim Bank / Working Group, within 30 days of entering into contract for grant of post-award approval.

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A. P. (DIR Series) Circular No. 117 dated June 25, 2013

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External Commercial Borrowings (ECB) in Renminbi (RMB)

This circular states that the facility of availing of ECB in Renminbi (RMB) has been discontinued with immediate effect.
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A. P. (DIR Series) Circular No. 116 dated June 25, 2013

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External Commercial Borrowings (ECB) for Civil Aviation Sector

Presently, the Civil Aviation sector could avail of ECB for working capital purposes within 12 months from the date of issue of the erstwhile circular (i.e. A.P. (DIR Series) Circular No. 113 dated 24th April, 2012).

This circular has extended the said period and hence, the Civil Aviation sector can now avail of ECB for working capital purposes upto 31st December, 2013.

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A. P. (DIR Series) Circular No. 115 dated June 25, 2013

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Buyback/prepayment of Foreign Currency Convertible Bonds (FCCBs)

This circular has extended the last date of the existing scheme for Buyback/Prepayment of FCCB, under the approval, route to 31st December, 2013 from 31st March, 2013.

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Alteration to Schedule XIV of Companies Act — Inclusion of intangible assets created under certain circumstances.

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The Ministry of Corporate Affairs has issued a notification dated 17th April 2012 to make alterations in Schedule XIV of the Companies Act pertaining to the rates of depreciation, to insert the category of intangible assets created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of Public-Private Partnership Route. Full version of the Circular can be accessed at

http://www.mca.gov.in/Ministry/notification/pdf/ GSR_(E)_17apr2012.pdf

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Timeline for submission of annual audited financial results for financial year 2011-12.

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SEBI vide its Circular No. CFD/LA/SK/AT/8278/2012, dated 11th April 2012 has given an option to listed entities for submission of financial results for quarter ended F.Y. 2011-12 and in respect of annual audited results for F.Y. 2011-12, to either:

  • Submit limited reviewed Q4 results within 45 days from end of the quarter and thereafter submit annual audited results as soon as they are approved by the Board. (or)
  •  Submit annual audited results within 60 days from the end of the fourth quarter along with Q4 results.

This one-time measure has been taken in view of the difficulty faced in submission of annual financial results along with Q4 results owing to the first-time adoption of the revised Schedule VI.

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Amendments to the Equity Listing Agreement — Change in format for interim disclosure of results.

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The Ministry of Corporate Affairs has vide Circular No. CFD/DIL/4/2012, dated 16-4-2012, revised the format of Balance Sheet under Schedule VI of the Companies Act as was notified in Notification dated 28-2-2011. Pursuant to the same, it has been decided to carry out consequential amendments to listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchange. Full version of the Circular is available on SEBI website at www.sebi.gov.in under the categories ‘Legal Frame and Listing.’

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A.P. (DIR Series) Circular No. 104, dated 4-4- 2012 — Authorised Dealer Category-II — Permission for additional activity and opening of Nostro account.

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1. Issue of foreign exchange pre-paid cards

Presently,
only Authorised Dealers Category-I banks are permitted to issue foreign
exchange pre-paid cards to residents travelling on private/business
visit abroad.

This Circular now permits Authorised Dealers
Category-II also to issue foreign exchange pre-paid cards to residents
travelling on private/business visits abroad, provided:

 (1) AD Category-II adheres to KYC/AML/CFT requirements.

(2) Settlement in respect of foreign exchange prepaid cards is effected through AD Category-I banks.

2. Opening of Nostro Accounts

This Circular permits AD Category-II to open Nostro accounts subject to the following terms and conditions:

(i) Only one Nostro account for each currency must be opened.

(ii)
Balances in the account must be utilised only for the settlement of
remittances sent for permissible purposes and not for the settlement in
respect of foreign exchange prepaid cards.

(iii) Idle balance cannot be maintained in the said account.

(iv) Reporting requirements as prescribed are complied with.

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A.P. (DIR Series) Circular No. 101, dated 2-4-2012 — Overseas Direct Investments — Liberalisation/Rationalisation.

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Presently, an Indian Party requires prior permission of RBI to open, hold and maintain Foreign Currency Account in a foreign country for the purpose of overseas direct investments in that country. This Circular permits an Indian Party to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments without obtaining prior permission from RBI, provided:

(1) The Indian Party is eligible to undertake overseas direct investments.

(2) The host country Regulations require that investments into the country are to be routed through a designated account in that country.

(3) FCA is opened, held and maintained as per the regulations of the host country.

 (4) Remittances sent to the FCA by the Indian party are utilised only for making overseas direct investment into the overseas JV/WOS.

(5) Any amount received in the account by way of dividend and/or other entitlements from the overseas JV/WOS are repatriated to India within 30 days from the date of credit.

 (6) The Indian Party submits details of debits and credits in the FCA on yearly basis to the designated bank along with a certificate from the Statutory Auditors of the Indian party certifying that the FCA was maintained as per the host country laws and applicable FEMA regulations/provisions.

(7) FCA so opened must be closed immediately or within 30 days from the date of disinvestment from overseas JV/WOS or cessation thereof.

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A.P. (DIR Series) Circular No. 100, dated 30-3-2012 — Trade credits for imports into India — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling or Trade Credits, as mentioned below, will continue up to September 30, 2012:

Sr.

No.

Average maturity period

All-in-cost over 6 month LIBOR for the respective
currency of borrowing or applicable benchmark

1

Up to one year

350 bps

2

More than 1 year and up to 3 years

350 bps

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

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A.P. (DIR Series) Circular No. 99, dated 30-3-2012 — External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue up to September 30, 2012:

Sr.

Average maturity period

All-in-cost over 6 month No. LIBOR for the respective currency of borrowing or applicable benchmark

1

Three years and
up to five years

350 bps

2

More than five years

550 bps

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A.P. (DIR Series) Circular No. 98, dated 30-3- 2012 — Discontinuation of supplying printed GR forms by Reserve Bank.

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This Circular states that with effect from July 1, 2012, GR forms will only be available online from RBI website www.rbi.org.in at the following link:

“Notification -> FEMA -> Forms -> For Printing of GR Form”.

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A.P. (DIR Series) Circular No. 52, dated 23-11-2011 — External Commercial Borrowings (ECB) Policy — Parking of ECB proceeds.

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Presently, borrowers are permitted to either keep ECB proceeds abroad or remit these funds to India, pending utilisation for permissible end-uses.

This Circular states that henceforth all proceeds of ECB raised abroad and meant for Rupee expenditure in India should be brought back immediately by the borrowers for credit to their Rupee accounts with banks in India. These Rupee funds cannot be used for investment in capital markets, real estate or for inter-corporate lending. Only ECB proceeds meant for foreign currency expenditure can be retained abroad pending utilisation.

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Deficiency in service by company/dealer supplying LPG cylinders and regulators : Consumer Protection Act 1986 S. 2(1)(g).

New Page 17 Deficiency in service by company/dealer supplying LPG cylinders and
regulators : Consumer Protection Act 1986 S. 2(1)(g).

 

Death caused due to leakage from LPG cylinder/regulator. The
NCDRC held that it was duty of Indian Oil Corporation (IOC) to provide technical
facilities to its consumers and periodically examine the cylinder or the
regulator to find out its defects.

 

As the Indian oil company also did not ask its dealer to get
the regulator and cylinder examined by any expert, the dealer and Indian Oil
Corporation were held jointly and severally liable to pay compensation to the
complainant.

[ Regional Manager IOC Ltd., Bhopal v. Rakesh Kumar
Prajapati & Ors., AIR 2008 (NOC) 1988 (NCC)]



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Co-operative Housing Society – Builders have to execute the conveyance: Consumer Protection Act:

New Page 2

23 Co-operative Housing Society – Builders have to execute
the conveyance: Consumer Protection Act:


Environ Emanual Co-op. Hsg. Soc. Ltd vs. The Environ
Enterprises INC, dated 19.9.2008; Consumer Complaint No. 91 /2008. (Consumer
Grievances Redressal Forum, Konkan Bhavan, Navi Mumbai)

The complainant society is a duly registered co-operative
housing society under the Maharashtra Co-op. Societies Act. In the year 2003,
the opponent builder handed over the possession of the flats to the members of
the society. But, the conveyance deed had not been executed to transfer the land
and building in favour of the society. The society visited the opponent a number
of times and placed their demand before them in writing. The complainant society
had filed this complaint as the opponent had provided defective service to the
complainant society. The complainant society further prayed that order may be
issued to provide occupation certificate, building completion certificate,
documents pertaining to ownership of building to the complainant society, and
also to register the conveyance deed in favour of the society.

The Consumer Forum held that as per the provisions of law, it
is the duty of the opponent builder to register the conveyance deed in favour of
the complainant society.

As the opponent builder had not registered the conveyance
deed in favour of the complainant society, the Consumer Forum was of the opinion
that as per the provisions of the Act, it was the responsibility of the builder
to take initiative to register the society of the flat owners. It was also the
responsibility of the builder to take initiative to register the conveyance deed
in favour of the society. Even though a period of three years has elapsed since,
the opponent has not registered the conveyance deed in favour of the society. As
per the Forum, this act of the opponent was not acceptable. As per Sec. 2(1)(g)
of Consumer Protection Act, this act of the opponent comes under the purview of
“defective services”. The opponent builder was directed to comply with all the
legal procedures to register the conveyance deed in favour of the society within
a period of two months from the date of the order.

 

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Appellate Tribunal – Exparte order: Tribunal must decide appeal on merits, if assessee files submissions in writing

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22 Appellate Tribunal – Exparte order:  Tribunal must
decide appeal on merits, if assessee files submissions in writing


Chemipol vs. UOI

(2009) 244 ELT 497 (Bom)

The appellant’s appeal before the CESTAT was dismissed for
non prosecution. The application filed by the appellant for setting aside the
order of dismissal for non prosecution was rejected by the Tribunal.

In a further appeal, the Hon’ble High Court observed that the
Tribunal has no power to dismiss an appeal for default on the part of an
appellant in making an appearance. Even if the appellant is absent, the Tribunal
is required to decide the appeal on the merits. The Tribunal presently has its
benches only in four or five places in India. An appellant, who on account of
his place or residence or business being far away from the place of sitting for
the Tribunal, may not, except at a high cost, be able to attend the hearing;
especially when we know that matters are usually adjourned for several times. In
such an event, if the appellant files on record his submissions in writing, the
Tribunal must decide the appeal on the merits and on the basis of the said
submissions. In that case, the Tribunal would not have a power to dismiss the
appeal; but where the appellant, in spite of notices, is persistently absent,
and the Tribunal, considering the facts of the case, is of the view that the
appellant is not interested in prosecuting the appeal, can, in the exercise of
its inherent power, dismiss the appeal for non prosecution. The conclusion of
the Tribunal that the appellant is not interested in prosecuting the appeal must
be arrived at based on the facts of each case, and not merely on account of the
absence of the appellant on a solitary occasion.

In the present case, the Tribunal had dismissed the appeal on
account of the absence of the appellant only on the occasion. The fact that the
appellant immediately thereafter applied for restoration of the appeal, shows
his intention: that he was interested in prosecuting the appeal, and maybe he
had a justifiable cause for his absence on one occasion. In the circumstances,
the Tribunal ought to have restored the appeal into the file.

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Rectification of mistake — No finding on the decision cited by the appellant.

New Page 1

8 Rectification of mistake — No finding on
the decision cited by the appellant.


The appellant had filed appeal before the CESTAT. In the
written submission filed before the Tribunal the appellant had relied on two
Tribunal decisions in its favour. The appeal was heard ex parte. The
Tribunal by referring to a judgment of the Supreme Court in the case of CCE,
Ahmedabad v. Ramesh Food Products, 2004(174) ELT 310 (SC) disposed of the
appeal. No reference was made to the judgments of the Tribunal which were relied
upon by the appellant. The appellant, therefore, filed an application for
rectification, pointing out that the appellant had relied upon two judgments of
the Tribunal in his submissions. The Tribunal, however, disposed of his appeal
without considering those judgments. The Tribunal again dismissed the
rectification application. On further appeal the High Court observed that the
procedure that has been followed by the Tribunal is not in accordance with law.
If in the opinion of the Tribunal, the two judgments of the Tribunal on which
the appellant was relying, were not relevant, the Tribunal could have said so in
its judgment. The course adopted by the Tribunal, of even not referring to the
judgments of the Tribunal or which the appellant was relying, is not proper. It
was for the Tribunal to point out, after considering the judgments of the
Tribunal on which the appellant was relying, why those judgments were not relied
and how, according to the Tribunal, the matter is covered by the judgment of the
Supreme Court. In view of the above, the appeal was allowed by remanding the
matter back to the Tribunal.

[ Stanlek Engineering P. Ltd. v. Commissioner of C. Ex.
Mumbai, 2008 (229) ELT 61 (Bom.)]

 


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Withdrawal of draft Dematerialisation of Certificate Rules.

The Ministry of Corporate Affairs has in consultation with the Law Ministry withdrawn the draft of Dematerialisation of Certificates Rules, 2011 as per the Notification issued on 28-10-2011.

Cost Accounting Records Rules prescribed for various products in supersession of the earlier Rules.

The Ministry of Corporate Affairs has issued the Cost Accounting Records Rules applicable to various products in supersession of the Rules issued thereof earlier. Full Notifications can be accessed on:

    1. Telecommunications http://www.mca.gov.in/ Ministry/notification/pdf/TELECOM_CARR_869E. pdf

    2. Sugar Industry http://www.mca.gov.in/ Ministry/notification/pdf/SUGAR_CARR_872E. pdf

    3. Pharmaceutical Industry http://www.mca.gov.in/Ministry/notification/pdf/ PHARMA_CARR_874E.pdf

    4. Petroleum Industry http://www.mca.gov.in/Ministry/notification/pdf/PETROLEUM_CARR_870E. pdf

    5. Fertiliser Industry http://www.mca.gov.in/Ministry/notification/pdf/Fertilizer_CARR_873E.pdf

    6. Electricity Industry http://www.mca.gov.in/Ministry/notification/pdf/ELECTRICITY_CARR_871E.pdf

Companies Bill.

The Companies Bill, 2011 as presented in the Parliament on 14th December 2011 can be accessed on http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf.

The Bill, proposes significant changes to the existing corporate law provisions. The Bill has 470 clauses as against 658 sections in the existing Companies Act, 1956.

Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011.

The MCA vide Notification dated 14th December 2011, has issued the Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 wherein it has mentioned that Preferential allotment means allotment of share or any other instrument convertible to shares including hybrid instruments issued under the provisions of section 81(1A) i.e., further issue of shares to existing shareholders and the allotment has to be made within 60 days of receipt of application money, else it is to be repaid in 15 days, failing which it is to be repaid with 12% p.a. interest.

The Rules shall come into force on the date of their publication in the Official Gazette.

Company Law Settlement Scheme (CLSS 2011) extended to 15th January 2012.

The MCA vide Circular No. 71/2011, dated 15th December 2011 has extended the last date for availing benefit under Company Law Settlement Scheme (CLSS), 2011 to 15th January, 2012 and has stressed that the Scheme will not be extended beyond 15th January, 2012. The statutory documents like Balance Sheets, Annual Returns not filed with the ROC can be filed under this scheme by paying additional 25% fee and immunity from prosecution is granted by the ROC.