Corporate And Other Laws Archives

Coparcener – Vested right after adoption – A coparcener/son continues to have vested right in joint family property of birth even after adoption. [Hindu Adoptions and Maintenance Act, 1956, 12(b); Hindu Succession Act, 1956, Section 30].

Purushottam Das Bangur AIR 2016 Cal. 227.

In the present case, son (born in a Mithakshara Undivided Hindu Family) given in adoption filed a caveat in the proceedings for probate of the will of his deceased natural father. The propounders seeking probate of the will asked for the discharge of the caveator on the ground that the caveator being given in adoption, had ceased to have any right in the natural family in view of the provisions of section 12(b) of the Hindu Adoptions and Maintenance Act, 1956. The Propounders relied upon decisions of Devgonda Raygonda Patil vs. Shamgonda Raygonda Patil & Anr AIR 1992 Bom 189 and Santosh Kumar Jalan vs. Chandra Kishore Jalan & Anr AIR Patna 125, wherein it was held that until the joint family property is partitioned, there can be no vesting i.e. only if the Joint property is partitioned before the adoption, only then does the coparcenor continue to have a vested right in Joint family property even after adoption.

However, the Court, taking a contrary view held that, a vested interest in a property is understood to mean that a person has acquired proprietary interest therein. However, the enjoyment of such proprietary interest may be postponed till the happening of a certain event. Once that event happens such person would enjoy proprietary rights in respect of the property. A coparcener in a Mitakshara coparcenary acquires an interest in the properties of the Hindu family on his birth. His interest is capable of variation by events such as birth, adoption or death in the coparcenary. In the event of a partition of the coparcenary, a coparcener is entitled to a share of the properties belonging to joint Hindu family. On partition his share gets defined. He can still continue to enjoy his share in jointness with other family members or he can ask for partition of the properties by metes and bounds in accordance with the shares. On partition his share gets defined. This interest which the coparcener in a Mitakshara family acquires by his birth in the natural family continues to remain with him in spite of the adoption in view of section 12(b) of the Hindu Adoptions and Maintenance Act, 1956.

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Withdrawal of Open offer – lessons from Supreme Court/SAT/SEBI decisions

Background
What happens when an open offer is made under the SEBI Takeover Regulations and thereafter the offerer, for some reason, changes his mind? Should he be allowed to withdraw his offer? If yes, under what circumstances? Can it be a unilateral withdrawal at his discretion or should it be under certain conditions only? Or should he be required to take approval of SEBI? Should SEBI have wide powers – and hence duty – to allow such withdrawal? What is the criteria SEBI should follow for permitting such withdrawal?

The stakes involved in such a case are large. For example there is a listed company whose market capitalisation is Rs. 1000 crore. The market price of its share is Rs. 100. An offerer believes that the shares are under priced and decides to acquire control and makes an open offer at Rs.150 per share. However, sometime later, for reasons such as new information coming to light, fresh developments or even change of mind, he wants to withdraw the open offer. However, the offer would have had consequences on the market. There may be persons who would have bought shares from the market at higher price. The Company would have faced restrictions in carrying out certain activities during the offer period under the Regulations. Further, withdrawal without regulation may make the whole process frivolous since offerers may make offers, disrupt the company and the market, perhaps profit from such disruption and then withdraw. Open offers thus may lose sanctity. At the same time, an absolute bar from withdrawal may result in heavy costs for the offerer even where there were genuine reasons for withdrawal. In the example, the offerer would have to pay about Rs. 390 crore to acquire the 26% from the shareholders. The offerer would thus be stuck with a huge lot of shares, whose value may have diluted for reasons beyond his control and perhaps not gain control of the company too.

Considering the huge stakes involved and also considering that this issue could often arise, the matter has been subject matter of serious litigation. The matter has twice reached the Supreme Court and litigated before the Securities Appellate Tribunal. Recently, once again, SEBI has passed an order (dated August 1, 2016 in respect of open offer for Jyoti Limited) which is under the latest SEBI (SAST) Regulations 2011 (“the Takeover Regulations”). Curiously, in each of these cases, the application to withdraw the open offer was rejected, but for differing reasons/facts. Study of these issues has importance for persons acquiring large stakes in companies to know whether and when they may be allowed to withdraw. They would carefully need to structure and prepare for their transactions since an inadvertent lapse may result into an irreversible open offer and huge losses. At the same time, the Regulations, which have been drafted in the interests of investors, are such that open offer is triggered off at a very early stage.

This issue is also relevant because the relevant provisions for withdrawal have been tweaked in the 2011 Takeover Regulations as compared to the 1997 Regulations. While these changes have not affected the outcome in each of these matters, they are relevant to future open offers.

Provisions of the Regulations for withdrawal of open offer Regulation 23(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, deals with withdrawal of open offer. Regulation 23(1) provides 3 specific reasons and one general/residuary one under which an open offer can be withdrawn. Amongst the specific reasons, the first permits withdrawal where statutory approvals required for the open offer/acquisitions have not been received, provided due disclosures were made. The second reason permits withdrawal where the offerer, a natural person, has died. The third sub-clause provides for a situation where the agreement to acquire shares contained a condition that the acquirer/offerer could not meet for reasons beyond his reasonable control and provided that conditions were disclosed in advance, and that lead to rescinding of the agreement, withdrawal of offer is allowed.

Finally, there is the general/residuary ground, which is also the ground under which litigation has arisen. SEBI has discretion to grant withdrawal pursuant to “such circumstances as in the opinion of the Board, merit withdrawal.”. The question is whether this means there has to be an impossibility, taking color from the previous three grounds, as contended by SEBI? Or whether withdrawal can be permitted on other grounds such as the offer becoming uneconomical or other reasons, as contended by offerers? On this aspect, the law under the 1997 Regulations, on which preceding decisions have been rendered, is the same as under the 2011 Regulations on which the latest decision of SEBI has been rendered.

Decisions of the Supreme Court
The Supreme Court has on two occasions to dealt with this issue. In Nirma Industries Limited vs. SEBI (2013] 121 SCL 149 (SC) (“Nirma”), the offerer, a lender company, had lent monies to certain promoter entities of a listed company against pledge of shares of such listed company. On default, it exercised the pledge and thus acquired the shares which in turn resulted in obligation to make an open offer. However, it was claimed that later investigation brought to light that the Promoters of such listed company had allegedly siphoned off huge amount of funds, there were undisclosed liabilities, etc. and, thus, the value of the shares suffered in value. Yet, the lender was now stuck with the open offer at a price being as per the formula under the Regulations. Obviously, this would result in huge losses to the lender. It approached SEBI seeking withdrawal. SEBI rejected such application. Finally, the issue came before the Supreme Court. The core issue was whether the power of SEBI to grant withdrawal under the residuary clause was wide. Thus, whether it could allow withdrawal under varying circumstances at its discretion? Or whether it had very narrow powers, limited, on principles of ejusdem generis, to the nature of circumstances under the first three clauses under which withdrawal was permitted? In essence, thus, the issue was, whether power of SEBI to grant withdrawal was only if the offer was impossible to be proceeded with? The Supreme Court considered the facts of the case and the nature, scheme and purpose of the Regulations and held that SEBI could grant withdrawal only if there was impossibility in proceeding with the open offer. In the case before it, the offerer could still go ahead with the open offer and it has not become impossible merely because of changed circumstances.

The Court thus concluded that “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”. Merely because the offerer may suffer losses does not make the offer impossible to make or to be proceeded with. In the words of the Hon’ble Supreme Court, “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.” Thus, the plea of the lender/offerer was rejected.

The Supreme Court had soon thereafter again to deal with a similar matter. In SEBI vs. Akshya Infrastructure (P.) Ltd. (126 SCL 125 (SC)(2014))(“Akshya”) too, the question was whether, if the open offer becomes uneconomical owing to changed circumstances (curiously, this was allegedly owing to huge delay by SEBI in approving the open offer document), should it be allowed to be withdrawn? The Court followed Nirma and observed that:-

“This impossibility envisioned under the aforesaid regulation would not include a contingency where voluntary open offer once made can be permitted to be withdrawn on the ground that it has now become economically unviable.”.

The Court also explained the rationale of this conclusion as follows:

“Accepting such a submission, would give a field day to unscrupulous elements in the securities market to make Public Announcement for acquiring shares in the Target Company, knowing perfectly well that they can pull out when the prices of the shares have been inflated, due to the public offer.”

Decision of SAT
A similar issue was agitated in case of an open offer for shares of Golden Tobacco Limited (“GTL”) (in Pramod Jain vs. SEBI [2014] 48 taxmann.com 226 (SAT – Mumbai)). Here too, an open offer was made to acquire shares at a certain point of time. However, during the intervening time (which again included a huge delay allegedly caused by time taken by SEBI in approving the offer document), the offerer alleged that owing to acts by the Promoters of GTL, the shares of the Company lost hugely in value. The offerer thus sought to withdraw the open offer. Following and applying Nirma and Akshaya, the SAT, in a majority decision, refused to allow the offer to be withdrawn since there was no impossibility in proceeding with the offer.

Decision in case of open offer for shares of Jyoti Limited. In this latest case, SEBI had occasion to consider a peculiar case though with underlying similar issues. The offerer had made an open offer to acquire 75% of the shares and thus control of the listed company at a price of Rs. 63 per share. However, it came to light that the Company was a sick industrial company, having lost its net worth. The BIFR ordered status quo on operations/controlling stake and change in control of the Company was prohibited in the interim. Appeal of the offerer against such order of BIFR was dismissed by the Appellate Authority for Industrial and Financial Reconstruction. The question was whether, since the open offer could not be proceeded with, this was a fit case for permitting withdrawal of open offer. SEBI noted that the BIFR had not prohibited the open offer, but had merely given a stay to it, pending final decision. It was thus possible for the offerer to proceed with the open offer post such decision. In other words, the pre-condition of impossibility did not exist. Hence, applying Nirma and Akshaya, SEBI rejected the application of the offerer to withdraw the open offer.

Conclusion
It would be a rare case, thus, that an open offer would be allowed to be withdrawn. The offerer will have to demonstrate that either one of the three specific circumstances as laid down in Regulation 23(1) existed or there should be some other impossibility in proceeding with an open offer. If something happens in between, even if caused by SEBI’s delay or actions by the Company/its Promoters, or other unavoidable circumstances, so long as it is possible to proceed with the open offer, SEBI will not allow withdrawal. As explained earlier, the Regulations have sensitive triggers for the open offer to arise and once a trigger is set off, it is more or less irreversible. The offerer would thus have to proceed warily and with adequate planning to ensure that (i) either the open offer does not arise (ii) if it does arise, he is prepared to proceed through it till completion, whatever arises in between. Apart from difficulties in negotiated takeovers, this can make hostile open offers near-infeasible. Even in negotiated cases, often owing to delayed processing by SEBI, disputes in the interim with the Company/Promoters, changed circumstances, etc. could create problems. Nevertheless, there is an underlying sensible principle involved here. Offerers should not be given a broad leeway that offers can be made and withdrawn at their discretion. This would, inter alia, play havoc with markets and harm interests of investors.

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A. P. (DIR Series) Circular No. 70 dated May 19, 2016

Money Transfer Service Scheme – Submission of statement/returns under XBRL

This circular states that all Authorized Persons, who are Indian Agents under Money Transfer Service Scheme (MTSS) have to submit the statement on quantum of remittances from the quarter ending June 2016 in eXtensible Business Reporting Language (XBRL) system which can be accessed at https://secweb.rbi.org.in/orfsxbrl/.

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A. P. (DIR Series) Circular No. 69[(1)/22(R)] dated May 12, 2016

Notification No. FEMA 22 (R)/2016-RB dated March 31, 2016

Establishment of Branch Office (BO)/ Liaison Office (LO) / Project Office (PO) in India by foreign entities – procedural guidelines

This Notification repeals and replaces the earlier Notification No. FEMA 22/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000.

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A. P. (DIR Series) Circular No. 68[(1)/23(R)] dated May 12, 2016

Notification No. FEMA 23 (R)/2015-RB dated January 12, 2016

Foreign Exchange Management (Exports of Goods and Services) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 23/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

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A. P. (DIR Series) Circular No. 67/2015- 16[(1)/23(R)] dated May 02, 2016

Notification No. FEMA 5 (R)/2016-RB dated April 01, 2016

Foreign Exchange Management (Deposit) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 5/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Deposit) Regulations, 2000.

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A. P. (DIR Series) Circular No. 66 dated April 28, 2016

Opening and Maintenance of Rupee / Foreign Currency Vostro Accounts of Non- Resident Exchange Houses: Rupee Drawing Arrangement

Presently, Exchanges Houses are required to maintain a collateral equivalent to one day’s estimated drawings under Rupee Drawing Arrangement with respect to Vostro Accounts.

This circular has done away with the requirement of mandatorily maintaining a collateral by Exchange Houses under Rupee Drawing Arrangement with respect to Vostro Accounts. However, banks are free to frame their own policies and decide whether to request for a collateral or not from Exchange Houses.

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A. P. (DIR Series) Circular No. 65 dated April 28, 2016

Import of Goods: Import Data Processing and Monitoring System (IDPMS )

This circular states that an Import Data Processing and Monitoring System (IDPMS) on the lines of Export Data Processing and Monitoring System (EDPMS) is to be developed. For this purpose Customs will modify the Bill of Entry format and non-EDI (manual) ports will be upgraded to EDI Ports.

This circular also contains guidelines to be following once the IDPMS system becomes operational. The guidelines pertain to: –

1. Write off of import bills due to discounts, fluctuation in exchange rates, change in the amount of freight, insurance, quality issues; short shipment or destruction of goods by the port / Customs / health authorities, etc.

2. Extension of Time for settlement of import dues

3. Follow-up for Evidence of Import.

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A. P. (DIR Series) Circular No. 64/2015-16 [(1)/13(R)] dated April 28, 2016

Notification No. FEMA 13 (R)/2016-RB dated April 01, 2016

Foreign Exchange Management (Remittance of Assets) Regulations, 2016

This Notification repeals and replaces the earlier Notification No. FEMA 13/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Remittance of Assets) Regulations, 2000.

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Benami Transactions

Introduction
A Benami Transaction is a transaction in which the property is acquired by one person in the name of another person or a business may be carried on by some person in the name of another person. Thus, the real or beneficial owner remains unknown and the apparent owner is only a name lender. As the word ‘benami” suggests it is one without a name. This practice of benami transactions has been extremely prevalent in India for several years. Benami transactions are one of the main sources of utilisation of black money, tax and duty evasion, corruption, etc. Benami transactions are quite common in the real estate business. However, they have also entered the arena of the stock market and other areas. Benami transactions were also used as a device for asset protection as the creditors would never be able to get their hands on a property which did not legally belong to their debtor. To deal with and curb benami transactions, the Benami Transactions (Prohibition) Act, 1988 (“the Act”) was passed. However, this law suffered from various inadequacies. Accordingly, the Benami Transactions (Prohibition) Amendment Bill, 2016 was moved by the Central Government to substantially modify the Act. This Bill was passed by the Lok Sabha on 27th July 2016 and by the Rajya Sabha on 2nd August 2016 and has also received the assent of the President and has been notified in the Official Gazette on 11th August 2016, thereby, becoming the Benami Transactions (Prohibition) Amendment Act, 2016 (“the Amendment Act”). One important feature of the Amendment Act is that it empowers the Government to frame Rules something which the original Act did not have.

Definitions

Benami Transaction
A Benami Transaction had been originally defined to mean a transaction in which the property is transferred to one person for a consideration paid or provided by another person. Thus, in a benami transaction, there are two persons, the real or beneficial owner who actually owns the property, but the property does not stand in his name and the second person is the one in whose name the property stands who is but a mere front i.e., the benamidar. The term “Benami” means one which has no name. Thus, the definition of a benami transaction may be summarised as under :

It is a transaction
(i) in which a property is bought by one person and transferred to another person; or

(ii) in which the property is directly bought by one person in the name of another person

The Amendment Act seeks to considerably enhance the definition of a benami transaction. The modified definition defines it as under:

(A) a transaction or an arrangement-

(i) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and

(ii) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration;

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies the knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

Thus, even a transaction wherein the real owner is not aware of ownership has been added. Further, in cases where the consideration provider is untraceable or fictitious would also qualify as a benami transaction. The Amendment Act also seeks to carve out certain exceptions to the definition of a benami transaction:

(i) property held by a Karta, or a member of an HUF on behalf of the HUF where the consideration for such property has been paid by the HUF;

(ii) property held by a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a depository participant and any other person as may be notified by the Central Government for this purpose;

(iii) property held by an individual in the name of his spouse / his child and the consideration for such property has been paid by the individual;

(iv) property held by any person in the name of his brother or sister or lineal ascendant or descendant, where the names of such relative and the individual appear as joint-owners, and the consideration for such property has been paid by the individual.

(v) property the possession of which has been obtained in part performance of a contract referred to in section 53 of the Transfer of Property Act, 1882 provided the contract has been stamped and registered.

The Supreme Court in the case of SreeMeenakshi Mills Ltd., 31 ITR 28 (SC) has defined a benami transaction as thus:

“……..The word benami is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, when A sells properties to B but the sale deed mentions X as the purchase. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word “Benami” is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B.

The fundamental difference between these two classes of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed.

It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid.”

Property
The definition of Property has been expanded by the Amendment Act and is now defined to mean, Property of any kind:

(a) Whether movable or immovable,

(b) Whether tangible or intangible,

(c) Including any right or interest or legal documents evidencing title or interest in such property. I t includes proceeds from the property also

Benami Property
This is a new definition and is defined to mean any property which is the subject matter of a benami transaction and includes proceeds from such property.

Benamidar and Beneficial owner
The Amendment Act adds two new definitions. While a benamidar is defined to mean the person / the fictitious person in whose name the benami property is transferred or one who is the name lender; the beneficial owner is the mysterious person for whose benefit the benamidar holds the benami property.

Prohibition of Benami Transactions
Section 3 is the operative section of the Act. It provides that no person shall enter into any benami transactions. The Act provided that a benami offence would be bailable and non-cognizable. This has now been deleted by the Amendment Amendment Act.

Consequences of Benami Properties
In case of a benami property, the real owner of the property cannot enforce or maintain any right against the benamidar or any other person. Thus, the real owner or any person on his behalf is prevented from filing any of a suit, claim or action against the namesake owner.

Similarly, the real owner or any person on his behalf cannot take up a defence based on any right in respect of the benami property against the benamidar or any other person.

Confiscation of Benami Properties
All benami properties are liable to be confiscated by the Central Government. For this purpose, the Amendment Act seeks to appoint an Adjudicating Authority and Initiating Officers. The Deputy Commissioner of the Income tax would be the Initiating Officer. Where the Initiating Officer has, based on material he possesses, reason to believe that any person is a benamidar of a property, he may ask him to show cause why the property should not be treated as benami property. He can also provisionally attach the property for a maximum period of 90 days. He must then draw up a statement of case and refer it to the Adjudicating Authority. The Authority must provide a hearing to the person affected and pass an order either holding the property to be a benami property or holding it not to be a benami property. The Authority has a maximum period of 1 year from the date of reference to pass its order. The affected person can appear before the Authority in person or through his lawyer / CA.

Once an order is passed by the Authority treating a property to be a benami property, it must pass an order confiscating the benami property. An appeal lies against the orders of the Adjudicating Authority to the Appellate Tribunal to be constituted under the Act. An appellant can appear before the Tribunal in person or through his lawyer / CA. The orders of the Appellate Tribunal can appealed before the High Court.

Once a property is confiscated, the Income-tax Officer would be appointed as the Administrator of such benami property who will take possession of the property and manage it.

The Act provides that if an Initiating Officer has issued a notice seeking to treat a property as benami property, then after the issuance of such a Notice, the subsequent transfer of the property shall be ignored. If the property is subsequently confiscated then the transfer will be deemed to be null and void.

Re-transfer of Benami Property
A benamidar cannot re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. If any benami property is re-transferred the transaction of such a benami property shall be deemed to be null and void. However, this does not apply to a re-transfer of benami property initiated pursuant to a declaration made under the Income Declaration Scheme, 2016. In this respect, section 190 of the Finance Act, 2016 provides that the Benami Act shall not apply in respect of the declaration of the undisclosed asset, if the benamidar transfers such benami property to the declarant who is the real beneficial owner within the period notified by the Central Government, i.e., on or before 30th September 2017.

Repeal of Certain Sections
The original Act had repealed the following sections, which continue under the Amendment Act:
(a) Sections 81, 82 and 94 of the Indian Trusts, Act, 1882;
(b) Section 66 of the Code of Civil Procedure, 1908; and
(c) Section 281A of the Income-tax Act.

Trusts Act
The Trusts Act originally recognised and allowed the concept of benamidar under certain situations which were covered under the repealed sections.

(i) Section 81 originally provided that where the owner of a property, transfers / bequeaths (by will) it and It is not possible to infer from the surrounding circumstances that the transferor intended to depose of the beneficial interest contained therein, then the transferee may hold the property for the benefit of the owner or his legal representative.

(ii) Section 82 originally provided that where the property is transferred to one person and the consideration is paid for by another person and it appears that such other person did not intend to pay for the same then the Transferee must hold the property for the benefit of the payer.

(iii) Section 94 originally applied where there was no trust and the possessor of the property did not have the entire beneficial interest in the property, then in such a case he must hold the property for the benefit of the beneficiary. Thus, now even honest benami transactions are prohibited.

Civil Procedure Code
Section 66 of the Code originally provided that no suit shall be maintained against any person claiming title under a Court certified purchase on the ground that the purchase was made on behalf of the plaintiff. Thus, after the repeal of section 66 it is no longer possible to raise a defence on the plea of benami.

Income Tax Act
Section 281A of this Act originally provided that in case the real owner desired to file a suit in respect of a benami property against the benamidar or any other person, then he could not do so unless he had first given a notice in prescribed format to the Commissioner of Income tax within one year of the acquisition of the property. In case the suit related to a property exceeding Rs. 50,000 in value, then it was sufficient if the notice was given at any time before the suit.

Thus, the above sections provided statutory recognition to certain genuine benami transactions but after the enactment of the 1988 Act they were rendered inconsistent and hence, the 1988 Act has repealed them which repeal has been continued under the Amendment Act.

Punishment
If any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of a benami transaction. Any person guilty of the offence of benami transaction shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to 25% of the fair market value of the property.

Thus, in addition to the compulsory acquisition of the property, the Act also provides for a severe penalty. The offence of entering into a benami transaction is not bailable and is non-cognizable.

The penalty for giving false information is punishable with rigorous imprisonment from 6 months to 5 years and fine up to 10% of the fair market value of the property.

In case a Company enters into any benami transaction, not only is the property liable to be acquired but the every person who at the time of the contravention was in charge of and responsible for the conduct of the business would be proceeded against and punished.

Conclusion
This is one more step in the Government’s fight against black money. While the Black Money Act, 2015 is a weapon against foreign black money, the Benami Act seeks to fight domestic black money.

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Independence

Arjun (A) — Slogging! Slogging!! Slogging!!! Please help me God. Oh Shrikrishna, where are you?

Shrikrishna (S) — My dear Arjun, I am always with you. I am everywhere! Omni-present!.

A — And Omnipotent, Omniscient as well! You have no boundaries; but we are bound by so many constraints.

S — Didn’t you celebrate your Independence Day?

A — There was that flag – hoisting in our housing society. But who will wake up early on a holiday? I never attend it.

S
— Oh! Shame on you. Don’t you remember the martyrs that sacrificed
everything for independence of the country? Even their lives! How dare
you be so callous about independence?

A — Oh, Lord, please pardon me. I never meant offence to anyone.

S — I thought, at least you would be valuing the independence above all!

A — Yes. I do. In fact, our profession is expected to be ‘independent’. We are supposed to act without fear or favour.

S — Then how can you afford to sleep when flag hoisting is on? You CAs should be in the forefront.

A
— I agree. But you know, we get so tired. So much of tension. Last
time, I narrated all our difficulties. You advised us to gear ourselves
up.

S — Then what have you done about it? You are in the habit of mere crying.

A — What to do? We are so helpless. Clients are not serious. Our staff is also useless. Everything comes on us.

S
— But you are an independent professional. You have to overcome the
situation some day or the other. How many years you can pull on like
this?

A — Lord, ‘Independence’ is a myth. Everybody dictates on
us. Regulators, Clients, staff, articles, our Institute; and even our
family members.

S — Ha ! Ha !! Ha !! Rukmini and Satyabhama also
keep dominating on me. Jokes apart; tell me, have you taken steps to
complete the audits in time?

A — Ah! There is so much time upto 30th September. Clients wake up only after 15th of September.

S — Let clients not wake up. What about you yourself? You need to be eternally vigilant. That is the cost of independence!

A
— So many holidays in August. Independence Day, Parsi New Year, then
Rakhi, then your own birthday of Krishnashtami. Again in September,
Ganapati will take away our time! I think, we cannot do things in time.
We must start crying for extension. You only said, we need to be
‘proactive’!

S — Wah! Great thought! You are very much aware
that this year courts will not support you. Tell me, have you studied
new CARO; have you looked into IFC?

A — IFC? What is that?

S — Internal Financial Controls. You have to specifically report on that. And CFS?

A — You are giving me surprises. What is this new ghost?

S — Consolidated Financial Statements. Are you at least aware that even your CARO format is changed?

A — Yes, Yes. I have heard about it. Frankly, I have not studied the new company law as yet. So much of ambiguity there!

S
— True. But you can’t afford to be totally ignorant. Remember,
Government is appointing new regulatory authority to look into the
quality of your work.

A — Baap Re! Already we have disciplinary
committee, consumer forum, NFRA, and what not! And on the top of it,
this new Authority? God save the profession.

S — I will surely save you, only if you are vigilant and diligent.

A — Oh Lord, I know, I am rather lethargic. I have to be constantly on my toes. Even slightest of relaxation may be suicidal.

S
— Assure you that so long as you can prove honest efforts and support
it by documentation, your Council will always help you. Don’t worry.

A — Thank you, Lord!

Om Shanti.

The
above dialogue aims at highlighting the importance of having the right
attitude towards the profession. Being alert and proactive towards the
dynamic laws becomes extremely important in today’s world.

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Interpretation of Statutes – Construction of Rules – Prospective or Retrospective – Any legislation said to be dealing with substantive rights shall be prospective in nature and not retrospective. [General Clauses Act, 1897, Section 6]

Collector vs. K. Govindaraj (2016) 4 SCC 763 (SC)

In the present case, a notification dated 09.10.1996 was published by the Appellant (Collector) inviting applications for grant of stone quarrying leases. This notification was issued under the provisions of Rule 8(8) of the Tamil Nadu Minor Mineral Concession Rules, 1959 and it was stated therein that lease would be granted for a period of five years. However, when these leases were still in operation and the said period of five years for which these leases were granted had not expired, rule came to be amended vide G.O. dated 17.11.2000. The amended rule provided that the period for quarrying stone in respect of virgin areas, which had not been subjected to quarrying earlier, shall be ten years whereas the period of lease for quarrying stone in respect of other areas shall be five years. On the basis of this amendment, the Respondents pleaded that since they were granted lease for quarrying stone in respect of virgin areas, amended provision was applicable in their cases and they were entitled to continue on lease for a period of ten years.

The Supreme Court held that, “though the Legislature has plenary powers of legislation within the fields assigned to it and can legislate prospectively or retrospectively, the general rule is that in the absence of the enactment specifically mentioning that the concerned legislation or legislative amendment is retrospectively made, the same is to be treated as prospective in nature. It would be more so when the statute is dealing with substantive rights. No doubt, in contrast to statute dealing with substantive rights, wherever a statute deals with merely a matter of procedure, such a statute/amendment in the statute is presumed to be retrospective unless such a construction is textually inadmissible. At the same time, it is to be borne in mind that a particular provision in a procedural statute may be substantive in nature and such a provision cannot be given retrospective effect. To put it otherwise, the classification of a statute, either substantive or procedural, does not necessarily determine whether it may have a retrospective operation”. It was thus held by the Hon’ble Supreme Court, that the right which is substantive in nature, accrued to the virgin areas for the first time by way of amendment only.

It was thus an unamended Rule under which the notification dated 09.10.1996 was issued and tenders were invited and auction held. Rule 8(8) of the 1959 Rules which prescribes period for grant of lease is not procedural but substantive in nature. It is only in respect of virgin areas that the period of lease stands enhanced to ten years whereas in respect of other areas the period of lease continues to be five years. This was clearly a substantive amendment which had nothing to do with any procedure. There was no concept of “virgin area” in the unamended rule which has been introduced for the first time by way of aforesaid amendment.

These appeals were accordingly allowed.

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Evidence – Compact Disk – Primary or Secondary evidence – A Compact Disk produced as a source of information of corrupt practice is inadmissible as a primary evidence . [Evidence Act, 1872, Section 65-B]

Mohammad Akbar vs. Ashok Sahu & Ors. AIR 2016 (NOC) 428 (CHH).

The Court held that where a compact disk is produced as a source of information of corrupt practice, it shall be admissible only as a secondary evidence and not as a primary evidence, where the compact disk did not contain any certificate as required u/s 65-B(4), hence not admissible as Evidence.

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Contempt – Non-Compliance of order of a Court on the ground that the appeal is pending against the Court’s order is not permissible. [Contempt of Courts Act, Section 2]

Sk. Abdul Matleb vs. R.P.S. Khalon & Ors. AIR 2016 Cal. 235.

The alleged respondents were not ready to comply with the Court’s directions on the ground that they had filed an appeal.

It is a well settled law that till the order passed by a competent Court is set aside/or stayed and/or varied and/ or modified, the said order remains valid and subsisting and is required to be complied with, both in law and in spirit.

However, if one has to accept the stand taken by the respondents, it would mean that no order passed by any competent Court will be ever complied with, till the person aggrieved exhausts all his appellate remedies which certainly is not in conformity with the scheme for rendering effective justice in any matter. The Court in such circumstances, issued Rule of Contempt against the respondents.

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Arrest – Procedure to be followed by Police Officer – The police must follow the procedures laid down by the courts – if any situation/circumstance is covered u/s. 41 and 41-A of the CR.P.C proper reasoning for the arrest is required [Criminal Procedure Code, 1974 Section 41, 41-A]

Dr. Rini Johar & Another vs. State of M.P. & Ors. AIR 2016 SC 2679

In the present case, Petitioners being a lady doctor and a lady advocate, against whom a complaint was filed and an FIR u/s. 420 (cheating) and 34 of IPC and Section 66D of the Information Technology Act, 2000, was registered by the Cyber Police. Petitioners submitted that this Court should look into the manner in which they had been arrested, how the norms fixed by this Court had been flagrantly violated and how their dignity was sullied permitting the atrocities to reign. It was urged that if this Court is prima facie satisfied that violations are absolutely impermissible in law, they would be entitled to compensation.

The Hon’ble Supreme Court (SC) held that before the police proceed to arrest, certain guidelines as prescribed by the SC in the case of D.K. Basu vs. State of W.B. (1977) SC 416 should be adhered to.

Thereafter, the Court referred to Section 41 of the Code of Criminal Procedure (inserted by Amendment Act of 2009) and analysing the said provision, opined that a person accused of an offence punishable with imprisonment for a term which may be less than seven years or which may extend to seven years with or without fine, cannot be arrested by the police officer only on his satisfaction that such person had committed the offence. It has been further held that a police officer before arrest, in such cases has to be further satisfied that such arrest is necessary to prevent such person from committing any further offence; or for proper investigation of the case; or to prevent the accused from causing the evidence of the offence to disappear; or tampering with such evidence in any manner; or to prevent such person from making any inducement, threat or promise to a witness so as to dissuade him from disclosing such facts to the court or the police officer; or unless such accused person is arrested, his presence in the court whenever required cannot be ensured.

It has been held that section 41A of the Code of Criminal Procedure makes it clear that where the arrest of a person is not required u/s. 41(1) of the Code of Criminal Procedure, the police officer is required to issue notice directing the accused to appear before him at a specified place and time. Law obliges such an accused to appear before the police officer and it further mandates that if such an accused complies with the terms of notice he shall not be arrested, unless for reasons to be recorded, the police officer is of the opinion that the arrest is necessary. At this stage also, the condition precedent for arrest as envisaged under Section 41 of the Code of Criminal Procedure has to be complied and shall be subject to the same scrutiny by the Magistrate as aforesaid.

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Disgorgement of profits – profits made in violati on of SEBI directions vs. profits made in violation of law

SEBI has passed an order dated 16 June 2016 in the case of Beejay Investment & Financial Consultants Private Limited and others that has interesting implications. SEBI now has power to forfeit profits made through illegitimate transactions in securities markets. Generally, SEBI directs that such illegitimate profits made by parties through price manipulation, insider trading, etc. should be forfeited.

In the present case, however, there is an interesting twist. To put it simply , in this case, the profits were made in the ordinary course of business. Hence, the profit made can be said to be legitimate. However, the transactions were carried on during a time when SEBI had debarred the parties from carrying on such transactions. SEBI ordered forfeiture of such profits.

Background of case
The rationale behind forfeiting (i.e., disgorging) of illegitimate profits needs discussion. SEBI often finds manipulations and other illegalities in the securities market. Profits made are illegitimate or losses are avoided. Such profits are usually made at the cost of persons such as investing public, the company, etc. The credibility of markets also suffers. SEBI has considerable powers to penalise and prosecute such persons. It also has powers to issue directions such as ordering such persons not to access the capital markets, not to trade in such markets, suspend/cancel registration of intermediaries, etc. The monetary penalty can be a multiple of such profits.

However, a question arises about the profits made by such persons through such wrong doings. Clearly, allowing them to retain such profits would be allowing them to keep the rewards of their wrongful acts. Thus, irrespective of other actions taken, it is in fitness of things that such profits are taken away from the wrong doers. Such forfeiture is called disgorgement. At one time, there were two views whether SEBI had power to disgorge such profits. However, a recent amendment has clarified that SEBI has and did have the power to disgorge profits and issue directions restricting their operations.

For example, a person may buy shares of a company at a low price, manipulate the share price of the company by various means to a higher level, and then sell the shares to unsuspecting investor. Such profits are clearly illegitimate. SEBI thus requires power to disgorge these profits. This is of course apart from other adverse action SEBI would take. For example, one such other adverse action is debarring such a person from dealing in securities markets for a specified period.

If a person, who has been so directed not to deal in securities for a specified period, yet violates it and deals in securities, there are obviously consequences under law. Such a person can be, as will be seen, penalised under law and even prosecuted.

However, there can be an interesting situation. A person has been held to have carried out price manipulation in the capital market. He has then been directed not to deal in the capital market for a specified period of time. He yet carries out such dealings by buying and selling shares. The dealings are, however, in the ordinary course of business and no manipulation is alleged or even suspected. In such a case, still, there is violation of SEBI’s directions. The issue is whether profits made out of such trades be disgorged? Even if the person has not committed any violation while carrying out such trades?

Facts of the case
In this case, SEBI had passed orders against certain persons whereby it had “prohibited them from buying, selling or dealing in the securities market, directly or indirectly.”. While such directions were in force, such parties allegedly dealt in shares in the securities markets indirectly and earned profit of nearly Rs. 19 crore. SEBI alleged that these parties carried out such trades by transferring funds to other parties to enable them to carry out trades and earn / make profits.

However, in dealings carried out during this prohibition period, SEBI had not alleged, nor even suspected that such persons had carried out any price manipulation or committed any other wrong act. Since the dealings were carried out despite of such prohibitions, SEBI passed an order impounding such profit and levying interest of Rs. 8.45 crore, viz., in all seeking payment of Rs. 27.44 crore. To give effect to such impounding, it asked such parties to deposit the amount in an escrow account with a lien in favor of SEBI. Till the amount was deposited, SEBI directed that they shall not alienate any of their assets. Their bank/demat accounts were frozen, in the sense that the banks/depositories were ordered not to allow debits except for purposes of creation of the escrow account. They were also directed to submit a list of their assets to SEBI presumably so that SEBI can keep track of their assets and perhaps freeze them too.

This order is an interim and ex-parte order pending completion of investigation after which SEBI may pass final orders for disgorgement of such profits. If the finding of such investigation is that the allegations are true, then the profits would be disgorged and interest will be charged i.e., effectively forfeiting the gain made through a third party.

The question thus to be examined is whether SEBI can in law can pass such orders forfeiting profits made through legitimate deals, albeit in violation of orders not to deal in securities.

Are prohibitory orders preventive or penal?
In this context, it would be relevant to examine whether prohibitory orders are preventive or penal. A person is found to have committed price manipulation in capital markets. He should obviously be punished. However, it may also be in the interest of market that such person be prevented from carrying out trades. Thus, the order prohibiting him from dealing may be prevention, though in practice it works as a penalty / punishment.

The distinction is important because a penal order requires specific powers. A similar question arose before the Supreme Court in SEBI vs. Ajay Agarwal ((2010) 3 SCC 765) albeit in the context of whether power to issue such directions given by an amendment can have a retrospective effect. If it was a penal power, then obviously SEBI could not have issued preventive directions. However, the Court held that it was not a penal power.

The relevance here is that if the parties were issued prohibitory directions not to trade as a preventive measure to avoid repetitive manipulation. That does not make the wrong of disobeying such directions right, but at least the spirit of the original direction was not seriously violated since there was no manipulation that the direction intended to prevent.

Can and should such profits be disgorged?
Having considered the above, the question is whether SEBI can order disgorgement in such a situation and whether it should order such disgorgement? In the first instance, the question is whether SEBI has powers in law to order such disgorgement. In the second instance, the question is whether it would be right to do so.

Can SEBI order such disgorgement?
As mentioned earlier, the power of SEBI to disgorge profits made in violation of the law was contentious. The SEBI Act, 1992, however, was amended in 2014 by way of adding an Explanation. This Explanation to section 11B of the SEBI Act clarifies that SEBI has power to order disgorgement of “wrongful gains” (or loss averted) made “by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder”. Thus, it can be seen that the requirements for disgorging profits are as follows:-

a. There have to be wrongful gains.

b. Such gains should be by indulging in any transaction or activity.

c. Such transaction or activity should be in contravention of the provision of the Act or Regulations made thereunder.

Thus, there have to be specific provisions in the Act/ Regulations and the profits made should be arising out of transactions/activity in contravention of such provisions. For example, the SEBI Prohibition of Insider Trading Regulations prohibit dealing in shares by insiders while in possession of unpublished price sensitive information. If a person still carries out such insider trading, such trading would be in contravention of the Regulations. Such profits are thus liable for disgorgement.

However, what if, as in the present case, the profits are made in violation of the directions of SEBI and not directly in violation of the Act/Regulations? Can SEBI thus disgorge profits made in violation of its directions? On one hand, it is arguable that provisions granting powers to disgorge money should be interpreted strictly. Thus, if the law does not expressly provide for forfeiture of profits made in violation of directions, such forfeiture cannot be made. On other hand, the question may be whether the law could be purposively and broadly interpreted. Thus, if powers to give such directions are given under the Act, then violation can of such directions be treated as violation of the Act?

It is also noteworthy that SEBI does have power to levy penalty where any person does not comply with directions of SEBI. Section 15HB provides for a penalty of upto Rs. 1 crore on persons “fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board”.

Should SEBI disgorge such profits?
Whether SEBI should disgorge such profits is an interesting question! Needless to clarify, this is not to say that what is right is necessarily legal. However, it is seen that a person who violates directions not to trade can suffer a penalty of a maximum amount of Rs. 1 crore. He can also be prosecuted. However, in the meantime, as is alleged in the present case, he could make a profit of several times the maximum penalty leviable. Thus, it is submitted that SEBI should have power to disgorge such profits or, alternatively, levy a penalty that is related to the profits made. Such power to levy penalty that is related to the profits already exists in cases where there is price manipulation, insider trading, etc.

Conclusion
One looks forward to the final order in this case. The issues, as explained earlier, are not just of law but also of power of SEBI to effectively prevent blatant disregard of its directions. Hopefully, if SEBI does order disgorgement, it will give detailed reasoning and legal basis for disgorgement.

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TRIBUTE TO MR. NARAYAN VARMA, RTI ACTIVIST

August 20, 2016, 85th birth anniversary of our beloved Narayan Sir.
Can’t express in words what you mean to us, Sir, only thing we wish to tell you is
THANK YOU!

As we look back over time
We find ourselves wondering …..
Did we remember to thank you enough
For all you have done for us?
For all the times you were by our sides
To help and support us …..
To celebrate our successes
To understand our problems
And accept our defeats?
Or for teaching us by your example,
The value of hard work, good judgement,
Courage and integrity?
We wonder if we ever thanked you
For the sacrifices you made.
To let us have the very best?
And for the simple things
Like laughter, smiles and times we shared?
If we have forgotten to show our
Gratitude enough for all the things you did,
We’re thanking you now.
And we are hoping you knew all along,
How much you meant to us.

THANK YOU SIR. WE MISS YOU A LOT.

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Part D REMEMBERING NARAYAN VARMA

I first met Narayanbhai Varma in 2006 when we were organizing a big RTI drive in about 40 places across India. We needed volunteers and had decided to get different organizations to take up the responsibility of paying for different requirements so that there was no need for any fund collection. Narayanbhai asked what I expected from BCAS. I requested him to either agree to pay the rent for the fortnight for the hall at Government Law college, or get some volunteers. He first asked me a few questions and then with a twinkle in his eye said he would do both. He agreed to pay for the hall from BCAS and also helped to get about a dozen very good volunteers. He came up with a small booklet on RTI which was distributed during the camp. After the event was over with over 3000 RTI applications being filed, he showed his appreciation by saying that BCAS would happily give us place for RTI meetings. We held many meetings at BCAS since there was no need to worry about payments.

He had a good commitment and grasp for law, having been a successful Chartered Accountant. This came through very well when we discussed some finer points of the RTI Act. Despite his age and failing health in the last few years, he happily came to RTI meetings for discussions, planning strategy or holding a RTI convention. I am aware that he was instrumental in getting RTI clinics at BCAS, IMC, Giants and PCGT.

He wrote an article on RTI for every issue of BCA journal, which was provided guidance to many users and practitioners of RTI . I am sure BCAS will continue this commitment to RTI . For many years if a RTI event was to be held Narayanbhai would contribute his time, wisdom and money without any hesitation, or seeking any specific recognition.

When I became a Central Information Commissioner he was very joyous and informed many people. When I met him, he embraced me with such warmth and love, I felt I was being embraced by my father who was no more. Narayanbhai always displayed his love for me and would forgive any mistakes very generously. After I went to Delhi he would often praise my work before others who told me of the pride he displayed when referring to my decisions and work.

There is one incident which I will always remember because it showed Narayanbhai’s unique humility and intellectual greatness. When the 97th Constitutional amendment was passed, he and many other activists thought one implication was that it would have the implication of covering Cooperative Societies in the domain of RTI . He called me and said he wanted to hold a meeting to discuss this issue and would call for a meeting at the IMC. I had not read the amendment but agreed to his request that I should be the main speaker on this subject. On the day before the meeting I carefully read the amendment and the arguments advanced by other RTI activists. I came to the conclusion that this amendment would not mean that Cooperative societies had come in the ambit of RTI . I called up Narayanbhai and explained the position to him and suggested that there could be some other person as the main speaker. Without any hesitation he said I would be the main speaker and should give my views, even if they did not agree with his. This was a man who readily accepted a different opinion and respected it. He had internalized the fundamentals of freedom of speech and information.

Narayanbhai wrote consistently on RTI and was very keen to empower citizens with it. He had understood the power and potential of this law to bring better governance for India. His demise was a personal loss for me, which I have felt very deeply. Narayanbhai’s contribution is an inspiration for all of us, and we owe it to his memory to bring greater life and vigour to its implementation. RTI is great tool for our democracy and better governance and Narayanbhai’s contribution to it has been very significant.

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Adoption and Inheritance

Introduction
Adoption of children is becoming a common feature in modern India with several people either not capable of having or not willing to have biological children. In a country such as India where there are a large number of orphans this is a welcome phenomenon. However, adoption too comes with its unique share of problems. As always the root cause of most disputes relates to inheritance. However, in the case of adoption there can be not one but two inheritance disputes – one relating to the adopted child’s adopted parents and the other relating to those of his biological parents. Recently, the Supreme Court has cleared the air on one such issue. Let us analyse some of the facets of inheritance in the context of an adopted child!

Law
The Hindu Adoptions and Maintenance Act, 1956 (“the Act”) is a codified law which overrules any text, custom, usage of Hindu Law in the context of adoption by a Hindu. All adoptions by a Hindu male or female must be in accordance with the provisions of the Act or else the shall be void. The consequences of a void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and
(b) his rights in the family of his natural birth also subsist and continue.

Thus, it naturally follows that in a case of a void adoption, the adopted child would not be entitled to any inheritance or succession benefits in his adopted family.

On the other hand, the effect of a valid adoption is that from the date of adoption the adopted child will be considered to be the natural child of the adoptive family and all his ties with the original family are severed. However, section 12 provides an important exception that the adopted child is not deprived of the estate vested in him or her prior to his/ her adoption when he/she lived in his/her natural family.

The Supreme Court in Chandan Bilasini vs. Aftabuddin Khan, (1996) 7 SCC 13, has held as follows:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family.”

Inheritance in Adopted Father’s Property
The wordings of section 12 make it clear that an adopted child shall become the child of the adopted parent for all purposes. Hence, it stands to reason that he would also become entitled to inherit the properties of his adopted parents. The Supreme Court had an occasion to consider this issue in Pawan Kumar Pathak vs. Mohan Prasad, CA 4456/2016. The brief facts of this case are interesting. There was a succession dispute after the death of a person between his brother and the deceased’s adopted son. The adopted son claimed he was the natural heir and hence entitled to property of his father. This plea was contested by the uncle. Thereafter the son tried amending his plaint to add that he was the adopted son of the deceased and even tried producing an adoption deed to prove the same. However, all the lower courts until the High Court refused to take this document on record stating it was nowhere pleaded initially that he was the adopted son and hence, now the plea could not be amended to include the same. Thus, the issue travelled up to the Supreme Court.

The Supreme Court set aside the ruling of the High Court. It held that the appellant had in no uncertain terms claimed that he was the only son and the only legal heir who was alive after the demise of his parents. The only controversy according to the Court was that the appellant has never claimed that he was the adopted son, which claim was now sought to be made by amending the plaint.

The Court opined that once the plaintiff had mentioned in the plaint that he was the only son of the deceased, it was not necessary for him to specifically plead that he was an adopted son. For this it relied upon section 3(57) of the General Clauses Act, 1897 which defined a ‘son’ as under:

“’son’ in the case of any one whose personal law permits adoption, shall include an adopted son;”

The Apex Court further observed that once the law recognised an adopted son to be known as a son, it failed to understand why it was necessary for him to specifically plead that he was the adopted son. His averment to the effect that he was the only son, according to the Court, was sufficient to lay the claim of his inheritance on that basis. In fact, it was not even necessary for the appellant to move an application with an attempt to take a specific plea that he was the adopted son as, his plea to the effect that he was the son of the deceased was an adequate plea and to prove that he was the son. Thus, the Supreme Court set aside the lower Court rulings. An important ruling that the Court gave was that an adopted son can claim inheritance of his parents’ property.

This decision, would assist one in taking a stand that an adopted son would be a son even for the purposes of the definition of a relative u/s. 56(2)(vii) of the Income-tax Act or even concessional stamp duty of Rs. 200 in case of gift of residential property under Art. 34 of Schedule-I to the Maharashtra Stamp Act, 1958.

Inheritance in Natural Father’s Property
Section 12 of the Act provides that the adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family. Thus, any property of his natural family vested in the adopted child prior to adoption would continue to be available to him even after adoption. This would be so even though he is deemed to have severed all ties with his biological family and becomes a part of the adopted family. Thus, the Act makes it perfectly clear that a person even after adoption, takes the property along with him which was earlier vested in that person.

Inheritance in Natural Family’s Coparcenary Property
While the law is well settled on inheritance in the vested property belonging to the adopted child’s natural family, there is a judicial controversy over whether he can claim inheritance in the coparcenary property belonging to his natural family. The moot question is whether he can claim to have a vested interest in HUF property or is his share ambulatory and fluctuating and hence, not vested? There are decisions of the High Courts both for and against this question.

The Division Bench of the Andhra Pradesh High Court in Yarlagadda Nayudamma vs. Government of Andhra Pradesh, 1981 AIR(A.P.) 19 has held that an adopted son continues to have a right in coparcenary property belonging to his natural family. It opined that the property vests in a coparcener by birth and hence he gets a vested right in that property by virtue of inheritance. All property vested in the son in his natural family whether self-acquired, obtained by will or inherited from his father or other ancestor or collateral (which is not coparcenary property held along with other coparcener or coparceners) including property held by him as the sole surviving coparcener would not be divested on adoption but would continue to be vested and to belong to the son even after adoption. The Court considered whether it be denied that the interest of a coparcener in the joint family property, though fluctuating, is a vested interest, whatever may be the extent of that interest? It observed that the interest of a deceased coparcener can devolve upon his heirs mentioned in the proviso to section 6 of the Hindu Succession Act and not by survivorship. Similarly, then why can it not be said that by virtue of the provision of Clause (b) of section 12 of the Act, the undivided interest of a person in a Mitakshara coparcenary property will not, on his adoption, be divested but will continue to vest in him even after adoption? It further held that property in the HUF estate is by birth. The coparcener had got every right u/s. 30 of the Hindu Succession Act to will away his property or to dispose of or alienate in whichever way he desired, which he is entitled by birth. It ultimately concluded that a person in Mitakshara family had a vested right even in the undivided property of his natural family and even on adoption he continued to have a right over it.

This decision was followed by a Single Judge of the Bombay High Court in the case of Shivaji Anantrao Deshmukh vs. Anantrao Deshmukh, 1990 (1) Mh. LJ 598. It further held that it was clear that so far as the coparcener is concerned, his right accrued on his birth. For this it relied upon a Supreme Court decision in Controller of Estate Duty, Madras vs. Alladi Kuppuswamy, A.I.R. 1977 S.C. 2069. In every coparcenary, therefore, the son, the grandson or great grandson obtained an interest by birth in the coparcenary property so as to be able to control and restrain improper dealings with the property by another coparcener. Section 30 of the Hindu Succession Act, 1956 clearly showed that undivided share of coparcener can be disposed of by testamentary disposition and this was one of the aspects leading to the conclusion that the right of the coparcener in the undivided share is a right of the owner. This legal sanction had thus strengthened the concept of the undivided share of a coparcener being vested in him as the full owner on birth. Such vesting was not divorced or deferred by any contingency or event. Birth and vesting were simultaneous processes and integrally connected, and nothing could intervene in that process so as to indicate that vesting had been postponed. The Court therefore, concluded that the undivided interest in the coparcenary property continued to vest in the adopted son even after the adoption. Section 12 read along with proviso (b) also clearly laid down that on adoption, there was virtually a severance of the adopted child from the coparcenary. There was thus a partition between the adopted son and other members.

However, a Single Judge of the Bombay High Court in a latter decision in the case of Devgonda Raygonda Patil vs. Shamgonda Raygonda Patil, 1991 (3) Bom. CR 165 has held that on adoption an adopted son ceases to lose his right in the family property of his natural family. It considered and dissented from the decision of the Division Bench of the Andhra Pradesh High Court discussed above. It observed that a coparcener got a right by birth in coparcenary property. However, the said right or interest of coparcener was liable to fluctuation, increasing by the death of a coparcener and decreasing by birth of a new coparcener. A coparcener had right to partition of the coparcenary property. On such partition, the shares of coparceners were defined and then specific property was vested in him. Till partition took place, he was having a right of joint possession and enjoyment. There was community of interest between all members of the joint family and every coparcener was entitled to joint possession and enjoyment of coparcenary property and to be maintained. It was well established that the essence of coparcenary under Mitakshara Law was unity of ownership. The ownership of the coparcenary property vested in the whole body of coparceners. According to the true notion of an undivided family governed by the Mitakshara law, no individual member of that family, whilst it remained undivided could predicate that he had a definite share in the joint and undivided property. His interest was a fluctuating interest, capable of being enlarged by deaths in the family and liable to be diminished by births in the family. It was only on a partition that he became entitled to a definite share. Considering this, according to the Court, there was no vested property in a coparcener and therefore proviso (b) to section 12 could not be attracted. It was only those properties which were already vested in the adoptee prior to adoption by inheritance or by partition in the natural family or as sole surviving coparcener which could pass on to him after the adoption. Therefore the properties which had already become vested in him before adoption as absolute owner were not forfeited by the adoption and the adoptee continued to hold them in the new family. But in the case of coparcenary property it cannot be said that a coparcener had a right to a particular part of it so as to get it vested. It held that section 30 of the Hindu Succession Act supported the view that coparcenary property was not vested in the coparcener. The legislature therefore included section 30 with a view to enable a coparcener to dispose of his interest in the coparcenary property by Will or other testamentary disposition. Ultimately, the Single Judge concluded that if there was coparcenary or joint family in existence in the family of birth on date of adoption, then the adoptee could not be said to have any vested properly. The property did not vest and therefore provision of section 12(b) were not attracted. Vested property meant where indefeasible right was created i.e., on no contingency it can be defeated in respect of particular property. In other words where full ownership were conferred in respect of a particular property. But this was not the position in case of coparcenary properly. The coparcenary property was not owned by a coparcener and never any particular property. All the properties vested in the joint family and were held by it.

Subsequently, another Single Judge of the Bombay High Court in the case of Somanath Radhakrishna More vs. Ujjawala Sudhakar Pawar, 2013 (6) Bom. C.R. 397 has also taken a view that on adoption an adopted son ceases to lose his right in the family property of his natural family. This decision has not considered any of the decisions explained above. It held that on adoption a son’s rights in ancestral property were extinguished. He would no longer be a coparcener in law. He did not have any legal right in the joint property of his natural family. Due to adoption those rights ceased. Even if he continued to stay with his natural family and look after their property his rights could not be rejuvenated.

It is humbly submitted that the two decisions of the Bombay High Court in Devgonda (supra) and Radhakrishna (supra) require a reconsideration for they suffer from judicial impropriety. They have both been issued without notice of an earlier favourable decision of a Single Judge of the Bombay High Court in Shivaji’s case on the same issue and hence, they are rendered per incuriam. It is a settled principle of law that a Single Judge of a High Court cannot give a decision contrary to an earlier judgment of a Single Judge of the same High Court – Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302. Moreover, these contrary Single Judge decisions have even gone against the Division Bench ruling of the Andhra Pradesh High Court. This is against a second principle of law that a Single Judge Ruling of one High Court cannot go against the Division Bench Ruling of another High Court. The correct procedure for the Single Judge in both these adverse rulings, If he did not find himself in agreement with the earlier favourable Rulings, was to refer the binding decision and direct the papers to be placed before the Chief Justice of the Bombay High Court to enable him to constitute a Division Bench to examine the question. This approach finds favour in the Rulings of CIT vs. BR Constructions, 202 ITR 222 (AP FB) and CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom).

On a separate note, notwithstanding the judicial impropriety, it is submitted that the decisions of the Andhra Pradesh Division Bench and the Bombay High Court in Shivaji appear to be more correct.

Conclusion
The Supreme Court’s decision has helped clear a major issue in inheritance of adopted children. One only wishes that the other issue relating to inheritance in HUF property of the natural family is also settled quickly. This would go a long way in reducing several succession disputes.

shailesh.kwebmaker

(Balanced behaviour)

(Balanced behaviour)

Arjun (A) — Bhagwan, in last so many meetings, you have been telling me about our professional ethics. I am rather fed up with your stories. Tell me something new.

Shrikrishna (S) — Arjun, Ethics is an all-pervasive concept. Your profession is your mission. People look upon a professional with certain expectations. Any deviation from ideal behaviour on your part is not acceptable.

A — But why? We are human beings. And today, whole world is behaving in whatever way they like.

S — True. But you can’t do that!

A — Let everyone mend his ways; then we will also change ourselves.

S — Oh! It is like standing on the bank of a river and saying – ‘Let the entire water flow away; then only I will cross it!’

A — Let me tell you one thing. By and large, we are ethical

S — That’s the problem! In ethics, one can be either ethical or unethical. There is no in between stage!

A — But why we alone are subjected to this burden?

S — Because you are intellectuals. You are expected to lead the society. You can’t follow the common lot who don’t think. They follow you. It is not a burden; it is your shield.

A — Our clients always dictate their terms. We can’t resist beyond a certain limit

S — Unfortunately, you people not only succumb to the pressures, but at times, you yourselves initiate unethical tricks!

A — Yes. Agreed. There are a few of us who indulge in this instances like that.

S — Remember these few spoil the image of the entire profession.

A — One cannot generalise. There are quacks in every profession.

S — Agreed. Still, even the basic professionalism is often lacking. You study lot of academics; but not learn the communication skills. Courtesy, etiquettes – all these are very important.

A — But that is lacking even in other professionals – like lawyers!

S — True. Do you think that justifies the lack in your profession!

A — See, many times, some disgruntled members of a company call us directly for some information. This is irritating that we don’t feel like talking to such persons.

S — Avoid taking their calls or meeting them! Right? And if they write to you, you feel you are not obliged to reply. Is it not?

A — You said it!

S — That precisely is the problem. If you feel that they should seek information from the management and not from you, why don’t you write to them firmly but politely?

A — Who has time to do that?

S — Dear Arjun, you don’t understand that their ego is hurt. They feel that you don’t have even the basic courtesy to reply to them. They approach the Institute with a complaint. Most of the complaints are made out of `ego’ problems

A — There is a point in what you say.

S — This behaviour is unbecoming of a professional. It creates a very bad impression about the profession, just as you blamed the lawyers a while ago.

A — How can this be a misconduct attracting disciplinary proceedings?

S — I agree. But then these people find out some loophole or the other in your work. In fact, your own professional brothers help them in doing that!

A — Yes. I have also noticed this. It gives them sadistic pleasure or sometimes, they act out of jealousy.

S — It takes at least 3 to 4 years to establish your innocence! This mental agony is more severe than the actual punishment, if at all you are held guilty! Please remember that in these proceedings, small things like lack of courtesy, lack of professional behaviour count a lot

A — I am realising that ethics is a very wide concept. It is not purely a legalistic idea. It travels beyond that. Even insignificant actions or inactions are a part of Ethics! Thank you Lord!

S — Bless you!

Om Shanti.
The purpose of the above dialogue is to bring forth the importance of certain simple courtesies the professional practice. Very often, it is seen that the disciplinary proceedings are initiated out of ego clashes. Such ego clashes can be minimised to a very large extent by following certain simple professional courtesies like timely and proper communication.

shailesh.kwebmaker

Right to Information Act – Information pertaining to development plan cannot be withheld by Municipal Corporation. [Right to Information Act, 2005, Section 6,8]

Ferani Hotels Pvt. Ltd. vs. State Information Commissioner AIR 2016 (NOC) 384 (Bom.).

The Sole administrator of the estate and effects of one late E.F. Dinshaw

[3rd respondent] submitted an application under section 6(1) of the Act, to the Public Information Officer of the Municipal Corporation of Greater Bombay on December 10, 2012 demanding information pertaining to certain lands. The information as applied was for the certified copies of the property card, certified copies of plans and amendments to the plans as submitted by Ferani Hotels Pvt. Ltd. [Petitioner] or its architects, certified copies of all layouts, sub division plans and amendments, certified copies of development plans and amendments thereon and certified copies of all reports submitted to the Municipal Commissioner and his approval thereto. It was the petitioner’s case that the 3rd respondent was a competitor of the petitioner and disclosure of the information would cause harm and injury to the business of the petitioner company as also would violate the intellectual property rights.

The information as sought by the 3rd respondent was also trade secret and thus would be detrimental to the business of petitioner interest as also in the pending suit and proceedings in various Courts.

The High Court held that information sought was regarding development proposal of land and development plan submitted to and in custody of Municipal Corporation. Municipal Corporation had granted approval to development proposal. Larger public interest requires that said information should be supplied. It was neither trade secret nor disclosure involving infringement of copyright. Such information cannot be withheld.

shailesh.kwebmaker

Precedent – High Court should be very slow in taking a view different than the view of other High Court. [Customs Act, 1962]

Dharmesh Devchand Pansuriya vs. UOI 2016 (336) E.L.T 402 (Guj.)

The settlement commission under the Customs Act, 1962 had held that it had no jurisdiction. Hence, Special Civil Application was filed by the Petitioner in Gujarat High Court. It was pointed out by the revenue that view of settlement commission was supported by decision of Additional Commissioner of Customs vs. Ram Niwas Verma, reported in 2015 (323) ELT (Del) (HC) and C.S. India vs. Additional Director General, DCEI, Bangalore, 2015 (325) ELT (Karn) (HC).

It was held by the Gujarat High Court that Customs Act, 1962 being a central statute bearing tax implications, we would, even otherwise, be slow in taking different view from two reasoned judgments of other High Courts. Even if, therefore, another view was possible, for the sake of consistency, we would have respectfully followed the view of other High Courts.

shailesh.kwebmaker

Hindu Widow’s Remarriage – On remarriage of Hindu widow, she gets divested of right, title and interest in deceased husband’s property. [Hindu Widows Remarriage Act, 1856 Section 2 ]

Balak Ram (By LR’s) & Ors vs. Rukhi & Ors. AIR 2016 Chhattisgarh 68.

The Chhattisgarh High Court held that a perusal of section 2 of Hindu Widows Remarriage Act, 1856 reveals that upon remarriage, all rights and interests of the widow in her deceased husband’s property by way of maintenance, or by inheritance to her husband or to his lineal successors, or by virtue of any Will or testamentary disposition conferring upon her, without express permission to remarry, only a limited interest in such property, with no power of alienating the same, shall, upon her remarriage, cease and determine. The legislative intention of a total disassociation of widow upon remarriage is clearly manifested by providing that upon remarriage, all interests and rights would cease and determine as if she had then died. This provision of strong import of civil death of the widow upon remarriage is sufficiently indicative of legislative intention that remarriage shall lead to determination and cessation of all rights and interests of widow in the property of the deceased. The provision is comprehensive in nature and every possible rights and interests which a widow might have in the property of the deceased including limited estate of maintenance have been brought within the ambit of the provision.

The High Court further held that at the time of commencement of the Hindu Succession Act, 1956 with effect from 17-6-1956 respondent Sukhmen had no subsisting interest or estate in the property of her husband. For that reason, there is no occasion of application of section 14 of the Hindu Succession Act, 1956 in the present case to the aid of the defendant Sukhmen because section 14 of the Hindu Succession Act, 1956 provides that limited estate shall become absolute in favour of a female survivor. The provision by itself does not create any new right or estate which the widow or the female relative did not have at the time of coming into force of the said Act.

shailesh.kwebmaker

Hindu Succession – Property inherited by female Hindu widow from her husband would devolve upon heirs of husband in absence of any son and daughter. [Hindu Succession Act, 1956 Section 15, 16].

Mahadev S. More vs. Sukhdev S More AIR 2016 BOM 151.

The Bombay High Court held as per section 15(2) of the Hindu Succession Act, 1956 any property inherited by a female Hindu from husband or father in law will devolve upon heirs of husband in the absence of any son or daughter of the deceased. Further, as per section16 of the said Act the property of intestate shall devolve as if the property had been the fathers or mothers or husbands as the case may be.

shailesh.kwebmaker

Hindu Marriage Act – Recording of statement of witness through video conferencing is permissible. [Hindu Marriage Act, Section 13B]

Shilpa Chaudhary (Smt.) vs. Principal Judge & Anr. AIR 2016 ALL 122.

The lower court noted in the impugned order that merely on the basis of an affidavit, the marriage cannot be dissolved in proceedings u/s. 13B of Hindu Marriage Act, 1955 (the Act). The presence of the parties is mandatory. Further, the electronic facility available in the court cannot be used, as there being no device for interacting with a party who is residing outside the country.

The Allahabad High Court held that the word “after hearing the parties” used in subsection (2) of section 13B of the Act, however, does not necessarily mean that both parties have to be examined. The word “hearing” is often used in a broad sense which need not always mean personal hearing. When there are no suspicious circumstances or any particular reason to think that the averments in the affidavit may not be true, there is absolutely no reason why the Court should not act on the affidavit filed by one of the parties. The family courts are entitled to ascertain the views of the parties, but however, if one of the parties, appears before the family court and expresses no objection to an affidavit of the other party to be taken on record and is not desirous of cross-examining the deponent of the affidavit, the family court can entertain, unhesitatingly any such application. Increasingly family courts have been noticing that one of the parties is stationed abroad. It may not be always possible for such parties to undertake trip to India, for variety of good reasons. On the intended day of examination of a particular party, the proceedings may not go on, or even get completed, possibly, sometimes due to pre-occupation with any other more pressing work in the Court. However, technology, particularly, in the Information sector has improved by leaps and bounds. Courts in India are also making efforts to put to use the technologies available. Skype is one such facility, which is easily available. Therefore, the Family Courts are justified in seeking the assistance of any practicing lawyer to provide the necessary skype facility in any particular case. For that purpose, the parties can be permitted to be represented by a legal practitioner, who can bring a mobile device. By using the skype technology, parties who are staying abroad can not only be identified by the Family Court, but also enquired about the free will and consent of such party. This will enable the litigation costs to be reduced greatly and will also save precious time of the Court. Further, the other party available in the Court can also help the Court in not only identifying the other party, but would be able to ascertain the required information.

shailesh.kwebmaker

CHANGING PARADIGMS OF CORPORATE SOCIAL RESPONSIBILITY

Not a New Issue
The concept of “Corporate Social Responsibility” (CSR) is not a new concept for business organisations. In fact, many organisations , both in the private and public sector, have pioneered the concept of CSR in India as part of their business responsibilities in different forms. Whilst the most common form of CSR has been the various employee welfare measures undertaken, quite a few companies / business groups have also been involved in charitable causes of different types either through their own “Not for Profit” entities or by tying up with NGOs or simply by making donations to avail of tax benefits.

Recent Developments
The concept of CSR has recently been in the limelight due to it being made mandatory under the Companies Act, 2013 (“the Act”) and the rules framed thereunder for certain classes of companies. It has been widely discussed that such mandatory provisions are not part of any other country’s corporate law provisions and in that sense it could be considered as an innovative provision. The provisions governing CSR are laid down in section 135 of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“the Rules”) and are applicable with effect from 1st April, 2014. The provisions broadly cover the following:

Companies having a net worth (Rs. 500 crore or more), turnover (Rs. 1,000 crore or more) or net profits (Rs. 5 crore or more) are required to mandatorily spend in every financial year starting from 1st April, 2014, atleast two percent of their “average net profits” of the three immediately preceding financial years calculated as per section 198 of the Act (for determining the managerial remuneration limits), on prescribed CSR activities.

The Rules define net profit of a company to mean the net profit as per its financial statements prepared in accordance with the Act, but excludes any profit arising from any overseas branch or branches of the company, whether or not operated as a separate company and any dividend received from other companies in India that are covered under and complying with CSR provisions. Net profit in respect of a financial year for which financial statements have been prepared as per the Companies Act, 1956 is not required to be re-calculated as per the 2013 Act.

Constitution of a CSR Committee of the Board of Directors having atleast one Independent Director (as defined in the Act). However, the Rules have clarified that in the following cases, the committee need not have an Independent Director:

• Unlisted public and private companies who are not required to appoint an Independent Director under the Act.

• Private Companies having only two directors may constitute the committee with the said directors.

• In case of foreign companies, the committee shall comprise of its authorized representative in India and any other nominated person.

The above CSR Committee shall formulate and recommend to the Board of Directors, a CSR Policy which shall specify the activities to be undertaken by the Company as prescribed in Schedule VII of the Act (discussed below) and no other activities even if they are in the nature of social activities would be eligible.

The Rules specify various procedural activities to be undertaken by the above committee and the management like specifying the amount which can be spent on the prescribed activities and the monitoring thereof, displaying the policy on the web site, format for disclosures in the Annual Report, clarifying that expenses incurred for the benefit of only employees and their families would not be considered for inclusion in the prescribed limits, political contributions not covered, etc.

The following are some of the eligible CSR spending which have been prescribed in Schedule VII of the Act:

a) Promoting preventive health care and sanitation and making available safe drinking water;

b) Setting up homes, hostels for women and orphans; old age homes, day care centres and other related activities;

c) E nsuring ecological balance, and other related matters;

d) Livelihood enhancement projects;

e) Protection of national heritage, art and related activities;

f) Measures for the benefit of armed forces veterans, war widows and their dependents;

g) Training to promote rural sports, nationally recognised sports, Olympic sports etc;

h) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

i) Promoting education and employment enhancing vocational skills;

j) Rural development projects;

k) Contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and welfare of scheduled castes, scheduled tribes, minorities and women.

Changing Paradigms
As with any new concept, the above legislative changes are expected to bring about a paradigm shift; both positive and negative in how corporates in particular and society in general could view CSR activities; the important ones amongst them are briefly discussed hereunder:

Commercialisation
Experience indicates that any new idea or concept which is mandated and thrust upon society drives its commercialisation, which is nothing but a formalised and systematic approach at launching the same. CSR which was hitherto largely seen as a voluntary concept is now mandatory, which would require companies, through the CSR Committee, to formalise various processes and formulate policies on various matters which are laid down in the Rules. The policies and procedures should cover various aspects like when, where, what and how to launch such activities within ethical and legal boundaries and keeping in mind the overall social responsibilities which are expected to take care of the interest of various stakeholders. These questions would need to be kept in mind by the CSR Committee and the Management whilst framing the CSR policy.

Certain specific aspects laid down in the Rules which would need to be kept in mind whilst framing the CSR policies and procedures are as under:

• The expenditure is required to be incurred only in respect of activities which are prescribed. This would require companies which are already undertaking CSR activities to reassess whether the same meet the criteria of eligible CSR spend. Also, any activities undertaken in the normal course of business though they may be in the nature of CSR activities need to be excluded. e.g a bank which lends money towards Clean Development Mechanism (CDM) projects and provides project and advisory services towards trading in Certified Emission Reductions (CER) even though it may facilitate in maintaining ecological balance and protecting the environment.

• CSR projects / programs / activities are required to be undertaken in India only.

• CSR projects / programs / activities benefitting only the employees of the Company and their families will not be considered as CSR activities.

• Contribution of any amount directly or indirectly to any political party will not be considered as CSR activity.

• The policy shall specify that any surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the Company.

Further, the Rules provide that the CSR programmes / activities which are approved can be implemented through either of the following:

• registered trust, or
• a registered society, or
• a company

established by the company or its holding or subsidiary or associate company whether as a “not for profit” company or otherwise.

If any of the above entities is not established by the company or its holding or subsidiary or associate company, it must have an established track record of 3 years in undertaking similar programs or projects. The company must also specify the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

The Rules also provide that the companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track record of at least three financial years. However, such expenditure is capped at 5% of total CSR expenditure of the company in a particular financial year. Also, collaboration with other companies for undertaking CSR activities is permissible provided that the CSR Committees of respective companies are in a position to report separately.

The above provisions if implemented in the right spirit would lead to a significant amount of funds getting channelized for the poorer and disadvantaged sections resulting in sustainable and all-round development. However, for companies which are already incurring expenses towards the benefit of their employees and families or in respect of other social causes which are not specifically within the purview of CSR activities prescribed in the Rules would have to incur additional expenses which may lead to a reduction of the distributable profits and consequentially lower returns to the shareholders. Hence, it is imperative that companies engage in a dialogue with the various stakeholders when formulating the CSR policy.

Professionalism
Professionalism is inevitable when commercialisation creeps in and the same is bound to happen also in the case of CSR. Professionalism encompasses taking the help of specialists and consultants. It is expected that many companies would take the help of professionals in formulation of customised CSR strategies aligned with the company’s core values as well as on various types of activities to be undertaken and the effective implementation thereof within the boundaries imposed by regulations so as not to fail on the legal front and be exposed to penalties. This would also open up opportunities for professionals at the same time increasing the cost for companies in the form of fees. Professionalism would also creep in internally through setting up of specialised departments by companies staffed by experienced professionals with the desired competencies to enable companies to navigate through the CSR regulatory maze.

Transparency
Commercialisation and professionalism make transparency inevitable. Further, the Act and the Rules contain various provisions / requirements which would bring about transparency, some of which are as follows:

• Displaying the CSR policy duly approved by the Board of Directors on the company’s web site.

• Detailed disclosures in the Board Report regarding the policy developed and implemented by the Company and the specific initiatives undertaken by the Company on the CSR front.

Many companies have already been disclosing in their Annual Reports on a voluntary basis their CSR initiatives. Further, SEBI through an amendment to the Listing Agreement, mandated the top 100 companies in terms of market capitalisation to include a Business Responsibility Report containing prescribed particulars dealing with various aspects of the company’s contribution towards various sustainability initiatives which amongst others would also include its CSR initiatives, including the amount spent towards the same. This could lead to some amount of duplication and information overload between the disclosures under the Act and the Listing Agreement for the large companies.

Whilst greater transparency is always desirable, it could also have negative connotations since competing recipients / donors of services could demand greater benefits for themselves thereby putting undue pressure on companies.

Employee Benefits
Presently most of the companies equate CSR with providing benefits to their employees and their families in the form of housing, education and medical benefits. However, these activities that benefit only the employees of the company and their families are not considered as CSR activities in the revised guidelines. Hence, most of the companies would have to go much beyond their employees to fulfill their CSR obligations. Further, any social service activities undertaken by the employees of the company not represented by actual spending by the company on the prescribed activities would not be considered to fall within the purview of CSR.

Political Overtones
Though donations to political parties and political contributions are not covered as eligible CSR spend, the CSR mandate could lead to certain forms of indirect contributions to political parties under which companies could be forced to incur CSR spend through organisations which have some form of political patronage or in areas of specific interest to the local political parties. However, it may be noted that contribution to the Prime Ministers’ National Relief is one of the permissible avenues for CSR spend.

Conclusion
Whilst the objectives and intentions of the above innovative provisions are laudable and a step in the right direction for a developing country like ours, it needs to be seen as to how India Incorporated navigates through its various positives and pitfalls.

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 63 dated April 21, 2016

Foreign Investment in units issued by Real Estate Investment Trusts, Infrastructure Investment Trusts and Alternative Investment Funds governed by SEBI regulations

This circular now permits foreign investment (acquire, purchase, sell, transfer) in units of Investment Vehicles registered and regulated by SEBI or any other competent authority, subject to compliance with the applicable terms and conditions. For the purpose of investment under these Regulations: –

1. foreign investment in units of REITs registered and regulated under the SEBI (REITs) Regulations, 2014 will not be included in “real estate business”

2. Presently, an Investment Vehicle will mean: –

a. Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014;

b. Infrastructure Investment Trusts (InvITs) registered and regulated under the SEBI (InvITs) Regulations, 2014;

c. Alternative Investment Funds (AIFs) registered and regulated under the SEBI (AIFs) Regulations 2012.

3. Unit will mean beneficial interest of an investor in the Investment Vehicle and will include shares or partnership interests.

4. A person resident outside India will include a Registered Foreign Portfolio Investor (RFPI) and a Non-Resident Indian (NRI).

5. Payment for the units must be by way inward remittance or by debit to an NRE or an FCNR account.

shailesh.kwebmaker

SEBI Order Now Enables Investors To Recover Losses From Fraudsters In The Securities Markets

Can the Securities and Exchange Board of India make a fraudster or other wrong doer in the securities markets compensate the wronged persons? The answer, generally, is that SEBI cannot do so. This question is important because the parties are normally required to approach other forums which could include courts, Consumer Protection Forums, etc. However, a recent order of SEBI, following an order by the Securities Appellate Tribunal, has opened the door to this aspect to a little extent. This order is significant for several reasons. SEBI is an expert body in the securities markets with fairly broad powers. It has a huge infrastructure at its command to investigate, adjudicate and punish. The groundwork for determining whether a person has committed such a fraud, etc. would be laid down by SEBI through such orders. SEBI also has, as we will see later, the powers to disgorge gains made by wrongdoers. In some cases, such as in the alleged scams in initial public offerings, SEBI even went the extra mile and made arrangements for distribution of these illegal gains to those at whose cost such gains were made. The next logical step ought be to allow such things on a general basis and perhaps even allow persons who have suffered losses to approach SEBI.

However, this has not happened mainly because of certain inherent limitations on SEBI under the law. SEBI is not an adjudicator of disputes. It would surely punish fraudsters. It may debar them from markets. It may make them pay penalty, though such penalty goes in government coffers and not to help those who lost monies. It may prosecute such persons too. It also orders parties who have illegally collected monies to refund them , with interest. However, an aggrieved person could not approach SEBI and require it to make a wrongdoer compensate the loss he had suffered. Indeed, till recently, it was a little uncertain whether SEBI had powers even to disgorge illegitimate gains. A clarificatory amendment was however made in 2014 to explicitly give such powers to SEBI.

However, compensating loss caused by fraudsters continued to remain out of SEBI’s legal powers. The investors were thus forced to approach the long drawn procedures in courts. An investor may get some satisfaction when such fraudsters are punished, but he still would remain short of his hard earned monies. However, thanks to persistent efforts of an investor who lost money to a company and its Promoters through fraud, there is a glimmer of hope that SEBI may be required to do broader justice in such matters. By a recent decision of SEBI, which indeed was following the directions of the Securities Appellate Tribunal (“SAT “), SEBI has acknowledged such responsibility. A final order is awaited, since calculation of ill-gotten monies is in progress. While it would be interesting to see the legal reasoning SEBI provides for passing such final order and also see its fate in appeals, if any, it would be worth to consider this decision.

SEBI’s decision

The decision was in case of the applicants Harishchandra and Ramkishori Gupta (“the Applicants”) in the matter of Vital Communications Limited (“Vital”)(SEBI Order dated 1st April 2016).

To summarise from the facts as narrated in the Order, Vital, a listed company, had made a preferential issue of equity shares to certain parties. SEBI found that a significant portion of the funding for such preferential issue was made by Vital itself. Many of the preferential allottees were also found to be connected to Vital/its Promoters. Thereafter, a spate of catchy advertisements were issued of proposed buyback of shares at a high price, preferential issue at even higher price, and for issue bonus shares. None of this actually took place in the manner described in the advertisements.However, along with such advertisements, certain preferential allottees sold a substantial quantity of shares. Effectively thus, the advertisements helped the parties to sell equity shares at a high price to unsuspecting investors. Since the ruling price then was much lower than the price that could be expected if the promises as per the advertisements had actually been carried out, investors rushed in and bought the shares. SEBI investigated and uncovered the facts and took action against the parties by debarring them, etc.

However, this left the investors with losses. The Applicants approached SEBI praying that their losses should be compensated. SEBI refused to do claiming that it had no powers under SEBI Act to order the company and/or its directors to compensate the Applicants. The Applicants filed an appeal to the SAT. SAT ordered that if SEBI found Vital guilty of fraud, “…it may consider directing the concerned entity or Vital to refund the actual amount spent by the applicants on purchasing the shares in question and with appropriate interest”.

SEBI undertook final investigation and did find wrongdoing and fraud. SEBI passed various directions against the parties. However, still, it did not pass orders providing for compensation to the investors who were duped into making investments. The Applicants once again appealed to SAT . SAT once again passed an order asking SEBI to do the needful. SEBI then passed an order that it will look into quantification of ill gotten gains and thereafter pass orders for disgorgement and restitution. It then thus finally gave a proper hearing to the Applicants on the issue of compensation. However, on review, SEBI found that its own orders/investigation had not made a proper calculation of the ill gotten gains by the Company/ Promoters. Accordingly, finally SEBI undertook vide this recent and latest order to determine the amount of ill gotten gains to take the matter to its next and final step of ordering such parties to return (i.e., effectively compensate) the gains made to the Applicants, who suffered losses. Interestingly, while the original fraudulent advertisement & sale of shares took place in 2002, it is only in 2016, after several petitions and appeals by the Applicants that SEBI has initiated action. It will still be some time before the amount of ill gotten gains would be calculated, then hopefully recovered from the parties and paid to the Applicants who have suffered losses.

Disgorgement – a history of uncertainties

Disgorgement, simply stated, is taking away ill-gotten gains from the wrong doer. A person may, for example, make gains from insider trading in violation of the applicable Regulations. SEBI may order such person to disgorge such gains and pay them over to SEBI. Till very recently, whether SEBI could, in law, order disgorgement was debated. However, the SEBI Act was amended vide the SEBI (Amendment) Act, 2014, with effect from 18th July 2013, specifically giving it power to disgorge gains made in violation of specified provisions of law. However, even these amendments expressly permit only disgorgement. The objective is only to ensure that the wrong doers do not keep their ill gotten gains. They do not specifically expressly provide for payment of these disgorged amounts to those who were at the losing end (though SEBI has passed some orders of such type). Further, it was still unclear law whether an investor can initiate such action. Now, this order creates a precedent that SEBI can undertake such exercise of disgorging such ill-gotten gains and then reimburse them to those whom they belonged.

Limitations

An important distinction to be made here is that this case is no precedent for investors being able to approach SEBI to get general disputes resolved and get the whole of their losses recovered. It only means that SEBI will disgorge gains made from acts/omissions in violation of specified securities laws. And that only such gains will go back to the hands of investors. The investors may have suffered a higher loss, but if its flow cannot be traced to the pockets of such wrong doers, then there may be nothing to recover to that extent. Thus, the investor may not get the whole of their losses compensated.

In any case, if SEBI cannot recover such monies as for example when the fraudsters do not have sufficient assets, the investors would still have lesser amounts to receive.

However, SEBI/SAT has ordered that interest shall also be disgorged and paid, irrespective of whether the fraudster had earned such interest or not. This, though an extension of the power of disgorgement, does give relief for the time element.

There is another type of situation where there may be fraud but the amount of gains made by the fraudster may not match with the losses of the investor. For example, a broker/adviser may give wrongful/fraudulent advice to gain commission fees. The investor may invest monies and then end up losing a large sum of money. However, disgorgement permits forfeiture of ill-gotten gains. In such a case would include only the brokerage/fees, which would be a small fraction of the loss. A purely contractual or similar dispute will not be covered. These continue to remain within the domain of civil courts, stock exchanges, etc.

Scope of disgorgement

As the amended Section 11B makes it clear, disgorgement is of all gains made from violations of SEBI Act and Regulations. Thus, gains made not just from fraud but from any violation of specified securities laws. Thus, even though the decision in this case related to a fraud, the principle would clearly extend to gains from any other violation of Securities Laws. And thus, those who suffer on account of violation of Securities Laws may get compensated.

Conclusion

A fresh, even if hesitant and incomplete, chapter has opened in the history of Securities Laws. While it is too early to draw final conclusions, investors now do have a better measure to recover their losses that is formal, speedier and effective. However, much depends on the final order, the manner in which losses are determined and recovered and also the legal reasoning SEBI adopts for such order. It will also have to be seen whether such orders are appealed against and what appellate Tribunal/ courts decide. The fact that the orders of SAT and SEBI both talk of restitution to be “considered in accordance with the provisions of the SEBI Act, 1992 …and the regulations framed thereunder” is also interesting since there could still be some legal uncertainties about the whole process

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ETHICS, GOVERNANCE & ACCOUNTABILITY

ACCOUNTABILITY

In ethics and governance, accountability is answerability, blameworthiness, liability and the expectation of accountgiving. As an aspect of governance, it has been central to discussions related to problems in the public sector, non-profit and private (corporate) and individual contexts Political accountability is the accountability of the government, civil servants and politicians to the public and to legislative bodies such as a congress or a parliament.

Within an organization, the principles and practices of ethical accountability aim to improve both the internal standard of individual and group conduct as well as external factors, such as sustainable economic and ecologic strategies. Also, ethical accountability plays a progressively important role in academic fields, such as laboratory experiments and field research.

Internal rules and norms as well as some independent commission are mechanisms to hold civil servants within the administration of government accountable. Within department or ministry, firstly, behavior is bound by rules and regulations; secondly, civil servants are subordinates in a hierarchy and accountable to superiors. Nonetheless, there are independent “watchdog” units to scrutinize and hold departments accountable; legitimacy of these commissions is built upon their independence, as it avoids any conflicts of interests. The accountability is defined as an element which is part of a unique responsibility and which represents an obligation of an actor to achieve the goal, or to perform the procedure of a task, and the justification that it is done to someone else, under threat of sanction.

RTI Clinic in June 2016: 2nd, 3rd, 4th Saturday, i.e. 11th, 18th and 25th, 11.00 to 13.00 at BCAS premises.

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2 States: The Story of Mergers and Stamp Duty

Introduction

Just when one thought that the burning issue of stamp duty on merger schemes has been settled once and for all, a Bombay High Court decision has stoked the fire some more! To refresh, the Supreme Court and several High Court decisions have held that the order of High Court u/s.394 of the Companies Act sanctioning an amalgamation was a conveyance within the meaning of the term conveyance and was liable to stamp duty. A Transfer under a merger is a voluntary act of parties and it has all the trappings of a Sale. The Scheme sanctioned by Court is an instrument and the State has power to levy duty on a merger. Even in States where there is no express provision levying duty as on a merger, Courts have held that stamp duty is payable as on a conveyance.

Recently, the Full Bench of the Bombay High Court in the case of The Chief Controlling Revenue Authority vs. M/s. Reliance Industries Ltd, Civil Reference No. 1/2007 was faced with an interesting issue of stamp duty payable on an inter-state merger. In a case where a company registered in Gujarat merged with a company registered in Maharashtra would stamp duty be payable once or twice was the moot question?

Background to the Case

Reliance Petroleum Ltd, a Gujarat based company had merged into Reliance Industries Ltd, a Mumbai based company. The Stamp Acts of both Maharashtra and Gujarat had a specific provision levying duty on a Court Order sanctioning a Scheme of merger. In Maharashtra, the maximum duty on a Scheme of merger is Rs. 25 crore. Pursuant to the merger, Reliance Industries Ltd had paid a stamp duty of Rs. 10 crores in Gujarat and hence, paid only the balance of Rs. 15 crore in Maharashtra. Thus, it claimed that it was eligible for a set off of the duty paid in one State against the duty payable in another State. For this, it relied upon section 19 of the Maharashtra Stamp Act, 1958 (“the Act”) which provides that where any instrument described in Schedule-I to the Act and relating to any property situate or to any matter or thing done or to be done in Maharashtra is executed out of Maharashtra subsequently such an instrument / its copy is received in Maharashtra the amount of duty chargeable on such instrument / its copy shall be the amount of duty chargeable under Schedule-I less the duty, if any, already paid in any other State. Thus, similar to a double tax avoidance agreement, a credit is available for the duty already paid. It may be recalled that under the Act, stamp duty is leviable on an every instrument(not a transaction) mentioned in Schedule I to the Maharashtra Stamp Act, 1958 at rates mentioned in that Schedule – LIC vs. Dinannath mahade Tembhekar AIR 1976 Bom 395. If there is no instrument then there is no duty is the golden rule one must always keep in mind. An English decision in the case of The Commissioner of Inland Revenue vs. G. Anous & Co. (1891) Vol. XXIII Queen’s Bench Division 579 has held that held that the thing, which is made liable to stamp duty is the “instrument”. It is the “instrument” whereby any property upon the sale thereof is legally or equitably transferred and the taxation is confined only to the instrument whereby the property is transferred. This decision was cited by the Supreme Court in the case of Hindustan Lever Ltd vs. State of Maharashtra, (2004) 9 SCC 438. Hence, if no instrument is executed, there would not be any liability to stamp duty.

In Reliance’s case, the Revenue Department argued that it was the Court Order and not the Scheme which was liable for duty. Since there were two separate Court Orders, the duty paid on the Gujarat High Court’s Order was not eligible for set off against the duty payable on the Bombay High Court’s Order. These two Orders were not the same instrument and hence, no credit was available. On the other hand, the Company argued that it was the Scheme which was the instrument and not the Court Orders. Accordingly, since there was only one Scheme, a credit was available. Since both the transferor and the transferee company were required to secure sanctions separately, the Scheme and the Order of the Bombay High Court sanctioning the Scheme would not constitute an instrument or a conveyance, unless and until the Gujarat High Court had sanctioned the Scheme. This is because the Scheme would become effective and operative and the property would stand transferred and vested from the transferor to the transferee, only on the Gujarat High Court making the second order sanctioning the Scheme. In fact if the Gujarat High Court had not sanctioned the Scheme, the same would not have become operative and there would be no transfer or vesting of property in the transferee company. Accordingly on such sanction being granted by the Gujarat High Court, the parties were liable to pay stamp duty on the sanctioned scheme in Gujarat and then to pay stamp duty in Maharashtra subject to a rebate u/s. 19 for the duty already paid in Gujarat.

Court’s Order

The Bombay High Court upheld the stand of the Department and negated Reliance’s plea. It held that the duty is payable on a Court Order and not a Scheme. The Court relied upon the decision of the Supreme Court in Hindustan Lever vs. State of Maharashtra (2004) 9 SCC 438 which held that the transfer is effected by an order of the Court and the order of the Court sanctioning the scheme of amalgamation is an instrument which transfers the properties and would fall within the definition of section 2(l) of the Act, which includes every document by which any right or liability is transferred. In Hindustan Lever’s case, it was held that the point as to whether the stamp duty was leviable on the Court order sanctioning the scheme of amalgamation was considered at length in Sun Alliance Insurance Ltd. vs. Inland Revenue Commissioners 1971 (1) All England Law Reports 135. There it was observed that the order of the court was liable to stamp duty as it resulted in transferring the property and that the order of the court which results in transfer of the property would be an instrument liable to be stamped. The Bombay High Court further held that it was the settled position of law that in terms of the Act, stamp duty is charged on ‘the instrument’ and not on ‘the transaction’ effected by ‘the instrument’.

The Bombay High Court Order dated 7.6.2002 which sanctioned the merger would be the instrument and that was executed in Mumbai, i.e., in Maharashtra. The instrument was chargeable to duty and not the transaction and therefore even if the Scheme may be the same, i.e., transaction being the same, if the Scheme was given effect by a document signed in the State of Maharashtra it was chargeable to duty as per the Act. As per the Act, the taxable event was the execution of the instrument and not the transaction. If a transaction was not supported by execution of an instrument, there could not be a liability to pay duty. Therefore, essentially the duty was leviable on the instrument and not the transaction. Although the Scheme may be same, the Order dated 7.6.2002 being a conveyance and it being an instrument signed in State of Maharashtra, the same was chargeable to duty so far as State of Maharashtra was concerned. It further held that although there were two orders of two different High Courts pertaining to the same Scheme they were independently different instruments and could not be said to be same document especially when the two orders of different High Courts were upon two different Petitions by two different companies. When the scheme of the Act was based on chargeability on an instrument and not on transaction, it was immaterial whether it was pertaining to one and the same transaction. The instrument, which effected the transfer, was the Order of the Court issued u/s. 394(1) that sanctioned the Scheme and not the Scheme of amalgamation itself. It accordingly held that the transfer would take effect from the date the Gujarat High Court passed an order sanctioning the Scheme. In other words, after the Gujarat High Court passed an order sanctioning the Scheme on account of the order of the Bombay Hon’ble Court, the transfer in issue took place. It negated the contention that only a document, which ‘created right or obligation’ alone constituted an ‘instrument’ since the definition of the term ‘instrument’ was an inclusive and not an exhaustive definition. Thus, the term ‘instrument’ also included a document, which merely recorded any right or liability.

It thus concluded that section 19 of the Act providing double-duty relief was not applicable. The Order of the Bombay High Court related to property situated within Maharashtra and was also passed in Maharashtra and hence, a fundamental requirement of section 19, i.e., the instrument must be executed outside the State, was not fulfilled. While paying duty on the Bombay High Court Order dated 7.6.2002 rebate cannot be claimed for the duty paid on Gujarat High Court’s Order by invoking section 19 of the Act.

Repercussions of the judgment

This judgment of the Bombay High Court will have several far reaching consequences on the spate of cross-country business restructuring. Emboldened by this decision, other States would also start demanding stamp duty on mergers involving companies from more than one state Companies would now have to factor an additional cost while considering mergers. The same would be the position in the case of a demerger. An interesting scenario arises if instead of a merger, one considers a slump sale of a business involving companies located in two states. In such an event if a conveyance is executed for any property, then there would only be one instrument. Here it is very clear that section 19 would apply and the duty paid in one state would be allowed as a set off in the other. Thus, depending upon the mode of restructuring the duty would vary. Is that a fair proposition? Also, while companies located in the same state would get away with a single point taxation, those in two or more states suffer an additional burden. Does this not throw up an arbitrage opportunity of having the registered offices of all companies party to the merger in the same state as opposed to having separate registered offices? Would that not lead to a larger loss of revenue for the state from which the office is shifted out as compared to the small gains it would have made from the stamp duty on merger. One wishes that the law is implemented and interpreted in a manner that does not encourage such manoeuvring.

Conclusion

One can only submit that the decision of the Bombay High Court needs a reconsideration otherwise the entire pace of mergers and demergers would be retarded in the Country. With mergers being neutral from an income tax as well as indirect tax perspective, stamp duty is the single biggest transaction cost. This decision would see a huge increase in the duty costs.

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Writ – Power of attorney – A writ petition under Article 226 of the Constitution can be filed by a power of attorney holder subject to certain safeguards [Constitution Of India – Art. 226]

Syed Wasif Husain Rizvi vs. Hasan Raza Khan AIR2016All52 (HC)

The issue before the Full Bench of the Allahabad High Court was “Whether a writ petition under Article 226 of the Constitution can be filed by a power of attorney holder.” The High Court held that when a writ petition under Article 226 of the Constitution is instituted through a power of attorney holder, the holder of the power of attorney does not espouse a right or claim personal to him but acts as an agent of the donor of the instrument. The petition which is instituted, is always instituted in the name of the principal who is the donor of the power of attorney and through whom the donee acts as his agent. In other words, the petition which is instituted under Article, 226 of the Constitution is not by the power of attorney holder independently for himself but as an agent acting for and on behalf of the principal in whose name the writ proceedings are instituted before the Court. Hence, the issue was decided in the affirmative.

The High Court further emphasised the necessity of observing adequate safeguards where a writ petition is filed through the holder of a power of attorney. These safeguards should necessarily include the following:

(1) The power of attorney by which the donor authorises the donee, must be brought on the record and must be filed together with the petition/application;

(2) The affidavit which is executed by the holder of a power of attorney must contain a statement that the donor is alive and specify the reasons for the inability of the donor to remain present before the Court to swear the affidavit; and

(3) The donee must be confined to those acts which he is 15 authorised by the power of attorney to discharge.

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Mohammedan Law – Will – Challenge – Limitation of three years starts from date author of Will expires – Bequest to heir is not valid unless consent of all other legal heirs is obtained. [Limitation Act Art 137 and Mohammedan Law – Rule 192].

Smt Munawar Begum vs. Asif Ali and Ors. AIR 2016 (NOC) 259 (Cal)(HC).

Saira Begum, the mother of the appellant had executed Will in the year 1995. She expired on 18th January, 2003. The appellant filed the suit on 12th November, 2003 for cancellation of the Will. The short point was from which date limitation is to be counted i.e. from 1995 or from 18th January, 2003. There is no dispute that a Will is a legal declaration of the intention of the testatrix with respect to her property and takes effect after her death. A Will is a voluntary posthumous disposition of property. Since a Will takes effect after death, the argument that the appellant was aware of the same in the year 1995 is of no significance. In the instant case, the author of the Will, the mother, expired on 18th January, 2003. The right to sue begins to run from 18th January, 2003 and the period of limitation is three years. The suit was filed on 12th November, 2003. Therefore, it was held that the suit was filed within the period of limitation.

The other issue was regarding the validity of the Will, submission was though a Will under the Mohammedan Law, in order to be valid and enforceable in law, it has to fulfill certain conditions under Rule 192. In the instant case, however, the Will of Saira Begum, the mother of the appellant falls short of the requirements stipulated therein since the Appellant had not given consent. It was held that as far as the consent of the appellant is concerned, under Rule 192, a bequest to an heir is not valid unless the other heirs consent. It appears from the Will dated 28th September, 1995, which was registered subsequently in 1998, that the signature of the appellant, an heir, is absent. Therefore, as the consent of the appellant is missing, the Will or the testamentary disposition is invalid. Though it was emphasised on behalf of the respondent that the Will in question speaks that “I further declare voluntarily that I do not wish to give any part of my said property to my any other children or relatives and I make this Will with the consent of all my other children and without any objection from any of them”, the same is of little significance as though the Will contains the signature of other heirs, it does not bear the signature of the appellant. The said sentence in the Will, as noted, could have been of some significance if other heirs had not put their signature. Since the signature of the appellant was absent, it was held that the Will was not valid under Rule 192 and not binding on the appellant.

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FIRM – Appointment of Arbitrator – Unregistered firm cannot enforce arbitration clause in a partnership deed. [Indian Partnership Act, 9132 – Section 69(3)].

C.M. Makhija vs. Chairman South Eastern Coalfields Ltd. AIR 2016 CHHATTISGARH 63 (HC).

An application was filed in the High Court under section 11(6) of the Arbitration & Conciliation Act, 1996 whereby the applicant sought to enforce an arbitral agreement and prayed for appointment of an Arbitrator. The application was objected to on the ground that the applicant was not a registered partnership firm having registration number from the Register of Firms & Societies and section 69 of the Indian Partnership Act, 1932, prohibits filing of a proceeding by an unregistered firm.

The High Court held that section 69, speaking generally, bars certain suits and proceedings as a consequence of non-registration of firms. Sub-section (1) prohibits the institution of a suit between partners inter se or between partners and the firm for the purpose of enforcing a right arising from a contract or right conferred by the Partnership Act unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. Sub-section (2) similarly prohibits a suit by or on behalf of the firm against a third party for the purpose of enforcing rights arising from a contract unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm. In the third sub-section a claim of set-off which is in the nature of a counter-claim is barred as also the s/s. (3) takes within its sweep the word “other proceedings”. The words “other proceedings” in sub-section (3) whether should be construed as ejusdem generis with “a claim of set-off”, was subject of conflicting decisions. Finally, the conflict was resolved by the Supreme Court in the case of Jagdish Chandra Gupta vs. Kajaria Traders (India) Ltd. AIR 1964 SC 1882 wherein the Court held the rule ejusdem generis did not apply to an unregistered firm and unregistered firm could not enforce an arbitration clause in the partnership deed. Hence, the application for appointment of Arbitrator cannot be gone into for the bar created u/s. 69(3) of the Indian Partnership Act, 1932.

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Fixed Deposits – Renewal of fixed deposits cannot be made in the name of different constituent other than original depositor. [Banking Regulation Act – Section 45ZB].

The Canara Bank vs. Sheo Prakash Maskara AIR 2016 PATNA 58 (HC).

Father, mother and son had different Kamdhenu Deposits made in the year 1996. These deposits were cumulative deposits i.e. the interest accruing is ploughed back and upon maturity, the entire cumulative amount is paid. They were to mature for payment at the end of one year i.e. in 1997. None of the three parties approached the Bank for either renewal or encashment of the said deposit certificates, it lay with the Bank. In other words, the money remained with the Bank. For the first time in the year 2002, the parties approached the Bank for renewal of the deposit receipts. This time the Bank refused to renew the receipts with effect from the date of its original maturity, though they were agreeable to renew the same for the matured amount from the date when they applied for renewal in 2002. However, the head office of the Bank examined the matter and directed the Bank to renew the certificates in relation to the son with effect from the date of its maturity on rate of interest prevailing in that period, but when it came to father and mother the Bank took a stand that it will not give the same treatment.

The Division bench of the High Court held that there is no plausible explanation why in case of the son the Bank agreed to renew for five years retrospectively and grant interest at the then prevailing rates, but when it came to his father and mother why the Bank took a different stand. Therefore, the Court held that the direction of the learned single Judge which is virtually directing that same treatment has to be given to the parents cannot be faulted with, but there was a problem i.e. due to subsequent events. It is not in dispute that during pendency of the writ petition, mother had died on 13-10-2010. Thus, renewal could only be up to that period and not beyond that. There cannot be a renewal in name of a different constituent, than the original applicant, as that would be a fresh deposit. To accept or not to accept fresh deposit is Bank’s discretion and that would also depend upon the claimants upon death, establishing their rights in absence of nomination. Father died on 17-9-1998, and it is for the first time in 2002 that renewal was sought by one of the sons. There could be no renewal in his name. To that extent, we are of the view that after the death of father, the K.D.R. receipt could not be renewed as there is no proof of the fact that renewal or maturity claim was led by all the heirs completing all formalities. The Court further held that if all the heirs claim payment consequent to encashment, Bank would pay the same as per their joint claim in the shares they desire.

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Daughters – Daughters in tribal areas in the State of Himachal Pradesh will inherit property in accordance with Hindu Succession Act 1956 and not as per custom and usage. [Hindu Succession Act, 1956 – Section 2(2), 4]

Bahadur vs. Bratiya and ors AIR 2016 HIMACHAL PRADESH 58 (HC).

A suit for declaration to the effect that father of plaintiff Rasalu was Gaddi, therefore, belonged to Scheduled Tribe community. The parties were governed by custom, according to which, the daughters do not inherit the property of their father

Sub-section (2) of section 2 of the Hindu Succession Act (the Act) reads as under:-

“(2) Notwithstanding anything contained in s/s. (1), nothing contained in this Act shall apply to the members of any Scheduled Tribe within the meaning of clause (255) of Article 366 of the Constitution unless the Central Government, by notification in the official Gazette, otherwise directs.”

The High Court held that in few of the judgments of the Senior Sub Judge and District Judge, it is held that in the community of Gaddi, property devolves only upon the sons and it does not devolve upon the daughters, but in few of the judgments, it is held that property amongst Gaddi community would devolve upon sons and daughters equally. There is no consistency in the judgments cited to prove the custom amongst the Gaddies that sons alone would inherit the property. The plaintiff had not even placed on record copy of Riwaj-i-aam to prove that there is a custom prevalent in the Gaddi community that after the death of male collateral, the property devolves upon sons only and not upon daughters. In the copy of Pariwar register produced by the plaintiff, expression “Rajput Gaddi” has been mentioned. It further strengthens the case of the defendants that parties were Rajput and not Gaddi.

Even if it is hypothetically held that the parties were Gaddi, still the plaintiff has failed to prove that there was any custom whereby the girls were excluded from succeeding to the property of their father. According to the plain language of section 4 of the Hindu Succession Act, 1956, any text, rule or interpretation of Hindu Law or any custom or usage as part of that law in force immediately before the commencement of the Act shall cease to have effect with respect to any matter for which provision is made in the Act. In view of this, though there is no conclusive evidence that the custom is prevailing in the Gaddi community that the daughters would have no rights in the property but even if it is hypothetically assumed that this custom does exist, the same would be in derogation of section 4 of the Hindu Succession Act, 1956.

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A. P. (DIR Series) Circular No. 1 dated July 7, 2016

Discontinuation of Reporting of Bank Guarantee on behalf of service importers

Presently, banks are required to furnish to the CGM-in- Charge, FED, Foreign Investments Division (EPD), RBI, Central Office, Mumbai-400 001 details of invocation of bank guarantee issued by them, on behalf of their resident customers, to non-resident service provider against service imports.

This circular states that, with immediate effect, banks are not required to submit details of invocation of bank guarantee issued by them, on behalf of their resident customers, to non-resident service provider against service imports. They are however required to maintain records of such invocations and furnish the required details to RBI whenever sought.

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A. P. (DIR Series) Circular No. 81 dated June 30, 2016

Settlement System under Asian Clearing Union (ACU)

This circular states that from July 01, 2016, until further notice, all eligible current account transactions including trade transactions in ‘Euro’ can be settled outside the ACU mechanism.

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A. P. (DIR Series) Circular No. 80 dated June 30, 2016

External Commercial Borrowings (ECB) – Approval Route cases

This circular states that all proposal received under the Approval route and exceeding a particular threshold limit will be placed before an Empowered Committee. Final decision will be taken by RBI after considering the recommendations of the Empowered Committee.

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A. P. (DIR Series) Circular No. 71 dated May 19, 2016

Rupee Drawing Arrangement – Submission of statement/returns under XBRL

This circular states that banks have to submit the statement E on total remittances from the quarter ending June 2016 in eXtensible Business Reporting Language (XBRL) system which can be accessed at https://secweb. rbi.org.in/orfsxbrl/.

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A. P. (DIR Series) Circular No. 79 dated June 30, 2016

Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR

With effect from June 20, 2016 the Rupee value of the Special Currency Basket has been fixed at Rs. 83.5796140 as against the earlier value of Rs. 80.9604520.

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Notification No. FEMA 10 (R) / 2015-RB dated January 21, 2016

Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 10/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000.

Further, this Notification contains regulations updated up to June 01, 2016 with respect to Foreign currency accounts by a person resident in India (including changes made vide Notification No. FEMA 10 (R) / (1) / 2016-RB dated June 01, 2016, mentioned above).

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Notification No. FEMA 10 (R)/(1)/2016-RB dated June 01, 2016

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Amendment) Regulations, 2016

This Notification has made the following changes in Regulation 10(R): –

Amendment to Regulation 5

A. The existing sub-regulation (E) shall be renumbered as (F).

B. In the re-numbered regulation (F), the existing subregulation (3) shall be substituted by the following namely:

“Insurance/reinsurance companies registered with Insurance Regulatory and Development Authority of India (IRDA) to carry out insurance/reinsurance business may open, hold and maintain a Foreign Currency Account with a bank outside India for the purpose of meeting the expenditure incidental to the insurance/reinsurance business carried on by them and for that purpose, credit to such account the insurance/reinsurance premia received by them outside India.”

C. After the existing sub-regulation (D), the following shall be inserted namely: –

“(E) Accounts in respect of Startups

An Indian startup or any other entity as may be notified by the Reserve Bank in consultation with the Central Government, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings out of exports / sales made by the said entity and / or the receivables, arising out of exports / sales, of its overseas subsidiary.

Provided that the balances in the account shall be repatriated to India within the period prescribed in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016, as amended from time to time, for realization of export proceeds.

Explanation: For the purpose of this sub-regulation a ‘startup’ means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.”

Amendment to Schedule 1

In Paragraph 1, in sub-paragraph (1), after the existing clause (vi), the following shall be inserted namely: – “vii) Payments received in foreign exchange by an Indian startup, or any other entity as may be notified by the Reserve Bank in consultation with the Central Government, arising out of exports/ sales made by the said entity or its overseas subsidiaries, if any.

Explanation: For the purpose of this schedule a ‘startup’ means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.”

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A. P. (DIR Series) Circular No. 74 dated May 26, 2016

Export Data Processing and Monitoring System (EDPMS) – Additional modules for caution listing of exporters, reporting of advance remittance for exports and migration of old XOS data

This circular contains details of proposed enhancements to the EDMS system which will be operational from June 15, 2016. The enhancements are in the areas of Caution / De-caution Listing of Exporters, Reporting of Advance Remittance for Exports & Export Outstanding Statement.

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A. P. (DIR Series) Circular No. 73 dated May 26, 2016

Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999

This circular states that RBI will upload on its web site www.rbi.org.in all compounding orders passed on or after June 1, 2016.

Further, annexed to this circular are the guidelines, along with examples, used by RBI for calculating the amount imposed under Section 13 of FEMA. The said Annex is as under: –

II. The above amounts are presently subject to the following provisos, viz.

(i) the amount imposed should not exceed 300% of the amount of contravention

(ii) In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.

(iii) In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

a. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
b. If the shares are not allotted and the amount is refunded after 180 days with the Bank’spermission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
c. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

(iv) In cases where it is established that the contravenor has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart.

(v) If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

III. For calculating amount in respect of reporting contraventions under para I.1 above, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays / holidays.

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A. P. (DIR Series) Circular No. 72 dated May 26, 2016

Memorandum of Procedure for channeling transactions through Asian Clearing Union (ACU)

Presently, the minimum amounts for which transactions can be channelized through the ACU mechanism is US $ 25,000 / € 25,000 and thereafter the amounts should be in multiples of US $ 1,000 / € 1,000.

The circular has reduced the minimum as well as multiples amount for which transactions can be channelized through the ACU mechanism. Hence, the new minimum amounts are US $ 500 / € 500 and the amounts should be in multiples of US $ 500 / € 500.

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Notification No. FEMA 368/2016-RB dated May 20, 2016

Given below are the highlights of certain RBI Circulars & Notifications

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Seventh Amendment) Regulations, 2016

Vide this amendment a new regulation – Regulation 10A has been inserted in Notification No. FEMA. 20/2000-RB dated 3rd May 2000 – Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000. This Regulation 10A permits deferment of 25% of the total consideration for a period of 18 months with respect to payment for transfer of shares between a resident and non-resident.

The said Regulation is as under: –

“10A. In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. For this purpose, if so agreed between the buyer and the seller, an escrow arrangement may be made between the buyer and the seller for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the transfer agreement or if the total consideration is paid by the buyer to the seller, the seller may furnish an indemnity for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the payment of the full consideration.

Provided the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines.”

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SEBI imposes restrictions on Wilful defaulters – concerns also for independent directors & auditors

The Securities and Exchange Board of India has joined and followed the Reserve Bank of India in imposing restrictions on `wilful defaulters’ from raising monies from the public. The step is laudable. Defaults, while a necessary risk of lending/investing, are a problem enough for lenders and investors. The tedious laws relating to taking action against them aggravate these problems. However, when persons default not due to difficulties but out of deliberate defiance, law does need to go an extra mile. Naming and shaming them is of course one step. However, now, SEBI, following RBI, has imposed certain restrictions on them from raising capital from the markets.

There are, however, difficulties. The definition of `wilful defaulter’ is felt to be a little too broad. The process for labelling a borrower a `wilful defaulter’ too has raised questions. There are concerns about independent and non-executive directors as to how they will be affected, though at least on paper there is some relief. As will be seen later, such matters have gone in litigation and Court had already read down the rules to some extent. These concerns are more since labelling as `willful defaulter’ would have a cascading effect on companies where such persons may be directors. Generally, auditors too of `wilful defaulters’ would be affected since there are provisions for debarring them from being given more work, etc. if they are found at fault.

Summary of new requirements
There already exist some restrictions on `wilful defaulters’ in the SEBI Regulations. However, now, SEBI has amended its Regulations relating to raising monies by issue of securities and also taking control of companies by `wilful defaulters’.

An issuer who is a `wilful defaulter’ is debarred from making any public issue of its equity securities. This bar will also apply if any of its directors or promoters is a `wilful defaulter’. Public issue of convertible debt instruments or debt securities are also barred in such cases. Further, if it is in default of repayment of principal amount of it debt instruments/debt securities or in payment of interest thereon for more than six months, then too such bar will apply. Certain disclosures are also required in respect of the `wilful default’ where issue is by way of private placement. This will ensure that subscribers know about such past defaults.

The bar does not cover issue of equity securities on `right basis’. However, certain disclosures would have to be made to ensure that the subscribers are made aware of the fact that the issuer is a `wilful defaulter’. Further, the promoters or the promoter group cannot renounce their rights except within the promoter group.

SEBI has also debarred `wilful defaulters’ from making open offers for acquiring shares under the Takeover Regulations. They are also barred from entering into any transaction that could result into attraction of obligation of making such an open offer. However, if someone else makes an open offer, then the `wilful defaulter’ can make a competing bid by way of an open offer. The intention is apparent. `Wilful defaulters’ would thus be prevented from taking control of a listed company or consolidating their stake therein.

Definition of `wilful defaulter’
The SEBI Regulations that impose restrictions on `wilful defaulters’ define the term as follows:-

“wilful defaulter” means an issuer who is categorized as a `wilful defaulter’ by any bank or financial institution or consortium thereof, in accordance with the guidelines on `wilful defaulters’ issued by the Reserve Bank of India and includes an issuer whose director or promoter is categorized as such.”

Thus, SEBI will effectively follow lead of the Reserve Bank of India. Hence, if a person is categorized as a `wilful defaulter’ by the banks/financial institutions in accordance with the guidelines of RBI, he would also become a `willful defaulter’ for the purposes of SEBI Regulations. Promoter or director of a wilful defaulter would also be categorized a `wilful defaulter’.

The Master Circular of the Reserve Bank of India on `Wilful Defaulters’ dated 1st July 2014 has defined `wilful default’ as follows:-

“A “wilful default” would be deemed to have occurred if any of the following events is noted:-

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

There are some points that can be observed from the above definition. For a person to be held to be a wilful defaulter, he needs to have made a default in meeting his payment/repayment obligations to the lender. This is a primary and obvious pre-condition. Such a defaulter would thus become a `wilful defaulter’ if he is found to have done one or more additional wrongs. For example, he may have capacity to honor his obligations and yet he defaults. He may have not utilised the finance for the specific purpose for which it was raised but diverted the funds for other purposes, or he has siphoned off the funds and such funds are not available with the unit in the form of other assets. Finally, he has disposed of or removed assets given as security without the knowledge of the lender.

The term diversion or siphoning of funds has been elaborated further and the meaning seems to go not just beyond the ordinary meaning but also to a situation where there can be serious difficulties. For example, “transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities;” is also deemed to be diversion/siphoning. Now it is of course true that funds are often siphoned off through the subsidiary/group companies route. However, bonafide investments are also needed to be made through such entities. Deeming such investments in hindsight to be siphoning off can be harsh. A similar difficulty arises in respect of another category of deemed siphoning which reads “investment in other companies by way of acquiring equities / debt instruments without approval of lenders”. One trusts that these words are read in context of the original definition and that such deeming would apply only if such investments were in violation of the specific terms on which the finance was given.

Where Independent Directors/Nonexecutive directors are declared as `wilful defaulters’
The SEBI Regulations specifically provide that a person is declared as a `wilful defaulter’, then the companies where he is a director or a promoter would also be deemed to be a `wilful defaulter’. This is irrespective whether the director is a non-executive director or an independent director. This thus would have a wider effect. However, fortunately, this deeming is not the other way round too. If a company is held to be a `wilful defaulter’, its directors are not automatically deemed to be `wilful defaulters’.

As regards independent/non-executive directors, the RBI’s Master Circular does require that the principles for determining whether such a person is a `officer in default’ under the Companies Act, 2013 would be applied here. Thus, unless such an independent/non-executive director can be so held, he would not be considered a `wilful defaulter’.

However, once a persons is held to be a `wilful defaulter’, there is a cascading effect. The other companies where he is also a director would be required by its lender banks/ financial institutions to remove him.

It is interesting to note that the original wide reach of the Rules has been reducedto an extent by the Gujarathas been reducedto an extent by the Gujarat High Court, in Ionic Metalliks vs. Union of India (128 SCL 316 (Gujarat)[2015]), the court has held that the Master Circular, so far as it said that all the directors of the `wilful defaulter’ company would also become `wilful defaulters’ is arbitrary and unreasonable. To this extent, the Circular has been declared as ultra vires the powers of RBI and has been declared to be violative of Article 19(1)(g) of the Constitution of India. The Master Circular now provides for caution and requires, that the conditions under the Companies Act, 2013, for holding a director as officer in default should be applied.

Cut off amount of Rs. 25 lakhs of lending for categoriSation of `wilful defaulters’
Wilful defaulters of any amount would attract various consequences as applicable under law. However, the Master Circular provides that “…keeping in view the present limit of Rs. 25 lakh fixed by the Central Vigilance Commission for reporting of cases of `wilful default’ by the banks/FIs to RBI, any wilful defaulter with an outstanding balance of Rs. 25 lakh or more, would attract the penal measures stipulated at para 2.5 below. This limit of Rs. 25 lakh may also be applied for the purpose of taking cognisance of the instances of ‘siphoning’ / ‘diversion’ of funds”.

Process of declaration of a person as a `wilful defaulter’
An elaborate, transparent and multi-level process has been laid down in the Master Circular to declare a person as a wilful defaulter. A Committee consisting of an Executive Director and two other senior officers of rank of general manager/deputy general manager would examine the evidence whether there was a case of `wilful default’. If it is so concluded, a show cause notice would be issued to the company and its whole-time directors/ promoters and their submissions, including in personal hearing if deemed fit to be given, would be noted. Finally, another Committee headed by Chairman/CEO/MD of the Bank and consisting of two independent directors would review and take a final decision. While this process does sound reasonable, concerns are also raised since the process can be subjective and that it is the lender itself who takes the final decision. In this context, the Gujarat High Court, in the matter of Ionic Metalliks vs. Union of India (ibid) can be usefully referred to for its observations.

Conclusion
`Wilful default’ is something that cannot be generally defended. However, it is necessary that, considering the disclosure, restrictions, etc. that the process of declaring entities and individuals as willful defaulters is fair, transparent and objective. The consequences on persons having no direct role can be devastating in terms of reputation and business both. At the same time, it serves as caution to directors of companies to be extra vigilant in companies on whose board they serve. Considering, the already heavy responsibilities of non-executive/ independent directors under the Companies Act, 2013 and SEBI’s norms on corporate governance, like other laws, this is yet one more reason deterring individuals from coming forward to serve on Board of companies.

shailesh.kwebmaker

Euthanasia– The Right to Die

Introduction
We have all heard that a Will takes effect when a person dies. However, a Living Will is different than a regular Will since it takes effect even when a person is alive. A Living Will is increasingly gaining popularity the world over. It is defined as a document executed by a person in his lifetime which states his desire to have or not to have extraordinary life prolonging measures when recovery is not possible from his terminal condition. It is also known as a medical power of attorney. Its popularity stems from the fact that it lays down the desire of a person as to how he should be medically treated in case he is not in a position to exercise his discretion. The US President Barrack Obama publicly announced that he has prepared a Living Will and encouraged others to also do so. Thus, should a person in a coma or a vegetative state remain so or does he have the right to prescribe beforehand that he desires to end his suffering? Is it valid in India? Let us analyse.

Indian Judicial controversy over Euthanasia
Euthanasia is a derivative of two Greek words and means ‘good death’. The more popular meaning is mercy killing. Thus, it denotes the act of terminating a terminally ill patient / person suffering from a very painful condition in order to putting an end to his suffering. The world over there is a raging controversy over whether euthanasia is valid or not. It is also known as physician assisted suicide. In India, an attempt to commit suicide is a punishable offence under the Indian Penal Code. Hence, the issue which arises is whether a physician assisted suicide or euthanasia is valid? Three Supreme Courts have analysed this issue in great detail.

Smt. Gian Kaur vs. State of Punjab, (1996) 2 SCC 648
In this case, the Constitution Bench of the Supreme Court was faced with the issue of the constitutional validity of the Indian Penal Code which deems attempt to suicide to be a criminal offence. The Court upheld the validity of this section and also discussed certain aspects of euthanasia. It analysed Art. 21 of the Constitution which guarantees the Right to Life and held that to give meaning and content to the word ‘life’ in Article 21, it has been construed as life with human dignity. Any aspect of life which makes it dignified may be read into it but not that which extinguishes it and is, therefore, inconsistent with the continued existence of life resulting in effacing the right itself. The right to die’, if any, is inherently inconsistent with the right to life’ as is death’ with life’. It further held that propagating euthanasia on the view that being in a persistent vegetative state is not of benefit to a patient with terminal illness cannot be an aid to determine whether the guarantee of right to life’ in Article 21 includes the right to die’. The right to life’ including the right to live with human dignity would mean the existence of such a right up to the end of natural life. This also includes the right to a dignified life up to the point of death including a dignified procedure of death. In other words, this may include the right of a dying man to also die with dignity when his life is ebbing out. But the ‘right to die’ with dignity at the end of life cannot be confused or equated with the right to die’ an unnatural death curtailing the natural span of life. The Court raised a question whether a terminally ill patient or one in a persistent vegetative may be permitted to terminate it by a premature extinction of his life? It felt that such category of cases may fall within the ambit of the ‘right to die’ with dignity as a part of right to live with dignity, i.e., cases when death due to termination of natural life is certain and imminent and the process of natural death has commenced. These are not cases of extinguishing life but only of accelerating the process of natural death which has already commenced. Ultimately, the Supreme Court concluded that the debate even in such cases to permit physician assisted termination of life is inconclusive. Thus, the Court did not give any definitive ruling.

Aruna Ramchandra Shanbaug vS. UOI, (2011) 4 SCC 454
This was the famous case of Aruna Ramchandra Shanbaug, the nurse who was in a vegetative state for over 38 years. A Writ Petition was filed by a social activist on her behalf urging the Supreme Court to permit mercy killing since there was no hope of recovery. Disallowing the plea, the Supreme Court embarked upon an extensive disposition on the topic of euthanasia in India and internationally.

The Court explained that euthanasia is of two types : active and passive. Active euthanasia entails the use of lethal substances or forces to kill a person e.g. a lethal injection given to a person with terminal cancer who is in terrible agony. Passive euthanasia entails withholding of medical treatment for continuance of life, for example, if a patient requires kidney dialysis to survive, not giving dialysis although the machine is available, is passive euthanasia. Similarly, if a patient is in coma or on a heart lung machine, withdrawing of the machine will ordinarily result in passive euthanasia. Similarly, not giving lifesaving medicines like antibiotics in certain situations may result in passive euthanasia. Denying food to a person in coma may also amount to passive euthanasia. The general legal position all over the world seems to be that while active euthanasia is illegal unless there is legislation permitting it, passive euthanasia is legal even without legislation provided certain conditions and safeguards are maintained. An important idea behind this distinction is that in “passive euthanasia” the doctors are not actively killing anyone; they are simply not saving him. Active euthanasia is legal in certain European countries, such as, the Netherlands, Luxembourg and Belgium but passive euthanasia has a far wider acceptance in the USA, Germany, Japan, Switzerland, etc.

It made a further categorisation of euthanasia between voluntary euthanasia and non voluntary euthanasia. Voluntary euthanasia is where the consent is taken from the patient, whereas non voluntary euthanasia is where the consent is unavailable e.g. when the patient is in coma, or is otherwise unable to give consent. While there is no legal difficulty in the case of the former, the latter poses several problems

It observed that the Constitution Bench of the Indian Supreme Court in Gian Kaur vs. State of Punjab, 1996(2) SCC 648 held that both, euthanasia and assisted suicide, are not lawful in India. It further observed that Gian Kaur has not clarified who can decide whether life support should be discontinued in the case of an incompetent person e.g. a person in coma or persistent vegetative state. This vexed question has been arising often in India because there are a large number of cases where a person goes into coma (due to an accident or some other reason) or for some other reason is unable to give consent, and then the question arises as to who should give consent for withdrawal of life support. The Court discussed the question as to when can a person said to be dead and concluded that one is dead when one’s brain is dead. The Court observed that there appeared little possibility of Aruna Shanbaug coming out of her permanent vegetative state. In all probability, she will continue to be in the state in which she is in till her death. The question now was whether her life support system should be withdrawn, and at whose instance? The Court said even though there were no Guidelines in India on this issue, it agreed that passive euthanasia should be permitted India. Accordingly, it framed guidelines for the same till Parliament framed a Law and stated that this procedure should be followed all over India until Parliament makes legislation on this subject:

(i) A decision has to be taken to discontinue life support either by the parents or the spouse or other close relatives, or in the absence of any of them, such a decision can be taken even by a person or a body ofpersons acting as a next friend. It can also be taken by the doctors attending the patient. It must be taken bona fide in the best interest of the patient.

(ii) Such a decision requires approval from the High Court, more so in India as one cannot rule out the possibility of mischief being done by relatives or others for inheriting the property of the patient.

(iii) In the case of an incompetent person who is unable to take a decision whether to withdraw life support or not, it is the Court alone, which ultimately must take this decision, though, no doubt, the views of the near relatives, next friend and doctors must be given due weightage.

(iv) When such an application is filed, a Bench of at least two Judges should decide based on an opinion of a committee of three reputed doctors, preferably a neurologist, a psychiatrist, and a physician.The committee of doctors should carefully examine the patient and also consult the record of the patient as well as taking the views of the hospital staff and submit its report to the High Court Bench.

(v) The Court shall also issue notice to the State and close relatives of the patient e.g. parents, spouse, brothers/ sisters etc. of the patient, and in their absence his next friend. After hearing them, the High Court bench should give its verdict.

(vi) The High Court should give its decision speedily at the earliest, since delay in the matter may result in causing great mental agony to the relatives and persons close to the patient.

Surprisingly, the Supreme Court did not lay down any guidelines on the concept of a living Will. Thus, while it upheld passive euthanasia, it did not suggest adhering to guidelines on treatment laid down by the patient himself.

Common Cause vS. UOI, WP (Civil) 215/2005 (SC)
This is the latest decision on the issue of euthanasia. In this case, an express plea was made before the Court to recognise the concept of a Living Will. which can be presented to hospital for appropriate action in the event of the executant being admitted to the hospital with serious illness which may threaten termination of life of the executant. It was contended that the denial of the right to die leads to extension of pain and agony both physical as well as mental which can be ended by making an informed choice by way of people clearly expressing their wishes in advance called “a Living Will” in the event of their going into a state when it will not be possible for them to express their wishes.

The Supreme Court analysed both Gian Kaur and Aruna Shanbaug’s decisions explained above. It held that in Gian Kaur, the Constitution Bench did not express any binding view on the subject of euthanasia rather reiterated that legislature would be the appropriate authority to bring the change.

It felt that in Aruna Shanbaug’s case, the Court upheld the validity of passive euthanasia and laid down an elaborate procedure for executing the same on the wrong premise that the Constitution Bench in Gian Kaurhad upheld the same. Hence, it felt that Aruna’s decision proceeded on an incorrect footing.

Finally the Court held that although the Constitution Bench in Gian Kaur upheld that the ‘right to live with dignity’ under Article 21 is inclusive of ‘right to die with dignity’, the decision does not arrive at a conclusion for validity of euthanasia be it active or passive. So, the only judgment that holds the field in regard to euthanasia in India is Aruna Shanbaug which is based on an incorrect understanding of an earlier decision. Considering the important question of law involved which needs to be reflected in the light of social, legal, medical and constitutional perspective and the unclear legal position, the Apex Court held that it becomes extremely important to have a clear enunciation of the law. Thus, it felt that this issue requires careful consideration by a Constitution Bench of the Supreme Court for the benefit of humanity as a whole. Hence, the matter was placed before the Constitution Bench. The case is still pending and is expected to be disposed of soon.

Recent Legislation
The Government has recently introduced a draft Bill titled “The Medical Treatment of Terminally-Ill Patients (Protection of Patients and Medical Practitioners)”. The key features of this Bill are as follows:

(a) Every competent person who is a major, i.e., above 16 years (yes you read it right, not 18 years) can take a decision on whether or not he should be given / discontinued medical treatment. Thus, in India, a person cannot drive, cannot drink, cannot vote, cannot marry, cannot contract, cannot be tried for an offence as an adult, before he / she turns 18, but such a person can take a decision about whether or not he wants to live? A bit paradoxical, would you not say?

If such a decision is given to a doctor then it is binding on him, provided the doctor satisfies himself that the patient has given it upon free will. Further, a competent patient is one who can take an informed decision about the nature of his illness and the consequences of treatment or absence of it. It would be very difficult for a doctor to determine whether or not the patient is a competent or incompetent person. How would he also determine the free will of a patient? Most doctors would be wary of taking such a subjective call and hence, in most cases would fear turning off life support systems or withdrawing medical treatment. This provision totally takes away the right to die of a patient.

(b) The doctor must then inform the close relatives about the decision of the patient and wait for 3 days before giving effect to the decision to withdraw treatment.

(c) Any close relative may apply to the High Court for obtaining permission in case of an incompetent patient or a competent one who has taken an uninformed decision. The Court will then appoint 3 experts to examine the patient and then give its decision by following a process similar to the that laid down in Aruna Shanbaug’s case. The Bill states that as far as practicable the Court must dispose of the case within a month. Is this possible? Further, why should a terminally ill patient suffer even for a day let alone a month?

(d) A Living Will / advanced medical directive is one given by a person stating whether to give medical treatment in case he becomes terminally ill. The Bill states that such a living Will is void and not binding on any doctor. It is surprising that while Parliament thought it fit to enact a law on passive euthanasia, it has not yet allowed a living Will. Rather than moving a Court, a Living Will would have been the answer to many vexed questions. One hopes that the final version of this all important law permits a Living Will.

Conclusion
While a Living Will is currently not accepted in India, one must nevertheless prepare one. One never knows when the tide may turn and the same may be legally accepted in India. In any event, it would surely have persuasive value if an application is to be made to a High Court since it indicates the wishes of the patient himself. One hopes that the Parliament and the Medical Council of India join hands to frame detailed guidelines to give legal sanctity to Living Wills. While it is important to permit them, there must also be safeguards to protect against misuse of the same. A Living Will must not become a tool to get rid of old / ill relatives in an easy manner. As rightly remarked by the Supreme Court,

“This is an extremely important question in India because of the unfortunate low level of ethical standards to which our society has descended, its raw and widespread commercialisation, and the rampant corruption, and hence, the Court has to be very cautious that unscrupulous persons who wish to inherit the property of someone may not get him eliminated by some crooked method”.

shailesh.kwebmaker

(Gearing up!)

(Gearing up!)

Arjun (A) —Hey Bhagwan, with great devotion I am offering my pranam to you!

Shrikrishna (S) — What happened to you suddenly? We have been meeting so often, but you never started with such ‘pranam’!

A — Bhagwan, I didn’t say it so expressly earlier. I always bow before you. I pray you and seek blessings from you.

S — You are always blessed. But what is the special reason today?

A — No; I was just wondering how I will cope up with the work of audits and tax returns. The season has started! Next 3 to 4 months is a ‘kurukshetra’ – battlefield for us CAs.

S — But this is going on for so many years. What is frightening you so much this year?

A — I believe, this year they are not going to extend the due date! We are always banking on extension.

S — But why do you need extension every year? Can you not plan the work well in advance?

A — It is easy to say so, but difficult to implement.

S— Why?

A — Every month we are busy meeting some deadline or the other. Recently I am told, a reputed bank recruited many employees. Out of them, 80% are for compliances and only 20% for business promotion!

S — Oh! But don’t you agree that such compliances are required for having financial discipline? And you have so much of automation at your disposal.

A — I agree. Still, it is rather too much.

S — Then that is your work opportunity. Look at it positively.

A — But every year they add something new. Our time goes in updating ourselves.

S— What is new this year?

A — So many things! CARO report is changed. They have added many points. Then Ind ASs. And on the top of it that ICDS in Income Tax!

S — What have you done to keep yourself updated? Good that you have compulsory CPE hours – continuous education. At least something you can know. Thereafter, you can study on your own.

A — What you say is right. But our CAs look at CPE hours also as a compliance! They are rarely interested in the lecture.

S — Then what do they do?

A — They just enrol themselves by paying fees. Then either leave the venue and re-appear at the closing hours to sign the attendance sheet. Otherwise, they doze off in the auditorium, sitting at the back. Or depute a proxy!

S — So, people also ‘manage’ CPE hours

A — Yes. Now I am told, they are going to increase the hours.

S — Unfortunately, many of you don’t appreciate the spirit behind CPE hours. How can one do such a demanding profession without updating the knowledge? You should not only upgrade your own knowledge and skills; but also see to it that your staff and trainees are also properly trained.

A — Ah! These days articles (trainees) are absolutely of no use. They have their own priorities. Exam and leave! I wonder why they join articles. And work-wise mostly they are a big zero!

S — Arjun, tell me how much time you have spent to train up your articles? Do you have proper systems in office? Do you implement what you studied in audit subject?

A — True. We are not ourselves well organised. We have no reference files of audit-clients, we don’t do proper documentation. But we have to work under so many constraints! No space, no manpower……

S— I appreciate that. But what is basically lacking is the will power. Anyway, for audit whatever is essential, have you started doing?

A — Like what?

S — Basically, third party confirmations from banks, debtors, creditors…….

A — Who has time to do all that? Our clients never listen to us.

S — No; but somewhere you need to take a firm stand. If you tell them at the last moment, they will resist. You have to insist or indicate to your client that you would then have to put a remark in the report.

A — What you say is right. We need to be more pro-active and assertive. We need to gear up on all fronts. It is high time. We need to wake up!

S— Yes. I suggest you can also see your last year’s files, make checklist, send mails to clients….

A — Yes. And I think, I should take out some time and study important laws applicable to my clients. This will help me in my audit work also

S— Arjun, be also very particular about your documentation. This makes things easier.

A — Yes. You are right.

S— Infact, you should be alert all the time. This will help you in being pro-active automatically. And that is precisely your Institute’s motto – Ya Esha Supteshu Jagarti!

Om Shanti.

shailesh.kwebmaker

Precedent – Judicial discipline – Tribunal cannot assume power to declare judgement of division Bench of Court as per incuriam and refuse to follow it. [Karnataka Sales Tax Act, 1957, Section 6B]

State of Karnataka vs. Deccan Sales Corporation Ltd [2016] 87 VST 265 (Karn).

Reassessment u/s. 12-A of the Act was passed on the basis of the judgment dated 25.11.2004 of this Court in the case of Pali Chemical Industries, Nippani, Belgaum vs. The Additional Commissioner of Commercial Taxes, Zone-I, Bangalore and another reported in 2005 (58) KLJ 54 (HC) (DB), that the chemical fertilizer mixture is not eligible for exemption from turn over tax even if its components have already suffered local tax under the Act.

The Tribunal after noticing that, while delivering the judgment in Pali Chemical Industries case, the decision in the case of State of Karnataka vs. Kothari Industrial Corporation, reported in 2000-01 (5) K.C.T.J. 193 was not noticed or brought before the Hon’ble High Court by the parties concerned in Pali Chemical Industries case, held that the judgment in Pali Chemical Industries case cannot be considered as a binding precedent.

The High Court observed that we would like to place on record that we are very much disturbed by the tendency exhibited by the lower authorities in refusing to follow the law laid down by this Court saying that the same is not binding on them merely because other binding precedents are not taken into consideration in those judgments. It appears that the Tribunal has assumed the power to declare the judgment of the Division Bench of this Court as per incuriam and thereby refused to follow the judgment. The justification for such a course of action is that it is permitted to do so by another Division Bench. If this tendency is not nipped in the bud, we are afraid that there will be total lawlessness especially in the branch of Taxation Law.

The High Court further held that if another Division Bench of this Court is not persuaded to accept the said view, the only course open is to place relevant papers before the Hon’ble Chief Justice to enable him to constitute a larger Bench to examine the question. That is the proper and traditional way to deal with such matter.

It is high time that the lower authorities learn to maintain judicial discipline and stop showing disrespect to the constitutional ethos. Breach of discipline has great impact on the credibility of the judicial institution and encourages chance litigation. It must be remembered that practicability and certainty is a hallmark of the judicial jurisprudence developed in the country in the last six decades.

shailesh.kwebmaker

Precedent – Stay – Strictures – Recovery of demand by adjustment of refund from stayed demand – In identical case for different years of the same assessee such mode of recovery was set aside by the High Court and revenue was unable to show how facts were different this time around. Recovery was set aside. Warning that officers would in future be personally liable.

Larsen & Toubro Ltd vs. UOI 2016 (335) E.L.T. 215 (Bom)

The Bombay High Court held that officers after officers are reluctant to take decisions for the consequences might be drastic for them. No officer is acting independently and following judgments of this Court, but waiting for the superiors to give them a nod. Even the superiors are reluctant given the status of the assessee and the quantum of the demand or the refund claim. We are sure that some day we would be required to step in and order action against such officers who refuse to comply with the Court judgments and which are binding on them as they fear drastic consequences or unless their superiors have given them the green signal. If there is such reluctance, then, we do not find any enthusiasm much less encouragement for business entities to do business in India or with Indian business entitles. Such negative reactions / responses hurt eventually the National pride and image. It is time that the officers inculcate in them a habit of following and implementing judicial orders which bind them and unmindful of the response of their superiors. That would generate the right support from all, including those who come forward to pay taxes and sometimes voluntarily. Hereafter if such orders are not withdrawn despite binding Division Bench judgments of this Court that would visit the officials with individual penalties, including forfeiture of their salaries until they take a corrective action. If any approval or nod is required from superiors that should also be granted expeditiously and while obeying the court orders, the officers can always reserve the Revenue’s rights to challenge them in appropriate legal proceedings. A copy of order be sent to the Secretary in the Ministry of Finance, Government of India and the Chairman, Central Board of Excise and Customs.

shailesh.kwebmaker

Bombay Stamp Act – Amalgamation – Scheme of amalgamation is not chargeable to stamp duty. It is the order of court sanctioning the scheme that is chargeable. [ Bombay Stamp Act,1958, Section 3,2(1)]

The Chief Controlling Revenue Authority, Maharashtra vs. Reliance Industries Ltd AIR 2016 BOMBAY 108 Full Bench.

The Reliance Industries Limited and Reliance Petroleum Limited, Jamnagar Gujarat entered into a scheme of amalgamation u/ss. 391 & 394 of the Companies Act 1956. Company petitions were filed by the transferor company in Gujarat High Court and the transferee company in Bombay High court. The Scheme was sanctioned by both the High Courts. Accordingly, stamp duty was paid in Gujarat of Rs 10 crore. When the order sanctioning the Scheme of amalgamation was presented for stamp duty adjudication in Maharashtra, the Company claimed set off of the stamp duty paid in Gujarat which was refused.

The full bench of the Bombay High court held that as the scheme of arrangement or amalgamation has no effect or force unless or until it was sanctioned by the court, it is the order sanctioning the scheme that would be an instrument u/s. 2(l) and not the scheme of amalgamation. Hence, the Company was not entitled for rebate of stamp duty paid in Gujarat.

shailesh.kwebmaker

Expectations from an Advisor

“Look for what’s missing. Many Advisors can tell a President how to improve what’s proposed or what’s gone amiss. Few are able to see what isn’t there”

Donald Rumsfeld

Over the years that I have been in the profession. I have seen the role of an advisor undergo a radical change and marked shift on the expectations that one has from the advisor. And over these years, I have seen a few things remain constant. The constants are the bedrock of the traits of an advisor and foundation without which no advisor can be successful. The changes emanate from the evolution of the profession and the changes in the ecosystem in which we operate.

Let’s first talk of the changes; I would describe them as:

– execution is the key

– the broad basing of the recipients

– recognising that change is the only constant and

– no man is an island.

Let me elaborate.

It is all about execution. There was a point of time when what was expected from an advisor was advice and the execution was left in-house. While clients do have execution capabilities, they now expect the advisor to be fully involved and lead the execution process. The reason is simple. The challenges at the execution level impact the advice and its efficacy. Whether the Registrar of Companies (ROC) will approve a Limited Liability Partnership (LLP) carrying on financial services or whether SEBI permits an AIF to be an LLP are issues to which the advice reading the law may be different from how execution happens at the ground level.

There was a point of time when the recipient of the advice was the only constituent who the advisor had to address. No longer so. The wider constituents who can be impacted by the advice today expect their interests to be addressed. This is critical from the view point of the advisor too. Increasingly, if the client is accused for breaking a law, the advisor could have his reputation sullied or be held to abet.

The world is in a constant flux of change. Just in the field of taxation, we grew up to say that tax and equity are strangers. One merely has to look at what the law says and no more, no less. No longer so. BEPS is making changes which will have deep rooted impact on the way a MNC operates. Street protests are held if a MNC is perceived as not paying ‘fair’ taxes. The world of taxes and equity are not as strangers as it seemed!! We need to recognise this change as advisors; in fact, the result of the actions we advise today will be evaluated after a few years and we need to anticipate changes and advice accordingly

Finally, the need is to collaborate with other specialists. An accounting advice has tax and financial implications; a tax advice has accounting and financial implications and, most important, all of these need to dovetail into the overall business objectives of an organisation. As advisors, we tend many a time to forget the overall business objective and focus on the little area of specialisation we have. The broad basing of the objective, the ability to relate to the bigger picture and interaction with other Advisors to provide holistic advice is the key to success.

Let us now look at a few constants which I have experienced over the decades;

– the spirit of partnership

– client before self

– tenacity and

– ethics and values

The identification of the advisor with the client and proactively finding solutions is a key constant. Most times, clients do not know the right questions to ask. It is for the advisor to prompt the client to the right question and guide them in the spirit of partnership.

Client before self may sound like a cliché!! It is not and I have seen the most successful advisors, when proposed an assignment by a client, respond that it is not necessary to carry out the assignment!! Indeed, sometimes the client believes in a complex solution which may mean larger fees to the advisor but the solution can be quite simple. It is for the advisor, at all times, to put client’s interest first. In fact, the best advisors have the ability to tell a client that he is not the right advisor but someone else is!!

Solutions provided by an advisor may be difficult to implement and often the client wants short cuts. Building substance to a transaction is a difficult process. It may be the only way to sustain a structure. An advisor needs to be firm with his convictions and not go down the path of least resistance; howsoever convenient it may sound in the short run

Last, but the most important, is ethics and integrity. Short term gains which compromise integrity come up all the time in a variety of ways. Some of these, like referral fees, may sound innocuous but pose conflicts of interest. Similarly, disclosure of interests or potential conflicts is critical. At the end of the day, an advisor has just one reputation to protect and its compromise is the end of the journey.

shailesh.kwebmaker

Right to Information

PART A I DIRECTIONS OF SUPREME COURT

– Fee For RTI Application Should Not
Exceed Rs.50/, Rs. 5/- Per Page, Motive Need Not Be Disclosed

The Supreme
Court on March 20, 2018 capped the fee charged by high courts for responding to
queries filed under the RTI Act at Rs. 50 per application, bringing cheers to
activists seeking information under the transparency law.

The bench
comprising Justices A. K. Goel, R. F. Nariman and U. U. Lalit also asked the
high courts not to force applicants to disclose the reason for seeking
information under the Right to Information law.

On the fee: “We
are of the view that, as a normal Rule, the charge for the application should
not be more than Rs.50/- and for per page information should not be more than
Rs.5/-. However, exceptional situations may be dealt with differently. This
will not debar revision in future, if the situation so demands.”

On disclosure
of motive: With regard to the requirement of disclosure of motive for seeking
information, the Court ruled, “No motive needs to be disclosed in view of the
scheme of the Act.

On CJ’s
permission for disclosure of information: The Court noted that the requirement
of seeking permission of the Chief Justice or the concerned Judge for
disclosure of information “will be only in respect of information which is
exempted under the Scheme of Act.”

On transfer of
application to another public authority: The Court opined that while normally
the public authority should transfer the application to another public
authority if the information is not available, the mandate may not apply “where
the public authority dealing with the application is not aware as to which
other authority will be the appropriate authority”.

On disclosure
of information on matters pending adjudication: With regard to the Rules
debarring disclosure of information on matters pending adjudication, the Court
clarified that “the same may be read consistent with Section 8 of the Act, more
particularly sub-section (1) in Clause (J) thereof, bench passed the order on a
batch of petitions challenging the RTI rules of various high courts, and other
authorities like the Chhattisgarh Legislative Assembly, which imposed
exorbitant fees for application and photocopying.

Advocate
Prashant Bhushan, the counsel for NGO Common Cause, which was one of the
petitioners, said exorbitant fee was charged to disincentivise the general
public from seeking information. He also said the fee should not act as a
deterrent for information seekers.

The petition
filed by the NGO claimed that the Central Information Commission had repeatedly
asked the Allahabad High Court to modify its RTI rules, but its pleas were
ignored.

The Allahabad
High Court was charging Rs. 500 for a reply under the RTI Act, the petition
claimed.

A similar plea
was filed against the Chhattisgarh High Court which had dismissed a petition of
an applicant Dinesh Kumar Soni, and imposed a cost of Rs 10,000 on him for
seeking information.

In his
petition, Soni had challenged the Rule 5 and Rule 6(1) of the Chhattisgarh
Vidhan Sabha Secretariat Right to Information (Regulation of fees and costs)
Rules 2011, which require that a person making an application u/s. 6(1) of the
RTI Act was required to pay Rs. 300.

(Source: http://www.livelaw.in/fee-rti-application-not-exceed-rs-50-rs-5-per-pages-motive-need-not-disclosed-read-sc-directions-read-order/)

PART
B RTI ACT, 2005

– India’s
Right to Information in a mess

Over the years, the pendency of cases under
Right to Information (RTI) Act has shown an upward trend with close to two lakh
pending second appeal and complaint cases been reported under the Act across
the country.

According to the latest report “State of
Information Commissions and the Use of RTI Laws in India (Rapid Review 4.0)” by
Access to Information Programme, Commonwealth Human Rights Initiative (CHRI), a
New Delhi-based NGO, there were 1.93 lakh pending second appeal and complaint
cases in 19 Information Commissions at the beginning of this year as compared
to 1.10 lakh cases pending across 14 Information Commissions in 2015. The
report based on annual reports and websites of Information Commissions was
released at the Open Consultation on the Future of RTI: Challenges and
Opportunities held in New Delhi in the second week of March.

Maharashtra (41,537 cases), Uttar Pradesh
(40,248), Karnataka (29,291), Central Information Commission (23,989) and
Kerala (14,253) were the top five Information Commissions that accounted for 77
percent of the overall pendency. Pendency in Bihar, Jharkhand and Tamil Nadu
among others was not publicly known while Mizoram State Information Commission
(SIC) received and decided only one appeal case in 2016-17, said the report,
adding that SICs of Tripura, Nagaland and Meghalaya had no pendency at all. The
Central Information Commission and nine SICs (Gujarat, Haryana, Jammu &
Kashmir, Kerala, Maharashtra, Nagaland, Odisha, Uttarakhand and Uttar Pradesh)
displayed updated case pendency data on their websites.

Referring to RTI applications, the report
said that around 24.33 lakh RTI applications were filed across the Central and
14 state governments between 2015-17. The report mentioned that it was not
possible to get accurate figures in the absence of annual reports from several
Information Commissions. By a process of extrapolation it may be conservatively
estimated that up to 50 lakh RTI applications would have been submitted by
citizens during the same period, the report added.

About 24.77 lakh RTI applications were
reported in 2015 and it was based on data available for the years 2012-14
(where data was taken for the latest year for which an annual report was
available). The figure for 2015-17 appeared to be a little less but that might
be due to the absence of figures from several jurisdictions where RTI was used
more prolifically, added the report. Furthermore, around 2.14 crore RTI applications
were filed across the country since October, 2005, as per the data published in
the annual reports of Information Commissions accessible on their websites, the
report said, adding that if data was published by all Information Commissions
the figure might have touched 3 to 3.5 crores. Less than 0.5 percent of the
population seemed to have used RTI since its operationalisation, it further
added.

Despite the absence of their latest annual
reports, the Central Government (57.43 lakhs) and the state governments of
Maharashtra (54.95 lakhs) and Karnataka (20.73 lakhs million) continue to top
the list of jurisdictions receiving the most number of information requests.
Gujarat (9.86 lakhs) recorded more RTI applications than neighbouring Rajasthan
(8.55 lakhs) where the demand for an RTI law emerged from the grassroots.
Despite having much lower levels of literacy, Chhattisgarh (6.02 lakh) logged
more RTI applications than 100 percent literate Kerala (5.73 lakhs). Despite
being small states, Himachal Pradesh (4.24 lakhs), Punjab (3.60 lakhs) and
Haryana (3.32 lakhs) registered more RTI applications each than the
geographically bigger state of Odisha (2.85 lakhs). Manipur recorded the lowest
figures for RTI use at 1,425 information requests between 2005-2017. The SIC
did not publish any annual report between 2005 and 2011 and is yet to release
the report for 2016-17.

While the Central government, Andhra Pradesh
(undivided), Assam, Goa, Jammu & Kashmir, Kerala and Uttarakhand have
recorded an uninterrupted trend of increase in the number of RTI applications
received, Himachal Pradesh, Punjab, Sikkim, Nagaland and Tripura have reported
a decline in the number of RTI applications received in recent years and the
reasons for the drop in numbers, according to the report, requires urgent
probing. Arunachal Pradesh, Chhattisgarh, Haryana, Meghalaya, Gujarat, Mizoram,
Odisha and West Bengal have recorded a mixed trend where the RTI application
figures have fluctuated over the years. After seesawing in the initial years, Arunachal
Pradesh has reported a more than 82 percent decline in the number of RTI
applications received in 2015 against the peak reached in 2014. Mizoram also
showed a declining trend of 23 percent in 2016-17 after the peak scaled during
the previous year. West Bengal’s figures rose and dipped to less than 62
percent of the peak reached in 2010 but a rising trend was reported in 2015.

Referring to headless and non-existent SICs,
the report highlighted that there was no State Chief Information Commissioner
(SCIC) in Gujarat since mid-January 2018. While Maharashtra SIC was headed by
an acting SCIC since June 2017, there was no Information Commission in Andhra
Pradesh (after Telangana was carved out in June 2014). The State government had
assured the Hyderabad High Court that it would soon set up an SIC. More than 25
percent (109) of 146 posts in the Information Commissions were lying vacant.
Against 142 posts created in 2015, 111 Information Commissioners (including
Chief Information Commissioners) were working across the country. 47 percent of
the serving Chief Information Commissioners and ICs were situated in seven
states: Haryana (11), Karnataka, Punjab and Uttar Pradesh (9 each), Central
Information Commission, Maharashtra and Tamil Nadu (7 each). Six of these
Commissions were saddled with 72 percent of the pending appeals and complaints across the country.

The report further referred that 90 percent
of the Information Commissions were headed by retired civil servants and more
than 43 percent of the Information Commissioners were from civil services
background. This is the trend despite the Supreme Court’s directive in 2013 to
identify candidates in other fields of specialisation mentioned in the RTI Act
for appointment, argued the report. The report further mentioned that only 8.25
percent of the serving SCICs and ICs were women. Only 10 percent (8 out of 79)
of the Information Commissioners serving across the country were women. Three
of these women ICs were retired IAS officers while two were advocates and two
had a background in social service and education. One woman IC in Punjab had a
background in medicine.There were nine women ICs in 2015. The report said that
the websites of SICs of Madhya Pradesh and Bihar could not be detected on any
internet browser and the SICs of Madhya Pradesh and Uttar Pradesh had not
published any annual report so far. Jharkhand and Kerala SICs each had six
pending annual reports and Punjab had five while Andhra Pradesh had four
pending reports.

(Source: http://www.milligazette.com/news/16188-india-s-right-to-information-in-a-mess)

PART C INFORMATION
ON & AROUND

– Focus On
“Act Rightly” As Much As Right To Information Act, Says PM Modi

Twelve years after it was set up under the
Right To Information (RTI) Act, the Central Information Commission has a new
address — a five-storey environment friendly building in south Delhi, fitted
with information technology and video conference facilities. Earlier, the
highest appellate authority for RTI complaints used to function from two rented
accommodations.

“The greatest asset of a democracy is
an empowered citizen. Over the last 3.5 years we have created the right
environment that nurtures informed and empowered individuals,” said Prime
Minister Narendra Modi who inaugurated the new premises.

At a time when activists have accused the
government of holding back information, PM Modi said like the RTI Act, serious
attention should be paid to “Act Rightly”.

“Many times it has been seen that some
people misuse the rights given to the public for personal gains. The burden of
such wrong attempts is borne by the system”.

Activists say the government is yet to walk
the talk on transparency, and anti-corruption laws await proper implementation.

A Lokpal is yet to be appointed, four years
after the law was put in place. The chief information commissioner was
appointed by the present government after activists went to court. Of the 11
posts of information commissioner, four are vacant and four more retire this
year.

(Source:https://www.ndtv.com/india-news/focus-on-act-rightly-as-much-as-right-to-information-act-says-pm-modi-1821017)

u Ex-corporators
seek right to pursue RTI

Eight former corporators of the Thane
Municipal Corporation (TMC) have filed a criminal writ petition in the Bombay
high court seeking quashing of complaints registered against them by the Thane
police commissioner at the behest of the corporation and its commissioner. The
corporators have alleged that the complaint lodged against them was aimed at
discouraging them from seeking information under Right To Information (RTI) Act
about unauthorised and illegal construction being carried on in the municipal
limits of the corporation.

According to the petition filed by Sanjay
Ghadigaonkar and seven others, all of whom were former corporators in TMC, a
complaint was lodged against them by the Thane police as they had been seeking
information under RTI. The petition has alleged that they had been discouraged
by the corporation from seeking the information, but when it did not deter
them, the police complaints were lodged. The complaint has alleged that the
corporators were misusing the RTI Act for vested interests.

The petition also points to the fact that in
the recent session of the Vidhan Sabha, the chief minister Devendra Fadnavis
had clarified that there was no restriction on anyone from seeking information
under RTI and they cannot be prosecuted for seeking the information, but the
corporation had not heeded the same but had lodged complaints with the police
against them.

The petition while seeking an early hearing
has also prayed for restraining orders against the police from taking any
action against them as well as quashing of the complaints. The petition is
expected to come up for hearing in due course.

RTI shows Left leader’s murderer received
parole every month for 3 yrs.

A Right To Information (RTI) reply has
revealed that CPI(M) leader and murder convict P.K. Kunhanandan was given 15
days parole every month since 2015.

Kunhanandan, one of the convicts in the
murder case of slain leader T.P. Chandrasekharan, is serving a life-term for
the same.

The reply, sought by slain leader’s wife K.
K. Rema, also stated that barring two months (October and November 2017), the
convict had got parole repeatedly from 2015 to 2018.

Chandrasekharan, a local leader of CPI (M)
at Onchiyam in Kozhikode district, left the party in 2009 to form a new one,
Revolutionary Marxist Party (RMP); however, his political journey was cut
short, as he was brutally murdered on May 4, 2012, after his party won
considerable number of seats in a local body elections.

Fifteen CPI (M) workers were found guilty in
the case.

Rema is now reportedly considering legal
action against the state government.

(Source:http://www.business-standard.com/article/news-ani/kerala-rti-shows-left-leader-s-murderer-received-parole-every-month-for-3-yrs-118031900030_1.html)

– RTI being
strangled due to Maha’s neglect: Former CIC Gandhi

Former Central Information Commissioner
Shailesh Gandhi today said that the Right to Information Act was being
“strangled” due to the neglect of the state government.

Gandhi has written a letter to Chief
Minister Devendra Fadnavis asking him to fill the vacancies in the Information
Commission in the state.

“RTI is slowly being strangled in
Maharashtra by not appointing information commissioners. In Maharashtra, there
is vacancy of one Chief Information Commissioner and three commissioners. These
are not being filled despite repeated reminders,” Gandhi stated in his
letter to Fadnavis.

Gandhi said that the pendency at all the
commissions was now alarming and it was in turn killing the objective of the
Act which was transparency.

Sharing the figures of 31,474 pending cases
in four regions, Gandhi said, “Nashik region has 9,931 pending cases, Pune
has 8,647 cases, Amravati 8,026 cases and Mumbai(HQ) has 4,870 cases pending.
These cases are languishing for the want of information commissioners.”

His letter stated that it was a serious
matter and needed immediate attention and claimed that failure to do so would
allow the state to “succeed” in making the RTI Act
“redundant”.

“It will continue as a haven for
rewarding retired bureaucrats and other favourites. It will be an expense
account with no benefit to its citizens,” Gandhi wrote.

He said that Maharashtra was one of the
first states to enact the law when it came into effect in October, 2005 but the
state was now “reeling from the worst levels of pendency in years”.

(Source:http://www.business-standard.com/article/pti-stories/rti-being-strangled-due-to-maha-s-neglect-former-cic-gandhi-118031900500_1.html)

– Agents of
RTI justice, information commissions are its biggest bottleneck

A crippling staff shortage and vacancies in
crucial positions at the central and state information commissions is severely
undermining the Right to Information (RTI) Act, a study by NGOs Satark Nagrik
Sangathan (SNS) and Centre for Equity Studies (CES) has found.

According to the study, ‘Report Card on the
Performance of Information Commissions in India’, which looked at 29
information commissions, including the central information commission (CIC),
and is based on data gathered via 169 RTI pleas, the failure of the central and
state governments to proactively put out information in the public domain is
the second biggest bottleneck in the effective implementation of the Act.

The CIC and state information commissions
(SICs) are almost all functioning much below their sanctioned strength. The
CIC, for example, is four short of its sanctioned strength of 10 information
commissioners. Of these, four are set to retire this year.

Also, the Maharashtra, Nagaland and Gujarat
SICs are headless in the absence of a chief information commissioner. Kerala’s,
meanwhile, has only one information commissioner, out of a sanctioned strength
of five.

The information commissions serve the role
of watchdogs in the implementation of the RTI Act, approached by petitioners
when their pleas are either not accepted by a government agency, refused, or
elicit inadequate information.

According to the report, in 2016, the number
of appeals and complaints pending with 23 SICs stood at the “alarming figure of
1,81,852”, growing 9.5 per cent to 1,99,186 at the end of October 2017. The
Mizoram and Sikkim SICs had zero pendency as of October 2017, while information
wasn’t available for other states.

“The assessment found that several ICs were
non-functional or functioning at reduced capacity, as the posts of
commissioners, including that of the chief information commissioner, were
vacant during the period under review,” said the study, which covered the
period from January 2016 to October 2017.

According to the report, Telangana, Andhra
Pradesh and Sikkim had spells where the SICs didn’t function at all, while the
West Bengal SIC did not hear any complaints or appeals for nearly 12 months.
Not surprisingly, the date of resolution for a complaint/appeal filed with West
Bengal SIC in November 2017 was estimated at 43 years later by the NGOs (see
graphic).

Estimated time required for disposal of an
appeal/complaint filed on November 1, 2017.

In a situation of this kind, people have “no
recourse to the independent appellate mechanism prescribed under the RTI Act”,
the report pointed out.

“The transparency in public authorities
completely diminishes. They have no fear or accountability when this happens,”
said RTI activist Subhash Agrawal.

“The poorest of the poor use RTI for
information regarding basic entitlements such as ration cards. If it takes 5
years to get a response then what is the point? Justice delayed is justice
denied,” said Anjali Bhardwaj, co-convenor of the National Campaign for
People’s Right to Information and a founding member of the Satark Nagrik
Sangathan. There are outliers, of course. The SICs for Mizoram and Sikkim
disposed of appeals/complaints in less than a month.

The political side of it

State chief information commissioners, as is
the case with the central chief information commissioner, are appointed by the
government in consultation with the opposition. Agrawal said while not
appointing chiefs was often a government bid to dilute institutions, delayed
appointments resulted several times from a lack of coordination between the
chief minister and the leader of the opposition. “Mayawati and Mulayam Singh
didn’t see eye to eye, so it took a long time for the UP state commission to be
set up,” he added.

“Not having a chief (information
commissioner) is legally unsound. It is the commissioner who runs everything,
while everyone else is supposed to support him,” said Habibullah.

When the last resort crumbles:

The multitude of vacancies is a factor, of
course, but experts pointed out that it was the lack of transparency on the
part of the central and state governments that forced people to file RTI pleas
even for the most basic information.

“The government is not doing its job of suo
motu disclosure u/s. 4(1)(B) of the RTI Act, under which it has to update
information every 120 days,” said Wajahat Habibullah, the first chief
information commissioner.

Agrawal said
“more proactive disclosures by the government can cut the number of RTI pleas
filed by 70%”.

The ‘inexplicable’ overnight drop

The report pointed out how the CIC stated in
an RTI reply that the total number of appeals and complaints pending with it
stood at 28,502 as on 31 December 2016. However, according to its website, only
364 cases were pending with it on 1 January 2017, it added, terming the fall
“inexplicable”.

The returned complaints

Apart from the pendency, concerns have also
been raised about the high number of appeals and complaints returned to
petitioners, several for unspecified reasons, with many people wondering
whether this was a ploy to project lower pendency rates.

“This is extremely problematic as people,
especially the marginalised, reach the commissions after a great deal of
hardship and a long wait,” said the report.

“The number is so high that I suspect cases
were not rejected on solid grounds,” Habibullah added.

Bhardwaj said they had found instances where
cases were wrongfully returned.

She added that when the commissions returned
complaints, it “fails to perform its legal duty as a friend of the petitioner”.
“Many people are unlettered but they do have the right to information,” she
said.

The penalties, or the lack thereof

According to the RTI Act, the information
commissions can impose penalties of up to Rs 25,000 against public information
officers (PIOs) for violations of the RTI Act. However, according to the
report, penalties were rare.

The report added: “Penalties were imposed
in… only 4.1% of the cases where penalties were imposable!”

(Source:https://theprint.in/governance/agents-of-rti-justice-information-commissions-are-its-biggest-bottleneck/41229/)

– Govt
Orders Voluntary Info Disclosure Under RTI

With most of the departments and authorities
in the state yet to disclose voluntary information under Right to Information
(RTI) Act, the government on Friday directed all the concerned officials to
ensure the disclosures as per the transparency law within a week.

“With a view to maintaining conformity with
the provisions of Section 4 of J&K Right to Information Act, 2009, from
time to time, instructions have been issued, impressing upon all the
Administrative Secretaries, Heads of the Departments and Public Authorities of
the State to ensure effective implementation of the provisions of Section 4 of
the J&K RTI Act in letter and spirit by hosting all requisite information
on the official websites and updating them periodically,” reads a circular
issued by the government.

“However, it is being constantly observed
that some of departments are not implementing the provisions of Section 4 of
the Jammu & Kashmir Right to Information Act, 2009 and some of them have
yet not created their departmental websites.”

The J&K State Information Commission has
been persistently requesting for ensuring implementation of the provisions of
the J&K Right to Information Act, it said.

“Therefore all such departments as have not
so far created their own departmental websites are impressed upon to do so
within a fortnight and host the requisite material on the websites under the
provisions of Jammu & Kashmir Right to Information Act, 2009, on regular
basis. Further, all the Administrative Secretaries are enjoined upon to furnish
the status on this account to the General Administration Department as well as
State Information Commission within a week’s time positively.”

The CIC had shared details with the GAD about
the status of different departments regarding creation of websites, disclosure
u/s. 4 of the RTI Act, appointment of Public Information Officer and First
Appellate Authority.

The CIC has informed the GAD that many
departments were not disclosing the information as per the Act.

The CIC has also highlighted that the domain
name of GMC Jammu has expired on August 30 last year.

(Source:https://kashmirobserver.net/2018/local-news/govt-orders-voluntary-info-disclosure-under-rti-29164)

– Meghalaya
RTI Activist, Who Went After Cement Firms, Found Murdered

A right-to-information activist who was
working to expose alleged misuse of public funds in Meghalaya was found dead in
the northeast state, police said on Tuesday.

Poipynhun Majaw had been filing applications
under the Right to Information (RTI) Act to check alleged corruption in public
projects in Meghalaya’s Jaintia Hills Autonomous District Council.

His body was found near a bridge in
Khliehriat, the district headquarters of East Jaintia Hills, 120 kilometres
from state capital Shillong. He was also the president of Jaintia Youth
Federation.

Police said he was last seen riding a
motorcycle near the East Jaintia Hills deputy commissioner’s office on Monday
night.

“A wrench was found next to the body.
Preliminary inquest suggests the victim was hit on the head leading to his
death,” senior police officer AR Mawthoh said.

Recently, using replies he got from the
authorities under using the RTI route, he had alleged that cement firms have
been mining in the area without permission from the council.

(Source:https://www.ndtv.com/india-news/meghalaya-rti-activist-who-went-after-cement-firms-found-murdered-1826488)

– RBI: SMA details exempted from disclosure under
RTI

Contradicting its reply to an earlier right
to information (RTI) query, the Reserve Bank of India (RBI) has recently said
bank-wise information on special mention account (SMA) 1 and 2 is exempt from
disclosure u/s. 8 (1) (a) & (d) of the RTI Act. While SMA 1 refers to loans
where repayments are overdue between 31-60 days, SMA 2 loans are ones where
principal or interest is overdue between 61-90 days. Although these are
technically not non-performing assets (NPAs), but nonetheless indicate
‘incipient stress’. In April 2016, RBI had said in an RTI response that SMA 1
and 2 loans of all banks stood at Rs 6,24,119 crore at the end of December
2015, 9% higher than Rs 5,73,381 crore at the end of June 2015. It had further
said while SBI’s SMA-2 accounts stood at Rs 60,228 crore, or 5.17% of its total
advances, at PNB this exposure was approximately 6.31% of its total loan book
or Rs 24,824 crore. RBI’s executive director and appellate authority Uma
Shankar said on March 7, 2018, that there is no overriding public interest in
the disclosure of credit information. She added that section 45E of the RBI
Act, 1934, contains a specific bar against disclosure of credit information
collected by the central bank. “Though section 22 of the RTI Act, 2005, starts
with a non-obstante clause, the interpretation given to that section by CIC is
that it is not intended to override special enactments,” she said. She said SMA
data is collected by RBI solely for disseminating the information to other
banks having exposure to the accounts reported in SMA by banks.

(Source:http://www.financialexpress.com/industry/rbi-sma-details-exempted-from-disclosure-under-rti/1096387/)

RTI Clinic in April 2018: 2^nd, 3^rd,
4^th Saturday, i.e. 8^th, 15^th and 22^nd
11.00 to 13.00 at BCAS premises.

shailesh.kwebmaker

Tax Planning/Evasion Transactions On Capital Markets And Securities Laws – Supreme Court Decides

Background

Carrying out
transactions on stock market to avoid tax is practiced. Using capital market
for tax evasion has recently been in news, for example, cases involving
long-term capital gains. A person may, for example, sell shares and book exempt
gains and soon thereafter buy such shares again from the market. At times, such
shares are sold within the family/group and therefore after some time,
transferred to the seller. In particular, what has also been alleged is that
transactions are carried not only with the sole purpose of generating capital
gain but also for manipulating volume and price on stock exchanges. The
question whether such transactions will get concessional tax treatment in tax
assessments is of course an important question. However, in this article, the
question is : how are such transactions treated under the Securities Laws?

Take a common
modus operandi to have been typically employed in the so-called long-term
capital gain transactions. A small listed company with low or non-existent
operations is used. A large quantity of shares is issued by way of preferential
allotment. The quantity of shares may be further increased through bonus issue.
During the period of one year for which such shares have to remain locked-in
(which is also the period of holding for availing of long term capital gains
benefits), the price of the shares is artificially inflated by a small group of
persons who trade within themselves at progressively higher prices. At the end
of this period, by which time the price of the shares is many times (often
50-100 times) more than the original price, the preferential allottees sell the
shares at such higher price. The initial buyer is alleged to have organised all
this. The preferential allottee thus obtains tax free long-term capital gains
(Finance Bill 2018 though seeks to charge 10% capital gains tax). However, in
the process, the capital market system is abused. Fake turnover at artificial
prices is recorded. If unchecked, this not only harms the credibility of the
capital markets but can also result in loss to investors. Several provisions of
Securities Laws specifically prohibit such artificial trading and manipulation.

There were
decisions of the Securities Appellate Tribunal that held, in effect, that the
mere fact that transactions were undertaken for purposes of obtaining tax
benefits, penal action will not necessarily follow. However, while such
decisions could be arguably held to be limited to their facts, it still leaves
an uneasy feeling.

Now, the
Supreme Court has given a detailed ruling. While we will consider the facts
before the Court and also what the Court said, it is important to note that the
Court did not specifically rule on the intent tax planning or even evasion in
such transactions. It did not consider the question whether the capital markets
can or cannot be used for such purposes. It, however, dealt with violation of
Securities Laws that often takes place in such cases and whether and when they
can be said to fall foul of Securities Laws. Hence, the decision has direct
relevance.

Facts of the
case

There were
several parties in the case before the Court but they fell in two broad
categories – the parties who carried out the transactions and the stock brokers
through whom such transactions were carried out.

The parties
entered into transactions that resulted in some persons making profits and
others making losses. This was said to have been done by entering into
transactions in the following manner. In the futures and options markets, one
party (or group) bought futures (or similar derivatives) from the other party
through the stock market mechanism at a particular price. These same parties
then entered into reverse transactions at a higher price, thus resulting in one
side earning profits while the other side was making losses. Take an example. A
transaction in futures of scrip X could be carried out by Mr. A purchasing 1000
futures at a price Rs. 100 each from Mr. B. This transaction would later be
reversed by selling such 1000 futures at a price or Rs. 140. Mr. A would earn a
profit of Rs. 40000 while Mr. B would make a loss of about the same amount.

These
transactions would be synchronised well and rarely, if at all, any other party
would – or even could – transact. Effectively, these persons would be almost
the only persons trading in such scrip.

SEBI found out
what was happening and penalised the parties and the brokers. The parties were
penalised for carrying out artificial trading and price manipulation. The stock
brokers, who are expected to act as gate keepers to the capital market and
exercise due diligence, were penalised for allowing such transactions to happen
through them.

The question
before the Supreme Court was whether such transactions violated the Securities
Laws and whether the parties and their stock brokers could be so punished ?

Ruling of
Court

The Supreme
Court had to deal with several aspects. The Court had to focus on how the
capital markets get affected by such transactions. Even if the purpose was
legitimate, the issue was whether the transactions contravened the Securities
Laws, if so, penal action would follow.

In particular,
it elaborately discussed the issue of synchronised trading. This is trading
where buyers and sellers match their transactions very closely in terms of
timing, volume and price. Thus, the net result is generally that, though the
market is open to all, the transactions get executed between connected parties.
The Court, discussed in detail certain decisions of SAT and ruled that
synchronised trading is not ipso facto illegal or violative of
Securities Laws.

However, it
noted that on the facts before it, the transactions were manipulative. The
price at which purchases and sales of futures and other derivatives was carried
out was not market driven but was pre-determined and therefore artificial. The
buying and selling price of such derivatives are usually related to the
underlying price of the shares/index with which they are linked. While of
course parties can buy at prices far away from such underlying price of the
scrip/index, if their judgement of the future tells them so, the Court found
that this was not so on the facts before it. The purchases and sales were
carried out at widely different prices on the same day and between the same
parties in a synchronised manner in terms of timing and volume. The conclusion
was only that the transactions for all practical purposes were bogus.

Interestingly,
a curious argument was advanced. Whether trading on the derivatives markets
could affect – and hence manipulate – the trading and price in the cash market?
For example, by manipulating say, the price of futures in Scrip X, can the
price of trading of Scrip X in the spot/cash market be affected? The SAT had
held that this was generally not possible in the type of transactions involved
in the present case. This was one of the reasons why SAT overturned the order
of Securities and Exchange Board of India. However, it is submitted the Supreme
Court, rightly pointed out that this was not the issue at all. It was not
SEBI’s case that the transactions in the derivatives markets were carried out
to manipulate the price in the spot/cash markets. SEBI’s case was that the
trading in the derivatives markets itself was artificial, bogus and
manipulative and this by itself was a violation of Securities Laws.

The Court also
rejected the argument that in case of futures, no delivery took place and hence
the transactions did not violate the provisions which prohibit dealing without
change of beneficial interest.

The Court
further described the meaning of unfair trade practices in securities particularly
in the context of the case. It stated, “Contextually
and in simple words, it means a practice which does not conform to the fair and
transparent principles of trades in the stock market. In the instant case, one
party booked gains and the other party booked a loss. Nobody intentionally
trades for loss. An intentional trading for loss per se, is not a
genuine dealing in securities. The platform of the stock exchange has been used
for a non- genuine trade. Trading is always with the aim to make profits. But
if one party consistently makes loss and that too in preplanned and rapid
reverse trades, it is not genuine; it is an unfair trade practice.”. The
Court pointedly noted that, “The non-genuineness of these transactions is
evident from the fact that there was no commercial basis to suddenly, within a
matter of minutes, reverse a transaction when the underlying value had not
undergone any significant change”. Once it held this, it was not difficult to
take the argument to the logical conclusion to hold that the trades were
violative of Securities Laws and uphold the penal action by SEBI.

The Court also
rejected the ruling of SAT that “only if there is market impact on account of
sham transactions, could there be violation of the PFUTP Regulations”. The
court held that fraudulent and unfair trade practices have no place whatsoever
in the capital market.

As far as the
stock brokers were concerned, the Court held that they could not be held liable
unless their own involvement could be demonstrated or it could be shown that
they acted negligently or in connivance with such traders.

Thus, the Court
upheld the penal actions against the traders but not against the stock brokers.

Tax
planning/avoidance/evasion through capital markets

The Court
steered clear of giving a specific and direct ruling on whether tax planning
through transactions in capital markets was by itself violative of Securities
Laws. However, it is submitted that it has given enough guidance on what the
approach should be. As discussed above, transactions that are manipulative or
fraudulent or apparently fake will by themselves be violative of Securities
Laws.

Conclusion

The decision
makes it clear that SEBI can examine transactions in light of how they are
carried out and whether they are violative of Securities Laws, irrespective of
whether or not the objective was tax planning, etc. Some tests are given on
whether such transactions would be held to be violative. The penal action under
Securities Laws will be in addition to any findings and consequences under tax
law.

shailesh.kwebmaker

Hindu Succession Amendment Act– Poor Drafting Defeating Gender Equalisation?

Introduction

The Hindu Succession (Amendment) Act, 2005 (“2005
Amendment Act”) which was made operative from 9th September, 2005, was
a path-breaking Act which placed Hindu daughters on an equal footing with Hindu
sons in their father’s Hindu Undivided Family by amending the age-old Hindu
Succession Act, 1956 (‘the Act”).
However, while it ushered in great reforms it also left several
unanswered questions and ambiguities. Key amongst them was to which class of
daughters did this 2005 Amendment Act apply? The Supreme Court has answered
some of these questions which would help resolve a great deal of confusion.

The 2005 Amendment Act

The Hindu Succession (Amendment) Act, 2005
amended the Hindu Succession Act, 1956. The Hindu Succession Act, 1956, is one
of the few codified statutes under Hindu Law. It applies to all cases of
intestate succession by Hindus. The Act applies to Hindus, Jains, Sikhs,
Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. Any
person who becomes a Hindu by conversion is also covered by the Act. The Act
overrides all Hindu customs, traditions and usages and specifies the heirs
entitled to such property and the order or preference among them. The Act also
deals with some important aspects pertaining to an HUF.

By the 2005 Amendment Act, the Parliament
amended section 6 of the Hindu Succession Act, 1956 and the amended section was
made operative from 9^thSeptember 2005. Section 6 of the Hindu
Succession Act, 1956 was totally revamped. The relevant portion of the amended
section 6 is as follows:

“6. Devolution of interest in coparcenary
property.?(1) On and from the commencement of the Hindu Succession (Amendment)
Act, 2005 (39 of 2005), in a Joint Hindu family governed by the Mitakshara law,
the daughter of a coparcener shall,?

(a) by birth become a coparcener in her
own right in the same manner as the son;

(b) have the same rights in the
coparcenery property as she would have had if she had been a son;

(c) be subject to the same liabilities in
respect of the said coparcenery property as that of a son, and any reference to
a Hindu Mitakshara coparcener shall be deemed to include a reference to a
daughter of a coparcener:

Provided that nothing contained in this
sub-section shall affect or invalidate any disposition or alienation including
any partition or testamentary disposition of property which had taken place
before the 20^th day of December, 2004.”

Thus, the amended section provides that a
daughter of a coparcener shall:

a) become, by birth a coparcener in her own
right in the same manner as the son;

b) have, the same rights in the coparcenary
property as she would have had if she had been a son; and

c) be subject to the same liabilities in respect
of the coparcenary property as that of a son.

Thus, the amendment equated all daughters
with sons and they would now become a coparcener in their father’s HUF by
virtue of being born in that family. She has all rights and obligations in
respect of the coparcenary property, including testamentary disposition. Not
only would she become a coparcener in her father’s HUF but she could also make
a will for the same. The Delhi High Court in Mrs. Sujata Sharma vs. Shri
Manu Gupta, CS (OS) 2011/2006 has held that a daughter who is the eldest
coparcener can become the karta of her father’s HUF.

Key Question

One issue which remained unresolved was
whether the application of the amended section 6 was prospective or
retrospective?

Section 1(2) of the Hindu Succession
(Amendment) Act, 2005, stated that it came into force from the date it was
notified by the Government in the Gazette, i.e., 9^th September,
2005. Thus, the amended section 6 was operative from this date. However, does
this mean that the amended section applied to:

(a) daughters born after this date;

(b) daughters married after this date; or

There was no clarity under the Act on this
point. The Maharashtra Amendment Act (similar to the Central Amendment) which
was enacted in June 1994 very clearly stated that it did not apply to female
Hindus who married before 22^nd June, 1994. In the case of the
Central Amendment, there was no such express provision.

Prospective Application upheld

The Supreme Court, albeit in the context of
a different context, clarified that the 2005 Amendment Act did not seek to
reopen vesting of a right where succession has already taken place. According
to the Supreme Court, “the operation of the Statute is no doubt prospective in
nature…. Although the 2005 Act is not retrospective its application is
prospective” – G. Sekar vs. Geetha (2009) 6 SCC 99.

The Supreme
Court has held in Sheela Devi vs. Lal Chand, (2007) 1 MLJ 797 (SC),
that if the succession was opened prior to the Hindu Succession (Amendment) Act,
2005, the provisions of the 2005 Amendment Act would have no application. Thus,
a daughter can be considered as a coparcener only if her father was a
coparcener at the time of the 2005 Amendment Act coming into force – Smt. Bhagirathi vs. S Manivanan AIR
2008 Mad 250. In that case, the Madras High Court observed that the
father of the daughter had expired in 1975. It held that the 2005 Amendment Act
was prospective in the sense that a daughter was being treated as a coparcener
on and from 9^thSeptember 2005. It was clear that if a Hindu male
died after the commencement of the 2005 Amendment Act, his interest in the
property devolved not by survivorship but by intestate succession as
contemplated in the Act. The death of the father having taken place in 1975,
succession itself opened in the year 1975 in accordance with the earlier
provisions of the Act. Retrospective effect cannot be given to the provisions
of the 2005 Amendment Act.

The Full Bench of the Bombay High Court in Badrinarayan
Shankar Bhandari vs. Omprakash Shankar Bhandari, AIR 2014 Bom 151 has
held that the legislative intent in enacting clause (a) of section 6 was
prospective i.e. daughter born on or after 9^thSeptember 2005 will
become a coparcener by birth, but the legislative intent in enacting clauses
(b) and (c) of section 6 was retroactive, because rights in the coparcenary
property were conferred by clause (b) on the daughter who was already born
before the amendment, and who was alive on the date of Amendment coming into
force. Hence, if a daughter of a coparcener died before 9^thSeptember
2005, since she would not have acquired any rights in the coparcenary property,
her heirs would have no right in the coparcenary property. Since section 6(1)
expressly conferred a right on daughter only on and with effect from the date
of coming into force of the 2005 Amendment Act, it was not possible to take a
view that heirs of such a deceased daughter could also claim benefits of the
amendment. The Court held that it was imperative that the daughter who sought
to exercise a right must herself be alive at the time when the 2005 Amendment
Act was brought into force. It would not matter whether the daughter concerned
was born before 1956 or after 1956. This was for the simple reason that the
Hindu Succession Act 1956 when it came into force applied to all Hindus in the
country irrespective of their date of birth. The date of birth was not a
criterion for application of the Principal Act. The only requirement was that
when the Act was being sought to be applied, the person concerned must be in
existence/ living. The Parliament had specifically used the word “on and
from the commencement of Hindu Succession (Amendment) Act, 2005” so as to
ensure that rights which were already settled were not disturbed by virtue of a
person claiming as an heir to a daughter who had passed away before the
Amendment Act came into force.

Finally, the matter was settled by the Apex
Court in its decision rendered in the case of Prakash vs. Phulavati,
(2016) 2 SCC 36. The Supreme Court examined the issue in detail and
held that the rights under the Hindu Succession Act Amendment are applicable to
living daughters of living coparceners (fathers) as on 9^th
September, 2005 irrespective of when such daughters were born. It further held
that any disposition or alienation including a partition of the HUF which may
have taken place before 20^th December, 2004 (the cut-off date
provided under the 2005 Amendment Act) as per law applicable prior to the said
date would remain unaffected.

Thus, as per the above Supreme Court
decision, in order to claim benefit, what is required is that the daughter
should be alive and her father should also be alive on the date of the
amendment, i.e., 9^th September, 2005. Once this condition was met,
it was immaterial whether the daughter was married or unmarried. The Court had
also clarified that it was immaterial when the daughter was born.

Further Controversy

Just when one thought that the controversy
had been settled by the Supreme Court, the fire was reignited. A new question
cropped up – would the 2005 Amendment Act apply to those daughters who were
born before the enactment of the Hindu Succession Act, 1956? Thus, could it be
said that since the daughter was born before the 1956 Act she could not be considered
as a coparcener? Hence, she would not be entitled to any share in the joint
family property? The Karnataka High Court in Pushpalata NV vs. V. Padma,
ILR 2010 KAR 1484 held that prior to the commencement of the 2005
Amendment, the legislature had no intention of conferring rights on a daughter
of a coparcener including a daughter. In the Act before the amendment the
daughter of a coparcener was not conferred the status of a coparcener. Such a
status was conferred only by the 2005 Amendment Act. After conferring such
status, right to coparcenary property was given from the date of her birth.
Therefore, it necessarily followed such a date of birth should be after the
Hindu Succession Act came into force, i.e., 17.06.1956. There was no intention
either under the unamended Hindu Succession Act or the Act after the amendment
to confer any such right on a daughter (of a coparcener) who was born prior to
17.06.1956. The status of a coparcener was conferred on a daughter of a
coparcener on and from the commencement of the 2005 Amendment Act. The right to
property was conferred from the date of birth. Both these rights were conferred
under the original Hindu Succession Act and, therefore, it necessarily followed
that the daughter who was born after the Act came into force alone would be
entitled to a right in the coparcenary property and not a daughter who was born
prior to 17.06.1956. The same view was taken again by the Karnataka High Court
in Smt Danamma and Others vs. Amar and Others, RFA NO. 322/2008 (Kar).

This 2^nd decision of the
Karnataka High Court was appealed in the Supreme Court and the Supreme Court
gave its verdict in the case of Danamma @ Suman Surpur and Others vs.
Amar and Others, CA Nos. 188-189 / 2018. The Apex Court observed that
section 6, as amended, stipulated that on and from the commencement of the 2005
Amendment Act, the daughter of a coparcener would by birth become a coparcener
in her own right in the same manner as a son. It was apparent that the status
conferred upon sons under the old section and the old Hindu Law was to treat
them as coparceners since birth.

The amended provision now statutorily
recognised the rights of coparceners of daughters as well since birth. The
section used the words ‘in the same manner as the son’. It was therefore
apparent that both the sons and the daughters of a coparcener had been
conferred the right of becoming coparceners by birth. It was the very factum
of birth in a coparcenary that created the coparcenary, therefore the sons
and daughters of a coparcener became coparceners by virtue of birth.

Devolution of coparcenary property was the
later stage of and a consequence of death of a coparcener. The firststage of a
coparcenary was obviously its creation. Hence, the Supreme Court upheld the
provisions of the 2005 Amendment Act granting rights even to those daughters
who were born before the commencement of the Hindu Succession Act, 1956, i.e.,
before 17.06.1956. Thus, the net effect of the decisions on the 2005 Amendment
Act is as follows:

(a) The amendment applies to living daughters of
living coparceners as on 09.09.2005.

(b) It does not matter whether the daughters are
married or unmarried.

(c) It does not matter when the daughters are
born. They may be born even prior to the enactment of the 1956 Act, i.e., even
prior to 17.06.1956.

(d) However, if the father / coparcener died prior
to 09.09.2005, then his daughter would have no rights under the 2005 Amendment
Act.

Conclusion

An extremely sorry state
that such an important gender equalisation move has been marred by a case of
poor drafting! One wonders why these issues cannot be expressly clarified
rather than leave them for the Courts. It has been 12 years since the 2005
Amendment Act but the issues refuse to die down. One can think of several more
questions, which are waiting in the wings, such as, would the daughter’s
children have a right in their maternal grandfather’s HUF? Clearly, this
coparceners amendment loves controversy.

shailesh.kwebmaker

Summary Of Supreme Court’s (Sc) Judgement On Operations Of Multinational Accounting Firms (MAF) In India

Date: 23^rdFebruary, 2018

Writ Petitions:

Civil Appeal No. 2422 of 2018: Arising out
of SLP (Civil) No. 1808 of 2016 and Write Petition (Civil) No. 991 of 2013

Issue/s Involved:

“Whether the MAFs are operating in India in
violation of law in force in a clandestine manner; and no effective steps are
being taken to enforce the said law. If so, what orders are required to be
passed to enforce the said law.”

Averments:

a. MAF are operating illegally in India and
providing Accounting, Auditing, Book Keeping and Taxation Services.

b. They are operating with the help of ICAFs
illegally.

c. Operations of such entities are, inter alia,
in violation of Section 224 of the Companies Act, 1956, sections 25 and 29 of
the CA Act, the Code of Conduct laid down by the Institute of Chartered
Accountants of India (‘ICAI’ or ‘Institute’).

(Reference: Report dated 15^th
September, 2003 of Study Group of the ICAI)

Study Group Report dated 15^thSeptember
2003:

The Study Group was constituted by the
Council of the ICAI in July, 1994 to examine attempts of MAFs to operate in
India without formal registration with the ICAI and without being subject to
any discipline and control. This was in the wake of liberalisation policy and
signing of GATT by India.

It was noted by the study group that the
bodies corporate formed for management consultancy services were being used as
a vehicle for procuring professional work for sister firms of Chartered
Accountants. Members of ICAI were associating with such board of directors,
managers etc. to provide escape route to MAFs. CA function must be discharged
by animate persons and not in anim bodies.

The concerns of various segments of CAs
noted by the Study Group are as under:

a) Sharing fees with non-members;

b) Networking and consolidation of Indian firms;

c) Need to review the advertisement aspect;

d) Multi-disciplinary firms with other
professionals;

e) Commercial presence of multi-national
accounting firms;

f) Impact of similarity of names between
accountancy firms and MAFs/Corporates engaged in MSC-Scope for reform and
regulation;

g) Strengthening knowledge base and skills;

h) Facilitating growth of Indian CA firms &
Indian CAs internationally;

i) Perspective of the Government, corporate
world and regulatory bodies and role of ICAI;

j) Introduction of joint audit system;

k) Recognition of qualifications under Clause (4)
of Part I of the First Schedule to the Chartered Accountants Act, 1949 for the
purpose of promoting partnership with any persons other than the CA in practice
within India or abroad;

l) Review the concept of exclusive areas keeping
in view the larger public interest involved so as to include internal audit
within it;

m) Conditionalities prescribed by certain
financial institutions/Governmental agencies insisting appointment of select few
firms as auditors/concurrent auditors/consultants for their borrowers.

Further allegations by the writ petitioners
directly filed in SC:

PricewaterhouseCoopers Private Limited
(PwCPL) and their network audit firms operating in India, apart from other violations,
have indulged in violation of Foreign Direct Investment (FDI) policy, Reserve
Bank of India Act (RBI)/Foreign Exchange Management Act (FEMA) which requires
investigation. Firms operating under the brand name of PwCPL received huge sums
from abroad in violation of law and applicable policies but the concerned
authorities have failed to take appropriate action. M/s. Pricewater House,
Bangalore was the Auditor of the erstwhile Satyam Computer Services Limited
(Satyam) for more than eight years but failed to discover the biggest
accounting scandal which came to light only on confession of its Chairman in
January, 2009. The said scandal attracted penalty of US Dollars 7.5 Million
(approx. Rs.38 crores) from the US Regulators apart from other sanctions. Since
certification by Auditors is of great importance in the matter of payment of
subsidies, export incentives, grants, share of government revenue and taxes,
sharing of costs and profits in PPP (Public Private Partnership) contracts etc.,
oversight of professionals engaged in such certification has to be as per law
of the land. Accordingly, even though investigation was sought by the
petitioner vide letter dated 1^stJuly, 2013, no satisfactory
investigation has been done.

ICAI Expert Group Report dated 29^thJuly
2011 (Report made in the wake of Satyam scam):

The expert group constituted by the ICAI
also examined the issues concerning operation of MAFs in India. Issues
referred to the Expert Group by the High Powered Committee group of the
ICAI are:

a) Manner in which certain Indian CA firms, hold
out to public that they are actually MAFs in India, the manner in which
assignments are allotted, determination of nexus/linkage. The representatives
of certain Indian CA firms carry two visiting cards one of Indian CA firm and
another of a multinational entity. They represent the multinational entity and
seek work for Indian CA firm.

b) Name used by auditor in his/her report – The
basic question was whether the auditors of M/s. Satyam had correctly mentioned the
name of their firm in the audit report.

c) Terms and conditions and cost payable for use
of international brand name – No international firm will allow its name to be
used by all and sundry. The question is what is the consideration whether it is
determined as a percentage of fee or profits and whether it is within the
framework of Chartered Accountants Act, 1949, Regulations framed, thereunder
Code of Conduct and Ethics.

d) Nature of extra benefits accrued to the Indian
CA firms having foreign affiliation.

e) How the MAFs placed their foot in India – Long
back in a meeting with RBI it was informed that the MAFs entered in India to
set up representative offices. No documents are available as regards the terms
and conditions set out while granting them permission to operate in India.
However, the RBI vide its letter No.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/
2003-2004 dated 23^rd March, 2004 inter alia, mentioned that
“RBI has not permitted any foreign audit firm to set up office or to carry out
any activity in India under the current exchange control regulations.

f) Contravention of permission originally
granted by Government – What was the original permission given for these firms
to enter into India and subsequently whether they are adhering to the terms and
conditions of that permission? If contravention was found to take up with
Government/FIPB – for approaching Government or FIPB, ICAI must have
information as to the nature of permission given. As already mentioned, no
documents are available indicating the nature of permission granted. What is
the current position of international trade in accounting and related services?
The opening up of accounting and related services, can be linked to reciprocal
opening up by developed countries.

g) Additional powers required by ICAI to curb the
malpractices – If under the existing legislation, ICAI does not have enough
powers to curb this practice, whether they would need more powers. A separate
proposal for amendment of Chartered Accountants Act, 1949 has been sent by the
Council to the Government seeking additional powers.

The Expert Group observed that MAF solicits professional work in an international brand name.
They have registered Indian CA firms with the ICAI with the same brand names
which are their integral part. There is no regulatory regime for their
accountability. Thus, the principle of reciprocity u/s. 29 of the CA Act,
Section 25 prohibiting corporates from chartered accountancy practice and Code
of Ethics prohibiting advertisement and fee sharing are flouted. The MAFs also
violate FDI policy in the field of accounting, auditing, book keeping, taxation
and legal services.

The Expert Group recommended that no person or entity and specially Chartered Accountants can
hold out to public that they are operating in India as or on behalf or in their
trade name and in any other manner so as to represent them being part of or
authorised by MAFs to operate on their behalf in India or they are actually
representing MAFs or they are MAFs office/representatives in India, except
those registered with ICAI in terms of clause (Hi) as a network, in accordance
with network guidelines as notified by ICAI from time to time.

Status Report by the ICAI

The Institute called for information from
171 Indian CA firms perceived to be having international affiliation to examine
whether they are functioning within the framework of CA profession. However,
the said firms were reluctant to submit copies of agreements with foreign
entities and their tax returns. Certain CA firms submitted the documents by
masking certain portions contained in their agreements, partnership deeds and
assessment orders/income tax returns claiming confidentiality and commercially
sensitive nature of the documents. Some of the firms did not provide the
details. Some of the findings from the data collected were as follows:

a) The multinational entity has granted
permission to the participating firms in the network to use the brand name.
This is notwithstanding the fact whether the firms have signed the License
Agreement with the entity or not. The relationship between members and firms
and how these are governed from same offices under common management and
control is not disclosed. The data disclosed on the website, however, clearly
brings out the linkage.

b) Though some of the firms participating in the
networks have not signed the Verein document of Name License Agreement, yet
while making remittances to the multinational entity, the revenue of the entire
network is taken into account.

c) Firms received financial grants from non-CA
firms. A member of the Institute is prohibited
from receiving any part of profits from a non-member of the Institute. Such an
act on the part of a member/firm seems to be in violation of Item (3) of Part I
of the First Schedule to the Chartered Accountants Act 1949.

d) The networking firms have made remittances to
a multinational entity, sharing their revenue which they have claimed to be
towards subscription fees, technology cost and administration cost etc.
in violation of Code of Ethics and regulations under CA Act.

e) Firms used the words such as “In Association
with ….”, Associates of ……..”, Correspondents of ……” etc. on the
stationery, letter-heads, visiting cards thereby violating provisions of Item
(7) of Part I of the First Schedule to the Chartered Accountants Act,1949. The networking firms in Network and all their
personnel are using the domain name identical to the name of the multinational
entity in their email IDs and the same is displayed in their visiting cards.

f) The obligations set out in respect of some of
the CA firms as per the sub-licensee agreement give a clear indication that the
CA firms are under the management and supervision of a non-CA firm for matters
such as admission of partners, merger, purchase of assets, etc.

g) Some of the firms in Network have admitted
that the global network identifies broad market opportunities, develops
strategies, strengthens network’s internal products and promotes international
brand. The member firms in India also gain access to brand and marketing
materials developed by their overseas affiliate, thereby indirectly soliciting
professional work.

h) Most of these firms have a name license
agreement to use International brand name. One of the terms of such agreement
is that apart from common professional standards etc., the Indian
affiliates shall harmonize their policies etc. with the global policies
of the network. In this manner, matters such as selection and appointment of
partners, acquisition of assets, investment in capital etc. are
regulated through the means of such agreements and at time even the
representative voting is held by an aligned private limited company rather than
the CA firms themselves. As a consequence of this, the control of the Indian CA
firms is effectively placed in the hands of non-members/companies/foreign
entities.

i) The member firms are required to refer the
work among themselves. In respect of some firms, referral fee is payable and
receivable. Agreements also provided for use of name and logo. Payment/receipt
of referral fee is prohibited as per code of conduct applicable to CAs.

In the light of the aforesaid findings,
following recommendations were made to the Council:

a) The Council should consider action against the
firms which had not given the full information.

b) Consider action against the firms who are
sharing revenue with multinational entity/consulting entity in India which may
include cost of marketing, publicity and advertising as against the ethics of
CAs or receiving grants from them.

c) Action to be taken against the audit firms
distributing its work to other firms and allowing them access to all
confidential information without the consent of the client;

d) Require the CA firms to maintain necessary data
about the remittances made and received on account of networking arrangement or
sharing of fee;

e) Consider action against firms being paid or
offered referral fee;

f) To disclose their international
affiliation/arrangement every year to the Institute;

g) Council should consider action against the
firms using name and logo of international networks and securing professional
business by means not open to CAs in India;

h) Only CAs and CA firms registered with ICAI
should be permitted to provide audit and assurance services. Wherever MAFs are
operating in India, directly or indirectly, they should not engage in any audit
and assurance services without ‘No Objection’ and permission from ICAI and RBI.

Directives issued by the court:

Important observations of the SC:

“Though the Committee analysed available
facts and found that MAFs were involved in violating ethics and law, it took
hyper technical view that non availability of complete information and the
groups as such were not amenable to its disciplinary jurisdiction in absence of
registration. A premier professionals body cannot limit its oversight functions
on technicalities and is expected to play proactive role for upholding ethics
and values of the profession by going into all connected and incidental
issues.” (Page 68)

“It can hardly be disputed that
profession of auditing is of great importance for the economy. Financial
statements audited by qualified auditors are acted upon and failures of the
auditors have resulted into scandals in the past. The auditing profession
requires proper oversight.” (Page 69)

On the basis of various reports and findings
as discussed aforesaid, the Court issued the following directives:

a) The Union of India may constitute a three
member Committee of experts to look into the question whether and to what
extent the statutory framework to enforce the letter and spirit of Sections 25
and 29 of the CA Act and the statutory Code of Conduct for the CAs requires
revisit so as to appropriately discipline and regulate MAFs.

b) To consider need for appropriate legislation
on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform
and Consumer Protection Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors.

c) Question whether on account of conflict of
interest of auditors with consultants, the auditors’ profession may need an
exclusive oversight body may be examined.

d) It may also consider steps for effective
enforcement of the provisions of the FDI policy and the FEMA Regulations
referred to above.

e) Such Committee may be constituted within two
months. Report of the Committee may be submitted within three months
thereafter.

f) The Enforcement Directorate (ED) may complete
the pending investigation within three months.

g) ICAI may further examine all the related
issues at appropriate level as far as possible within three months and take
such further steps as may be considered necessary.

(The above decision is a summery. Full
text of the decision may be read on the Supreme Court portal:
http://sci.gov.in/supremecourt/2013/35041/35041_2013_Judgement_23-Feb-2018.pdf
)

shailesh.kwebmaker

Liberalised Remittance Scheme

1. Background

Liberalised
Remittance Scheme [LRS / the Scheme] was introduced vide AP (DIR Series)
Circular No. 64 dated 4^th February, 2004 read with Notification No.
207(E) dated 23^rd March, 2004.

LRS was
introduced as a liberalisation measure to facilitate resident individuals to
remit funds abroad for permitted capital or current account transactions or
combination of both.

Presently, FED
Master Direction No. 7/ 2015-16 dated January 1, 2016 (updated as on 12^th
April, 2017) [LRS Master Direction] and FAQs on LRS dated 11^thAugust,
2016 [LRS FAQs], explain the provisions of the LRS.

2. LRS Limit

Currently,
under LRS, Authorised Dealers [ADs] may freely allow remittances by resident
individuals up to USD 2,50,000 per Financial Year (April-March) for any
permitted current or capital account transaction or a combination of both.

Consistent
with prevailing macro and micro economic conditions, the LRS limit has been
revised in stages. During the period from February 4, 2004 till date, the LRS
limit has been revised as under:

Date

Feb 4, 2004

Dec 20, 2006

May 8, 2007

Sep 26, 2007

Aug 14, 2013

Jun 3, 2014

May 26, 2015

LRS limit (USD)

25,000

50,000

1,00,000

2,00,000

75,000

1,25,000

2,50,000

Subsumes
remittances for current account transactions

Previously, there
were separate limits in respect of current account transactions. With effect
from 26^th May 2015, LRS limit was increased to USD 2,50,000 per FY.
The increased limit now also includes/subsumes remittance limit for current
account transactions available to resident individuals under Para 1 of Schedule
III to Current Account Transactions Rules, as amended.

Clause 1(ix) of
the Schedule III to Current Account Transactions Rules, provides ‘Any other
Current Account Transaction’. However, Current Account Transactions Rules do
not clarify the type of transactions that are covered under this residual
clause and also whether there will be separate limits for those transactions or
that they too will be subsumed within LRS limit. Specific RBI approval will be
required for any transaction above the LRS limit.

Consolidation
and Clubbing

Members of a family
can consolidate their individual remittances under the Scheme if each of the
individual family member complies with all the terms and conditions. However,
in case of capital account transactions such as opening a bank
account/investment/purchase of property, etc. consolidation by family members
is not permitted if the remitting family member is not a co-owner/co-partner in
the overseas bank account/investment/property. Apparently, this is because a
resident cannot draw foreign currency to make gift to another resident in
foreign currency even if such gift is made by way of credit to the latter’s
overseas foreign currency account held under LRS.

3. Availability of the LRS

– LRS is available to all resident
individuals including minors. In case of remitter being a minor, the Form
A2 must be countersigned by the minor’s natural guardian.

– LRS not available to Corporates,
Partnership firms, HUF, Trusts, etc.

– Remittance by sole proprietor under LRS

In case of a
sole proprietorship business, there is no legal distinction between the
individual / owner and the business. Hence, the owner of the business (in his
personal name and not in the name of the business) can make remittance up to
the
permissible limit under LRS. If the owner of the sole proprietorship business
intends to remit the money from the bank account of the sole proprietorship
business, then the eligibility of the proprietor only in his individual
capacity should be considered. Hence, if an individual in his own capacity
remits USD 250,000 in a financial year under LRS, he cannot remit another USD
250,000 in his capacity as owner of the sole proprietorship business.

4. Permissible/Prohibited
transactions under LRS

4.1 Permissible
Capital Account Transactions

Para A.6 of
the LRS Master directions provides that the permissible capital account
transactions by an individual under LRS are:

– opening of foreign currency account abroad
with a bank;

– purchase of property abroad;

– making investments abroad – acquisition and
holding shares of both listed and unlisted overseas company or debt
instruments; acquisition of qualification shares of an overseas company for
holding the post of Director; acquisition of shares of a foreign company towards
professional services rendered or in lieu of Director’s remuneration;
investment in units of Mutual Funds, Venture Capital Funds, unrated debt
securities, promissory notes;

– setting up Wholly Owned Subsidiaries and Joint
Ventures¹ (with effect from August 05, 2013) outside India for bona
fide business subject to the terms & conditions stipulated in Notification
No. FEMA. 263/ RB-2013 dated March 5, 2013;

– extending loans including loans in Indian
Rupees to Non-resident Indians (NRIs) who are relatives as defined in Companies
Act, 1956.

4.2 Permissible
Current Account Transactions

As
mentioned earlier, limit of USD 2,50,000 per FY subsumes earlier separate
limits for remittances under Current Account Transactions Rules (viz. private
visit; gift/donation; going abroad on employment; emigration; maintenance of
close relatives abroad; business trip; medical treatment abroad; studies
abroad). Release of foreign exchange exceeding USD 2,50,000, requires prior
permission from the RBI.

a. Private
Visits

For private
visits abroad, other than to Nepal and Bhutan, any resident individual can
obtain foreign exchange up to an aggregate amount of USD 2,50,000, from an AD
or FFMC, in any one financial year, irrespective of the number of visits
undertaken during the year.

Further,
all tour related expenses including cost of rail/road/water transportation;
cost of Euro Rail; passes/tickets, etc. outside India; and overseas
hotel/lodging expenses shall be subsumed under the LRS limit. The tour operator
can collect this amount either in Indian rupees or in foreign currency from the
resident traveller.

b. Gift /
Donation

Any
resident individual may remit up to USD 2,50,000 in one FY as gift to a person
residing outside India or as donation to an organization outside India.

c. Going abroad
on employment

A person
going abroad for employment can draw foreign exchange up to USD 2,50,000 per FY
from any AD in India.

d. Emigration

A person
emigrating from India can draw foreign exchange from AD Category I bank and AD
Category II up to the amount prescribed by the country of emigration or USD
250,000. Remittance of any amount of foreign exchange outside India in excess
of this limit may be allowed only towards meeting incidental expenses in the
country of immigration and not for earning points or credits to become eligible
for immigration by way of overseas investments in government bonds; land;
commercial enterprise; etc.

e. Maintenance
of close relatives abroad

A resident
individual can remit up-to USD 2,50,000 per FY towards maintenance of close
relatives [‘relative’ as defined in section 6 of the Indian Companies Act,
1956] abroad.

f. Business
Trip

Visits by
individuals for attending an international conference, seminar, specialised
training, apprentice training, etc., are treated as business visits. For
business trips to foreign countries, resident individuals can avail of foreign
exchange up to USD 2,50,000 in a FY irrespective of the number of visits
undertaken during the year.

If an employee
is deputed by the employer for any of the above and the expenses are borne by
the employer, such expenses shall be treated as residual current account
transactions outside LRS and may be permitted by the AD without any limit,
subject to verifying the bona fide of the transaction.

g. Medical
Treatment Abroad

ADs may
release foreign exchange up to an amount of USD 2,50,000 or its equivalent per
FY without insisting on any estimate from a hospital/doctor. For amount
exceeding the above limit, ADs may release foreign exchange under general
permission based on the estimate from the doctor in India or hospital/ doctor
abroad. A person who has fallen sick after proceeding abroad may also be
released foreign exchange by an AD (without seeking prior approval of the RBI)
for medical treatment outside India.

In addition
to the above, an amount up to USD 250,000 per financial year is allowed to a
person for accompanying as attendant to a patient going abroad for medical
treatment/check-up.

h. Facilities
available to students for pursuing their studies abroad.

AD Category
I banks and AD Category II, may release foreign exchange up to USD 2,50,000 or
its equivalent to resident individuals for studies abroad without insisting on
any estimate from the foreign University. However, AD Category I bank and AD
Category II may allow remittances (without seeking prior approval of the RBI) exceeding
USD 2,50,000 based on the estimate received from the institution abroad

i. Purchasing
Objects of Art

Remittances
under the Scheme can be used for purchasing objects of art subject to the
provisions of other applicable laws such as the extant Foreign Trade Policy of
the Government of India.

5. Outward remittance in the form of a DD

The Scheme
can be used for outward remittance in the form of a DD either in the resident
individual’s own name or in the name of beneficiary with whom he intends putting
through the permissible transactions at the time of private visit abroad,
against self-declaration of the remitter in the format prescribed.

6. Open, maintain and hold Foreign Currency
Accounts

Individuals can
also open, maintain and hold foreign currency accounts with a bank outside
India for making remittances under the Scheme without prior approval of the
Reserve Bank. The foreign currency accounts may be used for putting through all
transactions connected with or arising from remittances eligible under this
Scheme.

7. Prohibitions under LRS

7.1 Question
2 of the LRS FAQs provides that the remittance facility under the scheme is not
available for the following:

– The Scheme is not available for remittances
for any purpose specifically prohibited under Schedule I or any item restricted
under Schedule II of Foreign Exchange Management (Current Account Transaction)
Rules, 2000, dated May 3, 2000, as amended from time to time.

– Remittance from India for margins or margin
calls to overseas exchanges / overseas counterparty.

– Remittances for purchase of FCCBs issued by
Indian companies in the overseas secondary market.

– Remittance for trading in foreign exchange
abroad.

– Capital account remittances, directly or
indirectly, to countries identified by the Financial Action Task Force (FATF)
as “non- cooperative countries and territories”, from time to time.

– Remittances
directly or indirectly to those individuals and entities identified as posing
significant risk of committing acts of terrorism as advised separately by the
Reserve Bank to the banks.

In addition,
Banks should not extend any kind of credit facilities to resident individuals
to facilitate capital account remittances under the Scheme.

7.2 Holding
Gold Abroad

Under LRS a
person can remit for any purpose except those specifically prohibited.

LRS Master
Direction provides a positive list of transactions permitted and FAQs of 2016
provides a negative list of transactions which are not permitted.

Though not
specifically prohibited, it is understood that RBI is not in favour of using
remittances under LRS for holding gold abroad.

7.3 Providing
Loans Abroad

Due to
positive / negative list, though not specifically prohibited, it is understood
that RBI is not in favour of using remittances under LRS for giving loans
abroad.

8. Procedure for remittances under LRS

The
individual should designate a branch of an AD through which all the remittances
under the Scheme will be made. The resident individual seeking to make the remittance
should furnish extant Form A2 for purchase of foreign exchange under LRS.

9. Overseas Direct Investment by Individuals
under LRS

Regulation 20A of the Foreign Exchange Management
(Transfer or issue of any Foreign Security) Regulations, 2004 [FEMA 120]
provides that a resident individual (single or in association with another
resident individual or with an ‘Indian Party’ as defined in this Notification) satisfying
the criteria as per Schedule V of this Notification, may make overseas
direct investment in the equity shares and compulsorily convertible
preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS)
outside India.

Para 5 of
the Schedule provides that at the time of investments, the permissible ceiling
shall be within the overall ceiling prescribed for the resident individual under Liberalised
Remittance Scheme as prescribed by the Reserve Bank from time to time.

Explanation:
The investment made out of the balances held in EEFC/RFC account shall also
be restricted to the limit prescribed under LRS.

A resident
individual who has made overseas direct investment in the equity shares;
compulsorily convertible preference shares of a JV/WoS outside India or ESOPs,
within the LRS limit, will be required to comply with the terms and conditions
prescribed by the overseas investment guidelines in Schedule V of FEMA 120 vide
Notification No. FEMA 263/ RB-2013 dated March 5, 2013.

No ratings
or guidelines have been prescribed under LRS of USD 2,50,000 on the quality of
the investment an individual can make. However, the individual investor is
expected to exercise due diligence while taking a decision regarding the investments
which he or she proposes to make

10. Rupee Loan by a resident individual to a
NRI/PIO who is a close relative

A resident individual is permitted to make a rupee
loan to a NRI/PIO who is a close relative of the resident individual
(‘relative’ as defined in section 2(77) of the Companies Act, 2013) by way of
crossed cheque/ electronic transfer subject to the following conditions:

a. The loan is free
of interest and the minimum maturity of the loan is one year.

b. The loan, though
in rupees, should be within the overall LRS limit of USD 2,50,000, per
financial year, available to the resident individual. It is the responsibility
of the lender to ensure that the amount of loan is within the LRS limit of USD
2,50,000 during the financial year.

c. The loan should
be utilised for meeting the borrower’s personal requirements or for his own
business purposes in India.

d. The loan should
not be utilised, either singly or in association with other person, for any of
the activities in which investment by persons resident outside India is
prohibited, namely;

– the business of chit fund, or

– Nidhi Company, or

– agricultural or plantation activities or in
real estate business, or construction of farmhouses, or

– trading in Transferable Development Rights
(TDRs).

Explanation:
For this purpose, real estate business shall not include development of
townships, construction of residential / commercial premises, roads or bridges.

e. The loan amount
should be credited to the NRO a/c of the NRI / PIO. Credit of such loan amount
may be treated as an eligible credit to NRO a/c.

f. The loan amount
shall not be remitted outside India.

g. Repayment of
loan shall be made by way of inward remittances through normal banking channels
or by debit to the Non-resident Ordinary (NRO) / Non-resident External (NRE) /
Foreign Currency Non-resident (FCNR) account of the borrower or out of the sale
proceeds of the shares or securities or immovable property against which such
loan was granted.

11. The purpose of this article is to highlight the
major changes in the LRS which were brought about by Notification No. FEMA.
263/RB-2013 dated March 5, 2013 in respect of investment outside India,
Notification No. G.S.R. 426(E) dated May 26, 2015 issued by Ministry of Finance
in respect of limits under LRS and Notification No. FEMA. 341/2015-RB dated May
26, 2015 in respect of subsuming of limits under Current Account Transactions
Rules in a holistic manner. This apart, there could be some contentious issues.
However, in the absence of any official clarification, it may not be proper to
consider these.

shailesh.kwebmaker

Shell-shocked – SEBI’s directions against ‘Shell’ Companies

Background

In August 2017, SEBI issued
directions to Stock Exchanges to severely restrict trading in the shares of
certain companies. SEBI had received a list of 331 companies from the Ministry
of Corporate Affairs (“MCA”). It appears that the reason for this restriction
is that these companies were shell companies (i.e., having no substantive
operations) and may have been used for money laundering post demonetisation in
November 2016. The directions caused severe distress to these companies and
their shareholders, and some of the companies appealed to the Securities
Appellate Tribunal and got relief. SEBI’s directions were remarkable, have
far-reaching impact and involve issues of law, and hence, it is worth
discussing and understanding these directions.

Overview of what happened

SEBI stated that it had
received a list of companies from MCA that were allegedly shell companies
(which apparently compiled the list after taking inputs from other authorities
such as SFIO). The list included listed companies.

In the ordinary course of
business, stock exchanges do place restrictions on trading of companies. Under
stock exchange regulations, depending on what is suspected (which may include
disproportionate rise in price/trading without underlying fundamentals),
restrictions in trading are placed. These restrictions progressively increase
by levels till the most restrictive level VI is reached. At this stage, trading
is allowed only once a month, with the price being the last traded price. Thus,
increase or decrease in price is not possible.

The
buyer is also required to pay 200% margin for five months as deposit with the
stock exchange. There are other restrictions also. Needless to say, while this
is marginally better than total delisting/suspension of listing, however, for
all practical purposes, trading in shares of such companies drops to virtually
zero. In the ordinary course, it is for the stock exchange to decide the level
of restrictions.

However, in the present
case, SEBI issued a directive to stock exchanges to place all these companies
at level VI. Exchanges are bound to obey such directions. Thus, trading was
effectively stopped and it could be done only in the restricted manner
mentioned earlier. The directions also imposed restrictions on `off market
transactions.’

Curiously, SEBI did not
clarify that the authorities that had forwarded the list had required SEBI to
place restrictions on all companies. It appears that MCA wanted SEBI to
investigate and thereafter take action. It also appears that not all the companies
were listed on stock exchanges! Hence, even SEBI had to ask the exchanges to
first check the list to find out which of the companies are listed and then
take action.

Factually, many of the
companies were large profitable companies with considerable operations and
active trading. Trading in their shares on exchanges suddenly ceased. These
companies had no choice but to urgently approach the Securities Appellate
Tribunal (“SAT”). Appealing to SAT could have been difficult, because of the
manner in which the directions were given. However, SAT gave prompt relief,
staying the orders in case of companies which appealed and ordered SEBI to
investigate and give opportunity to the said companies to present their case.

The
present status is that except for the handful of companies that appealed and
got a stay, trading in the remaining listed companies stands suspended.

Directions issued against the shell
companies

The
following extract from the directions dated 7^th August 2017 of SEBI
to stock exchanges make clear what was ordered:-

“Trading in all such listed securities shall be placed in Stage VI
of the Graded Surveillance Measures (GSM) with immediate effect. If any listed
company out of the said list is already identified under any stage of GSM, it
shall also be moved to GSM stage VI directly. Under the Stage VI of GSM,
trading in these identified securities shall be permitted to trade once in a
month under trade to trade category. Further, any upward price movement in
these securities shall not be permitted beyond the last traded price and
Additional Surveillance Deposit of 200% of trade value shall be collected from
the Buyer which shall be retained with Exchanges for a period of five months.

Exchanges shall initiate a process of verifying the
credentials/fundamental of such companies. Exchanges shall appoint an
independent auditor to conduct audit of such listed companies and if necessary,
even conduct forensic audit of such companies to verify its credentials/
fundamentals.

On verification, if Exchanges do not find appropriate credentials/
fundamentals about existence of the company, Exchanges shall initiate the
proceedings for compulsory delisting against the company, and the said company
shall not be permitted to deal in any security on exchange platform and its
holding in any depository account shall be frozen till such delisting process
is completed.”

MCA had only suggested investi-gation by
SEBI, not orders

In its defense before SAT,
SEBI made a plea that it was required by the Ministry of Corporate Affairs to
pass such directions. This contention was rejected by SAT. Even otherwise, it
was held that SEBI cannot blindly follow directions of MCA. SEBI, being an
entity bound by the SEBI Act, could not issue such directions without following
due process prescribed under the SEBI Act. SAT also noted that MCA had merely
required SEBI to investigate such companies, whether they were shell companies,
etc. and to take action, if required under law.

Issue of directions as a circular which
could be non-appealable

SEBI took an interesting
mode of taking action against such companies. In the ordinary course, it would
examine the facts of each company, notify and put the facts before them, make
specific allegations and ask them to explain their side before passing an
order. In extreme cases, SEBI can even pass interim ex parte order and
could grant the company a post-order hearing. But, even such orders would
require at least basic investigation and also be a speaking order.

Instead, SEBI directly
issued directions to stock exchanges requiring them to put the companies on the
highest restriction level. The result of this was that – the companies faced
restrictions just as they would have under a direct order on them. It seems,
SEBI did that to avoid an overturning of its order by claiming protection under
a recent decision of the Supreme Court (in NSDL vs. (2017) 5 SCC 517,
discussed in an earlier article in this column) that administrative orders
cannot be the subject matter of appeal. Thus, the only course of action against
such directions would have been a writ petition to the High court.

When the companies appealed
to SAT, SEBI contended that such directions being of administrative nature,
were not appealable as held by the Supreme Court.

However, SAT rejected this
contention. The following observations of SAT are relevant in this regard:-

“4. We see no merit in the preliminary objection raised by SEBI.
In the case of NSDL (Supra) the Apex Court after considering the scope of the
expression ‘administrative orders’ held that in that case the administrative
circular issued by SEBI was referable to Section 11(1) of SEBI Act and hence
falls outside the appellate jurisdiction of this Tribunal.

…

6. Thus, the impugned communication is not a general direction
given by SEBI to the three stock exchanges in the interests of investors or
securities market as contemplated u/s. 11(1) of SEBI Act, but a specific
direction given in respect of only 331 listed companies which MCA suspected to
be shell companies. Moreover, specific direction given in the impugned
communication prejudicially affects the interests of only those companies
covered under the list of 331 companies identified by the MCA as ‘suspected to
be shell companies’. Therefore, in the facts of present case, the impugned
communication of SEBI which has serious civil consequences cannot be said to be
an administrative order. In other words, the impugned communication which
prejudicially impairs the rights and obligations of the appellants, its
promoters and directors would fall in the category of a quasi judicial order
and hence appealable before this Tribunal u/s. 15T of SEBI Act.

7. It is contended on behalf of SEBI that appeal u/s. 15T of SEBI
Act is maintainable only against an order passed by the Board or the
Adjudicating Officer of SEBI and therefore, the impugned communication issued
by the Chief General Manager of SEBI is not appealable u/s. 15T of SEBI Act. We
see no merit in the above contention, because, it is admitted by counsel for
SEBI during the course of arguments that the impugned action was approved by
the WTM of SEBI on 28.07.2017 and only thereafter on 07.08.2017, the Chief
General Manager has issued the impugned communication. Since the impugned
communication which is approved by the WTM of SEBI seeks to suspend the trading
in the securities of the appellants, on day to day basis the impugned
communication is in effect referable to a quasi judicial order passed u/s.
11(4) of SEBI Act and not an administrative order passed u/s. 11(1) of the SEBI
Act. Accordingly, we see no merit in the preliminary objection raised by SEBI.”

Whether matter was urgent?

SEBI often passes interim
orders before concluding investigation to ensure that status quo is
maintained. In the instant case, SAT rejected the view that there was an
urgency. SEBI received the letter from MCA dated 9^th June 2017, but
issued directions after nearly two months.

Striking off of names of companies by
Registrar of Companies

A similar action against
allegedly shell companies was initiated earlier by the respective Registrar of
Companies of various states. However, due process of law was followed whereby a
notice was issued, giving reasons as to why their names were sought to be
struck off and an opportunity was given to the companies to respond.
Reportedly, such companies were more than 2.50 lakhs in number. However, SEBI,
did not issue any such notice.

What laws have such companies violated?

An interesting question
that arises is: What Securities Laws have such companies violated, even if it
was found that they were guilty of money laundering? Though SEBI does have wide
powers to issue orders, generally they are passed where Securities Laws are
violated, or to protect interests of investors, etc.

If there was any money
laundering, the company and its directors could face action under appropriate
law. However, that may not enable SEBI to pass orders under the
Securities Laws. In particular, if restrictive orders are passed, it is the
public shareholders of such companies who may get affected probably for no
fault of theirs as it happened in the instant case. Earlier, in cases where it was alleged that price manipulation
and other wrongs was carried out for helping parties to earn tax free long term
capital gains, there were several grounds to take action under Securities Laws.
However, in the present case, it is not evident on the face of it as to what
action SEBI could take.

Conclusion

This is an
example of arbitrary action by SEBI. The prices of the shares of the companies,
even of those who got a stay order, crashed. There was no formal investigation
as required by law and no hearing was granted before or after such directions.
While the companies who rushed to SAT got a stay, the SAT has not granted a
stay for operation of the directions on all companies. Even the route adopted
by SEBI of issuing directions to stock exchanges with a hope that it cannot be
appealed against was not justifiable. The silver lining in all this is how
SAT promptly distinguished the decision of the Supreme Court and thus created a
precedent for questioning SEBI’s orders.

The
concerns about abuse of corporate form for money laundering and other crimes
and even of listing remain. However, a well thought out strategy would be
needed to ensure that the action hits those entities who engage in such
activities – and them only.

shailesh.kwebmaker

Insolvency and Bankuptcy Code: Pill for all Ills – Part I

Introduction

The Insolvency
and Bankruptcy Code, 2016 (“the Code”) has been hailed by many as the
messiah for resolving India’s sick company scene. It has been seen as the
saviour which would rescue India’s ailing companies and entities and provide a
speedy resolution for the creditors. Let us make an in-depth examination as
to whether the Code actually has the teeth to provide a simple one-window
clearance for creditors and the sick debtors or is it just another legislation
in India’s overcrowded regulatory scene!

Replaces Old Acts

The Code replaces
the archaic Sick Industrial Companies (Special Provisions) Act, 1985.
Although this Act was repealed long ago, it has only now been given a formal
burial. The Code even amends the Companies Act, 2013 and has deleted all
provisions relating to winding-up of companies. Provisions relating to
winding-up (voluntary or compulsory) and sickness resolution for corporate
bodies are now enshrined in the Code itself. Even the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) has been made subject to the Code. Thus, bankers cannot
resort to the SARFAESI Act when an application under the Code has been
admitted. Thus, the Code even gives a major breather to borrowers.

Eventually,
provisions relating to bankruptcy / financial sickness of individuals, and
firms would also be governed by the Code. However, these sections have not yet
been notified. As and when that happens, the
Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920
would be repealed. Thus, the Code would eventually become a one-shop law to
deal with financial sickness in all entities, corporate and non-corporate.

The Code is
divided into Five separate Parts, with the important ones being, Part II which
deals with Insolvency Resolution and Liquidation for Corporate Persons, Part
III which deals with Insolvency Resolution and Liquidation for
Individuals and Firms(this has not yet been made operational) and Part
IV which deals with the Regulation of Insolvency and Bankruptcy Board of
India, Insolvency Professional Agencies, Insolvency Professionals, etc.

The Code
constitutes an Insolvency and Bankruptcy Board of India (IBBI). The IBBI
would exercise regulatory oversight over insolvency professional agencies,
insolvency professionals, etc. and prescribe Regulations and Standards for
various purposes. The Scheme of the legislation is – the Code – the Rules
framed by the Central Government – the Regulations framed by the IBBI.

The Adjudicating
Authority under the Code is the National Company Law Tribunal (NCLT) and an
Appeal lies against an NCLT Order to the National Company Law Appellate
Tribunal (NCLAT). It may be noted that there is a barrage of
applications before the NCLT and the NCLAT has also been very active.

Triggering the
Code for Corporate Debtors

The Code gets
triggered when a corporate debtor commits a default provided the
default is Rs. 1 lakh or more. Thus, a very low threshold has been kept for the
creditors to access the Code. Even corporate debtors from the SME sector could
get covered within the ambit of the Code. The meaning of several important
terms has been defined by the Code:

a) A corporate
debtor is a corporate person (company, LLP, etc.,) which owes a debt
to any person. Here it is interesting to note that defined financial
service providers are not covered by the purview of the Code. Thus,
insolvency and bankruptcy of NBFCs, banks, insurance companies, mutual funds,
etc., are not covered by this Code. However, if these financial service
providers are creditors against any corporate debtor, then they can seek
recourse under the Code.

b) A debt
means a liability or obligation in respect of a claim and could be a financial
debt or an operational debt. A financial debt is defined to mean a debt
along with interest, if any, which is disbursed against the consideration for
the time value of money. An operational debt is defined as a claim for
provision of goods or services or employment dues or Government dues. The NCLAT
in the case of Neelkanth Township & Construction P. Ltd. vs. Urban
Infrastructure Trustees Ltd., CA(AT) (Insolvency) 44-2017 has
held that the law of limitation does not apply to the institution of an
insolvency process in respect of a financial debt in the nature of a debt with
interest. It further held that issue of debentures would fall within a
financial debt. Interestingly, the IBBI has come out with Regulations for other
creditors who are neither financial nor operational for submitting proof of
their claims.

c) A claim
which is one of the most important definitions is defined to mean a right to
payment or right to remedy for breach of contract under any law if such breach
gives rise to a right to payment. The right could be reduced to judgement,
fixed, disputed, undisputed, legal, equitable, secured or unsecured.

d) It is also
relevant to note the meaning of the term default which is defined to
mean non-payment of debt when whole or any part has become due and payable and
is not repaid by the debtor.

Initiating
Corporate Insolvency Resolution Process

The initiation (or starting) of the corporate insolvency resolution
process under the Code, may be done by a financial creditor (in respect of
default of a financial debt) or an operational creditor (in respect of default
of an operational debt) or by the corporate itself (in respect of any default).
Depending upon the type of initiator, the process may be summarised as
explained in Table-1 below.

Table-1: Types of
Insolvency Resolution

Insolvency Resolution by Financial Creditor	Insolvency Resolution by Operational Creditor	Insolvency Resolution by the Corporate itself
One or more financial creditors can file an application before the NCLT once a default (for a financial debt) occurs for initiating a corporate insolvency resolution process against a corporate debtor. The Gujarat High Court has, in the case of **Essar Steel Ltd. vs. RBI, C/SCA/12434/2017**, held that banks can initiate insolvency proceedings even without waiting for directions from the RBI under the Banking Regulation Act.	Any operational creditor can, once a default (for an operational debt) occurs, deliver a demand notice on a corporate debtor.	Once a corporate debtor commits any default, it may on its own, file an application for initiating corporate insolvency resolution proceedings before the NCLT.
The NCLT would decide within 14 days whether or not a default has occurred and whether to admit the application.	The debtor must, either pay the sum demanded within 10 days of receipt of the notice or point out any pending *dispute* in respect of the notice and pending arbitration / suit which has been filed before the receipt of such notice. The dispute could be qua the quality of goods / service or breach of any representations and warranties. The NCLAT in Kirusa Software P. Ltd. vs. Mobilox Innovations P. Ltd, CA(AT)(Insolvency) 6-2017 has held that dispute cannot be confined to pending arbitration or a civil suit alone. It must include disputes pending before every judicial authority including mediation, conciliation etc. as long there are disputes as to existence of debt or default etc., it would satisfy the conditions of a dispute. It could be in the form of a notice prior to institution of a suit, notice under the Sale of Goods Act relating to the quality of goods, etc.	The NCLT would decide within 14 days whether or not to admit the application.
The resolution process commences from the date of admission of the application by the NCLT.	If the corporate debtor does neither of the above, then the operational creditor may file an application before the NCLT. Only if the Operational Creditor does not receive payment or notice of dispute can he file an application before NCLT. The NCLAT in Uttam Galva Steels Ltd vs. DF Deutsche Forfait AG CA (AT) (Insolvency) 39-2017 has held that right of an operational creditor to file an application accrues after expiry of 10 days from the delivery of demand notice.	The resolution process commences from the date of admission of the application by the NCLT.
	The NCLT would decide within 14 days whether or not to admit the application.
	The resolution process commences from the date of admission of the application by the NCLT.

Insolvency Resolution by Financial Creditor

Insolvency Resolution by Operational
Creditor

Insolvency Resolution by the
Corporate itself

One or more financial creditors can file an application before
the NCLT once a default (for a financial debt) occurs for initiating a
corporate insolvency resolution process against a corporate debtor. The
Gujarat High Court has, in the case of Essar Steel Ltd. vs. RBI, C/SCA/12434/2017,
held that banks can initiate insolvency proceedings even without waiting for
directions from the RBI under the Banking Regulation Act.

Any operational creditor can, once a default (for an operational
debt) occurs, deliver a demand notice on a corporate debtor.

Once a corporate debtor commits any default, it may on its own,
file an application for initiating corporate insolvency resolution
proceedings before the NCLT.

The NCLT would decide within 14 days whether or not a default
has occurred and whether to admit the application.

The debtor must, either pay the sum demanded within 10 days of
receipt of the notice or point out any pending dispute in
respect of the notice and pending arbitration / suit which has been filed before
the receipt of such notice. The dispute could be qua the
quality of goods / service or breach of any representations and warranties.
The NCLAT in Kirusa Software P. Ltd. vs. Mobilox Innovations P. Ltd,
CA(AT)(Insolvency) 6-2017 has held that dispute cannot be confined to
pending arbitration or a civil suit alone. It must include disputes pending
before every judicial authority including mediation, conciliation etc. as
long there are disputes as to existence of debt or default etc., it would
satisfy the conditions of a dispute. It could be in the form of a notice
prior to institution of a suit, notice under the Sale of Goods Act relating
to the quality of goods, etc.

The
NCLT would decide within 14 days whether or not to admit the application.

The
resolution process commences from the date of admission of the application by
the NCLT.

If
the corporate debtor does neither of the above, then the operational creditor
may file an application before the NCLT. Only if the Operational Creditor
does not receive payment or notice of dispute can he file an application
before NCLT. The NCLAT in Uttam Galva Steels
Ltd vs. DF Deutsche Forfait AG CA (AT) (Insolvency) 39-2017 has held
that right of an operational creditor to file an application accrues after
expiry of 10 days from the delivery of demand notice.

The
resolution process commences from the date of admission of the application by
the NCLT.

The
NCLT would decide within 14 days whether or not to admit the application.

The
resolution process commences from the date of admission of the application by
the NCLT.

The NCLAT in JK
Jute Mills vs. Surendra Trading Co Ltd, CA(AT) 09-2017 has held that
the 14 days’ period available to the NCLT to admit or reject an application
must be counted from the date of receipt of the application by the NCLT and not
from the date of filing of the application. There would be a time gap between
the two, since the Registry will check whether the application filed is proper
in all respects. Further and importantly, it held that the 14 day period was
not a mandate of law since it was procedural in nature. Hence, in appropriate
cases, the NCLT could admit a petition even after this 14 days’ period. This is
a very crucial decision since it hits against the early resolution process for
which the Code is reputed. However, the NCLAT added that the time-bound
resolution within 180 + 90 days is mandatory since time is of the essence under
the Code.

The Calcutta High
Court in Sree Metaliks Ltd. vs. Union of India, WP 7144 / 2017
considered an interesting issue as to whether the NCLT must grant a hearing to
the corporate debtor before admitting any insolvency proceedings against it.
NCLT acting under the provisions of the Act, 2013 while disposing off any
proceedings before it. It held that NCLT was not to bound by the procedure laid
down under the Code of Civil Procedure, 1908. However, it is to apply the
principles of natural justice in the proceedings before it. It can regulate its
own procedure, however, subject to the other provisions of the Companies Act of
2013 or the Insolvency and Bankruptcy Code of 2016 and any Rules made
thereunder. The Code of 2016 read with the Rules 2016 is silent on the
procedure to be adopted at the hearing of an application u/s. 7 presented
before the NCLT, that is to say, it is silent whether a party respondent has a
right of hearing before the adjudicating authority or not. The Court held that
based on principles of natural justice a corporate debtor must be given an
opportunity of being heard and rebutting the claim of default against him. A
similar view has also been held by the NCLAT in Innoventive Industries
Ltd, CA(AT) (Insolvency) 1&2-2017.

Once an
application is admitted by the NCLT in either of the above three scenarios, the
corporate insolvency resolution process is set in motion and it must be
completed within a maximum period of 180 days subject to a further (maximum)
extension of up to 90 days. Thus, there is a specific time bound process within
which the corporate must be rehabilitated or else the NCLT would order its
liquidation / winding-up. This is one of the unique features of the Code.
Interestingly, once the Code has been triggered and a corporate insolvency
resolution process commences, there is no mechanism for its withdrawal and it
must be carried forward to its logical end, i.e., either the corporate is
rehabilitated or the resolution plea is rejected and liquidation proceedings
against the corporate commence. The Supreme Court has recently given a somewhat
distinguishing judgment in the case of Lokhandwala Kataria Construction
P. Ltd. vs. Nisus Finance and Investment Managers LLP, CA No. 9279/2017,
where it determined whether the NCLT has powers to admit a compromise between
the creditor and the corporate debtor once a resolution proceeding commences?
The NCLT held that it could not do so and the Supreme Court stated that this
was the correct position in law. However, its Order went on to state that since
all the parties were before it, by virtue of the powers conferred upon the
Supreme Court under Art. 142 of the Constitution, it was admitting the consent
terms. A similar view was again taken by it in Mothers Pride Dairy P.
Ltd. vs. Portrait Advertising and Marketing P. Ltd., CA No. 9286/2017. One
wonders whether for every consent terms would the parties have to approach the
Supreme Court for admission? Would this not be an unnecessary cost and time
burden on all parties concerned? Would it not be better to have a provision for
entertaining a consent applications by the NCLT itself? It is yet early days
for the Code and hopefully, these teething troubles would be resolved soon. It
may be noted that prior to admission, the Rules framed under the Code permit an
applicant to withdraw the applicant prior to its admission by the NCLT. This
view has also been held by NCLAT in its Order in the case of Ardor Global
P. Ltd. vs. Nirma Industries P. Ltd., CA (AT) (Insolvency) No. 135-2017.

The Gujarat High
Court in the case of Essar Steel Ltd. vs. RBI, C/SCA/12434/2017
has laid down the following guidelines to be followed by the NCLT while
considering any application under the Code:

1. It should not
act mechanically and that all provisions may not be treated mandatory but it
could be treated as a directive only based upon facts, circumstances and
evidence available before the NCLT;

2. It should act without being guided by any advice or
directions in any form or nature by RBI or any other authority.

3. The NCLT may proceed in accordance with Law and there
should not be undue pressure on it by the administration

(… to be continued)

shailesh.kwebmaker

Board Meetings By Video Conferencing Mandatory For Companies? – Yes, If Even One Director Desires

Background

Is a company
bound to provide facilities to directors to participate in board meetings by
video conferencing? The NCLAT has answered in the affirmative even if one
director so desires. This is what the Tribunal has held in its recent
decision in the case of Achintya Kumar Barua vs. Ranjit Barthkur ([2018] 91
taxmann.com 123 (NCL-AT)).

Section 173(2)
of the Companies Act, 2013 provides that a director may participate in a board
meeting in person or through video conferencing or through audio-video visual
means. Clearly, then, a director has three alternative methods to attend board
meeting. The question was: whether these three options arise only if a company
provides such facility or whether a director can insist that he be provided all
the three choices the director has the option of using any one of the three.

It is clear
that, for video-conferencing to work, facilities would have to be at both ends.
Indeed, as will also be seen later herein, the company will have to arrange for
far more facilities to ensure compliance, than the director participating by
video conference. The director may need to have just a computer – or perhaps
even a mobile may be sufficient – and internet access. Apart from providing
these facilities, the process of the board meeting itself would undergo a
change in practice where meeting is held by video conference.

While one may
perceive that, particularly with internet access and high bandwith
proliferating, video conferencing would be easy. However, the formal process of
Board Meetings by video conferencing has May 2018 video conferencing article
first post board been simplified. This would not only require bearing the cost
of video conference facilities but also carrying out several other compliances
under the Companies Act and Rules made thereunder. This makes the effort
cumbersome and costly particularly for small companies. Moreover, the
proceedings would become very formal. Directors would be aware that their words
and acts are being recorded. These video recordings can be reviewed later very
closely for legal and other purposes particularly for deciding who was at fault
in case some wrongs or frauds are found in the company.

Arguments before the NCLAT

Before the
NCLAT, which was hearing an appeal against the decision of the NCLT, the
company argued that the option to attend by video conferencing to a director
arises only if the company provides such right.

It was also
argued that the relevant Secretarial Standards stated that board meeting could
be attended by video conferencing only if the company had so decided to provide
such facility.

Additional
issues raised including facts that made it difficult for the company to provide
such facility.

Relevant provisions of law

Some relevant
provisions in the Companies Act, 2013 and the Companies (Meetings of Board and
its Powers) Rules, 2014 are worth considering and are given below (emphasis supplied).

Section 173(2)
of the Act:

173(2) The
participation of directors in a meeting of the Board may be either in person or through video conferencing or other
audio visual means, as may be prescribed, which are capable of recording and
recognising the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time:

Provided
that the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video
conferencing or other audio visual means:

Provided
further that where there is quorum in a meeting through physical presence of
directors, any other director may participate through video conferencing or
other audio visual means in such meeting on any matter specified under the
first proviso. (This second proviso is not yet brought into force)

Some relevant
provisions from the Rules:

3. A company shall comply with the
following procedure, for convening and conducting the Board meetings through
video conferencing or other audio visual means.

(1) Every
Company shall make necessary arrangements to avoid failure of video or audio
visual connection.

(2) The
Chairperson of the meeting and the company secretary, if any, shall take due
and reasonable care—

(a) to
safeguard the integrity of the meeting by
ensuring sufficient security and identification procedures;

(b) to ensure availability of proper
video conferencing or other audio visual equipment or facilities for providing
transmission of the communications for effective participation of the directors
and other authorised participants at the Board meeting;

(d) to store for safekeeping and marking the tape
recording(s) or other electronic recording mechanism as part of the records of
the company at least before the time of completion of audit of that particular
year.

(e) to ensure that no person other than
the concerned director are attending or have access to the proceedings of the
meeting through video conferencing mode or other audio visual means; and

(f) to ensure that participants attending the meeting
through audio visual means are able to hear and see the other participants
clearly during the course of the meeting:

What the NCLAT held

The NCLAT,
however, held that the right to participate board meetings via
video-conferencing was really with the director. This is clear, it pointed out,
from the opening words of Section 173(2) that read: “The participation of
directors in a meeting of the Board may
be either in person or through video conferencing or other audio visual means“.
Thus, if the director makes the choice of attending by video-conferencing, the
company will have to conduct the meeting accordingly.

The NCLAT
analysed and observed, “We find that the word “may” which has been
used in this sub-Section (2) of Section 173 only gives an option to the
Director to choose whether he would be participating in person or the other
option which he can choose is participation through video-conferencing or other
audio-visual means. This word “may” does not give option to the
company to deny this right given to the Directors for participation through
video-conferencing or other audio-visual means, if they so desire.”.

The NCLAT
further stated, “…Section 173(2) gives right to a Director to participate
in the meting through video-conferencing or other audio-visual means and the
Central Government has notified Rules to enforce this right and it would be in
the interest of the companies to comply with the provisions in public
interest.”.

On the issue of
the relevant Secretarial Standard that stated that video conferencing was
available only if the company had provided, the NCLAT rejected this
argument saying that in view of clear words of the Act, such standards could
not override the Act and provide otherwise. In the words of the NCLAT, “We
find that such guidelines cannot override the provisions under the Rules. The
mandate of Section 173(2) read with Rules mentioned above cannot be avoided by
the companies.”.

The NCLAT
finally stressed on the positive aspects of video conferencing. It said that
vide conferencing it could actually help avoid many disputes on the proceedings
of the Board meeting as a video record would be available. To quote the NCLAT, “We
have got so many matters coming up where there are grievances regarding
non-participation, wrong recordings etc.” It also upheld the order of the
NCLT which held that providing video conferencing facility was mandatory of a
director so desired, and said, “The impugned order must be said to be
progressive in the right direction and there is no reason to interfere with the
same.”.

Implications and conclusion

It is to be
emphasised that the requirements of section 173 apply to all companies –
listed, public and private. Hence, the implications of this decision are far
reaching. Even if one director demands facility of video conferencing, all the
requirements will have to be complied with by the company.

Rule 3 and 4 of
the Companies (Meeting of Board and its Powers) Rules, 2014, some provisions of
which are highlighted earlier herein, provide for greater detail of the manner
in which the meeting through video conferencing shall be held. Directors should
be able to see each other, there should be formal roll call including related
compliance etc. There are elaborate requirements for recording decisions
and the minutes in proper digital format.

In these days,
meetings so held can help avoid costs and time, particularly when the director
is in another city or town or in another country. However, there are attendant
costs too. Even one director could insist on attending by video conferencing
and the result is that the whole proceedings would have to be so conducted and
the costs have to be borne by the company.

Certain
resolutions such as approval of annual accounts, board report, etc.
cannot be passed at a meeting held by video-conferencing. A new proviso has
been inserted to section 173(2) by the Companies (Amendment) Act, 2017. This
proviso, which is not yet brought into force, states that if there are enough
directors physically present to constitute the quorum, then, even for such
resolutions, the remaining directors could attend and participate by video
conferencing.

Thus, in
conclusion, it is submitted that the lawmakers should review these provisions
and exclude particularly small companies – private and public – from their
applicability.

Note: in the april 2018 issue of
the journal, in the article titled “tax planning/evasion transactions on
capital markets and securities laws – supreme court decides”, on page 110, the
relevant citation of the decision of the supreme court was inadvertently not
given. the citation of this decision is sebi vs. rakhi trading (p.) limited
(2018) 90 taxmann.com 147 (sc).

shailesh.kwebmaker

Fugitive Economic Offenders Ordinance 2018

Introduction

Scam and Scat is the motto
of the day! The number of persons committing frauds and leaving the country is
increasing. Once a person escapes India, it not only becomes difficult for the
law enforcement agencies to extradite him but also to confiscate his
properties. In order to deter such persons from evading the law in India, the
Government has introduced the Fugitive Economic Offenders Bill, 2018 (“the
Bill”). The Bill has been tabled in the Lok Sabha. However, while the Bill
would take its own time to get cleared, the Government felt that there was an
urgent need to introduce the Provisions and so it promulgated an Ordinance
titled, the Fugitive Economic Offenders Ordinance, 2018. This Ordinance was
promulgated by the President on 21^st April 2018 and is in force from
that date.

Fugitive Economic Offender

The Preamble mentions that
it is an Ordinance to provide for measures to deter fugitive economic offenders
from evading the process of law in India by staying outside the jurisdiction of
Indian courts, to preserve the sanctity of the rule of law in India.

The Ordinance defines a
Fugitive Economic Offender as any individual against whom an arrest warrant has
been issued in India in relation to a Scheduled Offence and such individual
must:

(a) Have left India to avoid criminal prosecution;
or

(b) If he is abroad, refuses to return to India to
face criminal prosecution.

Thus, it
applies to an individual who either leaves the country or refuses to return but
in either case to avoid criminal prosecution. An arrest warrant must have been
issued against such an individual in order for him to be classified as a
`Fugitive Economic Offender’ and the offence must be an offence mentioned in
the Schedule to the Ordinance. The Ordinance provides for various economic
offences which are treated as Scheduled Offences provided the value involved in
such offence is Rs. 100 crore or more. Hence, for offences lesser than Rs. 100
crore, an individual cannot be treated as a Fugitive Economic Offender. Some of
the important Statutes and their economic offences covered under the Ordinance
are as follows:

(a) Indian Penal Code, 1860 – Cheating, forgery,
counterfeiting, etc.

(b) Negotiable Instruments Act, 1881 – Cheque
Bouncing u/s. 138

(d) Prohibition of Benami Property Transactions
Act, 1988 – Prohibition of Benami Transactions

(e) SEBI Act, 1992- Prohibition of Insider Trading
and Other Offences for contravention of the provisions of the SEBI Act in the manner
provided u/s. 24 of the aforesaid Act.

(f) Prevention of Money Laundering Act, 2002 –
Offence of money laundering

(g) Limited Liability Partnership Act, 2008 –
Carrying on business with intent to defraud creditors of LLP

(h) Companies Act, 2013 – Private Placement
violation; Public Deposits violation; Carrying on business with intent to defraud creditors / fraudulent purpose; Punishment for fraud in the
manner provided u/s. 447 of the Companies Act.

(i) Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 – Wilful attempt to
evade tax u/s. 51 of the Act. It may be noted that this offence is also a
Scheduled Cross Border Offence under the Prevention of Money Laundering Act,
2002. Thus, a wilful attempt to evade tax under the Black Money Act may have
implications and invite prosecutions under 3 statutes!

(j) Insolvency and Bankruptcy Code, 2016 –
Transactions for defrauding creditors

(k) GST Act, 2017 – Punishment for certain offences
u/s. 132(5) of the GST Act, such as, tax evasion, wrong availment of credit,
failure to pay tax to Government, false documents, etc.

Applicability

The
Ordinance states that it applies to any individual who is, or becomes, a
fugitive economic offender on or after the date of coming into force of this
Ordinance, i.e., 21^stApril 2018. Hence, its applicability is
retroactive in nature, i.e., it applies even to actions done prior to the
passing of the Ordinance also. Therefore, even the existing offenders who
become classified as fugitive economic offenders under the Ordinance would be
covered.

Declaration of Fugitive Economic Offender

The
Enforcement Directorate would administer the provisions of the Ordinance. Once
the ED has reason to believe that any individual is a Fugitive Economic
Offender, then he (ED) may apply to a Special Court (a Sessions Court
designated as a Special Court under the Money Laundering Act) to declare such
individual as a Fugitive Economic Offender. Such application would also contain
a list of properties in India and outside India believed to be the proceeds of
crime for which properties confiscation is sought. It would also mention a list
of benami properties in India and abroad to be confiscated. The term `proceeds
of crime’ means any property derived directly or indirectly as a result of
criminal activity relating to a scheduled offence, and where the property is
held abroad, the property of equivalent in value held within the country or
abroad.

With the
permission of the Court, the ED may attach any such property which would
continue for 180 days or as extended by the Special Court. However, the
attachment would not prevent the person interested in enjoyment of any
immovable property so attached. The ED also has powers of Survey, Search and
Seizure in relation to a Fugitive Economic Offender. It may also search any
person by detaining him for a maximum of 24 hours with prior Magistrate
permission.

Once an
application to a Court is made, the Court will issue a Notice to the alleged
Fugitive Economic Offender asking him to appear before the Court. It would also
state that if he fails to appear, then he would be declared as a Fugitive
Economic Offender and his property would stand confiscated. The Notice may also
be served on his email ID linked with his PAN / Aadhaar Card or any other ID
belonging to him which the Court believes is recently accessed by him.

If the
individual appears himself before the Court, then it would terminate the
proceedings under the Ordinance. Hence, this would be the end of all
proceedings under the Ordinance. However, if he appears through his Counsel,
then Court would grant him 1 week’s time to file his reply. If he fails to appear
either in person or Counsel and the Court is satisfied that the Notice has been
served or cannot be served since he has evaded, then it would proceed to hear
the application.

Consequences

If the
Court is satisfied, then it would declare him to be a Fugitive Economic
Offender and thereafter, the proceeds of crime in India / abroad would be
confiscated and any other property / benami property owned by him would also be
confiscated. The properties may or may not be owned by him. In case of foreign
properties, the Court may issue a letter of request to a Court in a country
which has an extradition treaty or similar arrangement with India. The
Government would specify the form and manner of such letter. This Order of the
Special Court is appealable before the High Court.

The Court,
while making the confiscation order, exempt from confiscation any property
which is a proceed of crime in which any other person, other than the
FugitiveEconomic Offender, has an interest if the Court is satisfied that such
interest was acquired bona fide and without knowledge of the fact that
the property was proceeds of crime. Thus, genuine persons are protected.

One of the
other consequences of being declared as a Fugitive Economic Offender, is that
any Court or Tribunal in India may disallow him to defend any civil claim in
any civil proceedings before such forum. A similar restriction extends to any
company or LLP if the person making the claim on its behalf/the promoter/key
managerial person /majority shareholder/individual having controlling interest
in the LLP has been declared a Fugitive Economic Offender. The terms
promoter/majority shareholder /individual having controlling interest have not
been defined under the Ordinance. It would be desirable for these important
terms to be defined or else it could either lead to inadvertent consequences or
fail to achieve the purpose. This ban on not allowing any civil remedy, even
though it is at the discretion of the Court/Tribunal, is quite a drastic step
and may be challenged as violating a person’s Fundamental Rights under the
Constitution. Although the words used in the Ordinance are that “any Court
or tribunal in India, in any civil proceeding before it, may, disallow
such individual from putting forward or defending any civil claim”; it
remains to be seen whether the Courts interpret may as discretionary or as
directory, i.e., as ‘shall’?

The
Ordinance also empowers the Government to appoint an administrator for the
management of the confiscated properties and he has powers to sell them as
being unencumbered properties. This is another drastic step since a person’s
properties would be confiscated and sold without him being convicted of an
offence. A mere declaration of an individual as a Fugitive Economic Offender
could lead to his properties being confiscated and sold? What about charges
which banks/Financial Institutions may have on these properties? Would these
lapse? These are open issues on which currently there is no clarity. It is
advisable that the Government thinks through them rather than rushing in with
an Ordinance and then have it struck down on various grounds!

An
addition in the Ordinance as compared to the Bill is that no Civil Court has
jurisdiction to entertain any suit in respect of any matter which the Special
Court is empowered to determine and no injunction shall be granted by any Court
in respect of any action taken in pursuance of any power conferred by the
Ordinance.

Onus of Proof

The onus
of proving that an individual is a Fugitive Economic Offender lies on the
Enforcement Directorate. However, the onus of proving that a person is a
purchaser in good faith without notice of the proceeds of crime lies on the
person so making a claim.

Epilogue

This
Ordinance together with the Prohibition of Benami Transactions Act, 1988; the
Prevention of Money Laundering Act, 2002 and the Black Money(Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 forms a
four-dimensional strategy on the part of the Government to prevent wilful
economic offenders from fleeing the country and for confiscating their
properties. Having said that, there are many unanswered questions which the
Ordinance raises:

(a) Whether a mere declaration of an individual as
a Fugitive Economic Offender by a Court would achieve the purpose– Is it not
similar to bolting the stable after the horse has eloped?

(b) How easy is it going to be for the Government
to attach properties in foreign jurisdictions?

(c) Would a mere Letter of Request from a Special
Court be enough for a foreign Court / Authority to permit India to confiscate
properties in foreign jurisdictions?

(d) Would not the foreign Court like to hear
whether due process of law has been followed or would it merely take off from
where the Indian Court has left?

(e) The provision of attachment of property is
common to the Ordinance, the Prohibition of Benami Transactions Act, 1988, and
the Prevention of Money Laundering Act, 2002. In several cases, all three
statutes may apply. In such a scenario, who gets priority for attachment?

These and several unanswered questions
seem to create a fog of uncertainty. Maybe with the passage of time many of
these doubts would get cleared. Till such time, let us all hope that the
Ordinance is able to achieve its stated purpose of deterring economic offenders
from fleeing the Country and create a Ghar Vapsi for them…!!

shailesh.kwebmaker

Money Laundering Law: Dicey Issues

INTRODUCTION

United Nations General Assembly held a special
session in June 1998. At that session, a Political Declaration was adopted
which required the Member States to adopt national money-laundering
legislation.

On 17^th January, 2001, the President
of India gave his assent to The Prevention of Money-Laundering Act, 2002
(“PMLA”). Enactment of PMLA is, thus, rooted in the U.N. Political Declaration.

EVOLUTION OF LAW

The preamble to PMLA shows that it is an “Act
to prevent money-laundering and to provide for confiscation of property derived
from, or involved in, money-laundering and for matters connected therewith or
incidental thereto”.

After PMLA was enacted, the Government had to
deal with various issues not adequately addressed by the existing legal
framework. Accordingly, the Government modified the legal framework from time
to time by amendments to PMLA. The amendments made in 2005, 2009, 2013 and 2016
helped the Government to address various such issues which were reflected in
the Statement of Objects and Reasons appended to each amendment.

JUDICIAL REVIEW

In addition to the issues addressed by the
amendments to PMLA, many more issues came up for judicial review before Courts.
The Supreme Court and various High Courts critically examined such further
issues and gave their considered view in respect of such issues.

In this article, the author has dealt with the
following dicey issues and explained the rationale underlying the conclusion
reached by the Court.

1) Does
possession of demonetised currency notes constitute offence of
money-laundering?

2) Whether
a chartered accountant is liable for punishment under PMLA?

3) Doctrine
of double jeopardy – whether applicable to PMLA?

4) Right
of cross-examination of witness.

5) Whether
the arrest under PMLA depends on whether the offence is cognisable?

6) Whether
the arrest under PMLA requires the officer to follow CrPC procedure?
(Registering FIR, etc.)

7) How
soon to communicate grounds of arrest?

1) Does possession of demonetised currency notes
constitute offence of money-laundering?

This issue was examined by the Supreme Court in a
recent decision[1] in the
light of the following facts.

In November 2016, the Government announced
demonetisation of 1000 and 500 rupee notes. The petitioner conspired with a
bank manager and a chartered accountant (CA) to convert black money in old
currency notes into new currency notes. In such conspiracy, the CA acted as
middleman by arranging clients wanting to convert their black money. The CA
gave commission to the petitioner on such transactions.

The petitioner opened bank accounts in names of
different companies by presenting forged documents and deposited Rs. 25 crore
after demonetisation.

Statements of 26 witnesses were recorded.
However, the petitioner refused to reveal the source of the demonetised and new
currency notes found in his premises.

The abovementioned facts were viewed in the light
of the relevant provisions of PMLA and thereupon, the Supreme Court explained
the following legal position applicable to these facts.

Possession of demonetised currency was only a
facet of unaccounted money. Thus, the concealment, possession, acquisition or
use of the currency notes by projecting or claiming it as untainted property
and converting the same by bank drafts constituted criminal activity relating
to a scheduled offence. By their nature, the activities of the petitioner were
criminal activities. Accordingly, the activity of the petitioner was replete
with mens rea. Being a case of money-laundering, the same would fall
within the parameters of section 3 [The offence of money-laundering] and was
punishable u/s. 4 [Punishment for money-laundering].

The petitioner’s reluctance in disclosing the
source of demonetised currency and the new currency coupled with the statements
of 26 witnesses/petitioner made out a formidable case showing the involvement
of the petitioner in the offence of money-laundering.

The volume of demonetised currency and the new
currency notes for huge amount recovered from the office and residence of the
petitioner and the bank drafts in favour of fictitious persons, showed that the
same were outcome of the process or activity connected with the proceeds of
crime sought to be projected as untainted property.

The activities of the petitioner caused huge
monetary loss to the Government by committing offences under various sections
of IPC. The offences were covered in paragraph 1 in Part A of the Schedule in
PMLA [sections 120B, 420, 467 and 471 of IPC].

On the basis of the abovementioned legal
position, the Supreme Court held that the property derived or obtained by the
petitioner was the result of criminal activity relating to a scheduled offence.

The possession of such huge quantum of
demonetised currency and new currency in the form of Rs. 2000 notes remained
unexplained as the petitioner did not disclose their source and the purpose for
which the same was received by him. This led to the petitioner’s failure to
dispel the legal presumption that he was involved in money-laundering and the
currencies found were proceeds of crime.

2) WHETHER A CHARTERED ACCOUNTANT IS LIABLE TO
PUNISHMENT UNDER PMLA?

A chartered account can act as authorised
representative to present his client’s case u/s. 39 of PMLA.

In the event of the client facing charge under
PMLA, can his chartered account be also proceeded against and punished under
PMLA?

This topical issue was examined by the Supreme
Court in the undernoted decision[2].

In this case, CBI was investigating the charge of
corruption on mammoth scale by a Chief Minister which had benefitted his son –
an M. P. When CBI sought custody of the respondent chartered accountant, he
contended that he was merely a chartered accountant who had rendered nothing
more than professional service.

The Supreme Court rejected such contention having
regard to serious allegations against the chartered accountant and his nexus
with the main accused. The Supreme Court gave weight to the CBI’s allegation
that the chartered accountant was the brain behind the alleged economic offence
of huge magnitude. The bail granted to the chartered accountant by the Special
Court and the High Court was cancelled by the Supreme Court.

The ratio of this decision may be used by
CBI/Enforcement Directorate to rope in chartered accountants for their role in
the cases involving bank frauds and transactions which are economic offences
which are recently in the news.

3) DOCTRINE OF DOUBLE JEOPARDY- WHETHER
APPLICABLE TO PMLA

When a person facing criminal charge in a trial
is summoned under PMLA, can he raise the plea of double jeopardy in terms of
Article 20(2) of the Constitution?

This issue was examined by the Madras High Court
in the undernoted decision[3].

In this case, the charge-sheet was filed by
police to investigate the offences of cheating punishable under sections
419-420 of the Indian Penal Code. Under PMLA, these offences are
regarded as “scheduled offences”.

When summon under PMLA was issued to the
petitioner, she pleaded that the summon cannot be issued to her. According to
her, the summon was hit by double jeopardy as police had already filed
charge-sheet alleging the offence under the Indian Penal Code.

It was held by the Madras High Court that
issuance of summon under PMLA was merely for preliminary investigation to trace
proceeds of crime which did not amount to trying a criminal case. Hence, there
was no double jeopardy as envisaged under Article 20(2) of the Constitution.

The plea of double jeopardy was also raised in
another case[4].

In this case, the petitioner was acquitted from
criminal charges under the Indian Penal Code. After such acquittal,
however, the proceedings under PMLA continued. Hence, the petitioner claimed
the benefit of double jeopardy on the ground that the proceedings under PMLA
regarding seized properties cannot be allowed to continue after his acquittal
from criminal charges under the Indian Penal Code.

The Orissa High Court held that even when the
accused was acquitted from the charges framed in the Sessions trial, a
proceeding under PMLA cannot amount to double jeopardy since the procedure and
the nature of onus under PMLA are totally different.

4) RIGHT
OF CROSS-EXAMINATION OF WITNESS

Whether, at the stage when a person is asked to
show cause why the properties provisionally attached should not be declared
property involved in money-laundering, can he claim the right of
cross-examining a witness whose statement is relied on in issuing the
show-cause notice?

This was the issue before the Delhi High Court in
the under mentioned case[5].

The Delhi High Court observed that, prior to
passing of the Adjudication Order u/s. 8 of PMLA, it cannot be presumed that
the Adjudicating Authority will rely on the statement of the witness sought to
be cross-examined by the petitioner. On this ground, it was held that the
noticee did not have the right to cross-examine the witness at the stage when
he merely received the show-cause notice.

5) WHETHER
THE ARREST UNDER PMLA DEPENDS ON WHETHER THE OFFENCE IS COGNISABLE

The Bombay High Court has discussed this issue in
the undernoted decision[6].

The Court referred to the definition of ‘cognisable
offence‘ in section 2(c) of CrPC and observed that if the offence falls
under the First Schedule of CrPC or under any other law for the time being in
force, the Police Officer may arrest the person without warrant. The Court also
referred to the following classification of the offences under the ‘First Schedule’
of CrPC.

– ‘cognisable’ or ‘non-cognisable’;

– bailable or non-bailable

– triable by a particular Court.

Under Part II of the First Schedule of CrPC,
[‘Classification of Offences under Other Laws’], it is provided that ‘offences
punishable with imprisonment for more than three years would be cognisable and
non-bailable’.

The punishment u/s. 4 for the offence of
money-laundering is described in section 3. The punishment is by way of
imprisonment for more than three years and which may extend up to seven years
or even upto ten years. Therefore, in terms of Part II of the First Schedule of
CrPC, such offence would be cognisable and non-bailable.

In the opinion of the Bombay High Court,[7] however,
for arresting a person, the debate whether the offences under PMLA are
cognisable or non-cognisable is not relevant.

The Court explained that section 19 of PMLA
confers specific power to arrest any personif three conditions specified in
section 19 existde hors the classification of offence as cognisable.

According to section 19, the following three
conditions need to exist for arresting a person.

Firstly, the authorised officer has the reason to believe
that a person is guilty of the offence punishable under PMLA.

Secondly, such reason to believe is based on the material
in possession of the officer.

Finally, the reason for such belief is recorded in
writing.

Section 19 nowhere provides that only when the
offence committed by the person is cognisable, such person can be arrested.

6) WHETHER THE ARREST UNDER PMLA REQUIRES THE
OFFICER TO FOLLOW CRPC PROCEDURE (REGISTERING FIR, ETC.)?

Section 19 of PMLA does not contemplate the
following steps before arresting the accused in respect of the offence
punishable under PMLA.

– registration of FIR on receipt of information relating to cognisable offence.

– obtaining permission of the Magistrate in case of non-cognisable offence.

According to the Court[8], when
there are no such restrictions on the ‘power to arrest’ u/s. 19 it does not
stand to reason that in addition to the procedure laid down in PMLA, the
officer authorised to arrest the accused under PMLA be required to follow the
procedure laid down in CrPC (viz., registering FIR or seeking Court’s
permission in respect of non-cognisable offence) for arrest of the accused.

The Court observed that if the provisions of
Chapter XII of CrPC (regarding registration of FIR and Magistrate’s permission)
are to be read in respect of the offences under PMLA, section 19 of PMLA would
be rendered nugatory. According to the Court, such cannot be the intention of
the Legislature. Thus, a special provision in PMLA cannot be rendered nugatory
or infructuous by interpretation not warranted by the Legislature.

7) HOW
SOON TO COMMUNICATE THE GROUNDS OF ARREST?

Whether the grounds of arrest must be informed or
supplied to the arrested person immediately or “as soon as possible” and
whether the same must be communicated in writing or orally.

The Bombay High Court[9] addressed
this issue as follows.

Section 19(1) of PMLA does not provide that the
grounds of arrest must be immediately informed to the arrested person. The use
of the expression ‘as soon as may be‘ in section 19 suggests that the
grounds of arrest need not be supplied at the very time of arrest or
immediately on arrest. Indeed, the same should be supplied as soon as may be.

The Court observed that if the intention of the
Legislature was that the grounds of arrest must be mentioned in the Arrest
Order itself and that, too, in writing, the Legislature would have made clear
provision to that effect by using the word ‘immediately’ or ‘at the time of
arrest’. According to the Court, the fact that the Legislature has not done so
and instead, used the words ‘as soon as may be‘, is clear indication
that there is no statutory requirement that the grounds of arrest should be
communicated in writing and that also at the time of arrest or immediately
after the arrest. The use of the words ‘as soon as may be‘ implies that
the grounds of arrest should be communicated at the earliest.

SUMMATION

All the aforementioned dicey issues considered by
the Supreme Court and High Courts have significant relevance to chartered
accountants in practice while advising their clients on the matters concerning
PMLA.

As discussed in the Supreme Court’s decision in
the case of Vijay Sai Reddy[10], there is always a possibility that
the bail initially given to the chartered accountant by the Special Court or
High Court may be cancelled by the Supreme Court.

Hence, it is important for chartered accountants
to take a conservative view while giving their professional advice or view.
They must keep abreast of the important issues discussed in this article which
would enable them to give proper advice to their clients.

[1] Rohit Tandon vs. ED
[2018] 145 SCL 1 (SC

[2] CBI vs. Vijay Sai Reddy (2013) 7SCC 452

[3] M.Shobana vs. Asst
Director (2013) 4 MLJ (Cr.) 286

[4] Smt. Janata Jha vs.
Asst Director (2014) CrLJ2556 (Orri)

[5] Arun Kumar Mishra
vs. Union (2014) 208 DLT 56

[6]Chhagan Chandrakant Bhujbal vs. Union
[2017] 140 SCL 40 (Bom)

[7] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[8] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[9] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[10] CBI vs. Vijay Sai
Reddy (2013) 7 SCC 452

shailesh.kwebmaker

Daughter’s Right In Coparcenary – V

The Hindu Succession Act, 1956 (“the Act”)
was amended by the Hindu Succession (Amendment) Act, 2005 (“the Amending Act”)
with effect from 9^th September 2005, whereby the law recognised the
right of a daughter in coparcenary. Unfortunately, the amended provisions of
section 6 of the Act has caused a lot of confusion and resulted in litigation
all over the country. My articles in BCAJ published in January 2009, May 2010,
November 2011 and February 2016 have made some attempt to analyse and explain
the legal position as per the decided case law.

When my last article was published in BCAJ
in February 2016, it was safe to assume that in view of the then latest Supreme
Court decision in the case of Prakash and others vs. Phulavati and others (now
reported in (2016) 2 SCC 36) the law was finally settled and there would be no
need for any further discussion on the subject. However, Supreme Court is
supreme. Its latest decision in case of Danamma vs. Amar (not yet
reported) has not only prompted me to write this fifth article on the subject,
but may also open floodgates of new controversy for further litigation on the
issue all over the country.

Sub-section (1) of section 6 of the Amendment
Act inter alia provides that on and from the commencement of the
Amendment Act, the daughter of a coparcener shall, by birth become a coparcener
in her own right in the same manner as the son; have the same rights in the
coparcenary property as she would have had if she had been a son; and be
subject to the same liabilities in respect of the said coparcenary property as
that of a son.

The aforesaid recent decision seems to be
contrary to the earlier decisions of the Supreme Court. With a view to understand
the issue, it may be necessary to consider the earlier case law although some
of it was already a part of my earlier articles.

The Supreme Court in the case of Sheela
Devi vs. Lal Chand [(2006), 8 SCC 581] has clearly observed that the
Amendment Act would have no application in a case where succession was opened
in 1989, when the father had passed away. In the case of Eramma vs.
Veerupana (AIR 1966 SC 1880), the Supreme Court has held that the
succession is considered to have opened on death of a person. Following that
principle in the case of Sheela Devi cited above, the father passed away in
1989 and it was held that the Amendment Act which came into force in September
2005 would have no application.

The same issue was considered by the Madras
High Court in the case of Bhagirathi vs. S. Manvanan. (AIR 2008 Madras 250)
and held that ‘a careful reading of section 6(1) read with section 6(3) of the
Hindu Succession Amendment Act clearly indicates that a daughter can be
considered as a coparcener only if, her father was a coparcener at the time of
coming into force of the amended provision.’

Para 14 of the said judgement reads as
under:-

“In the present case, admittedly the father
of the present petitioners had expired in 1975. Section 6(1) of the Act is
prospective in the sense that a daughter is being treated as coparcener on and
from the commencement of the Hindu Succession (Amendment) Act, 2005. If such
provision is read along with S. 6(3), it becomes clear that if a Hindu dies
after commencement of the Hindu Succession (Amendment) Act, 2005, his interest
in the property shall devolve not by survivorship but by intestate succession
as contemplated in the Act.”

In the said case, the Hon’ble Court relied
upon its earlier decision in the case of Sundarambal vs. Deivanaayagam
(1991(2) MLJ 199). While interpreting almost a similar provision, as
contained in section 29-A of the Hindu Succession Act, as introduced by the
Tamil Nadu Amendment Act 1 of 1990 where the Learned Single Judge had observed
as under:-

“Under sub-clause (1), the daughter of a
coparcener shall become a coparcener in her own right by birth, thus enabling
all daughters of the coparcener who were born even prior to 25^th
March, 1989 to become coparceners. In other words, if a male Hindu has a
daughter born on any date prior to 25^th March, 1989, she would also
be a coparcener with him in the joint family when the amendment came into
force. But the necessary requisite is, the male Hindu should have been alive on
the date of the coming into force of the Amended Act. The Section only makes a
daughter a coparcener and not a sister. If a male Hindu had died before 25^th
March, 1989 leaving coparcenary property, then his daughter cannot claim to be
a coparcener in the same manner as a son, as, on the date on which the Act came
into force, her father was not alive. She had the status only as a sister vis-a-vis
her brother and not a daughter on the date of the coming into force of the
Amendment Act …”.

The Madras High Court had occasion to
consider the similar issue in the case of Valliammal vs. Muniyappan (2008
(4) CTC 773) where the Court has observed as under:-

“6. In the plaint, it is stated that the
father of the plaintiffs died about thirty years prior to the filing of the
suit. The second plaintiff as P.W.1 has deposed that their father died in the
year 1968. The Amendment Act 39 of 2005 amending S. 6 of the Hindu Succession
Act, 1956 came into force on 9-9-2005 and it conferred right upon female heirs
in relation to the joint family property. The contention put forth by the
learned Counsel for the appellant is that the said Amendment came into force
pending disposal of the suit and hence the plaintiffs are entitled to the
benefits conferred by the Amending Act.

The Amending Act declared that the daughter
of the coparcener shall have the same rights in the coparcenary property as she
would have had if she had been a son. In other words, the daughter of a
coparcener in her own right has become a coparcener in the same manner as the
son insofar as the rights in the coparcenary property are concerned. The
question is as to when the succession opened insofar as the present suit
properties are concerned. As already seen, the father of the Plaintiffs died in
the year 1968 and on the date of his death, the succession had opened to the
properties in question. In fact, the
Supreme Court itself in the case of Sheela Devi vs. Lal Chand has
considered the above question and has laid down the law as follows:-

19.
The Act indisputably would prevail over the old Hindu Law. We may notice that
the Parliament, with a view to confer the right upon the female heirs, even in
relation to the joint family property, enacted the Hindu Succession Act, 2005.
Such a provision was enacted as far back in 1987 by the State of Andhra
Pradesh. The succession having opened in 1989, evidently, the provisions of
Amendment Act, 2005 would have no application.

In view of the above statement of law by the
Apex Court, the contention of the appellant is devoid of merit. The succession
having opened in the year 1968, the Amendment Act 39 of 2005 would have no
application to the facts of the present case.”

Even in the case of Prakash vs. Phulavati
cited above which was decided in 2016, the Supreme Court has held that
“the rights under the Amendment Act are applicable to living daughters of
living coparceners as on 9.9.2005 irrespective of when such daughters are
born”.

Thus, there is a plethora of cases deciding
that the father of the claiming daughter should be alive if the daughter makes
a claim in the coparcenary property. Moreover, it is necessary that the male
Hindu should have been alive on the date of coming into force of the Amended
Act.

With a view to understand the problem, it is
necessary to consider the facts leading to Danamma judgement. Danamma and her
sister, who were the appellants before the Supreme Court, were daughters of
Gurulingappa. Apart from these two daughters, Gurulingappa had two sons Arun
and Vijay. Gurulingappa died in 2001 leaving behind two daughters, two sons and
his widow. After his death Amar, son of Arun, filed a suit for partition. The
trial court denied the shares of the daughters. Aggrieved by the said
judgement, the daughters appealed to the High Court but the High Court
dismissed the appeal. The Supreme Court held in favour of the daughters giving
each of them shares equal to the sons. Paras 24 and 28 (part) read as follows:-

“24. Section 6, as amended, stipulates that
on and from the commencement of the amended Act, 2005, the daughter of a
coparcener shall by birth become a coparcener in her own right in the same
manner as the son. It is apparent that the status conferred upon sons under the
old section and the old Hindu Law was to treat them as coparceners since birth.
The amended provision now statutorily recognizes the rights of coparceners of
daughters as well since birth. The section uses the words in the same manner as
the son. It should therefore be apparent that both the sons and the daughters
of a coparcener have been conferred the right of becoming coparceners by birth.
It is very factum of birth in a coparcenary that creates the
coparcenary, therefore, the sons and daughters of a coparcener become
coparceners by virtue of birth. Devolution of a coparcenary property is the
later stage of and a consequence of death of a coparcener. The first stage of a
coparcenary is obviously its creation as explained above, and as is well
recognised. One of the incidents of coparcenary is the right of a coparcener to
seek a severance of status. Hence, the rights of coparceners emanate and flow
from birth (now including daughters) as is evident from sub-s (1)(a) and (b).”

“28. On facts, there is no dispute that the
property which was the subject matter of partition suit belongs to joint family
and Gurulingappa Savadi was propositus of the said joint family
property. In view of our aforesaid discussion, in the said partition suit,
share will devolve upon the appellants as well. …”

It is apparent that Gurulingappa had died in
the year 2001 i.e. before the Amendment Act came into force and the succession
opened before coming into force of the Amendment Act. That being so, if we
apply the principles laid down by the Supreme Court in Sheela Devi’s case, the
daughter would not have any claim or share. The earlier case law (including
Supreme Court) contemplates that the male Hindu (in whose estate the daughter
is making a claim) should have been alive on the date of coming into force of
the Amendment Act. While in the present case, Gurulingappa had died before the
Amendment Act came into force. However, in that case the Supreme Court had no
occasion to consider its own earlier decision in case of Sheela Devi cited
above.

It is submitted
that Sheela Devi’s case was well considered and had settled the issue.
Therefore, the recent decision of the Supreme Court in Danamma’s case can
result in further litigation and court cases. I can only end with a fervent
hope that the Apex Court will review its decision in Danamma’s case so that the
apparent conflict is resolved without resulting in further litigation.

shailesh.kwebmaker

Supreme Court Freezes Assets Of Independent Directors – A Thankless Job Made Worse

Background

In a recent ruling, the Supreme Court has
directed a freeze on assets of all the directors, including independent
directors, owing to certain defaults by the Company. They have also been
required to be personally present at hearings of the Court. At this stage,
there does not appear to be any conclusive finding about the guilt of the
independent directors and the matter is still sub judice. But this order
does raise concerns about the liabilities and inconveniences that independent
directors can be subjected to. As will be discussed later herein, being an
independent director is in a sense a thankless job. Their remuneration is
subject to statutory limits while their liability is enormous. There have
already been several orders by SEBI, that has taken different types of actions
against them. The defences available in law owing to recent changes appear to
have been diluted. Let us consider this decision (Chitra Sharma vs. UOI,
dated 22^nd November 2017) generally in the light some existing
provisions.

Needless to emphasise, Chartered
Accountants, Company Secretaries, lawyers, etc. are sought after persons
to fill in the posts of independent directors in listed companies and also
committees like Audit Committee. They too will warily see the developments in
law and court rulings.

Role of independent directors

Independent directors are a major pillar of
good corporate governance. They are meant to balance against the control of
Promoters, and directly or indirectly protect the interests of minority/public
shareholders and even other stakeholders. Committees like Audit Committee or
Nomination and Remuneration Committee are to have majority or at least half of
the number of members as independent directors.

The Companies Act, 2013 (“the Act”) lays
down in Schedule IV a very detailed code for independent directors. Their role
and obligations are laid down broadly and generally as well as specifically.

Apart from the specific code for independent
directors, there is a very detailed role under the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (“the Regulations”) for the
Board generally.

Powers of independent directors

The powers of independent directors are, in
comparison, relatively scanty. They do have powers as part of the Board generally.
They have right of information as part of the Board/Committee. However, these
are available few times a year when the Board/ Committee meets. Between these
meetings, they do not have direct substantive powers, either individually or
collectively. In meetings too, they individually do not have powers except to
participate and vote and perhaps require that their dissenting views be
recorded.

Remuneration

Independent directors are in a peculiar
position. They cannot be paid too much simply because they would lose their
independence since they would become dependent on the Company. Paying them too
less means that they do not have enough compensation and incentive to do
justice to their efforts and the risks that the position carries, of action by
regulators.

Typically, independent directors are paid by
way of sitting fees and, where the Company is profitable and if the Company so
decides, payment by way of commission as a percentage of profits. Sitting fees
are, however, limited to Rs. 1,00,000 per meeting (in practice, often a lesser
amount). Such level of remuneration in many cases would not be adequate for
many competent directors to accept the responsibilities and liabilities that
law imposes.

Kotak Committee appointed by SEBI has
recently recommended certain minimum remuneration for independent and
non-executive directors and though it still does not appear to be adequate in
proportion to liability, it is clear that attention is being given to this
area.

Liability of independent directors generally

Non-executive directors usually do not have
specific and direct liability under the Act/Regulations. Generally, executive
directors, key managerial personnel, etc. are taken to task first, for their
respective general or specific role in defaults. Non-executive directors who
are promoters may of course face action under certain circumstance. But
generally, non-executive directors can ensure that due role is formally
apportioned to competent persons so that they do not face actions on matters so
delegated. However, under the Act and even the Regulations, this has changed to
an extent. Under section 149(12) of the Act and the Regulations, some further
relief is sought to be given. Essentially, an independent director will be
liable, only if the default is with his knowledge through board proceedings.
This does help him because, unless the matter is brought before and part of
board proceedings, he may not be held liable. However, this is subject to the
condition that he should have acted diligently. This provision has not been
tested well and it will have to be seen how much it helps.

Orders/actions against independent directors

SEBI has general and special powers by which
it can pass adverse orders against independent directors. And it has passed
such orders. SEBI can, of course, take action for violation of specific
provisions of the Regulations applicable to them. However, depending on their
role, SEBI can use its general powers to pass orders against them. This may
include debarring them from acting as independent directors of listed
companies.

The Order in case of Zenith Infotech as
originally passed is particularly noteworthy. (Order No. WTM/RKA/ISD/11/2013
dated 25^th March 2013). In this case, SEBI had alleged diversion of
funds of Zenith. SEBI ordered the whole Board, including the independent
directors, to provide personal bank guarantee to the extent of $33.93
million for the losses suffered by Zenith. The guarantee was to be provided
without use of the assets of Zenith. Needless to emphasise that, independent
directors, particularly professionals, would usually not be able to provide
such guarantees. Professional directors would then face further adverse
directions for not complying with orders which may include prosecution.

Order of the Supreme Court

The Company concerned here is facing
insolvency proceedings. Numerous persons have booked flats and it appears that
the buyers are looking at loss of advances paid for purchase of flats. The
Supreme Court had earlier required the promoters to infuse funds in the
company. However, this apparently was not done to the extent ordered. The
Supreme Court has thus ordered that, inter alia, the independent directors
and their dependents will not transfer any of their assets till further notice.
The Court ordered:-

(d) Neither the independent
directors nor the promoter directors shall alienate their personal properties
or assets in any manner, and if they do so, they will not only be liable for
criminal prosecution but contempt of the Court.

(e) That apart, we also direct
that the properties and assets of their immediate and dependent family members
should also not be transferred in any manner, whatsoever.

…

Matters be listed on 10.1.2018. On that day, all the independent
directors and promoter directors of Jaiprakash Associates Limited, shall remain
present.

Thus, the directions are (i) the assets of
the independent directors and their immediate and dependent family
members are frozen (ii) the independent directors are required to be personally
present before the Court at the hearing of the case.

The broad based order means that independent
directors’ business/professional and even personal activities are seriously
affected.

At this stage, there does not appear to be
any final ruling of the guilt of the independent directors. It is also not
clear whether there is any finding of complicity or even negligence of their
duties as independent directors. Even if such a direction is reversed in the
future, in the interim, the independent directors face serious difficulties.

As stated earlier, there are some defences
available to independent directors in case of wrong doings by the company. If
they have taken due safeguards and carried out their role with diligence, they
may not ultimately be held liable. But in the interim, such orders are
effectively a punishment.

Recent order of SEBI exonerating
independent directors where they exercised diligence.

In the case of Zylog Systems Limited (Order
dated 20^thJune 2017), there was a finding that the Company declared
dividends but did not pay it. The question arose as to the role of the Board
generally and also of the independent directors in particular. SEBI issued show
cause notices to, inter alia, the independent directors, alleging
violations and seeking to pass adverse directions. The independent directors
explained in detail their role as independent directors generally and as
members of the Audit Committee. They explained how they brought to notice such
non payment of dividends to the Board of Directors of the company. When the
Board of Directors did not still take steps to pay the dividends, the said directors resigned. SEBI dropped the
proceedings against them and observed.

I have considered the charges alleged in
the SCN and replies filed by the noticees. I note that the Independent
Directors do have an important role to play in guiding the management so that
the interest of the Company and the minority shareholders are protected.
Further, the Independent directors will also have to ensure that the
functioning of the Company is in full compliance with the applicable laws. In
this case, I have noted that noticees after noticing the violation of non-payment
of dividend have taken strong stands to convince the Company’s Board about the
necessity of ensuring that the statutory dues and the dividends are paid
without any delay, in the Board meeting held on November 14, 2012. As the
company failed to comply, the two noticees resigned from the Company ’s Board.

Considering the above facts and
circumstances of the case, I am of the view that since both the noticees did
not have any role in the day-to-day management of the company and have
discharged their responsibility as Independent Directors putting in their best
efforts, I do not deem it fit to pass any directions under section 11 and 11B
of the SEBI Act, 1992 against Mr. S. Rajagopal and Mr. V. K. Ramani. The SCN is
disposed of accordingly.

Conclusion

Many of the cases till now where independent
directors have faced adverse actions are fairly glaring cases of serious
alleged violations causing losses to shareholders/others. Clearly, if
independent directors are complicit with such violations, adverse action
against them is expected and inevitable. However, adverse directions before
such allegations are proved can cause losses. Even otherwise, proving their
innocence or that they exercised diligence in their duties can itself be an
expensive affair. It is submitted that specific and general guidelines should
be framed both by Ministry of Corporate Affairs and SEBI. There should be
guidance as to the specific steps an independent director should take to
discharge his duties with diligence on one hand and clear examples where they
can be held liable. Else, there will be increasing disillusionment amongst
existing and potential independent directors. In the absence of clarity, the
intention of the lawmakers to have good corporate governance may fall flat. _

shailesh.kwebmaker

Insolvency And Bankruptcy Code: An Inordinate Ordinance?

Introduction

The first batch of the Insolvency and
Bankruptcy Code, 2016 (“the Code”) has been enforced with effect from 1^st
December 2016 and has met with mixed success. Attention of the readers is
invited to the columns which appeared in this Feature in the months of October
and November where the Code was analysed in detail. While the Code has been
successful in transforming corporate debtors from being debtor driven to
creditor driven, at the same time there have been certain gaps which needed to
be addressed on an urgent basis.

Background for the Ordinance

One of the key concerns under the Code was
whether a promoter of a corporate debtor could be a bidder for the very same
debtor under the resolution process? There had been several instances under the
Code where promoters had bid for the very same companies which they were
earlier running. India is one of the only nations where the powers of the Board
of Directors is superseded by the resolution professional (“RP”) during
the resolution process. Further, in other nations, there is no bar on promoters
bidding for their own stressed assets.

Interestingly, the Insolvency and Bankruptcy
Board of India (“IBBI”) had in November 2017 amended the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2017 to provide for enhanced disclosures with respect to all
corporate resolution applicants. It provided that a resolution plan shall
contain details of the resolution applicant and other connected persons to
enable the Committee of Creditors (“CoC”) to assess the credibility of
such applicant and other connected persons to take a prudent decision while
considering the resolution plan for its approval. The details to be given in the plan are as follows:

(a) identity of the applicant
and connected persons;

(b) conviction for any
offence, if any, during the preceding five years;

(d) disqualification, if any,
under the Companies Act, 2013, to act as a director;

(e) identification as a
wilful defaulter, if any, by any bank or financial institution or consortium
thereof in accordance with the guidelines of the RBI;

(f) debarment, if any, from
accessing to, or trading in, securities markets under any order or directions
of the SEBI; and

(g) transactions, if any,
with the corporate debtor in the preceding two years.

Thus, the IBBI put the onus on the CoC to
take an informed decision after due regard to the credibility of the bidder for
the corporate debtor. It also put a great deal of responsibility on the
shoulders of the RP.

It was in this backdrop that a burning question
cropped up – should the promoter who was in charge of the downfall in the first
place be given a second chance – and this was both a legal and an ethical
issue! While there are no easy answers to the ethical dilemma, the Government
has tried to address the first question, i.e., the legal question. It has done
so through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“the
Ordinance”) which was promulgated by the President on 23^rdNovember,
2017 (nearly a year after the Code was enforced). Let us examine this Ordinance
and also whether it suffers from the vices of extremity or is it a necessary
evil?

Interesting Preamble

The Ordinance states that it has been
enacted to strengthen further the insolvency resolution process since it has been
considered necessary to provide for prohibition of certain persons from
submitting a resolution plan who, on account of their antecedents, may
adversely impact the credibility of the processes under the Code. Thus, it
seeks to prohibit certain persons who have questionable antecedents as these antecedents
may adversely impact the credibility of the resolution process.
The Ordinance enlists these antecedents.

Criteria for the Resolution Applicant

The Code earlier described a resolution
applicant as any person who submits a resolution plan to the RP. Thus, he would
be the person interested in bidding for the corporate debtor or its assets. The
Ordinance now defines this term to mean a person, who individually or jointly
with any other person, submits a resolution plan to the resolution professional
pursuant to the invitation made by the RP. One of the key duties of the RP,
earlier included inviting prospective lenders, investors and other persons to
put forth resolution plans for the corporate debtor.

This duty has now been significantly
amplified by the Ordinance to provide that it would include inviting
prospective resolution applicants, who fulfil such criteria as may be laid down
by the RP with the approval of the CoC, having regard to the complexity and
scale of operations of the business of the corporate debtor and such other
conditions as may be specified by the IBBI, to submit a resolution plan.

Thus, the CoC and the RP would jointly lay
down the criteria for all resolution applicants. This criteria would be fixed
after considering the regulations issued by the IBBI in this respect and the
complexity and scale of operations of the business of the corporate debtor.
Hence, again a very onerous duty is cast on both the CoC and the RP to fix the
criteria after considering various subjective and qualitative conditions.

Ineligible Applicants

While the Ordinance seeks to formulate
certain subjective criteria for barring prospective bidders, it also lays down
objective conditions under which any person would not be eligible to submit a
resolution plan under the Code. What is interesting to note is that the bar
operates not just in respect of the plan for the corporate debtor under
question but also for any other resolution plan under the Code. Hence, there is
a total embargo on such debarred persons from acting as a resolution applicant
applying under the Code.

A person ineligible to submit a resolution
plan/act as a resolution applicant under the Code, is anyone who, whether alone
or jointly with anyone else:

(a) is an undischarged
insolvent;

(b) has been identified as a
wilful defaulter under the RBI Guidelines. The RBI’s Master Circular on Wilful
Defaulters dated 1^st July 2015 states that a ‘wilful default’ would
be deemed to have occurred if any of the following events is noted:

(i) The unit has defaulted
in meeting its payment / repayment obligations to the lender even when it has
the capacity to honour the said obligations.

(ii) The unit has defaulted
in meeting its payment /repayment obligations to the lender and has not
utilised the finance from the lender for the specific purposes for which
finance was availed of but has diverted the funds for other purposes.

(iii) The unit has defaulted
in meeting its payment /repayment obligations to the lender and has siphoned
off the funds so that the funds have not been utilised for the specific purpose
for which finance was availed of, nor are the funds available with the unit in
the form of other assets.

(iv) The unit has defaulted in
meeting its payment /repayment obligations to the lender and has also disposed
off or removed the movable fixed assets or immovable property given for the
purpose of securing a term loan without the knowledge of the bank/lender.

(c) whose account is
classified as an NPA (non-performing asset) under the RBI Guidelines and a
period of 1 year or more has lapsed from the date of such classification and
who has failed to make the payment of all overdue amounts with interest thereon
and charges relating to non-performing asset before submission of the
resolution plan – this is the only case where a promoter though barred can
become eligible once again to bid. As long as the promoter makes his NPA account
a standard account by paying up all overdue amounts along with
interest/charges, he can submit a resolution plan. However, this is easier said
than done. The account became an NPA because the promoter was unable to pay up.
Now that it has become an NPA, it would be a herculean task for him to find a
financier who would lend him so that the NPA becomes a standard account!

(d) has been convicted for
any offence punishable with imprisonment
for 2 years or more – this is a very harsh condition, since any conviction for
2 years or more would disentitle the applicant. Consider the case of a person
who has been implicated in a case which is actually a civil dispute, but
converted into a criminal case of forgery and he is convicted by a lower Court
for 2 years or more. Ultimately, his case may be overturned and he may be
acquitted by a Higher Court. In the absence of an express provision, it is
possible that such a person, although acquitted, would be ineligible. Hence,
the amendment should provide that once conviction is set aside, he would again
become eligible.

(e) has been disqualified to
act as a director under the Companies Act, 2013 – this would impact several
directors who have been recently disqualified as directors u/s. 164(2) of the
Companies Act, 2013 on account of failure of the companies to file Annual
Returns and other documents. Several independent directors have also been
disqualified by virtue of the Ministry of Corporate Affair’s drive against
supposed shell companies. All such directors would also become ineligible to
submit applications.

(f) has been prohibited by
the SEBI from trading in securities or accessing the securities markets – this
embargo is quite severe. The SEBI has been known to prohibit several persons
from trading in securities or accessing the securities markets. Many of the
SEBI’s Orders in this respect have been overturned by the Securities Appellate
Tribunal. What happens in such a case?

(g) has indulged in
preferential transaction or undervalued transaction or fraudulent transaction
in respect of which an order has been made by the Adjudicating Authority under
the Code – this is to prevent promoters who have entered into fraudulent
transactions with the corporate debtor or transactions to defraud creditors.

(h) has executed an
enforceable guarantee in favour of a creditor, in respect of a corporate debtor
under the insolvency resolution process or liquidation under the Code – this
again ranks as a surprising exclusion. Merely because a person has provided a
guarantee for a company which is undergoing a corporate resolution process, he
is being penalised. Not all cases of insolvency are because of fraud or
misfeasance. Some are genuine cases because of changes in market circumstances
or spiralling of raw materials/oil prices, etc. In such cases, why
should a person who was not even in charge of the debtor be debarred. In fact,
he had provided a guarantee in favour of the creditors which could have been
enforced and some dues could be recovered. Many persons may now think twice
before standing as corporate guarantors.

(i) Is a connected person in
respect of a person who meets any of the criteria specified in clauses (a) to
(h) would also be ineligible. A connected person is defined to mean

(1) any person who is the promoter
or in management/control of the resolution applicant.

(2) any person who is the
promoter or in management/control of the business of the corporate debtor
during the implementation of the resolution plan.

(3) the
holding/subsidiary/associate company or related party of the above two persons.
The term related party is defined u/s. 5(24) of the Code and includes a long
list of 13 persons. Thus, all of these would also be disqualified if a promoter
becomes ineligible and none of these could ever submit a resolution application
for any company/LLP under the Code.

(j) has been subject to any
disability, corresponding to the above clauses under any law in a jurisdiction
outside India –thus, even if a person has acted as a guarantor for a small
foreign company which is undergoing bankruptcy proceedings abroad, then he
would be ineligible from participating in the bidding process. This is indeed a
strange provision.

A related provision is that the CoC cannot
approve a resolution plan which was submitted before the commencement of the
Ordinance in a case where the applicant became disqualified by virtue of the
amendments carried out by the Ordinance. Moreover, if no other resolution plan
is available before the CoC other than the one presented by the now
disqualified bidder, then the CoC would be required to ask the RP to invite a
fresh plan. Clearly, this is a very tough task to follow in practice. An actual
case of this nature has occurred in Gujarat NRE Coke Ltd. where, other than the
promoters, there were no other bidders and the promoters have now been
disqualified under the Ordinance. It would be interesting to see what happens
next in this case. However, it is clear that there would be several more such
cases.

Conclusion

As it is, RPs are finding it tough to get
resolution applicants. The problem is even more severe in the case of SME
corporate debtors undergoing insolvency resolution. This is now going to get
worse with a whole slate of applicants becoming disqualified by virtue of the
Ordinance. It has painted all applicants by the same brush and even their
related parties and associate companies. If one were to try and plot a tree of
disqualified bidders, one could end up with a forest! This Ordinance while
laudable in its objective of keeping out unscrupulous promoters from gaining a
backdoor re-entry, may in practice become a pain point for RPs.

Considering that the IBBI had amended its
Regulations to provide full disclosure about applicants and asked the CoC and
the RP to take more responsibility about applicants, the Ordinance may appear
excessive in its outreach. In fact, this may further lower the value which the
stressed assets could fetch! One only hopes that the Ordinance does not cause
inordinate harm to the already overburdened bad loans’ market. _

shailesh.kwebmaker

Report On Corporate Governance – SEBI Committee Recommends Significant Changes In Norms

Background

The norms relating to corporate governance in India see periodical revisions and thus have come a long way. From being recommendatory at one time, to forming part of the Listing Agreement, some provisions relating to corporate governance now form part of the Companies Act, 2013. To review the requirements, particularly in the light of several recent developments, a Committee was set up. The Committee has made several recommendations which, whilst mostly being largely incremental, have already become contentious. Considering the past, where after considering, the recommendations are fast tracked and finally implemented, and hence the proposed changes need to be highlighted. The Report itself, however, recommends a phased adoption with extra time being given in appropriate cases. The recommendations are numerous. However, considering paucity of space, only some of the important ones are highlighted.

Requirements relating to accounts/auditors

Several recommendations have been made in the area of accounts/audit. The Committee is of the view that there is a need to improve disclosures in financial statements and also enhance the quality of financial statements and audit. Important recommendations are summarised below :

Presently, a company is required to quantify the impact of audit qualifications on various financial parameters such as profits, net worth, etc. The Report recommends that the management shall mandatorily make an estimate of impact of qualifications, where the impact on financial parameters of qualifications is not quantifiable. However, such estimate need not be made on matters like going concern or sub-judice matters. But in such cases, the management shall give reasons and the auditor shall review them and report thereon.

The Report then recommends that where the auditor is not satisfied with the opinion of an expert (lawyer, valuer, etc.) appointed by the company on an issue, he is entitled to obtain, at the cost of the listed company, opinion of another expert appointed by him.

The Committee noted that, presently, the auditor of the holding company may place reliance on audit performed by respective auditors of subsidiaries while reporting on the consolidated financial statements. He may, however, decide that supplemental tests on the financial statements of the subsidiary are necessary and he may send a questionnaire seeking information to the auditor of the subsidiary. Whether this was enough or whether the auditor should have more active role was the question. In line with global standards, the Committee recommended that the auditor should be made responsible for the audit opinion of all material unlisted subsidiaries. Thus, the auditor of the holding company would have more control over how the audit of the subsidiary is conducted.

The Committee has recommended that both quarterly consolidated and standalone statements, should be published. Further, half-yearly cash flow statement should also be published. The quarterly limited review should now include review also of the subsidiaries in such a manner that at least 80% of the consolidated revenue/assets/profits are covered in such review. In the last quarter, regulations currently require that the last quarter figures would be the balancing figures of the whole year’s figures minus those of the preceding three quarters. For this purpose, the Committee recommends that material adjustments made in the last quarter but relating to preceding quarters shall be disclosed.

The Committee recommends that the detailed reasons given by the auditor for his resignation before the end of his term shall be disclosed.

A recommendation that could have far reaching effect relates to power of SEBI to take action against auditors. Presently, a decision of the Bombay High Court (Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96) affirms the power of SEBI to take action against the auditors in case of fraud/connivance. The Committee recommends that this power be taken one step ahead and SEBI should be allowed to take action also in case of gross negligence. However, the ICAI has opposed this recommendation stating that “the regulation of chartered accountants is covered under the Chartered Accountants Act, 1949” and also “to avoid jurisdictional conflict and other issues.”

The Committee has made recommendations regarding the Quality Review Board (“QRB”) in relation to review of audits including strengthening this Board, enhancing its independence, etc. The ICAI has dissented with this recommendation stating that it was outside the scope of reference of the Committee. Further, it has stated that QRB has already applied for membership of International Forum of Independent Audit Regulators (IFIAR).

Changes regarding board/independent directors/women directors/Chairman

One of the pillars of good governance is sufficient number of independent directors. The principle is to balance the promoter/management dominated board with independent directors who have no connection or relationship with the promoters or the Company. Hence, the present law requires a significant number of independent directors on the board and at least one woman director on the board.

The Report now recommends certain changes. Firstly, it recommends that the minimum board size be increased from the current three to six. The intention clearly is to have a larger board having diverse expertise, which would help in better governance. While boards having only the bare minimum 3 directors may be rare, several companies have boards in the range of 3-6 directors. Companies will now need to find more directors. Importantly, since the number of independent directors is calculated as a fraction (one-third or half) of the Board size, more independent directors would also have to be appointed. Liability of independent directors (and even directors generally) under the Companies Act, 2013, as well as the SEBI Regulations is already very high.

Remuneration of independent directors

Remuneration, particularly of independent directors, remains low and limited. The Committee has recommended increase in remuneration. The irony is that a higher remuneration to independent directors may supposedly result in dilution of independence. It would thus be tough to find directors who are really independent directors.

Remuneration of independent directors is a tricky area. Give too less they lose incentive to put in the efforts required. Give too much, they become dependent on the company for getting substantial remuneration and compromise their independence. At same time, the increased remuneration will also be a burden on the Company, even if for a valid purpose.

Presently, the law requires that at least one-third of the Board should consist of independent directors, but if the Chairman is from the promoter group or an executive director, the said proportion is one-half. The Report recommends that :

– the Chairman should not be an executive director.

– the number of independent directors should at least be 50% of the Board size.

– Woman director should be an independent director to comply wih the spirit of the law.

The objective is to strengthen further this pillar of corporate governance. Needless to emphasise that the demand for independent directors will increase.

But perhaps the most curious of requirements relates to who should be Chairman. Presently, there are already some restrictions on appointing a promoter/executive director as Chairman. However, now, the Report goes much further, noting the already existing similar requirement under the Companies Act, 2013, and proposes a blanket prohibition and recommends that the Chairman shall not be an executive director. The rationale provided is that this would avoid in excessive concentration of powers in the hands of one person. I submit that this is a western concept where promoter holding is scattered and hence the CEO has vast powers without any counter balance. In India, companies are largely promoter dominated who typically hold controlling interest. The CEO, even if professional, is easily balanced by the promoter group along with the independent directors. Further, the post of Chairman, at least in India, is largely ceremonial unless executive power is specifically granted. The Chairman conducts the meetings as per law and not arbitrarily. It is reiterated that he does not have ipso facto any executive or overriding powers. On the other hand, he does represent the face and image of the Company. Shareholders do know that a promoter driven company has usually the senior family member of the promoter family in the forefront. In such a case, seeking to replace him with a non-executive person does not make sense. It may only result in a member of the promoter group being appointed as Chairman but without being an executive director. But it will not change the position that the promoters control the company. The Report does clarify that initially the requirement be made only for companies with at least 40% public shareholding. But even that is too low since this may require even a company with 51% promoter holding to have such a non-executive Chairman.

The Report now suggests that it would be fair to provide at least a certain level of minimum compensation to independent directors. This is suggested to be worked out as a mix of their actual role in terms of work done and also in terms of performance of the company in terms of profits. The Report recommends at least Rs. 5 lakh (if profits permit) should be provided as minimum remuneration (including sitting fees) to independent directors for the top 500 listed companies. The minimum sitting fees should be Rs. 50,000 for board meetings, Rs. 40,000 as sitting fees for Audit Committee meetings and Rs. 20,000 for other Committee meetings, for top 100 companies (with half of that for next 400 top companies).

This will clearly incentivise the directors. However, considering that this increase is also together with overall increase in number of independent directors, the burden on companies in terms of costs will also increase.

Sharing of information with Promoters, etc.

Finally, the Report deals with an issue having special relevance to India. And that is sharing of unpublished price sensitive information in listed companies in India with its promoters and generally also with significant shareholders who have rights under an agreement of access to such information.

The issue is detailed and complex and would require a full length article to even cover the main points. But suffice here to say that the Report makes certain recommendations to ensure that the information that the promoters and others get is not misused. In particular, they face restrictions on their use/distribution, etc. similar to insiders under the Regulations relating to insider trading.

Conclusion

There are other recommendations too. However, the Report has faced controversy on some issues, not just from outside but within the Committee itself with certain members/representatives openly and strongly expressing their dissent. It will be beyond the scope of this article to analyse the merits of such objections.

But one can conclude that some of the important recommendations may either get dropped or substantially modified and perhaps get delayed in implementation till a broader debate is conducted and a consensus arrived at. Nevertheless, the path of future corporate governance leads is visible and it is a tough call for independent directors.

shailesh.kwebmaker

Companies (Amendment) Act, 2017 – Part I: Genesis and Changes in Key Definitions

Companies Act 1956 was replaced in the year 2013 with a new avatar as the Companies Act 2013. When an act was on the statute book for a period of almost 60 years and a new act has come in its place, it was bound to have issues from practical perspectives, besides challenges and shortcomings.

To overcome these issues, the new Act had to undergo several amendments in its first few years. If we look at the evolution of this Act, of the total 470 sections of the Companies Act, 2013 the status as on date is as under:

Particulars

Number
Of sections

Sections
Notified on different dates

428

Sections
yet to be enforced

Sections
Deleted

Total

470

Major amendments were done in the year 2015. At the time of these amendments it was felt that the matter needs further relook and hence Companies Law Committee was constituted (CLC) to address these issues. The CLC made its recommendations which culminated in Companies Amendment Bill, 2016.

Companies Amendment Bill, 2016 was introduced in Lok Sabha in March 2016 and was referred to Standing Committee on Finance (Committee) for further examination. After considering various suggestions of the Committee this Bill was renamed as Companies Amendment Bill, 2017 and was reintroduced and passed in Lok Sabha in July 2017.

This Bill was approved by Rajya Sabha on 19th of December 2017 and has received President’s Assent on 3rd January 2018. It was notified on the same day in the official gazette and will be called as The Companies (Amendment) Act, 2017.
OBJECTIVE/GUIDING PRINCIPLES BEHIND AMENDING THE COMPANIES ACT, 2013
The amendments introduced in The Companies (Amendment) Act, 2017 are guided by the following objectives1 :-

(i) addressing difficulties in implementation owing to undue stringency of compliance requirements,

(ii) facilitating ease of doing business for companies, including start-ups, in order to promote growth with employment,

(iii) harmonisation with accounting standards, and other financial and economic legislations,

(iv) rectifying omissions and inconsistencies in the Act, and

(v) Carrying out amendments in provisions relating to qualification and selection of members of NCLT and NCLAT in accordance with the Supreme Court directions.

The key amendments in the Companies (Amendment) Act, 2017, are2 :

a) Simplification of the private placement process, involving doing away with separate offer letter, details/record of applicants to be kept by company and to be filed as part of return of allotment only, and reducing number of filings to Registrar
[section 42].

b) Allowing unrestricted object clause in the Memorandum of Association dispensing with detailed listing of objects, with a view to ease incorporation of companies; Self-declarations to replace affidavits from subscribers to memorandum and first directors [sections 4 and 7].
________________________________________________________________
1 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.12
2 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.14

c) Provisions relating to forward dealing and insider trading in securities to be omitted from Companies Act as these are covered under SEBI regulations [sections 194 and 195].

d) Requirement of approval of Central Government for Managerial remuneration above prescribed limits to be replaced by approval through special resolution by shareholders in general meeting [sections 196 and 197].

e) Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement [section 185].

f) Amendment of definitions of associate company and subsidiary company to ensure that ‘equity share capital’ is the basis for deciding holding-subsidiary relationship rather than “both equity and preference share capital” [section 2].

g) Rationalisation of penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies and One Person Companies to be reduced [various sections].

h) Auditor reporting on internal financial controls to be restricted with regard to financial statements [section 143].

i) Frauds involving an amount less than Rupees 10 lakhs to be compoundable offences [section 447].

j) Reducing requirement for maintaining deposit repayment reserve account from 15% each for two years to 20% during the maturing year [section 73].

k) Test of materiality to be introduced for pecuniary interest for testing independence of Independent Directors [section 149].

l) Recognition of the concept of beneficial owner of a company proposed in the Act. Register of beneficial owners to be maintained by a company, and filed with the Registrar. [Section 90].

m) Re-opening of accounts to be limited to 8 years [section 130].

n) Requirement for annual ratification of appointment/continuance of auditor by members to be removed [section 139].

o) Provisions relating to Corporate Social Responsibility to bring greater clarity [section 135].

CHANGES IN KEY DEFINITIONS

Let us now consider a few important amendments made by the Act in the definitions. In total, 14 Definitions have been amended. I am discussing major amendments hereunder.

I. Associate Company – Section 2 (6)

Section before Amendment

After Amendment

Remarks

For the purposes of this clause, ?significant influence
means control of at least twenty per cent of total
share capital, or of business decisions under an agreement;

For the purpose of this clause—

(a) the expression “significant influence”
means control of at least twenty percent, of total voting power, or
control of or participation in business decisions under an agreement;

(b) the expression “joint venture” means a
joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement;’

The definition is made more specific from existing percentage
of share capital to percentage of total voting power.

Latter portion of the Explanation is amended from control
of business decisions under an agreement to “or control of
or participation in business decisions under an agreement.”

However, a joint venture is defined but joint
arrangement is still not defined.

Probable Impact would be –

? Total
voting power to be referred to;

? Control
determined through total voting power only and not by capital

? Agreement
is essential element to establish control through participation

Presently an Associate Company is a related party of
Investor. However, for Associate Company, Investor was not a related party
(i.e. Converse was not true). This anomaly is sought to be removed by
amending Section 2(76) to include an investing company or the venturer of the
company as related party of an investee i.e. an Associate;

(For more details please refer amendment to section
2(76) below).

Definition of Associate Company in clause 6 of section 2 is amended so as to substitute existing explanation as under:

GENESIS OF THIS AMENDMENT:
In fact, at the time of representations before Standing Committee, various stake holders had suggested that the words “control of or participation in business decisions under an agreement” from the explanation may be deleted.

The Ministry of Corporate affairs however in response suggested3 as under:

“Various innovative and complex instruments are being used by business entities to exercise control or significant influence over other entities. It is felt that in order to cover various situations including through issue of instruments referred to above through which companies may exercise significant influence over other companies, the phrase “or control of or participation in business decisions under an agreement” needs to be retained in the explanation. “

Suggestion of MCA was accepted and that of the stakeholders rejected. However, in the process, this definition of Significant Influence has undergone a change to incorporate even participation in business decisions under an agreement.

II. Financial Year – Section 2(41), Change of Financial Year in the case of Associate Company of a Company incorporated outside India

Section before Amendment

After Amendment

Remarks

First Proviso:

Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary of a company incorporated outside India and
is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any
period as its financial year, whether or not that period is a year:

“Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary or associate company of a company
incorporated outside India and is required to follow a different financial
year for consolidation of its accounts outside India, the Tribunal may, if it
is satisfied, allow any period as its financial year, whether or not that
period is a year.”

Post
Amendment, even an Associate Company of a company incorporated outside India
can apply to the Tribunal for a different financial year.

This
amendment will facilitate ease of doing business.

________________________________________________________
3 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 2.4

III. Section 2(46), Holding Company

Section before Amendment

After Amendment

Remark

?holding company, in relation to one or more other
companies, means a company of which such companies are subsidiary companies;

Explanation—For the purposes of this clause, the
expression “company” includes anybody corporate

Presently Body corporate is not included in the
definition of Holding Company.

This amendment has far reaching implications for
ascertaining the status of the Subsidiary company as to whether it is Public
or Private. For the said purpose, one will have to ascertain the status of
Body Corporate. (Definition of Public Company u/s. 2(71) may be referred.)

Henceforth, Subsidiary Companies who would otherwise be
a Small Company, will now have to ascertain whether they continue to be so,
based on the status of their holding company (body corporate) (Refer section
2(85) of the Companies Act)

A body corporate, which may earlier be excluded from
Related Party Disclosure, will now be included as a related party.

For more details, please refer amendment to section
2(76) below.

GENESIS OF THIS AMENDMENT:
The Stakeholders in their written memorandum suggested on this clause as under:-

“The proposed insertion should not take place in view of the “ease of doing business” in Indian Companies.”

The Ministry responded as under:

“Attention is invited to section 4 of the erstwhile Companies Act, 1956, wherein the proposed explanation was applicable for both the terms ‘holding company’ and ‘subsidiary company’. The intention behind the change in section 2(46) is to bring harmony between provisions of section 2(87) and 2(46) of the Bill. It goes without saying that overseas holding companies will have to comply with the provisions of the jurisdictions in which these are incorporated. However, it would be appropriate to have this provision to ensure that transactions entered with overseas holding companies are carried out with adequate disclosures and thus any abuse is avoided. The suggestion, therefore, may not be considered.”

The Committee, while endorsing the view of the Ministry, recommended that the proposed amendment in Explanation to Clause 2(v) relating to clause (46) of the Companies Act, 2013 on definition of “holding company” may be retained in order to ensure adequate disclosure in regard to transactions entered with overseas holding companies.

IV. Section 2(49), Interested Director

Interested director was defined u/s. 2(49) as under:

“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;

The term interested director was relevant for the purposes of section 174 (Quorum), 184 (Disclosure of interest by director) and section 189 (Register of contracts or arrangements in which directors are interested).Unfortunately, definition of interested director was very wide and leading to the confusion as to which definition is to be used.

FAQs published by ICSI in the year 2014 sought to answer the question but that too with a caution. (Refer last two lines in reply to the question)

Question and reply reads as under:

Q. Section 2(49) defines the term ‘interested directors’ whereas at various sections reference to section 184 is drawn to mean/define interested director. Section 2(49) is wider than section 184 leading to confusion – which definition should be applied?

Ans. Section 2(49) of the Companies Act, 2013 defines interested director as a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;

Section 184 (2) provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be
entered into—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,

shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Wherever the term ‘interested director’ appears in the Act and the Rules thereon, read sections 2(49) and 184 together.

Section 2(49) is now deleted and thus confusion in the term is sought to be avoided.

V. Section 2(51), Key Managerial Personnel (KMP)

Section before Amendment	After Amendment	Remarks
“Key managerial personnel” in relation to a company, means—	“Key managerial personnel” in relation to a company, means—	This change in the definition now enables Companies to designate whole time employees as KMP besides the four designation based categories. This is an enabling provision.
(i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; and (v) Such other officer as may be prescribed.	(i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; (v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and (vi) such other officer as may be prescribed

Section before Amendment

After Amendment

Remarks

“Key
managerial personnel” in relation to a company, means—

“Key
managerial personnel” in relation
to a company, means—

This
change in the definition now enables Companies to designate whole time
employees as KMP besides the four designation based categories.

This
is an enabling provision.

(i)
the Chief Executive Officer or the managing director or the manager;

(ii)
the company secretary;

(iii)
the whole-time director;

(iv)
the Chief Financial Officer; and

(v)
Such other officer as may be prescribed.

(i)
the Chief Executive Officer or the managing director or the manager;

(ii)
the company secretary;

(iii)
the whole-time director;

(iv)
the Chief Financial Officer;

(v) such other officer, not more than one level below the
directors who is in whole-time employment, designated as key managerial
personnel by the Board; and

(vi)
such other officer as may be prescribed

VI. Section 2(57), Net Worth

Section before Amendment

After Amendment

Remark

“net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits and securities premium account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation

net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits, securities premium account and
debit or credit balance of profit and loss account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation.

In
absence of clarity, one was not clear about treatment to be given to Debit or
credit Balance in Profit and Loss Account. Unfortunately, while introducing
this amendment, transition to Ind AS of several companies is lost sight of.
It would have been in the fitness of things, if clarification on the
components of Other Comprehensive Income (OCI) was also given. Especially
this assumes importance because OCI includes unrealized gains too.

VII. Section 2(71), Public company

Section before Amendment

After Amendment

Remark

Public company means a company which— (a) is not a private company;
(b) has a minimum paid-up share capital as may be prescribed: …………

“(a) is not a private company; and”

The word “and” is added so as to clarify that cumulative conditions
are to be observed. This provision is more clarificatory in nature.

VIII. Section 2(76) Related Party

Section before Amendment

After Amendment

Remark

(viii)
any company which is—

(A)
a holding, subsidiary or an associate company of such company; or

(B)
a subsidiary of a holding company to which it is also a subsidiary;

“(viii)
anybody corporate which is—

A.
a holding, subsidiary or an associate company of such company;

B.
a subsidiary of a holding company to which it is also a subsidiary; or

C.
an investing company or the venturer of the company;

Explanation — For the purpose of this clause, “the investing
company or the venturer of a company” means a body corporate whose investment
in the company would result in the company becoming an associate company of
the body corporate.

“Company”
is replaced with “body corporate” and investing companies/ venturer are also
added to the list.

The
amended Explanation has expanded the scope of the definition of related
parties.

The
reference to body corporate is consequent upon inclusion of body corporate in
the definition of holding company.

Refer
discussions above for impact on Associate Company [Section 2(6)] and Holding
Company [Section 2(46)].

GENESIS OF THIS AMENDMENT:

At the time of representations to the Committee, MCA had suggested as under:

Suggestions were received by the Committee, pointing out that the term “related party”, as currently defined, used the word ‘company’ in Section 2(76)(viii), meaning thereby that those entities that were incorporated in India would come in the purview of the definition. This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company. It noted that this would be unintentional and would seriously affect the compliance requirements of related parties under the Act. The Committee, therefore, recommended that section 2 (76) (viii) be amended to substitute ‘company’ with ‘body corporate’

IX.Section 2(87) Subsidiary Company

Sub section is amended to the effect that a company will be treated as subsidiary in case the holding company exercises or controls more than 50% of the total voting power either of its own or together with one or more of its subsidiary companies. Currently, the Act provides for exercise or control of more than half of the total share capital (Which included Preference Capital). Henceforth, holding of Preference Shares only will not be considered for control and instead only voting power will be considered.

Preference shares, which is often a quasi loan is rightly excluded. For example, optionally convertible redeemable preference shares are effectively a loan and the option exists only for the purpose of security of the lender.

This change also makes the definition consistent with AS 21 – Consolidated Financial Statements. However, the change falls short of its coherence with the Ind AS.

As regards layers of Subsidiaries, the proviso to Section 2(87) remains and was notified on 20th September 2017.

•It will be interesting to see what happened after introduction of Companies Amendment Bill 2016 as regards the proviso referred to above.
•The Companies Act 2013 permits Central Government to impose a cap on layers of subsidiaries a company can have. Companies Amendment Bill 2016 removed the restrictions on number of layers of a subsidiary company. Standing Committee had no recommendation on this issue. Finally (Quietly?) on 5th April 2017, amendments were circulated which restored the position which existed in the Companies Act 2013. (Source Notice of Amendments, The Companies (Amendment) Bill, 2016, Lok Sabha, April 5, 2017 http://www.prsindia.org/uploads/media/Companies,%202016/Notice%20of%20Amendments,%20Apr%205,%202017.pdf)
•One may now refer to the Companies (Restriction on number of layers) Rules, 2017 which have become effective from 20th September, 2017.

X.Section 2(91) Turnover

Existing Definition

As Amended

Remark

“turnover”
means the aggregate value of the realization of amount made from the
sale, supply or distribution of goods or on account of services rendered, or
both, by the company during a financial year;

“turnover”
means the gross amount of revenue recognised in the profit and loss account
from the sale, supply, or distribution of goods or on account of services
rendered, or both, by a company during a financial year;

Previously
“turnover” was indicative of realisations made.

Now the shift is to amount recognised in Profit and Loss
Account. The concept of turnover is important since several obligations of
the company are linked to the turnover.

Interestingly
amended definition now refers as “a company “instead of “the company” before
amendment.

CONCLUSION

The Standing Committee Report states that more than two thousand suggestions were received from the stake holders4. Additionally, responses of CLC and views of MCA were considered in finally amending the Act. The amendments also include inputs given by Standing Committee. This entire process, having taken massive amount of interactions and deliberations over a period of about 2 years from 2016 has resulted in the Companies (Amendment) Act, 2017 which seems like a largely cohesive document as far as definitions are concerned. _
___________________________________________________________
4 37th Report of the Standing Committee on Finance dated 01-12-2016
Para 1.8

shailesh.kwebmaker

New Section 90 In Companies Amendment Act 2017 – Aims At Benami Shareholders, Shoots Everyone Else But Them

Background

‘Shell companies’ have been in the news
recently. On how money is laundered, laws are avoided/evaded, benami properties
are held, etc. through such companies. This is more so
post-demonetisation when it has been alleged that a large sum of money has been
laundered through such companies. A series of actions have been taken. Several
listed companies have got their trading on stock exchanges restricted. Though
many got relief thereafter, it is also seen that investigations have been
initiated into activities of many such companies. Directors of such companies
have also been debarred.

It has been perceived that shares of such
companies may be held benami, thus making it difficult to catch the real
culprits. There are of course laws to deal with benami holdings including the
most prominent Prohibition of Benami Property Transactions Act, 1988, which too
was substantially amended in 2016.

A further step has now been taken to,
inter alia, tackle such benami holdings through an amendment to section 89
and through introduction of a new section 90 by the Companies Amendment Act
2017, which has received the assent of the President on 3^rdJanuary
2018. However, the provisions, as this article is being written, await
notification.

Essentially, the said section 90, in very
wide terms, requires disclosure by individuals who, singly or jointly with
others, hold/control substantial interests in companies. This supplements and
indeed widely extends section 89 which requires disclosure of beneficial
interests in shares. This effectively appears to be intended to require
disclosure not just of benami holdings but also holding by eventual individual
owners.

However, the provisions are very widely and
even loosely/ambiguously worded. They will apply not just to listed companies
but also to unlisted/private companies. Further, disclosure, at least one time,
will be required by almost all companies, who then will have to make onward
disclosures to the Registrar.

Existing Section 89

Section 89 of the Companies Act 2013 deals
with disclosure of beneficial interests. A person who holds shares in his name
but who does not hold the beneficial interest therein is required to make a
declaration in the prescribed manner. This section corresponds to section 187-C
of the Companies Act, 1956. Now it has been amended by introduction of the
following definition which will be relevant also for section 90 discussed
below:

“(10) For
the purposes of this section and section 90, beneficial interest in a share
includes, directly or indirectly, through any contract, arrangement or
otherwise, the right or entitlement of a person alone or together with any
other person to—

(i) exercise or
cause to be exercised any or all of the rights attached to such share; or

(ii) receive or
participate in any dividend or other distribution in respect of such
share.”.

As can be seen, the scope of section 89 is
thus widened.

New Section 90

Section 90 goes much further beyond the
provisions of section 89. It requires that individuals who hold or control significant
holding in a company should disclose such fact to the Company. The Company will
record this declaration in a specified register and also make disclosures to
the Registrar. Some relevant extracts from the said section are given below
(emphasis supplied):-

90. (1) Every individual, who acting alone or together, or through one or more persons
or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than
twenty-five per cent. or such
other percentage as may be prescribed, in
shares of a company
or the right to exercise, or
the actual exercising of significant
influence or control as defined in clause (27) of section 2,
over the company (herein referred to as “significant beneficial
owner”), shall make a declaration to the company, specifying the nature of
his interest and other particulars, in such manner and within such period of acquisition
of the beneficial interest or rights and any change thereof, as may be
prescribed:

Provided that the Central Government may
prescribe a class or classes of persons who shall not be required to make
declaration under this sub-section.

…

(4) Every company shall file a return of
significant beneficial owners of the company and changes therein with the
Registrar containing names, addresses and other details as may be prescribed
within such time, in such form and manner as may be prescribed.

(5) A company shall give notice, in the
prescribed manner, to any person (whether or not a member of the company) whom
the company knows or has reasonable cause?to believe—

(a) to be a significant beneficial owner
of the company;

(b) to be having knowledge of the
identity of a significant beneficial owner or another person likely to have
such knowledge; or

(c) to have been a significant beneficial
owner of the company at any time during the three years immediately preceding
the date on which the notice is issued, and who is not registered as a
significant beneficial owner with the company as required under this section.

…..

(7) The company shall,—?(a) where that person fails to give the company the information
required by the notice within the time specified therein; or?(b) where the information given is not satisfactory, apply to the
Tribunal within a period of fifteen days of the expiry of the period specified
in the notice, for an order directing that the shares in question be subject to
restrictions with regard to transfer of interest, suspension of all rights
attached to the shares and such other matters as may be prescribed.

(8) On any application made under
sub-section (7), the Tribunal may, after giving an opportunity of being heard
to the parties concerned, make such order restricting the rights attached with
the shares within a period of sixty days of receipt of application or such
other period as may be prescribed.

(9) The company or the person aggrieved
by the order of the Tribunal may make an application to the Tribunal for
relaxation or lifting of the restrictions placed under sub-section (8).

(10) If any person fails to make a
declaration as required under sub-section (1),?he shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to ten lakh rupees and where the failure is a
continuing one, with a further fine which may extend to one thousand rupees for
every day after the first during which the failure continues.

(11) If a company, required to maintain
register under sub-section (2) and file the information under sub-section (4),
fails to do so or denies inspection as provided therein, the company and every
officer of the company who is in default shall be punishable with fine which
shall not be less than ten lakh rupees but which may extend to fifty lakh
rupees and where the failure is a continuing one, with a further fine which may
extend to one thousand rupees for every day after the first during which the
failure continues.

(12) If any person wilfully furnishes any
false or incorrect information or suppresses any material information of which
he is aware in the declaration made under this section, he shall be liable to
action under section 447.

To which categories of companies does this
section apply?

Section 90 applies to all types of
companies, whether public or private, whether listed or unlisted. All persons
who hold such significant beneficial ownership are required to make such
declaration, except where the Central Government has exempted them.

What type of holdings are required to be
disclosed?

The following types of holdings/control are
required to be disclosed:

1. Beneficial interest of at
least 25% (or such other prescribed percentage) in shares of a company

2. Right to exercise
significant influence or control.

3. Actual exercising of
significant influence or control.

Such holding, etc. would be by an
individual either by himself or together or through other persons including
even persons outside India. The holding/control may be in a private, public or
even a listed company.

Implications

The implications of the new provisions are
wide. Almost every company will see such disclosures, unless the holding is so
widely held that no individual or group hold a significant holding/control. It
applies to all companies – private, public or listed. These disclosures will
then have to be recorded and then filed to Registrar. There will be massive
paperwork, even if one-time. A husband-wife company where each holds such 50%
will require disclosure by both persons. Private equity firms will have to make
such disclosures if they hold such significant holdings. Listed companies will
also see such disclosures. Even if none of these are benami holdings. Even
foreign shareholders are covered.

The wording is wide and, at some places,
ambiguous. Certain definitions are not given and hence may result in further
ambiguity. Take some examples.

If an individual holds/controls ‘together’
with another person, disclosure is required. However, it is not clear what
‘together’ means. Does it have a meaning similar to ‘persons acting in concert’
as defined in detail under the SEBI SAST Regulations?

Often directors, trustees, etc. may
exercise voting rights for companies, trusts, etc. Will they too have to
make disclosures? The Central Government may notify persons who are exempted
from making disclosures.

Shareholding particularly in groups and
listed companies may be held in complex structures. Is the law sufficient to
unravel such structures to find out who, if any, are ultimate persons who hold
shares or have or exercise control? SEBI and RBI have given guidance under
certain circumstances how to find who are real ultimate owners. But the Act
does not give any guidance.

Apparently, the provision will apply to
existing holdings as well as fresh acquisitions. Hence, a one-time declaration
would have to be made.

In any case, will the objective of detecting
benami holdings be achieved? The Prohibition of Benami Property Transactions
Act provides for confiscation of the properties and prosecution of persons
involved. Thus, making such a disclosure could be invitation for such serious
actions. The penalties for not making such disclosures, though significant in amount,
are not very large and does not result in any prosecution under the Act.

The Company has an obligation to notify
persons who hold shares or control to such extent if it has reason to believe.
If they do not take action, they too may face action.

Action by Company which believes a person who
is a significant beneficial owner

If the Company has reason to believe that
there is a person who has such holding/control, it needs to notify such person
to make a disclosure. If such person does not make a disclosure, the Company
has to approach the Tribunal to investigate. If it is found by the Tribunal
that there exists such holding, etc., then it may direct that the
transfer of such shares shall be restricted and all rights relating to such
shares shall be suspended.

Penalties

There are penalties if such individuals do
not make such disclosure. A penalty of Rs. 1 to 10 lakh plus upto Rs. 1000 for
every day of delay can be levied. False disclosures can result in prosecution.
The Company too faces penalties.

Conclusion

Clearly, these provisions need
reconsideration. It is submitted that it should not be notified and brought
into effect. Ideally, a revised and well drafted provision should be introduced
or, second best, through circulars and rules, the implications need to be
diluted and restricted. _

shailesh.kwebmaker

Money Laundering Act: Arrest And Bail

Introduction

Money laundering is a
serious offence which poses a threat not only to the financial systems of a
country but also to its integrity and sovereignty. To curb this offence of
money laundering, India passed the Prevention of Money Laundering Act,
2002 (“the Act”). It is an Act which has assumed great significance in
the recent times. Several economic offences, such as, insider trading, under
the Prevention of Corruption Act, copyright infringement, cheating, forgery,
fraudulently preventing creditors, etc., have been added to the list of
scheduled offences under the Act and now the Act has been used as a weapon in
the fight against financial crimes. The Act is also important since it has
arrest provisions. The matter of bail in respect of an arrest under the Act is
something which has attracted great attention. Let us examine some of these
crucial provisions.

Money Laundering

The offence of Money
Laundering is dealt with by section 3 of the Act. The essential limbs of the
charging section are as under :

(i) Whosoever
directly or indirectly

(ii) attempts
to indulge or knowingly assists or knowingly is a party or is actually involved
in any process or activity connected with

(iii) the
proceeds of crime and projecting it as untainted property

(iv) shall
be guilty of offence of money-laundering.

Under section 3 of the Act,
the categories of persons responsible for money laundering is extremely wide.
Words such as “whosoever”, “directly or indirectly” and “attempts to indulge”
would show that all persons who are even remotely involved in this offence are
sought to be roped in. The entire section revolves around the term “proceeds
of crime”.

The term “proceeds of
crime” has been defined by section 2(1) (u) to mean any property
derived or obtained, directly or indirectly, by any person as a result of
criminal activity relating to a scheduled offence or the value of any such
property or where such property is taken/held outside India, then the property
equivalent in value held within India. It is also relevant to note that not
only must there be proceeds of crime but the accused must either project it or
claim it to be as untainted property in order that it is an offence of money
laundering.

The Schedule to the Act
lays down a list of crimes such as drug trafficking, murder, homicide,
extortion, robbery, forgery of a valuable security, will or authority to make
or transfer any valuable security or to receive any money, counterfeiting of currency, illegal trafficking in arms and
ammunition, poaching, etc. Thus, any proceeds from these crimes is covered by
the definition of proceeds of crime. As the Schedule is exhaustive only those
crimes which are covered by the Schedule and no other offences would fall
within its purview. The Act divides the
offences under the Schedule into three Parts: Part A, Part B and Part C. Part A offences are treated as money
laundering no matter howsoever small the amount involved in the offence,
whereas Part B offences are treated as money laundering, if and only if, the
amount involved exceeds Rs.1 crore.
Part C relates to offences covered under Part A or against property
under the Indian Penal Code which have cross-border implications. An important
addition to Part C is an offence of wilful attempt to evade any tax, penalty or
interest under the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015.

The term “property”
is defined by section 2(1)(v) to mean any property or assets of every
description, whether corporeal or incorporeal, movable or immovable, tangible
or intangible and includes deeds and instruments evidencing title to, or
interest in, such property or assets, wherever located. It may be noted that
section 3 even covers indirect usage of laundered money. Thus, even if the
money is converted into some other asset, the provisions of section 3 would
apply. U/s. 24, the burden of proving that
proceeds of crime are untainted property shall be on the accused.

Offences

Whoever commits the offence
of money-laundering shall be punishable with rigorous imprisonment for a term
from 3 years to 7 years and fine. In case of any offence specified under
paragraph 2 of Part A of the Schedule, maximum term is 10 years.

Further, u/s.45, in case of
a scheduled offence specified under Part A of the Schedule to the Act for which
the term is more than 3 years, the accused cannot be released on bail unless
two cumulative conditions are satisfied -the Public Prosecutor has been given
an opportunity to oppose such release and once he opposes, the Court is
satisfied that there are reasonable grounds for believing that the accused is
not guilty of such offence and that he is not likely to commit any offence
while on bail. This provision for granting bail overrides anything contained to
the contrary in the Code of Criminal Procedure, 1973 which applies to
procedures relating to arrest, bail, confiscation, investigation, prosecution, etc. It is this bail provision which has garnered
maximum attention.

The Supreme Court in Gautam
Kundu vs. Directorate of Enforcement (Prevention of Money-Laundering Act),
(2015) 16 SCC 1, without going into the Constitutional validity of
section 45, held that the conditions specified u/s. 45 of the Act were mandatory
and needed to be complied with which was further strengthened by the provisions
of section 65 and also section 71 of the Act. Section 65 required that the
provisions of the Criminal Procedure Code should apply in so far as they were
not inconsistent with the provisions of this Act and section 71 provided that
the provisions of the Act had overriding effect notwithstanding anything
inconsistent contained in any other law for the time being in force. The Act
had an overriding effect and the provisions of the Code would apply only if
they were not inconsistent with the provisions of the Act. Therefore, the
conditions enumerated in section 45 of PMLA had to be complied with even in
respect of an application for bail made u/s.439 of the Code. That coupled with
the provisions of section 24 provided that unless the contrary was proved, the
Court presumed that proceeds of crime were involved in money laundering and the
burden to prove that the proceeds of crime were not involved, was on the
appellant. The same view was followed by the Supreme Court in Rohit
Tandon vs. The ED, Cr. A 1878-1879/2017.

Evolution of the Act

Before analysing the
aforesaid section 45, it would be interesting to understand how the Act has
evolved from 2002 to its present form. When the Act was enacted, there were two
categories of scheduled offences – Part A and Part B of the Schedule to the
Act. Part A offences were treated as money laundering no matter howsoever small
the amount of offence involved, whereas Part B offences were treated as money
laundering, if and only if, the amount involved exceeded Rs. 30 lakh. Part A at
that time contained only two offences – Paragraph 1 contained sections 121 and
121A of the Indian Penal Code, which dealt with waging or attempting to wage
war or abetting waging of war against the Government of India and conspiracy to
commit such offences and Paragraph 2
dealt with offences under the Narcotic Drugs and Psychotropic Substances Act,
1985. Except for these two serious offences, all other offences were listed
under Part B of the Schedule.

Thus, as originally
enacted, the Act provided that the twin conditions applicable u/s. 45(1) would
only be in cases involving waging of war against the Government of India and
offences under the Narcotic Drugs and Psychotropic Substances Act. For all
offences under Part B, these conditions were not applicable.

The 2009 Amendment
increased offences under Parts A and B of the Schedule. In Part A, offences
under the Indian Penal Code, relating to counterfeiting, offences under the
Unlawful Activities (Prevention) Act, 1967, etc., were added. In Part B,
offences from the Indian Penal Code, Securities and Exchange Board of India Act
1992, Customs Act 1962, CopyrightAct 1957, Trademarks Act 1999, Information
Technology Act, etc., were added.

By the Amendment Act of
2012, a major change was made by which the entire Part B offences were
incorporated in Part A of the Schedule. Thus, the monetary limit of Rs. 30 lakh
no longer applied to these offences which were now made a part of Part A.

By the Finance Act of 2015,
the monetary limit of Rs.30 lakh under the Part B of the Schedule was raised to
Rs.1 crore and Part B of the Schedule incorporated one solo entry, pertaining
to false declarations and false documents under the Customs Act, 1962. Thus,
only in respect of this offence is there a monetary threshold.

Bail Provisions Challenged

It was in this backdrop
that the constitutional validity of the twin conditions laid down u/s. 45(1)
for granting bail to an accused under the Act were challenged before the
Supreme Court in Nikesh Tarachand Shah vs. UOI, WP(Cr.) 67/2017 (SC).
The Supreme Court considered four alternative scenarios in which bail was
sought by a person arrested under the Act:

No.

Arrest
Scenario

Whether
s.45(1) applies?

Can
Bail be granted without satisfying twin conditions?

Arrested
for money laundering alone without attracting a scheduled offence

No
since Part A to Schedule does not apply

Yes

Arrested
for money laundering along with offence under Part B of the Schedule

No
since Part A to Schedule does not apply

Yes

Arrested
for money laundering along with offence under Part A of the Schedule for
which the term is 3 years or less

No
since although Part A to Schedule applies, the imprisonment is for 3 years or
less

Yes

Arrested
for money laundering along with offence under Part A of the Schedule for
which the term is more than 3 years

Yes
since Part A to Schedule applies and the imprisonment is for more than 3
years

The Court observed that the
likelihood of the accused getting bail in the first three situations was far
greater than in the fourth illustration, merely because he was being prosecuted
for a Schedule A offence which had imprisonment for over 3 years, a
circumstance which had no nexus with the grant of bail for the offence of money
laundering. This was something which could not by itself lead to grant or
denial of bail. It also observed that if an accused was tried for a scheduled
offence independently without the added tag of money laundering, then he could
easily get bail under the Code of Criminal Procedure but if was tried along with
section 3 of the Act, then the twin conditions of section 45 got attracted.
This was unfair,

It further observed that
section 45 requires the Court to decide whether it has reasonable grounds for
believing that the accused is not guilty of an offence under Part A. Thus,
while the accused has been arrested for an offence of money laundering, bail
would be denied on grounds germane to the scheduled offence, whereas the person
prosecuted would ultimately be punished for a completely different offen ce –
namely, money laundering. This, was laying down of a condition which had no
nexus with the offence of money laundering at all. Further, a person who may
prove that there were reasonable grounds for believing that he was not guilty
of the offence of money laundering may yet be denied bail, because he was
unable to prove that there were reasonable grounds for believing that he was
not guilty of the scheduled offence.

It held that the Act was
enacted so that property involved in money laundering may be attached and
brought back into the economy, as also that persons guilty of the offence of
money laundering must be brought to book. A classification based on sentence of
imprisonment of more than 3 years of an offence contained in Part A of the
Schedule, had no rational relation to the object of attaching and bringing back
into the economy large amounts by way of proceeds of crime. When it came to
Section 45, it was clear that a classification based on sentencing qua a
scheduled offence had no rational relation with the grant of bail for the
offence of money laundering.

The Court also observed
that certain similar offences were either incorporated or not incorporated
under Part A and hence, for some twin conditions for bail applied but not so
for the other. For instance, while counterfeiting of Government stamps was
included in the Act as a scheduled offence, counterfeiting of Indian coins was
not. Both were punishable with the same term under the Criminal Procedure Code,
but bail conditions would apply differently for each of them.

Another anomaly pointed out
by the Court was that while granting of bail required fulfilment of twin
conditions in respect of a specific situation, granting of anticipatory bail
did not attract any conditions for the very same situation. Thus, if pre arrest
bail was granted, which continued throughout the trial, for an offence under
Part A of the Schedule and money laundering, such a person would be out on bail
without him having satisfied the twin conditions of section 45. However, if in an
identical situation, he was prosecuted for the same offences, but was arrested,
and then he applied for bail, the twin conditions of section 45 would have
first to be met.

Accordingly, for the above
reasons, the Apex Court held that section 45(1) was extremely unjust,
manifestly arbitrary and discriminatory and would directly violate the
fundamental rights of the accused under the Constitution of India. It also held
that the earlier Supreme Court decisions on section 45 of the Act proceeded
onthe footing that section 45 was constitutionally valid and then went on to
apply section 45 to the facts of those cases. Hence, they were not of any
assistance in the case under question where its constitutional validity itself
was challenged.

Ultimately, the Apex Court
declared that section 45(1) of the Act insofar as it imposed two further
conditions for release on bail, was unconstitutional as it violated Articles 14
and 21 of the Constitution of India. All the matters in which bail had been
denied, because of the presence of the twin conditions contained in section 45,
were sent back to the respective Courts which denied bail.

Conclusion

This is a very important
decision since it deals with bail which is a basic right of an accused who is
imprisoned. The Supreme Court, in an old case of Gurbaksh Singh Sibbia
vs. State of Punjab, (1980) 2 SCC 565, had laid down that bail is the
rule and refusal an exception and that a presumably innocent person must have
his freedom to enable him to establish his innocence.This decision has given
strength to the old adage, presumed innocent until proven guilty, otherwise the
section required an accused to demonstrate his defence at the bail stage
itself! _

shailesh.kwebmaker

Background: Gst Returns For Small And Medium Enterprises

The GST law requires that:

i) Every person, supplying
taxable goods and/or services, to take registration if his aggregate turnover
of all supplies of goods and services (including tax free and exempt supplies)
exceeds the prescribed limit during a financial year;

ii) All those persons who were
registered under the earlier laws (Excise, Service Tax and State Vat, etc.)
to take registration w.e.f. 1^st July 2017;

iii) Every person so registered,
must report invoice wise details of all sales and purchases every month to the
Central and State Government authorities through various prescribed forms by
the due dates so prescribed and pay the taxes accordingly, every month.

The procedural aspects of filing return and
payment of taxes may be summarised, in brief, as follows:-

(Ref: sections 37, 38 and 39 of CGST Act and
Rules 59, 60 and 61 of CGST Rules)

The provisions, contained in above referred
sections and Rules, require every ‘registered person’ to file monthly returns
in three stages by three different dates every month. While monthly details of
invoice wise outward supplies have to be submitted and filed (in GSTR-1) by the
10^th day of the succeeding month, invoice wise details of inward
supplies to be filed (in GSTR-2) between 11^th day and 15^th
day of the succeeding month, and the final calculation of liability to be filed
(in GSTR-3) between 16^th day and 20^th day of the
succeeding month. There are two more forms namely GSTR-2A and GSTR-1A. While
information in GSTR-2A is provided by the GST portal to all registered dealers,
GSTR-1A is to be submitted by the suppliers in certain circumstances. In
addition thereto, those who are doing business of providing e-commerce
facility, those who are liable to deduct TDS or TCS and those who are Input
Service Distributors, have to file separate monthly returns (in prescribed
forms) in respect of those specified activities. All these forms have to be
submitted and filed every month, by all such registered persons (other than
those who have opted for composition scheme) by different due dates within that
overall limited period of 20 days. And the dates so prescribed (i.e. by and
between) have to be followed strictly. In case of failure, there are provisions
for levying Late Fees and penalties, etc., if any of these returns are
not filed within that prescribed date/s of filing, as well as levy of interest
for delayed payment, if any.

Representation to Government and
Assurance:-

Considering such a cumbersome procedure of
filing returns, almost all trade associations, from all over India, requested
the Government that such a procedure is impracticable and needs to change. It
was also represented that it would be almost impossible for small and medium
enterprises to comply with the requirements in such a manner. Various
suggestions were presented before the authorities concerned to simplify the
procedure. Two major suggestions may be noted here as follows:-

1. The three different forms i.e. GSTR-1, GSTR-2 and GSTR-3, which are
prescribed to be submitted on three different dates, should be combined together.
Thus, all that information which is required for the purpose can be submitted
in one return only. There is no need of three different forms for this purpose.

2. The requirement of filing monthly returns should be made applicable
to large tax payers only (those big dealers/registered persons who are having
large turnover of more than certain prescribed limit). All others should be
asked to file quarterly return (as was the procedure under the earlier laws).

Further;

3. It was specifically represented
that small and medium enterprises (SMEs) should be asked to file one quarterly
return (instead of three returns a month).

4. It was also represented to look
into the tax collection data, available with the Department, which may reveal
that 80 to 90 % of revenue is contributed by 10 to 20 % of total tax payers.
Thus, remaining more than 80% of tax payers contribute just 10 to 20 % of total
revenue to the Government. But, these 80% tax payers (most of them falling in
the category of small and medium enterprises) play a most important role in the
entire chain of production and distribution of goods and services throughout
the country. Their concerns need to be addressed appropriately. The procedure,
which may be applicable to large and very large tax payers, cannot be made
applicable to small tax payers, particularly those falling in SME category.

The Prime Minister, the Finance Minister and
the Revenue Secretary of the Government of India, who met representatives of
various SMEs, at various occasions post implementation, personally appreciated
the importance of role played by SMEs, acknowledged the practical difficulties
of stringent compliances and assured to mitigate the hardship faced by them. In
fact, the Prime Minister, in the first week of October at a public rally, made
a big announcement that we have provided big relief to Small and Medium
Enterprises (chhote and majhole udyog). It
was impressed upon that the SMEs will now file only one return every three
months instead of three returns a month to be filed by other taxable persons.

However, the GST Department issued a
press release stating that all those tax payers whose annual turnover is up to
1.5 crore will file quarterly returns instead of monthly returns (although no
notification was issued to that effect).

Problem and Unfairness: Who are SMEs?

Our Government, specifically almost all our
ministers, time and again have said that we take due care of our small and
medium business enterprises as the SMEs play an important role in our economy.
There is a separate ministry in the Government to look after the welfare of
Micro, Small and Medium Enterprises. And, if we look at the definition of SMEs
as provided in Micro, Small & Medium Enterprises Development (MSMED) Act,
2006, Small and Medium Enterprises are classified in two Classes i.e. (1) Manufacturing
Enterprises and (2) Service Enterprises.

Small Enterprises (in the manufacturing
sector) are defined as those who have investment of more than Rs. 25 lakh but
does not exceed Five crore rupees. And in the service sector, the investment
limits have been kept at minimum Rs. 10 lakh and maximum Two crore rupees.

Medium Enterprises (in the manufacturing sector) need to have
investment of more than Five crore rupees, but not exceeding Ten crore rupees,
while for the service sector, this limit is rupees Two crore and Five crore.

Although the above definitions are based upon
investment in business (plant & machinery, equipments, etc.), there
is no turnover criteria prescribed under the MSMED Act, but one can expect that
the same can be worked out by applying Investment to expected Turnover ratio
(which may be considered as between 1:5 and 1:10). Thus, expected turnover of
SMEs may fall between 10 crore to 100 crore rupees.

Based upon the ground realities and assurance
given by the Prime Minister, the SMEs were expecting that Government will
provide relief at least to all those dealers, whose annual turnover is up to 50
crore rupees. As the trade and industry was not asking for any monetary aid,
there was no loss of revenue to Government, it was just asking for simplified
procedure of statutory compliance, the SMEs were sure that their Government
will certainly take care to mitigate their hardship, but it looks like that the
Departmental authorities have some different view. From the developments so
far, it looks like that according to GST Department, the SMEs should not have
turnover of more than Rs. 1.5 crore per annum.

And if that is not the intention, then it
would be necessary to clarify the issue in larger public interest. Either the
definition of SMEs under MSMED Act needs to change or the mindset of those who
are responsible for designing and approving procedural aspects of GST
compliances.

Is It Fair?

The question arises, is it fair to ask a
businessman to invest Rs. 2 crore to Rs. 10 crore in a business which will have
turnover of just Rs. 1.5 crore per annum?. _

shailesh.kwebmaker

Supreme Court Widens Powers of SEBI – Penalties Now Even More Easier to Levy

Background

The Supreme Court in SEBI vs. Kanaiyalal B
Patel (2017) 85 taxmann.com 267 has held that `front running’ by any person
(and not merely intermediaries as provided by a specific provision) is in
violation of the SEBI Regulations relating to fraud and unfair trade practices.
By holding that SEBI is right in taking penal action against a person who is
`front running’, the Supreme Court has increased the penal powers of SEBI even
where the letter of the law is found wanting. However, the reasons given by the
Court have created a precedent that will have far reaching implications. It extends
the scope of `front running’ to almost every case of tipping. It makes it easy
to levy penalties with a lesser level of proof. It also broadens the definition
of ‘fraud’ to include even cases where there is no deceit. It would allow SEBI
to act even when there is a private
wrong between two parties and even if public/securities markets are not
affected. Finally, the Supreme Court holds that proving mens rea is
not required for levy of penalty in case of fraud.

Some parts of this ruling make it easier for
SEBI to take action against persons who indulge in fraudulent acts which are
not covered by the strict letter of the law. The decision makes the law
dynamic. Some parts of the judgement cover acts that shouldn’t at all be the
business of SEBI even if the actions were wrong. Finally, some parts of the
ruling overly broaden the scope of the law to convert some actions which are
neither wrong nor irregular into an offence. Instead of actually reading down
certain overly broad wordings of the Regulations, the ruling takes them
literally, it is respectfully submitted, that this creates absurd results.
Hence, this decision has far reaching effect beyond the specific offence of
`front running.’

What is front running?

`Front running’ is recently being found to be
a common practice in the securities market, considering that several cases have
been detected. Essentially, it is abusing of trust/confidence placed usually in
a market intermediary by a client, but it can happen in another context too.
`Front running’ is not only not defined – but the term is not even used in the
Regulations/Act. The Supreme Court has cited several definitions. Taking the
example of a stock broker, the gist of the definition is :

– A client may place an order for a large
quantity of shares with a stock broker. The stock broker knows that as soon as
he places this large order, the market price will move up. To profit from this,
at the cost of his client and hence unethically, he would place the order of an
identical or lesser quantity of shares for himself (or he may tip some
friend/relative to do so). The price of the share would rise. He then would
place the order in the name of his client and simultaneously offer for sale at
the higher price the shares he had earlier bought. The result would be that he
would make a profit from the difference and his client would end up paying a
higher price. He may act similarly in case of a large order of sale.

– There can be variants as was seen in the
cases in appeal before the Supreme Court. There may be a mutual fund
intermediary who seeks to buy a large quantity of shares and the employee who
is authorised to place such an order, tips off a friend/relative. A portfolio
manager may seek to buy and the manager/employee may do the same. Indeed, even
an employee of the client who is planning to buy such number of shares may do a
similar act.

In each of such cases, it is seen that the
person goes in front of such order and places his orders first. Hence the term
?front running.’

It is easy to see that such acts done by
registered market intermediaries result in the investing public losing trust in
the securities markets. SEBI obviously would be right in acting against such
intermediaries. However, should SEBI act even in cases where such acts are
committed by persons not registered with it? For example, should SEBI take
action against the employee of a private investor who
uses the information
about a large
planned order by his employer and commits `front
running’? Such a matter does not affect the securities markets. Is it similar
to any other fraud/breach of trust committed by an employee against his
employer! The issue becomes relevant because the Regulations relating to
frauds/unfair trade practices of SEBI provide specifically for front running by
intermediaries.

Background of the decision – front
running – law, SEBI and SAT decisions and amendments

The decision of the Supreme Court is in
appeal against five decisions of the Hon’ble Securities Appellate Tribunal (“SAT”)
in relation to `front running.’ In each of these cases, certain persons got
tipped off of large orders in shares. They thus bought ahead of such orders
(hence the term ‘front running’) and sold when these large orders actually
materialised, making a handsome profit. In each of these cases, SEBI had taken
penal action against persons found guilty of `front running.’ In the earlier
two of these cases, SAT held the SEBI Regulations applied only when an
intermediary did such front running ahead of its client’s large orders, not
when a person tipped off by an intermediary’s employee and did front running
ahead of the intermediary & its client’s large orders. The reasoning
offered was that the relevant regulation – 4(2)(q) of the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 (“the Regulations”) – applied only to intermediaries and not
to others. The principle applied was “expressio unius est exclusio
alterius”, i.e., when something specific is expressly mentioned, others in
the same class are excluded.

In later decisions, however, the SAT took a
different view. It held that the general provisions in the Regulations relating
to fraud were wide enough to cover front running even by non-intermediaries.

In the meantime, SEBI amended Regulation 4.
As noted earlier, Regulation 4(2)(q) treated front running by intermediaries as
a specific case of fraud prohibited by the Regulations. Some other clauses in
this Regulation too applied only to intermediaries. Apparently, to overcome
this, an explanation was introduced in 2013 to this Regulation which was stated
to be clarificatory and which, for this context, effectively said that the
clauses were not restricted to acts of intermediaries. The intention of the
amendment also appears to give it a retrospective effect and thus would apply
even to past cases including the ones decided by SAT.

Apart from the technical issue of whether the
specific provision that prohibits `front running’ only by intermediaries, there
was another issue involved. The tipping
by an unregistered intermediary (and other parties) or its employee to an
outsider which results in front running does not necessarily mean that the
capital markets or the public are thereby harmed. The harm is caused to the
intermediary privately and/or its clients. To take an example, say a closely
held company seeks to place a large order of purchase of
shares in a particular company. An employee of the
buyer company tips a friend who then buys the shares and then sells the shares
to the buyer company at a higher price. Now in this case, the company ends up
paying a higher price, but the public who sells shares to the friend do not
lose since they would have otherwise sold the shares directly to the company at
the same price. Hence the loss is caused only to the company, by paying a
higher price, then it is arguable that the interests of the public/capital
markets are not affected. Indeed, it is also arguable that even if the orders
were placed on behalf of a client, the harm is caused by the intermediary to
the client and thus, the intermediary may need to compensate the client and
also otherwise face action for allowing such things to happen. The question
thus is whether wrongs that are private between parties and not affecting the
public/capital markets should be dealt with by SEBI?

Decision of the Supreme Court

The Supreme Court thus essentially had to
face certain basic questions. First question is, whether the specific
provisions relating to front running by intermediaries meant that front running
by others were not prohibited by the Regulations? Or were the general
provisions relating to fraud were wide enough to cover all types of front
running. The Court held that the rule that specific excludes the general does
not apply here. Several other issues were raised which were answered and also
certain reasoning and ruling of law/interpretation were provided which need
consideration.

The Court (reading together the separate
judgement of each of the two Hon’ble Judges) effectively held as follows:-

1. The definition of fraud is very wide. It includes every act
that induces another person to deal in shares.
Importantly, it is not necessary that such inducement should be with a
malafide intention of deceit or the like.

2. The act whereby the
tippee engages in front running is in breach of the understanding and law
relating to confidentiality of information and thus is an act that is violative
of the Regulations.

3. The general provisions of
Regulation 3 are wide enough to cover front running. Effectively, it is thus
not necessary to refer to Regulation 4 that refers to front running by
intermediaries.

Note: In
the author’s view, taking the ruling to its logical end, the specific
provisions relating to front running by intermediaries become redundant!

4. The Court held that
proving mens rea – guilty mind – is not necessary. It is sufficient if
the violation is proved by preponderance of probabilities and not beyond
reasonable doubt.

Note: This observation
lowers the bar of proof required to find a person guilty and subject to penal
action.

5. Any tipping by a
person to another is in violation of the Regulations. Effectively, this would
thus include
insider trading where insiders share unpublished price sensitive information
with third parties. `Front running’ thus is one of the types of such irregular
tipping.

Note:
This again may result in many provisions of the SEBI Regulations relating to
Insider Trading being redundant. This would extend the provisions of the
Regulations beyond what is expressly provided in the regulations.

Implications

As stated earlier, we
now have a broad and
widely interpreted definition of fraud by the Supreme Court that gives
SEBI wider powers to catch and punish persons who directly or indirectly take
advantage of the securities markets. However, we have an earlier decision of
the Supreme Court in Shriram Mutual Fund ((2006) 131 Comp Cas 591 (SC)) that
has resulted in SEBI taking a view that penalty has to automatically follow
every violation. This decision goes many steps ahead and even effectively
endorses poorly drafted law, albeit mentioning in passing that current law
needs an overhaul. While one can hope that SEBI will not apply in practice the
definition of fraud which says deceit is not required. One also hopes that SEBI
exercises restraint whilst despite the wider powers provided by the Court.
However, it still remains an area of concern since parties will find it
difficult to meet allegations, which are not serious and will suffer larger
amounts of penalty, etc. whether before SEBI or even in appeal before
SAT. It is humbly submitted that this decision needs reconsideration. _

shailesh.kwebmaker

Insolvency and Bankuptcy Code: Pill for all Ills – Part II

3
Consequences of the Process

After the corporate
insolvency resolution process commences, i.e., once the application is admitted
by the NCLT, the following three consequences immediately take place in respect
of the corporate debtor:

(i) The
NCLT would declare a moratorium prohibiting any suits against the
debtor; execution of any judgement of a Court / authority; any transfer of
assets by the debtor; recovery of any property against the debtor. The
moratorium continues till the resolution process is completed. Thus, total
protection is offered to the debtor against any suits / proceedings. Even
proceedings for enforcement of security against the debtor under the SARFAESI
Act would be put on hold. In Indus Financial Ltd. vs. Quantum Ltd., 147
SCL 332 (NCLT-Mum), it was held that two parallel proceedings, one
under the SARFAESI and the other under the Code could run side-by-side against
the same debtor. Since the life of the insolvency proceedings is only for 180
days, it does not eclipse the SARFAESI Act proceedings for an unlimited period.
An interesting Order has been given by the NCLAT in Schweitzer Systemetek
India P. Ltd.,CA (AT) (Insolvency) 129/2007, wherein it held that the
moratorium only operated against assets of the corporate debtor. If an action
was bought for enforcing the personal guarantee provided by the promoters of
the corporate
debtor, then the same would survive and can be proceeded against.

(ii) An
Interim Resolution Professional (IRP) would be appointed by NCLT to
manage the affairs of the corporate debtor within 14 days of the commencement
of the resolution process. The IRP is vested with all powers to manage the
corporate and the powers of the board of directors / designated partners stand
suspended and these powers would be exercised by the IRP. It may be noted that
there is no provision under the Companies Act, 2013 to provide for this
vacation of powers by the Board in case of appointment of an IRP. However,
section 238 of the Code provides that it would override anything inconsistent
contained in any other law. One question which arises is that, should the
Directors resign on the appointment of the IRP or should they continue but with
no powers? A Company cannot function without directors, for that would be a
violation of section149(1)(a) of the Companies Act, 2013. The Supreme Court in Innoventive
Industries Ltd. vs. ICICI Bank, CA 8337/2017 has held that once an
insolvency professional is appointed to manage the company, the erstwhile
directors who are no longer in management, cannot even maintain an appeal on
behalf of the corporate debtor. Accordingly, any appeal filed by the erstwhile
Directors challenging an order of the NCLAT is not maintainable.

The
IRP is empowered to take all actions as are necessary to manage the corporate
as a going concern and continue its operations as a going concern. An IRP is an
Insolvency Professional (IP) who has passed the examination in this
respect and is authorised to conduct the corporate insolvency proceedings. CAs
can appear for this examination and become IPs.

An
interesting order has been passed by the NCLAT in Bhash Software Ltd. vs.
Mobme Wireless Solutions Ltd., CA(AT) (Insolvency) 79/2017, where it
set aside the order of the NCLT admitting the insolvency application on grounds
of natural justice not being followed. Accordingly, it held that all actions of
the IRP were illegal and were set aside. The corporate debtor was freed from
the rigours of the Code and the powers of its Board of Directors were
reinstated. It even asked the operational creditor to bear the fee of the IRP.

(iii) A
Public Announcement would be issued by the IRP giving details of the
commencement of the process, asking all creditors to submit their claims. All
creditors must submit their claims in the prescribed form along with proof of
their claims.

Further Steps

The further steps in the corporate
insolvency resolution process are as follows:

(a) Within
30 days of his appointment, the IRP has to collate all claims of creditors and
determine the financial position of the corporate debtor and constitute a
Committee of Creditors. This shall comprise of all financial creditors.

(b) Within
7 days of its constitution, the Committee of Creditors has to meet and appoint
a Resolution Professional. It may either continue with the IRP or appoint a new
IP. The decision must be taken by a majority of at least 75% votes of the
Committee. However, in a case where the Committee could not take a decision
with 75% majority on whether the IRP should continue, the NCLT held that a
viable solution was to give a preference to the decision taken by that Financial
Creditor which had the largest percentage in the voting rights. Thus, the
wishes of the creditor having 61% vote share was preferred over the other
creditors – Raj Oil Mills Ltd., MA 362/2017 (NCLT Mum).

(c) The
Resolution Professional so appointed would act as the Chairperson of the
Committee, conduct the entire corporate insolvency resolution process and
manage the operations of the corporate debtor. He would conduct the meetings of
the Committee of Creditors. He can even raise interim finance for the corporate
debtor, appoint professionals as may be necessary, etc.

(d) Operational
Creditors may attend the meetings of the Committee of Creditors but cannot
vote.

(e) Any
creditor who is a member of the Committee of Creditors can appoint an IP as his
representative on such Committee.

(f) The
Resolution Professional can carry out certain functions only with the prior
approval of 75% of the Committee of Creditors, such as, creating any security
interest, changing the capital structure of the corporate debtor, appointing
auditors / internal auditors, etc.

(g) The
most important task for the Resolution Professional is to prepare an
Information Memorandum and a Resolution Plan. The Memorandum must contain all
financial and other details of the corporate debtor along with the liquidation
value of the assets, i.e., their realisable value if the corporate were to be
liquidated. This must be worked out by two registered valuers after physical
verification of the stock and fixed assets of the debtor.

The
resolution plan must provide for the payment of all costs associated with the
insolvency resolution, repayment of debts of operational creditors, management
of affairs, implementation and supervision of the plan, etc. It may
provide for measures such as, transfer of assets, reduction in amount payable,
issuing securities of the corporate debtor, modifying any security interest, etc.
It must provide for the specific sources of funds which would be used to pay
all costs of the insolvency resolution process, liquidation value to
operational creditors and liquidation value due to financial creditors who
dissented to the plan.

The
SEBI Regulations and the Takeover Code have been amended to permit issue of
shares and takeover of listed companies under a resolution plan. The provisions
relating to preferential allotment of listed shares and an open offer process
do not apply to a resolution plan formulated under the Code.

The
resolution plan may be likened to the Scheme prepared by an Operating Agency
before the erstwhile BIFR in relation to a sick industrial company.

(h) The
resolution plan must also be approved by a 75% vote of the financial creditors.

(i) Once
approved by the Committee, the plan must be submitted to the NCLT for its final
approval. If so approved, it becomes binding on the corporate debtor, the
creditors, the employees, etc. Further, the moratorium order shall come
to an end. However, if the plan is rejected by the NCLT, then a liquidation
process is triggered.

The
Hyderabad Bench of the NCLT pronounced the very first insolvency resolution
order under the Code in the case of Synergies-Dooray Automotive Ltd., CP(IB)
No. 01/HDB/2017 within the 180 day period provided under the Code.The
Scheme involves merging Synergies-Dooray with Synergies Casting, a creditor and
also a related party. The Order also provides for financial restructuring of
the dues of financial and operational creditors, government dues as well as
capital infusion from the promoters. The payments of creditors’ dues and
government dues would be made in instalments over 3 years and at a discount.
The Scheme also envisaged relief from the Andhra Pradesh Government in the form
of waiver of stamp duty on the merger scheme. Further, it sought that the sales
tax and service tax department waive all interest charged on the Company for
deferred payment. An interesting waiver was sought from the CBDT to exempt the
transferor sick company from the applicability of sec. 79 and sec. 72A of the
Income-tax Act, 1961, i.e., the transferee company be allowed to carry forward
and set off the accumulated losses and depreciation of the transferee company.
It even asked CBDT to exempt the transferee from the applicability of and
payment of MAT. The NCLT has approved the resolution plan as submitted with
some minor modifications. One of the creditors aggrieved by this Order has
appealed against it to the NCLAT.

Non-Obstante Clause

The Code contains a non-obstante
provision in section 238 which states that it would override all other laws.
The Supreme Court had an occasion to test this provision in Innoventive
Industries Ltd. vs. ICICI Bank, CA 8337/2017, where the issue was
whether the Maharashtra Relief Undertakings (Special Provisions Act), 1958
(‘the Maharashtra Act’), which suspended all liabilities of the corporate
debtor would impede any action under the Code? The Apex Court held that the
earlier State law was repugnant to the later Parliamentary enactment as under
the said State law, the State Government could take over the management of a
relief undertaking, after which a temporary moratorium similar to that under
the Code took place. Giving effect to the State law would directly impede or
come in the way of the taking over of the management of the corporate body by
the interim resolution professional. Also, any moratorium imposed under the
Maharashtra Act would directly clash with the moratorium to be issued under the
Code. Therefore, unless the Maharashtra Act was out of the way, the
Parliamentary enactment would be hindered and obstructed in such a manner that
it will not be possible to go ahead with the insolvency resolution process
outlined in the Code. Further, the non-obstante clause contained in the
Maharashtra Act could not possibly be held to apply to the Central enactment,
inasmuch as a matter of constitutional law, the later Central enactment being
repugnant to the earlier State enactment by virtue of Article 254 (1) of the
Constitution. It was clear that the later non-obstante clause of the
Parliamentary enactment would also prevail over the limited non-obstante clause
contained the Maharashtra Act. Accordingly, it held that the Maharashtra Act
could not stand in the way of the corporate insolvency resolution process under
the Code.

A similar question arises
as to whether the provisions and procedures specified under the Companies Act,
2013 need to be followed while implementing any plan under the Code? For
instance, would actions such as, sale of assets, preferential issue of shares, etc.,
need special resolutions? If yes, could not the promoters of the corporate
debtors defeat such resolutions? Section 30 of the Code provides that the
resolution plan must not contravene any of the provisions of the law in force.
Does that mean that the provisions of the Companies Act need to be adhered to?
However, at the same time one must also give due weightage to the non-obstante
clause u/s. 238 of the Code and the above-mentioned Supreme Court decision. It
would be a very strong argument to state that the Code overrides all other laws
including the Companies Act. Clearly, this is one area which needs to be tested
at a higher judicial forum.

Liquidation Process

If the NCLT rejects the
resolution plan or if a resolution plan has not been submitted to the NCLT
within the maximum period of 180 days + any extension, then it must order the
liquidation of the corporate debtor. Alternatively, if the Committee of
Creditors decides to liquidate the debtor, then also the NCLT must pass a
liquidation order. Once such an order is passed, the resolution professional
becomes the liquidator for the liquidation purposes provided the NCLT does not
replace him.

The liquidator has various
powers and duties under the Code and he can appoint professionals to assist him
in the discharge of his duties. He must verify all the claims of the creditor
and take custody of all assets of the debtor. He would carry on the debtor’s
business for its beneficial liquidation. He would also defend and institute all
legal proceedings for / on behalf of the debtor. He can also investigate the
affairs of the corporate debtor to determine whether there have been any
undervalued or preferential transactions which have led to one creditor being
preferred over the other. He also has the power to disclaim any onerous
property by applying to the NCLT.

He must form a liquidation
estate comprising of all assets owned by the corporate debtor and hold them in
a fiduciary capacity for the benefit of all the creditors. However, assets of a
third party possessed by the corporate, assets of any subsidiary of the
corporate, etc., would not form a part of the liquidation estate.

He must collect all
creditor claims within 30 days of the commencement of the liquidation process
and verify the same within 30 days from the last date for the receipt of
claims. He must then determine the value of the claims admitted. If the
liquidator is of the opinion that a corporate debtor has given a preference to
a particular creditor, then he must apply to the NCLT for avoiding the same.
The window of determining preferential treatment is two years before the
insolvency commencement date for related parties and one year for other
persons. Similarly, if he is of the opinion that during this window certain
transactions were undervalued, then the liquidator can apply to the NCLT for
having them set aside. He can also apply to the NCLT for setting aside any
extortionate credit transactions entered into by the corporate debtor within
two years preceding the insolvency commencement date.

The liquidator may make an
itemised sale of the assets of the liquidation estate or make a slump sale or
in parcels. The usual mode of sale of the assets is an auction, but in certain
cases he may even resort to a private sale. The Code lays down the priority for
distribution of proceeds from the sale of assets of a corporate debtor in
liquidation. It states that this priority would apply notwithstanding anything
to the contrary contained in any other Central / State law as well as any
contract to the contrary between the debtor and the recipients. The priority
schedule under the Code is as follows:

(a) the insolvency resolution process costs and
the liquidation costs in full;

(b) the following debts which shall amongst
themselves rank equally;

(i) workmen’s dues (i.e., wages / salary + accrued
holiday remuneration + compensation under Workmen’s Compensation Act +
Provident Fund, Gratuity, Pension due to the workmen) for 24 months preceding
the liquidation commencement date; and

(ii) debts owed to a secured creditor if
he has relinquished his security;

(c) wages and any unpaid dues owed to employees
other than workmen for the period of 12 months preceding the liquidation
commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between
themselves:

(i) any amount due to the Central Government and
the State Government for a period of 2 years preceding the liquidation
commencement date;

(ii) debts owed to a
secured creditor for any amount unpaid following the enforcement of security
interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case
may be.

The distribution should be
made within 6 months from the receipt of the proceeds after deducting the
associated costs. If certain assets cannot be sold, the liquidator may, with
the approval of the NCLT, distribute them to the stakeholders.

The liquidator is required
to submit Progress Reports to the NCLT starting from within 15 days from the
end of the quarter of his appointment and thereafter within 15 days from the
end of every quarter of his tenure. This report shall also contain an Asset
Sale Report when any assets are sold.

The NCLT Mumbai bench has
passed an order in VIP Finvest Consultancy P. Ltd. vs. Bhupen Electronic,
CP No. 03/I&BP/2017, ordering liquidation of Bhupen Electronic.
This decision was taken by the Committee of Creditors, since the company was
not a going concern and had land and building as its only valuable asset.

Completion of Liquidation

The
liquidator shall liquidate the corporate debtor within 2 years, failing which
he must apply to the NCLT to continue the process. He must submit reasons why
the additional time would be required. At the end, he must submit a Final
Report to the NCLT explaining how the liquidation was conducted and how the
assets have been liquidated.

When
the assets have been completely liquidated, the liquidator must apply to the NCLT
for dissolution of the corporate debtor. Once the NCLT passes an order, the
body corporate would be dissolved from that date.

Transfer of Winding up Pro-ceedings under
Companies Act, 1956

Earlier,
all winding up petitions against a company were heard u/s. 433 of the Companies
Act, 1956. Since the Companies Act, 1956 was superseded by the Companies Act,
2013, section 434(1)(c) of the Companies Act, 2013 provided that all
proceedings under the Companies Act, 1956, including proceedings of winding up
shall stand transferred to the NCLT. However, with the enactment and
notification of the Code, section 434 of the Companies Act, 2013 was also
amended. The amended section 434(1)(c) now provides that all proceedings under
the Companies Act, 1956 including those relating to winding up shall stand
transferred to the NCLT.

However,
it also adds a Proviso to section 434(1)(c), which states that only such
proceedings relating to winding up of companies shall be transferred to the
NCLT that are at a stage as may be prescribed by the Central Government. Thus,
if they have crossed the stage notified by the Central Government, then they
cannot be transferred to the NCLT under the Insolvency and Bankruptcy Code,
2016. They would then continue to remain with the High Court and be governed by
the provisions of section 433 of the Companies Act, 1956. The Central
Government notified the Companies (Transfer of Pending Proceedings) Rules,
2016, which provided that in order that proceedings of winding up are
transferred to the NCLT from the High Court, two conditions were a must ~ the
petition must be pending before a High Court and the petition must not have
been served on the respondent under Rule 26 of the Companies (Court) Rules,
1959.

The
above view has also been endorsed by the Bombay High Court in Ashok
Commercial Enterprises vs. Parekh Aluminex Ltd., CP No. 136/2014. It held
that it was clear that all winding up proceedings did not stand transferred to
the NCLT. If the service of the notice of the Company   Petition
under   Rule   26
of the Companies(Court)   Rules,
1959      was      not
complied    before 15^thDecember
2016, such Petitions stood transferred to NCLT, whereas all other Company
Petitions would continue to be heard and adjudicated upon only by the High
Court. The Legislative intent was thus clear that two sets of winding up
proceedings would be heard by two different forums, i.e., one by NCLT and
another by the High Court, depending upon the date of service of Petition on or
before or after 15^th December 2016. There was no embargo on a High
Court to hear a Petition if the notice under Rule 26 of the Companies (Court)
Rules, 1959 was served on the respondent prior to 15^th December
2016.

Conclusion

It
would be evident from this brief discussion that the Code has plenty of issues
and already in its short span it has seen several unique decisions from various
forums. While there are bound to be creases which need ironing, it is
definitely a step in the right direction. One booster shot to the Code could be
in the form of increasing the NCLT benches so that more applications can be
heard. Once the provisions relating to individuals and firms are made
operational, it is expected that industrial sickness resolution would have a
greater coverage.

However,
at the same time, the Code must be looked upon as the last frontier and not the
first form of attack by a creditor. Whether resolution professionals can
successfully run a sick company (which its promoters have not been able to) is
a matter which only time would tell? That is the reason why one of the largest
private sector banks in India looks upon the Code as the least preferred
solution unless the debtor was a wilful defaulter. Clearly, not all bankers view
the Code as the panacea for all ills!

shailesh.kwebmaker

Is it Fair to thrust the avoidable burden of compliance under the GST?

Background:
On 1^st of July 2017, the Goods and Services Tax legislation (‘GST’)
was ushered in with pomp and fanfare. Enamoured by the hue created around the
switchover, businesses and tax consultants eagerly welcomed the ‘Good and
Simple Tax’.

In the run up to the
switchover, the Government maintained, confirmed and reiterated that the
Government and the GSTN was ready. That life (compliance) under GST will be
simple and that the GSTN is well equipped and ready to handle the loads of data
that was sought to be uploaded by taxpayers every month through the GSTR-1, 2
and 3 return forms.

Unfairness@Groundzero: Within
weeks from the switchover, grim reality of the preparedness of the Government
and the GSTN began to emerge and the simplicity of the ‘Good and Simple tax’
started to unfold. The Government announced
that the date for filing GSTR-1 (return for outward supplies made) for
the months of July and August 2017 was being extended and in the interim tax
payers would be expected to file a ‘summary’ return in form GSTR-3B. In effect,
the assessee was required to file a return for the aforesaid period twice i.e.
first in summary Form3B and subsequently in Form GSTR1/2/3 giving full details.
Assurances were given that this was a one-time measure and will not extend
beyond August 2017.

When the assessee started
uploading the GSTR 3Bs for the month of July, the Government and the GSTN had
to face harsh reality that: they had underestimated the issue, but the assessee
had to bear the brunt of outages and the snags in data upload, even for
uploading summary data. In a knee jerk reaction, the Government extended the
time limit for filing the return by a ‘few days’. History was repeated while
filing the GSTR-3B for the month of August and the GSTR-1 for the month of
July.

By mid-September, the
Government realised that the patchy solutions approach was adding to the
assessees woes. Faced with the possibility of non-compliance en masse,
the Government announced that a Committee would be formed to address the issues
and in the meanwhile, filing of GSTR-3B would be extended upto the month of
December.

Is it fair?

Is it Fair to thrust upon
Taxpayers a huge new compliance regime? In spite of being aware of the lack of
preparedness, can the Government throw caution to wind in implementation of
GST? Is it fair to be unrelenting on the issue of extending the due dates for a
reasonable period or waiving the fee for filing returns late and hold the tax
payer at a gun point, threatening to penalise for defaults which were not
entirely due to their inaction?

Ergo, desperate tax payers
and tax professionals (who help to facilitate compliance) have had to
thanklessly and fruitlessly expend time and resources to ensure that the
returns are uploaded. In doing so, they have had to forsake personal life not
to mention peace of mind, among other things.

Is it fair for our
Government to adopt such an unrelenting approach, completely belying its own
assurances that in the initial period the Government will adopt a soft approach
and give time to the taxpayers! In addition, is it fair to drain the taxpayers
with a half-baked and untested compliance system?

Last but not the least, is it
fair of the Government to fix the due dates of an untested new law, without
pondering about clash of other due dates where there is no time for the
assessee /tax consultants to effectively comply with anything but a simple tax
law?

Way forward

The Government needs to look at the whole
process with open eyes. To ensure that the system and processes on the GSTN are
truly ready and functional for various types of taxpayers / filings for
which thorough testing of the modules has to be done. Post this, announce due
dates to ensure that compliances can be done realistically.

Also, the Government should build an
interface between the GSTN and the tax payers, which is systematic and time
bound. This will ensure that small and recurring issues are dealt with
efficiently and in early stages, the larger, and more burning issues get
escalated to the relevant persons for early resolution.

The Government needs to understand that the
GST implementation will be effective only if all the stakeholders, instead of
adopting the current ‘silo’ approach, adopt an ‘eco-system’ approach and they
appreciate that their relationship inter se is symbiotic. _

shailesh.kwebmaker

Can there be Two Kings of the Jungle? The Delineation of ‘Dominance’ under the competition Act, 2002

Until the advent of competition law in
India, many large corporate entities functioned on the principle that “might is
right”. The stronger and more influential would set the norms, which others
would have to follow. This practice took various shapes and forms, by which
companies which had a substantial market share would dictate the terms on which
a particular market / industry would function, and all the others were expected
to fall in line.

Substantive provisions of the Competition
Act, 2002 (the “Act”) were notified in 2009. A regulator, namely the
Competition Commission of India (“CCI”) was established with the avowed
objective of promoting and sustaining competition in the market and for
striking down and preventing activities found to be having an appreciable
adverse effect on competition in the relevant market.

The thrust of the competition policy is directed
to preventing cartel-like anti-competitive arrangements (section 3 of the Act)
and preventing parties from abusing their dominant position (section 4 of the
Act) so as to adversely affect consumers as well as competitors in a relevant
market. The Act also provides for regulation of mergers and acquisitions which
exceed certain prescribed thresholds of assets and turnover where the prior
approval of the CCI will be required before giving effect to such transactions
(sections 5 and 6 of the Act).

The Regulator – Role and Powers

Since its inception, the CCI has set about
its role investigating into anti-competitive conduct of various companies
across various sectors, and taking appropriate remedial measures with alacrity.
Over the years, the CCI has investigated the activities of various corporate
entities, trade associations and PSUs, and has passed various orders with the
object of restoring the balance in the relevant market. The various sectors
investigated include the cement manufacturers, real estate developers,
automobile part manufacturers, explosive manufacturers and the practices of
stock exchanges.

The CCI is a quasi-judicial body which has
the power to frame regulations, to investigate into offences through its
investigative wing, namely the office of the Director–General, and also to hear
and decide complaints in connection with anti-competitive conduct and to pass
appropriate, reasoned orders in respect of the same. Under the Act, the CCI has
been bestowed the powers to initiate investigations suo motu or upon
receipt of complaints / information from parties aggrieved by anti-competitive
conduct of other entities.

Further, the CCI has been granted extensive
powers to issue appropriate orders against entities found to be in violation of
the provisions of the Act. For instance, the CCI may impose penalties not
exceeding 10% of the average turnover of an offender for the preceding three
financial years. In case of a cartel, the penalty may be up to three times the
profits for each year of the continuance of the agreement, or 10% of turnover
for each year of continuance of the agreement, whichever is higher. The CCI
also has the power to direct enterprises to terminate an agreement which is
found to be anti-competitive; to direct them not to re-enter into such an
agreement, and even to modify an agreement which is perceived to have an
anti-competitive effect. An order passed by the CCI may be appealed before the
Competition Appellate Tribunal constituted under the Act. Any appeal against an
order of the Appellate Tribunal will lie directly before the Supreme Court.

Abuse of Dominance

Many sectors in the Indian market had
companies which held a substantial market share and huge asset base, and which
were in a position to abuse their dominance in the market by indulging in
discriminatory pricing policies and prescribing unfair terms and conditions for
purchase / sale of products dealt with by these entities.

Such conduct is caught by section 4 of the
Act, which states that no enterprise shall abuse its dominant position. The
types of ‘abuses’ of a dominant position caught by the Act are enumerated in
section 4(2) of the Act, and includes the imposition of an unfair or
discriminatory condition or price in the purchase / sale of goods, limiting or restricting
production of goods or services, practices resulting in denial of market
access, and also using a dominant position in one market to enter into or
protect another market. As such, abuse of dominance under the Act would cover
scenarios where a dominant entity imposes unfair conditions on consumers
directly (such as by excessive pricing). It also covers behaviour where a
dominant entity engages in conduct which would preclude competitors from
entering into or expanding in a particular market (such as by tying – i.e.
making the sale of one product conditional upon purchase of another product).
Such conduct reduces competition in the market, which ultimately harms
consumers. It is pertinent to note that abuse of dominance can also occur
across markets, for instance, where a supplier holding a dominant position in
an upstream market (e.g. for raw materials / input products) refuses to supply
its competitor in a downstream market, and thereby forecloses competition in
the downstream market.

One of the widely recognised forms of abuse
of dominance is by indulging in predatory pricing policies, where goods are
sold below the cost of production by a dominant undertaking with a view to
eliminate competition and capture the market. The concept is in the nature of
undertaking short-term pain for long-term gain, where an undertaking would, on
the basis of its vast resources, willingly undertake losses in the short-run
with the expectation of recouping these losses in the future when competition
would be eliminated. Smaller players and market participants would not be able
to match such a conduct of dropping prices below the cost and consequently
would be driven out of the market, leaving the dominant entity free to raise
prices and recover its losses.

A recent case which saw this kind of a
conduct was in MCX-SX vs. NSE, where NSE, a leading stock exchange, used its
dominant position in the market to implement a zero transaction fee structure
for trading on its currency derivatives segment, thereby making it unviable for
others who did not have a similar asset and resource base to match the NSE’s
transaction-fee waiver. MCX-SX, a relatively newer and smaller market player,
brought this conduct to the attention of the CCI, alleging that NSE had abused
its dominant position in violation of section 4 of the Act. A full-fledged
inquiry was conducted by the CCI, and a detailed order was passed holding that
NSE was in a dominant position in the relevant market, that it had used its
dominant position in one market to abuse its position in another market, and
huge penalties were consequently imposed on NSE for such a conduct in addition
to directions to refrain from such a conduct which had an anti-competitive
effect on the market¹.

In another case, huge penalties were imposed
on DLF, a real-estate major, in connection with anti-competitive practices
whereby onerous terms and conditions were imposed on consumers looking for
residential accommodation in real estate projects. It was observed by the CCI
that DLF was holding a substantial market share in the relevant market, which
was defined as the market for high-end residential accommodation in Gurgaon².

Factors that determine violation

As can be seen, there have been a number of
cases where the CCI has stepped in where a dominant undertaking was found to be
abusing its market position to the detriment of consumers and/or other
competitors. However, the determination of whether each such company has, by a
particular practice, abused its dominant position in a particular market, is
not a cut-and-dried formula. Each industry exhibits different complexities in
the factors that influence the development of competition in that market, and
therefore each type of market practice alleged to be abusive and violative of
the Act may impact different markets differently. Therefore, in each of the
cases that the CCI is faced with, a detailed analysis is conducted to arrive at
a conclusion as to (i) the relevant product market and geographic market in
which the entity which was subject to scrutiny, operated, (ii) whether the
entity in question was a dominant undertaking in the relevant market, so
defined, and (iii) whether the conduct complained of amounted to an abuse of
the dominant position, contrary to section 4 of the Act.

A pre-condition to a finding of abuse of
dominance in terms of section 4 of the Act, therefore, is that the entity in
question holds a dominant position in the relevant market. The assessment of
dominance includes an analysis of various factors including the market share of
the entity in the relevant market, its assets and resource base, barriers to
entry and expansion of competitors in the market, the relative size, importance
and resources of competitors, etc.

__________________________________________________________________________

1 Case
No. 13/2009,MCX-SX vs. NSE, decided on 23 June 2011

2
Case No. 19/2010, Belaire Owner’s Association vs. DLF Limited

Can more than one entity be dominant?

While there have been a number of cases
where a single undertaking is found to be abusing its dominant position in a
particular market, it remains to be seen whether the concept of ‘dominance’
under Indian competition law will embrace possibility of there being more than
one undertaking exercising substantial market power in a particular market,
where either or all of such companies can be said to be in a dominant position.

For example, there may be instances where
the market can be potentially carved out between two companies, both exercising
substantial market power without them indulging in any concerted arrangement inter
se. It may be possible for these two dominant undertakings to mirror each
other’s anti-competitive practices to the exclusion of other smaller players
who do not have the resources to compete in such anti-competitive conduct. The
situation which could result would be one where the market is carved out
between two undertakings exercising market power and being in a position to
abuse such power. Also, the possibility of two players trying to carve out markets
by indulging in similar practices and eventually aligning their forces,
directly or indirectly, cannot be ruled out.

While there is nothing in the Act which
prevents the possibility of more than one dominant undertaking in a relevant
market, the jurisprudence on this aspect is yet at a nascent stage. In a recent
decision, the CCI has taken the view that the Act does not allow for more than
one dominant player. According to the CCI, the concept of ‘dominance’ is meant
to be ascribed to only one entity.

By contrast, antitrust laws of other
jurisdictions have recognised the concept of “collective dominance”. European
competition law, for instance, prohibits abuse of a dominant position “by
one or more undertakings”, thereby expressly accounting for the possibility
of two or more economically independent undertakings together holding a
dominant position vis-à-vis the other operators in the same market.

Other jurisdictions have also embraced the
possibility of more than one dominant undertaking operating in a particular
market in circumstances that merit such a finding. One such instance was the
case of Visa and Mastercard which was decided by the District Court of New
York, where it was alleged that both Visa and Mastercard had both violated
antitrust law by implementing rules prohibiting their member banks from issuing
cards of their competitors, American Express and Discover. Pursuant to a
detailed analysis of the market and the impugned market practices, the Court
came to the conclusion that both Visa and Mastercard had market power, whether
considered jointly or separately. This finding of the District Court was upheld
by the US Court of Appeals³. In a similar case before the Canadian
Competition Appellate Tribunal, the Canadian authorities too, accepted the
proposition that both Mastercard and Visa each possess market power in the same
relevant market⁴.

Even under the Indian Competition Act, if an
enterprise enjoys a position of strength and the potential to operate
independently of competitive forces in the market or affect its competitors /
consumers / the market in its favour, it will be an enterprise having a “dominant
position” ⁵. Such a position would not change even if there
is another enterprise which also meets the above criteria.

Evolution and Way Forward

Competition law in India is a dynamic law
which must constantly adapt to meet with the requirements of the time and the
changed circumstances of different markets. Competition jurisprudence and
policy must evolve to meet the challenges which new facts and situations may
present. The legislation ought to be given effect to further the object of the
law-makers; the approach must be to identify a wrong-doing and prevent mischief
from bearing fruition. Any constraint on the law or to the ability of a
regulator to act in such a case may result in a situation which may defeat the
avowed objects with which the law was enacted. As Lord Denning famously said⁶:

“What is the
argument on the other side? Only this, that no case has been found in which it
has been done before. That argument does not appeal to me in the least. If we
never do anything which has not been done before, we shall never get anywhere.
The law will stand whilst the rest of the world goes on; and that will be bad
for both.” _

__________________________________________________________________________________

3 United
States Court of Appeals for the Second Circuit, United States of America vs.
Visa & Mastercard, Decision dated 17 September 2003

4 CT-2010-010
Commissioner of Competition vs. Visa Canada Corporation & Ors., Decision
dated 23 July 2013

5 Explanation
(a) to section 4 of the Competition Act, 2002

6 Packer vs. Packer
[1953] 2 All ER 127

shailesh.kwebmaker

Maintenance Under Hindu Law

Introduction

The codified Hindu Law consists of four main Acts which deal with different aspects of family law, such as, succession, adoptions, guardianship, marriage, etc. One such important Act is the Hindu Adoptions and Maintenance Act, 1956 (“the Act”). As the name suggests, this Act deals with two diverse topics – Adoptions by a Hindu and Maintenance of a Hindu. Let us consider some of the facets of the Maintenance part of this Act.

Maintenance of Different Persons

The Act provides for the maintenance of four different categories of persons, namely:

(a) maintenance of a wife by her husband;

(b) maintenance of a widowed daughter-in-law by her father-in-law;

(d) maintenance of dependants by the heirs of a deceased Hindu.

What is Maintenance?

The Act defines the term maintenance in a wide and inclusive manner to include in all cases, provision for food, clothing, residence, education and medical attendance and treatment. Thus, even the right to residence is treated as a part of maintenance – Mangat Mal vs. Smt Punni Devi, (1995) 6 SCC 88.

Further, in the case of an unmarried daughter (included in the category of children), it also includes the reasonable expenses of and incidental to her marriage. What is reasonable would depend upon the facts of each case and the financial status of each family. No hard and fast rule could be laid down in this respect and it would be a qualitative answer which would vary from family to family.

The Act provides that it is the discretion of the Court to determine whether and what maintenance would be awarded. In doing so, it would consider various factors. For instance, in the case of an award to a wife, children or aged parents, it would consider the position / status of parties, reasonable wants of the claimant, value of the claimant’s property, income of the claimant, number of persons entitled to maintenance under the Act. Similarly, while determining the maintenance of dependants, it would consider the net value of the estate of the deceased, degree of relationship between the deceased and dependants, reasonable wants of dependants, past relations, value of property of the dependant and their source of income, number of persons entitled to maintenance under the Act. The Court is granted very wide discretion. In Kulbhushan Kumar vs. Raj Kumari, 1971 SCR (2) 672, income-tax was allowed as a deduction in computing the income of the husband for determining the maintenance payable to his wife.

Maintenance of Wife

A Hindu wife is entitled to be maintained by her Husband during her life-time. Of course, this is subject to the marriage subsisting. Once a marriage is dissolved on account of a divorce, then an order for maintenance / alimony would be u/s.25 of the Hindu Marriage Act, 1925 and not under this Act. In Chand Dhawan vs. Jawaharlal Dhawan, 1993 (3) SCC 406, it was held that the court is not at liberty to grant relief of maintenance simplicitor obtainable under one Act in proceedings under the other. Both the statutes were codified as such and were clear on their subjects and by liberality of interpretation, inter-changeability could not be permitted so as to destroy the distinction on the subject of maintenance.

In Kirtikant D. Vadodaria vs. State of Gujarat, (1996) 4 SCC 479, it was held that there is an obligation on the husband to maintain his wife which does not arise by reason of any contract – expressed or implied – but out of jural relationship of husband and wife consequent to the performance of marriage. The obligation to maintain is personal, legal and absolute in character and arises from the very existence of the relationship between the parties. The Bombay High Court in Bai Appibai vs. Khimji Cooverji, AIR 1936 Bombay 138, held that under the Hindu Law, the right of a wife to maintenance is a matter of personal obligation on the husband. It rests on the relations arising from the marriage and is not dependent on or qualified by a reference to the possession of any property by the husband. The Supreme Court in BP Achala Anand vs. S Aspireddy, AIR 2005 SC 986 held that the right of a wife for maintenance is an incident of the status or estate of matrimony and a Hindu is under a legal obligation to maintain his wife.

A Hindu wife is also entitled to live separately from her husband without forfeiting her claim to maintenance in several circumstances, namely ~ if he is guilty of desertion, i.e., abandoning her without reasonable cause and without her consent; if he has treated her with cruelty; if he is suffering from virulent leprosy; if he has any other wife alive; if he keeps a concubine; if he has converted to a non-Hindu or if there is any other cause justifying her living separately. However, the wife loses her right to separate residence and maintenance if she is unchaste or converts to a non-Hindu.

Maintenance of Daughter-in-law

A Hindu widow is entitled to be maintained by her father-in-law provided the following circumstances exist:

(a) She has not remarried and is unable to maintain herself out of her own earnings or property; or

(b) She has not remarried, has no property of her own and she cannot obtain maintenance from the estate of her husband or her father or mother or from her son or daughter or their estate.

In either case, the obligation on the father-in-law is not enforceable if he does not have the means to maintain her from the joint property in his possession. If he has no coparcenery property, then a claim cannot lie against him. Of course, it is trite, that this provision cannot have force when a Hindu lady’s husband is alive, it is only a widow who can avail of this protection. Further, this right ceases when she remarries.

An interesting question would be whether this right would lie against her mother-in-law?

In Vimalben Ajitbhai Patel vs. Vatslaben Ashokbhai Patel, Appeal (Civil) 2003 / 2008 (SC), it was held that the property in the name of the mother-in-law can neither be a subject matter of attachment nor during the life time of the husband, his personal liability to maintain his wife can be directed to be enforced against such property.

Maintenance of Children and Parents

A Hindu male/female has an obligation to maintain his/her children and aged /infirm parents. Children can claim maintenance till they are minor. However, the Act also provides that the obligation to maintain parents or unmarried daughter extends if the parent/unmarried daughter is unable to maintain himself/herself from own earnings/other property. Hence, a conjoined reading of the different provisions of the Act would indicate that minority is relevant only for maintenance of sons but for daughters, the obligation continues till they are married whatever be her age – CGT vs. Bandi Subbarao, 167 ITR 66 (AP). However, it has been held in CGT vs. Smt. G. Indra Devi, 238 ITR 849 (Ker) that gifts to daughter after her marriage would not fall within the purview of maintenance.

Maintenance of Dependants

The Act has an interesting provision where it states that the heirs of a deceased Hindu (male or female) are bound to maintain the dependants of the deceased out of the estate inherited by them from the deceased. If a dependant has not obtained (under a Will or as intestate succession) any share in the estate of a deceased Hindu, then he is entitled to maintenance from those who take the estate. The liability of each of the persons who take the estate, shall be in proportion to the value of the estate’s share taken by him. The list of dependants is as follows:

(a) father

(b) mother

(d) son/son of predeceased son/son of predeceased grandson, till he is a minor

(e) unmarried daughter/unmarried daughter of pred-eceased son/unmarried daughter of predeceased grandson

(f) widowed daughter

(g) widow of son/widow of son of predeceased son

(h) illegitimate minor son

(i) illegitimate unmarried daughter.

For certain types of dependants, the claim for maintenance is subject to they not being able to obtain maintenance from certain other sources.

Maintenance under Domestic Violence Act

In addition to maintenance under Hindu Law, it also becomes essential to understand maintenance payable to a wife under the Protection of Women from Domestic Violence Act, 2005 (“the 2005 Act”). It is an Act to provide for more effective protection of the rights, guaranteed under the Constitution of India, of those women who are victims of violence of any kind occurring within the family. It provides that if any act of domestic violence has been committed against a woman, then such aggrieved woman can approach designated Protection Officers to protect her. An aggrieved woman under the 2005 Act is one who is, or has been, in a domestic relationship with an adult male and who alleges to have been subjected to any act of domestic violence by him. A domestic relationship means a relationship between two persons who live or have, at any point of time, lived together in a shared household, when they are related by marriage, or through a relationship in the nature of marriage or are family members living together as a joint family. A live-in relationship is also considered as a domestic relationship. In D. Velusamy vs. D. Patchaiammal, (2010) 10 SCC 469, it was held that in the 2005 Act, Parliament has taken notice of a new social phenomenon which has emerged in India, known as live-in relationships. According to the Court, a relationship in the nature of marriage was akin to a common law marriage.

Under this Act, the concept of a “shared household” is very important and means a household where the aggrieved lady lives or at any stage has lived in a domestic relationship with the accused male and includes a household which may belong to the joint family of which the respondent is a member, irrespective of whether the respondent or the aggrieved person has any right, title or interest in the shared household. Section 17 of the 2005 Act provides that notwithstanding anything contained in any other law, every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. Further, the Court can pass a relief order preventing her from being evicted from the shared household, against others entering / staying in it, against it being sold or alienated, etc. The Court can also pass a monetary reliefs order for maintenance of the aggrieved person and her children. This relief shall be adequate, fair and reasonable and consistent with her accustomed standard of living.

An interesting decision was rendered by the Bombay High Court in the case of Roma Rajesh Tiwari vs. Rajesh Tiwari, WP 10696/2017. This was a case of domestic violence in which the wife had alleged that she was driven out of her husband’s home, but she was willing to go back to that home. She filed a petition before the Family Court for allowing her to stay in her husband’s home. This petition was rejected as it was held that the flat exclusively belonged to her father-in-law and there was nothing to show that her husband had any interest or title in the property, hence, she had no right to claim any relief in respect of the property, which stood in the name of her husband’s father. On appeal, the Bombay High Court set aside the Family Court’s order and analysed the definition of the term shared household under the 2005 Act. It also analysed section 17 which stated that every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. It held that since the couple were living in the father-in-law’s flat, it became a shared household under the 2005 Act. It was irrelevant whether the husband had an interest in the same and title of the husband or that of the family members to the said flat was totally irrelevant. The question of title or proprietary right in the property was not at all of relevance. It held that the moment it was proved that the property was a shared household, as both of them had resided together there up to the date when the disputes arose, it followed that the wife got a right to reside therein and, therefore, to get the order of interim injunction, restraining her husband from dispossessing her, or, in any other manner, disturbing her possession from the said flat.

Contrast this decision of the Bombay High Court with that of the Delhi High Court in the case of Sachin vs. Jhabbu Lal, RSA 136/2016 (analysed in detail in this Feature in the BCAJ of January 2017). In that case, the Delhi High Court held that in respect of a self acquired house of the parents, a son and his wife had no legal right to live in that house and they could live in that house only at the mercy of the parents up to such time as the parents allow. Merely because the parents have allowed them to live in the house so long as his (son’s) relations with the parents were cordial, does not mean that the parents have to bear the son and his family’s burden throughout their life. A conclusion may be drawn that in cases of domestic violence, a wife can claim shelter even in her in-laws’ home, but in a normal case she and her husband cannot claim a right to stay in her in-laws’ home.

Conclusion

Right to claim maintenance has been provided to several persons under the Act. Codification of this important part of Hindu Law has resolved a great deal of ambiguities, but considering the complex nature of this Act dealing with personal law, it does have its fair share of controversies and litigations.

shailesh.kwebmaker

When Negligence/Lapses Become Knowing Frauds? Lesson From The Price Waterhouse Order

SEBI’s Order – whether and when mere
negligence amounts to connivance to fraud?

SEBI’s order in Price Waterhouse’s case (of
10^th January 2018) is a worrisome precedent not just for auditors,
but also for almost every person associated with securities markets including
independent directors and CFOs from whom certain standards of care are expected
in the discharge of their duties. The issues are :

1. When can a person be held
to have committed fraud?

2. Does not holding a person
guilty of fraud require a much higher and stricter benchmark of proving `mens
rea’ (i.e. guilty mind/wilful act) beyond reasonable doubt? SEBI has
held that in case of auditors, under certain circumstances proving `mens rea’
is not required.

Let us put this in a different way. What
would be the consequence to a person who has exercised less than `due care’
whilst performing his duties? The issue is : Would he be liable of negligence
or fraud? This is because the consequences for both would be different and they
can be more severe for fraud.

SEBI has effectively held that a series of
such negligent acts would amount to fraud under certain circumstances. This is
by applying a lower benchmark and test of ‘preponderance of probabilities’,
instead of proving mens rea beyond reasonable doubt.

The effect of this is far reaching. Take
another category, that is directors/independent directors. The Companies Act,
2013 and the SEBI LODR Regulations both provide for comprehensive duties of
directors. Will a director who performs his duties short of `due care’ be held
to have participated in `fraud’.

SEBI’s order is of course under challenge
and it could be some time before a final resolution as to whether the findings
in the order are upheld or reversed. However, considering that SEBI has relied
on relevant rulings of the Supreme Court and the Bombay High Court, it will be
necessary to examine the findings in the order and the reasoning for the
punishment. Needless to emphasise, for the purpose of this article, the
findings in the SEBI’s order are presumed to be true and the focus is on the
principles enunciated.

Brief background

While the Satyam case is widely known, SEBI
summarises some of its findings in the order. It is stated that a more than Rs.
5000 crore shown as cash/bank balances in balance sheet of Satyam was
non-existent and hence fraudulently stated. Similarly, the revenues and profits
too were overstated for several years, which resulted in over statement of
cash/bank balances. The question before SEBI was : whether the auditors were
aware of such falsification and connived with the management? or whether their
non-detection of such falsification was on account of being merely negligent?

Negligence vs. connivance

Why does it matter whether the role of the
auditors of Satyam (“the Auditors”) was of being merely negligent or whether
they had connived in such falsification? When SEBI initiated action against the
auditors, seeking to, inter alia, debar them from acting as auditors for
a specified period, the jurisdiction of SEBI to act against auditors was
challenged before the Bombay High Court. It was contended that only the
Institute of Chartered Accountants of India could act against auditors who are
chartered accountants, for not carrying out their duties in accordance with
professional standards, and not SEBI. However, the Bombay High Court rejected
this argument, but with a condition. It effectively held that if it was a mere
case of not adhering to prescribed professional standards while carrying out
the audit, SEBI may not have any jurisdiction. However, if it could be shown
that the auditors had knowingly participated or connived in the fraud, then
SEBI could have jurisdiction.

The Bombay High Court observed in Price
Waterhouse & Co. vs. SEBI ([2010] 103 SCL 96 (Bom.)), “If it is
unearthed during inquiry before SEBI that a particular Chartered Accountant in
connivance and in collusion with the Officers/Directors of the Company has
concocted false accounts, in our view, there is no reason as to why to protect
the interests of investors and regulate the securities market, such a person
cannot be prevented from dealing with the auditing of such a public listed Company.”

It further said, “In a given case, if
ultimately it is found that there was only some omission without any mens rea
or connivance with anyone in any manner, naturally on the basis of such
evidence the SEBI cannot give any further directions.” Thus, it is not
enough to show that the auditors had not followed the prescribed professional
standards but it is also necessary to establish that they had done this in
connivance with and in collusion with the management.

Supreme Court on “connivance” vs.
“negligence”

In SEBI vs. Kishore R. Ajmera ([2016] 66
taxmann.com 288 (SC)), the Supreme Court had examined this issue in context
of role of stock brokers vis-à-vis acts of their clients. Stock brokers
too have to follow certain norms and code of conduct. Stock brokers are of
course, unlike auditors, registered and regulated directly by SEBI. The
observations and conclusions of the Court on when negligence becomes connivance
are applicable in the present case too. The Court observed as follows (emphasis
supplied):

“Direct proof of
such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of
preponderance of probabilities so far as adjudication of civil liability
arising out of violation of the Act or the provisions of the Regulations framed
thereunder is concerned. Prosecution under Section 24 of the Act for violation
of the provisions of any of the Regulations, of course, has to be on the basis
of proof beyond reasonable doubt. ……Upto an
extent such conduct on the part of the brokers/sub-brokers can be attributed to
negligence occasioned by lack of due care and caution. Beyond the same,
persistent trading would show a deliberate intention to play the market.”

The Court thus laid down certain important
criteria. Firstly, it made a distinction between proceedings for adjudication
of civil liability and for prosecution. The present case, it may be
recollected, was not of prosecution. The Court said that the criteria here is
`preponderance of possibilities’. It also generally explained that to some extent,
a default can be attributed to negligence. But persistence of negligence will
show a deliberate intention to do so. This is the criteria SEBI applied in
SEBI’s Order.

How did SEBI hold the auditors to have acted
in connivance with management?

SEBI found that the Auditors had not carried
out the audit in accordance with the prescribed standards. The issue is : Does
this amount to mere negligence or does this amount to acting this in connivance
with the management? SEBI examined the audit process followed from time to time
and made the following pertinent observations and conclusions:

1. “There can be only two
reasons for such a casual approach to statutory audit – either complacency
or complicity.”

2. “I find that while the
Noticees have justified their acts by selectively quoting from various AAS, the
marked departures from the spelt-out Auditing standards and Guidance Notes are
too stark to ascribe the colossal lapses on the part of auditors to mere
negligence. It is inconceivable that the attitude of professional skepticism
was missing in the entire exercise spanning over 8 long years.”

3. ?”All these factors turn the needle of suspicion away from negligence
to one of acquiescence and complicity on the part of the auditors.”

4. “The preceding paragraphs
have unambiguously shown that there has been a total abdication by the auditors
of their duty to follow the minimum standards of diligence and care expected
from a statutory auditor, which compels me to draw an inference of malafide and
involvement on their part.

5. “The auditors were well
aware of the consequences of their omissions which would make such accumulated
and aggregated acts of gross negligence scale up to an act of commission of
fraud for the purposes of the SEBI Act and the SEBI (PFUTP) Regulations.”

Making the above observations, and recording
a finding of repetitive non-observance of certain professional auditing
standards, SEBI held that the acts/omissions were not merely negligence but
amounted to connivance in the commission of fraud. It thus issued directions of
debarment, disgorgement of fees, etc. against the Auditors.

Conclusion and relevance for other persons
associated with the securities markets

Though this is not the first case to be
dealt with in this manner, it is obvious, considering the detailed analysis and
the stakes involved, that those involved with listed companies are being
closely examined. Further, the principles now well settled will surely be
followed in future cases.

There are many persons – some registered
with SEBI and some not – who may need to take note of this. Any person who is
expected to observe some standards of behaviour whilst performing his duties in
relation to securities markets will have to take, if one may say, a little more
than `due care’.

Directors of companies, particularly
independent directors, are one such group of persons. The Companies Act, 2013
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
prescribe the role of the Board/directors/independent directors in great detail.
A director may not have actually participated in a fraud, but if he does not
perform his duty with diligence expected of a person of his
background/expertise and if this happens repeatedly, he may be subject to such
action by SEBI.

Registered intermediaries of various types
such as stock brokers, portfolio managers, investment advisors, etc. all
too would have cause for concern.

Compliance Officers and CFOs are yet another
category who have a prescribed role under various SEBI Regulations. Defaults by
them may make them subject to action by SEBI.

Needless to emphasise, much will also depend
on the facts of the case.

It needs to be reiterated for emphasis
that, for initiating prosecution, a higher standard of proving mens rea beyond
reasonable doubt is still required. However, the consequences of SEBI orders of
debarment/disgorgement by itself can be harsh enough in terms of loss of
livelihood, monetary loss and loss of reputation. _

shailesh.kwebmaker

Companies Act: Operation Delyening

Introduction

A bariatric surgeon is one who cuts away
layers of fat from an obese person in order to have a slimmer structure. The
Ministry of Corporate Affairs (“MCA”) has also donned the role of such a
surgeon by trimming away vertical layers of subsidiaries (or step-down
subsidiaries) in order to present a leaner and clearer corporate structure. Its
scalpel for this highly impactful operation was the Companies (Amendment
Act), 2017 to the Companies Act, 2013 (“the Act”) coupled with the
Rules issued under the Act. The Amendment Act has introduced several changes to
the Act but the one which had the most disruptive effect is in fact not a part
of the Amendment Act. Initially, the Amendment Bill had decided against
restricting vertical layers of subsidiaries but subsequently on account of the
action against shell firms and other similar events, the MCA decided to retain
the restriction in the Amendment Act. Thus, the Amendment Act does not amend
the existing position in the Companies Act, 2013 of restricting the number of
layers of vertical subsidiaries.

Amendment

The original definition of section 2(87) of the Act which defined the
term “subsidiary” provided that a subsidiary in relation to a
company, which was the holding company, meant one in which the holding company
controlled the composition of the board of directors or exercised or controlled
more than half the total share capital either on its own or together with its
subsidiaries. The definition as it stood had generated several problems since
even a passive investor, e.g., a private equity investor, who owned more than
50% of the total share capital but not 50% of the total voting power was
treated as the holding company of the investee company. This created unique
problems for several investors and investees alike.

This definition was amended by the Amendment
Act to replace total share capital with total voting power.
Hence, the Amendment restores the old position, i.e., in order to be treated as
a subsidiary, the holding company must control more than 50% of the total
voting power and not merely 50% of the total capital. Accordingly, all shares
not carrying voting rights, e.g., non-voting shares, preference shares, etc.,
would be ignored while determining whether there is a holding-subsidiary
relationship between 2 companies.

The proviso to this definition provides that
such classes of holding companies as may be prescribed by the MCA shall not
have more than the prescribed number of layers of subsidiaries. The Companies
(Amendment) Bill, 2016 sought to delete this proviso and permit holding
companies to have as many layers as they desired. However, when the Bill was
passed by the Lok Sabha this deletion was dropped, i.e., the original position
of restriction in number of layers of subsidiaries, was retained.

Rules

Pursuant to the proviso being retained, the
MCA notified the Companies (Restriction on Number of Layers) Rules,
2017 (“the Rules”) on 20^thSeptember 2017. The Rules
provide that on and from 20^th September 2017, a company cannot have
more than 2 layers of subsidiaries. A layer in relation to a holding company
has been defined to mean one or more subsidiaries. A layer thus, is a vertical
layer of a subsidiary. However, in computing the limit of 2 layers, 1 layer
comprising of one or more wholly owned subsidiaries is excluded. Thus, the
total number of layers which a company can have is 1 + 2 = 3, i.e., 1 layer of
wholly owned subsidiaries + 2 layers of other subsidiaries which may or may not
be wholly owned. For instance, HCo has 5 wholly owned subsidiaries – A to E.
All of these would constitute 1 layer which would be exempted. Each of these
wholly owned subsidiaries can now incorporate 2 vertical layers, e.g., A can
incorporate A1 and A1, in turn, can have A2. A1 and A2 would constitute 2
vertical layers in relation to HCo. However, A2 cannot incorporate A3 since
that would mean that HCo would violate the prescribed limits. It may be noted
that the restriction is on vertical layers and not horizontal subsidiaries.
Thus, in the above example, instead of 5 subsidiaries, A to E, HCo can have
many more direct subsidiaries (whether 100% or less), say, A to Z. However, the
number of step-down subsidiaries would be limited as per the Rules.

Section 2(87) provides that company includes
a body corporate and hence, the definition of subsidiary would even encompass a
foreign body corporate which is a subsidiary of the Indian holding company.
Also, a subsidiary in the form of a Limited Liability Partnership, being a body
corporate, would be covered.

Gateways

The Rules do not apply to the following
types of companies:

(a) a Bank

(b) a Systemically Important
Non-Banking Finance Company, i.e., NBFCs whose asset size is of Rs. 500 cr. or
more as per its last audited balance sheet.

(d) a Government Company

The Rules provide grandfathering to existing
layers of subsidiaries even if they are in excess of the limits prescribed by
the Rules. For availing of this protection, holding companies were required to
file a prescribed return with the Registrar of Companies latest by 17^thFebruary
2018. The protection further provided that after the commencement of the Rules,
such a holding company cannot have any additional layers over and above those
which have been grandfathered. Further, if the existing layers are reduced
after the commencement of the Rules, then it cannot have new layers over and
above the limit prescribed by the Rules. To give an illustration, HCo had 5
layers of subsidiaries prior to the enactment of the Rules. These layers would
be protected by the grandfathering provisions and can continue. However, HCo
cannot incorporate any fresh 6^th layer of subsidiary.If HCo were to
sell the shares of one of the subsidiaries and be left with 4 layers then it
cannot now incorporate any fresh layer of subsidiaries since that would again
violate the provisions of the Rules, but it can continue with the 4 layers
which have been grandfathered.

Another exemption provided by the Rules is
that the limit of 2 layers would not affect a company from acquiring a company
incorporated abroad which already has subsidiaries beyond 2 layers and these
are allowed under the laws of such foreign country. However, this exemption is not provided if such a
foreign company desires to subsequently set up multiple layers of foreign
subsidiaries. Thus, it would not be possible to have multiple foreign layers
even if the foreign laws were to permit them.

Impact Analysis

The Rules would severely impact the creation
of Special Purpose Vehicles (“SPVs”) which are very prevalent especially
in sectors such as, infrastructure, real estate, roads, etc. In these
sectors, it is a common practice to have multiple layers for different
projects. For instance, a real estate company may have 2 subsidiaries, one for
commercial projects and one for residential. Within each of them, there may be
holding companies for different regions, e.g., one for Mumbai, one for Delhi,
one for Chennai, etc. Under each regional holding company, there may be
an SPV for a specific project. The benefit of a layered structure is that it
facilitates value unlocking at multiple levels. A strategic investor/project
partner can invest at the SPV level. A financial investor who is interested
only in residential projects in Mumbai can invest at the Mumbai layer level
since he would then get access to all the projects in Mumbai. Similarly,
investors could invest at the residential level or even at the corporate level.Such
structuring would be constrained by the limit on the layers. Also, in a case
where the 1^st layer is not of wholly owned subsidiaries, the limit
would be of only 2 layers and not 1+2 =3.

Another area which would be affected is that
of outbound investment. It is quite common for Indian companies to have
multiple layers when investing abroad. For instance, an Indian company may have
an Intermediate Holding Company (IHC) in a tax haven, followed by a Regional
Holding Company (RHC) say, one in a European country for housing all European
ventures and another in an African country for all African ventures. Under the
RHC would be the countrywise SPVs. These layers would now also have to toe the line
laid down under the Rules. However, on a related note, the Reserve Bank of
India also does not easily approve of multi-layered structures for outbound
investments involving the use of multiple layers of foreign SPVs. Thus, the
Companies Act restrictions and the RBI’s views under the Foreign Exchange
Management Act are now similar.

Same Difference

A similar restriction already existed in
section186 (similar to section 372/372A of the Companies Act, 1956) of the Act.
According to this section, a company cannot make an investment through more
than two layers of investment companies. Thus, any company, desiring to make an
investment, can do so either directly or through an investment company or
through one investment company followed by a 2^nd layer of investment
company. However, it cannot have a 3^rdlayer of investment company
under the 2^nd layer of the investment company.

It may be noted that the prohibition is on
having more than 2 layers of investment companies and hence, we need to
ascertain what constitutes an investment company? The section
defines an ‘investment company’ to mean a company whose principal
business is acquisition of shares, debentures or securities.

Secondly, it must be a company whose principal
business is acquisition of securities. What is principal business has now
been defined by the Amendment Act. According to these tests, a principal
business is defined if it satisfies the following conditions as per its audited
accounts:

(i) Its assets in the form of
investment in shares, debentures or other securities constitute not less than
50% of its total assets; OR

(ii) Its income from investment
business constitutes not less than 50% of its gross income.

The Act expressly provides that the
restriction on two layers of investment companies even applies to an NBFC whose
principal business is acquisition of securities.

The investor company could be an investment
or an operating company, but it cannot route its investment via more than 2
layers of investment companies. If the investment is routed through an
operating company or one whose principal business is not acquisition of
securities, then the restriction u/s. 186 on 2 layers would not apply.

The prohibition on making investments only
through a maximum of two layers of investment companies will not affect the
following two cases:

(i) a company from acquiring any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country; or

(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

Certain
Government companies have also been exempted from this provision.

The Rules u/s. 2(87) provide that they are
not in derogation to the exemptions contained u/s. 186(1). Thus, the Rules
would apply equally to an investment company as long as they are not in
derogation of the proviso to section 186(1).

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

Details

Section 186

Section 2(87)

Restriction on

More than 2 layers of investment companies

More than 2 layers of subsidiaries

Applies to

All companies, including NBFCs but excluding certain
Government companies.

All companies other than banks, NBFCs, insurance companies,
Government companies.

Type of layers prohibited

Only investment companies – not applicable to operating
companies

All types of subsidiaries, whether operating or investment.

Companies or body corporates?

Only companies

All types of subsidiaries, whether companies or body
corporates.

Effective from

1^st April 2014

20th September 2017, the date from which the Rules were notified.

Conclusion

India Inc. is going to find it tough to
grapple with these provisions more so when it is used to having multiple
layers. The objective seems to be to cut through the opacity haze of multiple
layers and provide more transparency to the regulators to find out who is the
real investor. Clearly, thin is in!! _

shailesh.kwebmaker

Companies (Amendment) Act, 2017 – Important Amendments Which Have Relevance From Audit

In the first part, I have covered
definitions along with its impact and also reasons/ background for such
amendments. In this article, I propose to cover amendments which are of
importance and relevance from Audit of small and medium-sized companies and issues
one may face while carrying their audit. I have thus avoided matters applicable
to listed companies

I. Public deposits:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently, companies are required to deposit an amount of not less than 15% of the deposits maturing during the financial year and financial year next following which is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account. ( Section 73)	Companies Amendment Act 2017 (CAA 2017) now provides that an amount of not less than 20% of the deposits maturing during the following financial year is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.	Companies Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are self-explanatory which read as under : The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits. Currently Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that amount of deposit pursuant to these rules shall not fall below fifteen per cent. of the amount of deposits maturing, until the end of the current financial year and the next financial year. This provision in the case of larger deposit accepting companies required huge amount to be blocked in deposits since it required two financial years to be considered for maintenance of liquid assets . Thus amendment made now will help in reducing the financial burden of deposit accepting companies especially in the falling interest rate scenario.
Presently, companies accepting deposits are required to get the deposits insured.	This requirement is done away with.	CLC Observations in Para 5.2 of the report are self-explanatory which read as under : It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products. Considering the above situation, the provisions of Section 73(2) (d) along with relevant Rules are omitted.
Presently, companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits.( Section 73)	CAA 2017 provides that companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company has made good the default and a period of five years has elapsed since the date of making good the default.	Thus post-amendment, Company can accept deposits after 5 years from the date of making good such default (In repayment of deposit and/or interest). CLC Observations in Para 5.3 of the report are self-explanatory which read as under : The Committee noted that imposing a lifelong ban for a default anytime in the past would be harsh. Therefore, it was recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults. However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures.
Currently, deposits accepted and interest thereon, which remained unpaid at the commencement of Companies Act, 2013 was required to be paid within one year or before the expiry of the stipulated period, whichever was earlier. ( Section 74)	CAA 2017 now provides that such amounts shall be repaid within three years or before the expiry of the stipulated period, whichever was earlier.	Under Companies Act 2013, deposits are allowed to be accepted by only eligible companies and this has put lot of restrictions on the companies which had accepted deposits under Companies Act 1956 . To overcome the difficulties faced by such companies, repayment is now permitted up to 3 years or maturity , whichever is earlier.
Currently, Section 76A(1)(a) provides that in respect of contraventions of Section 73 or 76, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees;	CAA 2017 provides that a company will be punishable with a fine of one crore rupees or twice the amount of deposit accepted by the company, whichever is lower.	Normally, rules of Penalty require that Penalty be imposed with reference to the quantum of offence committed. Thus flat penalties provided under the current provisions were disproportionate to the offence committed and hence this amendment seeks to correlate penalty with the underlying deposit.
Currently, it is provided that an officer of the company who is in default shall be punishable with imprisonment or fine.	Now it is provided that an officer of the company who is in default shall be punishable with imprisonment and fine.	In the process, the offence has been made non-compoundable.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently,
companies are required to deposit an amount of not less than 15% of the
deposits maturing during the financial year and financial year next following
which is to be kept in a Scheduled Bank and called as Deposit Repayment
Reserve Account. ( Section 73)

Companies
Amendment Act 2017 (CAA 2017) now provides that an amount of not less than
20% of the deposits maturing during the following financial year is to be
kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.

Companies
Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are
self-explanatory which read as under :

The
Committee felt that though the provision was a safeguard for depositors, it
would increase the cost of borrowing for the company as well as lock-up a
high percentage of the borrowed sums. Accordingly, the requirement for the
amount to be deposited and kept in a scheduled bank in a financial year
should be changed to not less than twenty percent of the amount of deposits
maturing during that financial year, which would mitigate the difficulties of
companies, while continuing with reasonable safeguards for the depositors who
have to receive money on maturity of their deposits.

Currently
Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that
amount of deposit pursuant to these rules shall not fall below fifteen per
cent. of the amount of deposits maturing, until the end of the current
financial year and the next financial year.

This
provision in the case of larger deposit accepting companies required huge amount
to be blocked in deposits since it required two financial years to be
considered for maintenance of liquid assets . Thus amendment made now will
help in reducing the financial burden of deposit accepting companies
especially in the falling interest rate scenario.

Presently,
companies accepting deposits are required to get the deposits insured.

This
requirement is done away with.

CLC
Observations in Para 5.2 of the report are self-explanatory which read as
under :

It
was also noted by the Committee that as on date none of the insurance
companies is offering such insurance products.

Considering
the above situation, the provisions of Section 73(2) (d) along with relevant
Rules are omitted.

Presently,
companies accepting deposits are required to certify that the company has not
committed any default in the repayment of deposits accepted either before or
after the commencement of this Act or payment of interest on such deposits.(
Section 73)

CAA
2017 provides that companies accepting deposits are required to certify that
the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of
interest on such deposits and where a default had occurred, the company
has made good the default and a period of five years has elapsed since
the date of making good the default.

Thus
post-amendment, Company can accept deposits after 5 years from the date of
making good such default (In repayment of deposit and/or interest).

CLC
Observations in Para 5.3 of the report are self-explanatory which read as
under :

The
Committee noted that imposing a lifelong ban for a default anytime in the
past would be harsh. Therefore, it was recommended that the prohibition on
accepting further deposits should apply indefinitely only to a company that
had not rectified/made good earlier defaults.

However,
in case a company had made good an earlier default in the repayment of
deposits and the payment of interest due thereon, then it should be allowed
to accept further deposits after a period of five years from the date it
repaid the earlier defaulting amounts with full disclosures.

Currently,
deposits accepted and interest thereon, which remained unpaid at the commencement
of Companies Act, 2013 was required to be paid within one year or before the
expiry of the stipulated period, whichever was earlier. ( Section 74)

CAA
2017 now provides that such amounts shall be repaid within three years or
before the expiry of the stipulated period, whichever was earlier.

Under
Companies Act 2013, deposits are allowed to be accepted by only eligible
companies and this has put lot of restrictions on the companies which had
accepted deposits under Companies Act 1956 .

To
overcome the difficulties faced by such companies, repayment is now permitted
up to 3 years or maturity , whichever is earlier.

Currently,
Section 76A(1)(a) provides that in respect of contraventions of Section 73 or
76, the company shall, in addition to the payment of the amount of deposit or
part thereof and the interest due, be punishable with fine which shall not be
less than one crore rupees but which may extend to ten crore rupees;

CAA
2017 provides that a company will be punishable with a fine of one crore
rupees or twice the amount of deposit accepted by the company, whichever is
lower.

Normally,
rules of Penalty require that Penalty be imposed with reference to the
quantum of offence committed. Thus flat penalties provided under the current
provisions were disproportionate to the offence committed and hence this
amendment seeks to correlate penalty with the underlying deposit.

Currently,
it is provided that an officer of the company who is in default shall be
punishable with imprisonment or fine.

Now
it is provided that an officer of the company who is in default shall be
punishable with imprisonment and fine.

In
the process, the offence has been made non-compoundable.

II. Registration and
Satisfaction of Charges:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Currently,
the charge holder can register the charge only in case the company fails to
do so within the period specified in section 77, which is 300 days.

CAA
2017 now provides that the person in whose favor the charge has been created
can file the charge on the expiry of 30 days from the creation of charge
where a company (borrower) fails to file such charge

This
amendment is welcome from the point of view of the lender.

Primary
obligation for registration was with the borrower u/s 77 which allowed
creation of charge up to 300 days on payment of additional fees. After such
period, application for condonation was required to be done by the company or
any other person interested in such charge. It was felt that the wordings of
the present section required a waiting period up to 300 days for creation of
charge by the lender. But in the process the charge remained to be registered
and as such loan under the charge remained unsecured. This anomaly is sought
to be removed by this amendment.

A
company was required to report satisfaction of charge within a period of 30
days from the date of such satisfaction failing which an application for
condonation of delay had to be made before the Regional Director.( Section
82)

The
company can now report satisfaction of charge within a period of 300 days.

This
amendment now brings reporting period of satisfaction in line with creation
of charge and as such a welcome measure.

III. Annual Returns to be filed by the Companies:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Section
92(1) Every company shall prepare a return (hereinafter referred to as the
annual return) in the prescribed form containing the particulars as they
stood on the close of the financial year regarding—

(j)details,
as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by them;

Provided
that in relation to One Person Company and small company, the annual return
shall be signed by the company secretary, or where there is no company
secretary, by the director of the company.

Section
92(1):

(a)
clause (c) shall be omitted;

(b)
in clause (j), the words “indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by
them” shall be omitted;

“Provided
further that the Central Government may prescribe abridged form of annual
return for One Person Company, small Company and such other class or classes
of companies as may be prescribed”;

The
details related to disclosing indebtedness and details with respect to
name, address, country of incorporation etc. of FII in the annual return of
the company are also omitted.

It
is further provided that the Central Government may prescribe the abridged
form of annual return for One Person Company (‘OPC’), Small Company and such
other class or classes of companies as may be prescribed.

This
amendment thus seeks to achieve an objective of avoiding duplication of
information.

Further
proviso when implemented will achieve simplicity in the case of companies
proposed to be covered in the proviso.

Section
92(3)

An
extract of the annual return in such form as may be prescribed shall form
part of the Board‘s report.

Section
92(3)

Every company shall place a copy of the
annual return on the website of the company if any, and the web-link of such
annual return shall be disclosed in the Board’s report.”

CAA
2017 has omitted the requirement of MGT-9 i.e. extract of annual return to
form part of the Board’s Report. The copy of annual return shall now be
uploaded on the website of the company if any, and its link shall be
disclosed in the Board’s report.

This
amendment was largely guided by the fact that report of the Board of Directors
was becoming very much lengthier and expensive especially for the listed
companies.

Time
limit of 270 days within which annual return could be filed on payment of the
additional fee has been done away with. It is further provided that a company
can file the annual return with ROC at any time on payment of a prescribed
additional fee.

All
the measures proposed hereinabove are expected to simplify Annual Return
filing process and avoid duplication of information.

;

IV. Dividend:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently dividend can be paid u/s 123(1) from : Current Year Profits or Accumulated Profits or from a and b above or From money provided by Central or State Governments pursuant to a guarantee given	A proviso is added as under : “Provided that in computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded; Reserves are clarified as “free reserves” so as to bring clarity as to the source of the dividend.	Consequent upon Ind AS Applicability to Phase I and Phase II companies, this amendment is clarificatory and a welcome measure. This has become essential since one of the sources for payment of dividend is free reserves and definition of free reserves under Section 2 (43) excludes unrealised or notional gains and l credits to such reserves on account of measurement of assets and liabilities at fair value. Thus primary source of reserves being profits are also sought to be brought in line with definition of free reserves for the purpose of determination of distributable profits.
Section 123 (3)The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the	Section 123 (3) The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:	Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. The dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting
average dividends declared by the company during the immediately preceding three financial years.	Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.”	(which is called ‘interim dividend’). [Source: Monograph on Dividend by ICSI ] Thus it is now clarified that Interim dividend will not only mean dividend paid during the financial year but also dividend declared from the closure of financial year till holding of an AGM.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently
dividend can be paid u/s 123(1) from :

Current
Year Profits or

Accumulated
Profits or

from
a and b above or

From
money provided by Central or State Governments pursuant to a guarantee given

A
proviso is added as under :

“Provided
that in computing profits any amount representing unrealized gains, notional
gains or revaluation of assets and any changes in carrying amount of an asset
or of a liability on measurement of the asset or the liability at fair value
shall be excluded;

Reserves
are clarified as “free reserves” so
as to bring clarity as to the source of the dividend.

Consequent
upon Ind AS Applicability to Phase I and Phase II companies, this amendment
is clarificatory and a welcome measure.

This
has become essential since one of the sources for payment of dividend is free
reserves and definition of free reserves under Section 2 (43) excludes
unrealised or notional gains and l credits to such reserves on account of
measurement of assets and liabilities at fair value. Thus primary source of
reserves being profits are also sought to be brought in line with definition
of free reserves for the purpose of determination of distributable
profits.

Section
123 (3)The Board of Directors of a company may declare interim dividend
during any financial year out of the surplus in the profit and loss account
and out of profits of the financial year in which such interim dividend is
sought to be declared:

Provided
that in case the company has incurred a loss during the current financial
year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared
at a rate higher than the

Section
123 (3) The Board of Directors of a company may declare interim dividend
during any financial year or at any time during the period from closure of
financial year till holding of the annual general meeting out of the surplus
in the profit and loss account or out of profits of the financial year for
which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of
declaration of the interim dividend:

Dividends
are usually payable for a financial year after the final accounts are ready
and the amount of distributable profits is available. The dividend for a
financial year of the company (which is called ‘final dividend’) is payable
only if it is declared by the company at its annual general meeting on the
recommendation of the Board of directors. Sometimes dividends are also paid
by the Board of directors between two annual general meetings without
declaring them at an annual general meeting

average
dividends declared by the company during the immediately preceding three
financial years.

(which is called ‘interim dividend’).

[Source:
Monograph on Dividend by ICSI ]

Thus
it is now clarified that Interim dividend will not only mean dividend paid during
the financial year but also dividend declared from the closure of financial
year till holding of an AGM.

V. Financial Statements:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 129(3)- ‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	Revised Section 129(3)- “Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	As regards consolidation of accounts, main concern related to the inclusion of associate companies in absence of the specific provisions. This concern now is addressed and consolidation will have to be done even if there is no subsidiary. The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards which is now specifically provided in the section itself.

Explanation.—For the purposes of this subsection, the word ?subsidiary? shall include associate company and joint venture.	This explanation stands deleted after the amendment	This amendment is consequential to the changes mentioned hereinabove.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
129(3)-

‘Where
a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub-section (2), prepare a consolidated financial
statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the annual general
meeting of the company along with the laying of its financial statement under
sub-section (2):

Revised
Section 129(3)-

“Where
a company has one or more subsidiaries or associate companies, it shall, in
addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries
and associate companies in the same form and manner as that of its own and in
accordance with applicable accounting standards, which shall also be laid
before the annual general meeting of the company along with the laying of its
financial statement under sub-section (2):

As
regards consolidation of accounts, main concern related to the inclusion of
associate companies in absence of the specific provisions. This concern now
is addressed and consolidation will have to be done even if there is no
subsidiary.

The
consolidated financial statement of the company, its subsidiaries and
associates should be in accordance with the applicable accounting standards
which is now specifically provided in the section itself.

Explanation.—For the purposes of this
subsection, the word ?subsidiary?
shall include associate company and joint venture.

This
explanation stands deleted after the amendment

This
amendment is consequential to the changes mentioned hereinabove.

VI. Reopening of Accounts:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Existing Sec 130 of the Act provides that reopening can be done on the basis of an order from court or tribunal. The said section provides that court or tribunal will give a notice to various regulatory authorities and will take into consideration representations made by such regulatory authorities. However, the said section did not provide for an opportunity of representing to any other concerned party.	CAA, 2017 has now amended the said section to give an opportunity to other persons concerned of making a representation before an order is passed by the tribunal or court.	Presently in the case of reopening, notice was required to be given to various regulatory authorities and court or tribunal is required to take into consideration representations of such regulatory authorities . Surprisingly it did not provide for representation to persons concerned such as auditors even though court/ tribunal had an inherent power to give notice to any other interested parties. This amendment will remove this anomaly since it is now provided in the section itself.

Existing section did not provide the time limit up to which reopening could be done	CAA, 2017 now provides that reopening cannot be done for a period earlier than 8 financial years immediately preceding the current financial year unless Central Government has given a direction under Section 128(5) for maintaining the accounts for a longer period.	Section 128(5) provides for the period for which books are required to be maintained which cannot go beyond 8 financial years immediately preceding current financial year except with the permission of the Central Government. Thus the amendment seeks to align the period of maintenance of books of accounts with the reopening.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Existing
Sec 130 of the Act provides that reopening can be done on the basis of an
order from court or tribunal. The said section provides that court or
tribunal will give a notice to various regulatory authorities and will take
into consideration representations made by such regulatory authorities. However,
the said section did not provide for an opportunity of representing to any
other concerned party.

CAA,
2017 has now amended the said section to give an opportunity to other persons
concerned of making a representation before an order is passed by the
tribunal or court.

Presently
in the case of reopening, notice was required to be given to various
regulatory authorities and court or tribunal is required to take into
consideration representations of such regulatory authorities . Surprisingly
it did not provide for representation to persons concerned such as auditors
even though court/ tribunal had an inherent power to give notice to any other
interested parties. This amendment
will remove this anomaly since it is now provided in the section itself.

Existing
section did not provide the time limit up to which reopening could be done

CAA,
2017 now provides that reopening cannot be done for a period earlier than 8
financial years immediately preceding the current financial year unless
Central Government has given a direction under Section 128(5) for maintaining
the accounts for a longer period.

Section
128(5) provides for the period for which books are required to be maintained
which cannot go beyond 8 financial years immediately preceding current
financial year except with the permission of the Central Government.

Thus
the amendment seeks to align the period of maintenance of books of accounts
with the reopening.

VII. Financial Statements, Board’s report etc.:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.( Section 134)	The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon .	The amendment provides that the Chief Executive Officer shall sign the financial statements irrespective of the fact whether he is a director or not because Chief Executive Officer is a Key Managerial Personnel, and is responsible for the overall management of the company. Further, since the appointment of a managing director is not mandatory for all companies, it is proposed to insert the words “if any”, after the words “managing director”.

Presently extract of Annual Return is required to be annexed to the Board’s Report. ( Section 134)	Now annual return is to be placed on the website and web address is required to be mentioned in the Board’s report.	The Requirement of having an extract of Annual return (Form MGT-9) has been done away with by placing the copy of annual return on the website of the company (if any) and the web address/ link is to be provided. As mentioned in the Annual Return part above, this seeks to avoid duplication and voluminous information which was associated with report of the Board of Directors.

Right of member to copies of audited financial statement [ Section 136(1) ] A copy of the financial statements, including consolidated financial statements, if any, auditor‘s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than 21 days before the date of the meeting:	A provision is now made for a situation where the required copies are sent less than 21 days before the date of the meeting. Accordingly, If the copies of the documents are sent less than 21 days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members— (a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or (b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the meeting:	Amendment to sub-section (1) of section 136 provides that copies of audited financial statements and other documents may be sent at shorter notice if ninety-five percent of members entitled to vote at the meeting agree for the same. Section 101 of the Act provides that the consent of members holding at least ninety-five percent of the voting power be obtained to call a general meeting at a notice shorter than twenty-one days. For circulation of annual accounts to members, the MCA had clarified by way of a circular dated 21^stJuly 2015 that the shorter notice period would also apply to the circulation of annual accounts. It is now provided in the Amendment Bill itself.

Appointment and Ratification: It was provided that every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. It was further required that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.( Section 139)	The requirement to place the matter relating to such appointment for ratification by members at every annual general meeting has been removed.	In view of this amendment, controversy as to whether the form is required to be filed with ROC after every ratification stands resolved. Besides, inconsistency between removal (which required Special Resolution and Central Government Approval) and non ratification (which required only Board Approval) stands resolved.

Resignation of auditor: The penalty for non-filing of the return of resignation with the Registrar made the auditor punishable with fine, not less than fifty thousand rupees but which may extend to five lakh rupees.( Section 140)	The penalty for non-filing of the return of resignation with the Registrar shall now make the auditor punishable with fine not be less than fifty thousand rupees or the remuneration of the auditor, whichever is less.	This form filing requirement was to be complied by the Auditor who was resigning. (Form ADT 3).

Eligibility : Presently, it was provided in Section 141(3)(i) as under: The following persons shall not be eligible for appointment as an auditor of a company, namely:- (i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.	In section 141 of the principal Act, in sub-section (3), for clause (i), the following clause shall be substituted namely:- (i) a person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding company or its subsidiary company. Explanation.—For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it in the Explanation to section 144.‘	Existing provisions were not very happily worded and gave an impression that Auditor could not provide services referred to in Section 144 to any other company. Amendment now made makes it clear that such services are not to be provided to auditee company or its holding or subsidiary company.
Access to the records : Presently the proviso to Section 143(1) reads as under : Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.	(i) in sub-section (1), in the proviso, for the words “its subsidiaries”, at both the places, the words “its subsidiaries and associate companies” shall be substituted;	The change now made will enable auditors of the holding company to have right to access records of associate companies. As associate includes, Joint Venture (JV), access will now be available to the records of JVs also.
Internal Financial Controls: Presently as per the provisions of Section 143(3)(i) auditor is required to report : whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.	Amendment provides as under: in sub-section (3), in clause (i) for the words “internal financial controls system”, the words “internal financial controls with reference to financial statements” shall be substituted;	This amendment is in pursuance of the suggestion of Companies Law Committee in Para 10.11which are worth noting: Section 143 (3) (i) requires the auditor to state in his report whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. This has to be read with Section 134 (5) (e) on the Directors’ Responsibility Statement which also defines internal financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that auditing internal financial control systems by auditors would be an onerous responsibility. It was also expressed that their responsibility should be limited to the auditing of the systems with respect to financial statements only and that this cannot be compared with the responsibility of directors which is wider and can be discharged as they have other resources like internal auditors, etc. who can be used for this purpose. In this regard, the Committee recommended that the reporting obligations of auditors should be with reference to the financial statements. Thus this amendment is now brought in line with the Guidance Note issued by ICAI.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board at least by the chairperson of the company where he is
authorised by the Board or by two directors out of which one shall be
managing director and the Chief Executive Officer, if he is a director in the
company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of a One Person Company,
only by one director, for submission to the auditor for his report thereon.(
Section 134)

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director, if
any, and the Chief Executive Officer, the Chief Financial Officer and the
company secretary of the company, wherever they are appointed, or in the case
of One Person Company, only by one director, for submission to the auditor
for his report thereon .

The
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of the fact whether he is a director or not because
Chief Executive Officer is a Key Managerial Personnel, and is responsible for
the overall management of the company. Further, since the appointment of a
managing director is not mandatory for all companies, it is proposed to
insert the words “if any”, after the words “managing director”.

Presently
extract of Annual Return is required to be annexed to the Board’s Report. (
Section 134)

Now
annual return is to be placed on the website and web address is required to
be mentioned in the Board’s report.

The
Requirement of having an extract of Annual return (Form MGT-9) has been done
away with by placing the copy of annual return on the website of the company
(if any) and the web address/ link is to be provided. As mentioned in the
Annual Return part above, this seeks to avoid duplication and voluminous
information which was associated with report of the Board of Directors.

Right
of member to copies of audited financial statement [ Section 136(1) ]

A
copy of the financial statements, including consolidated financial
statements, if any, auditor‘s report and every other document required by law
to be annexed or attached to the financial statements, which are to be laid
before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued
by the company, and to all persons other than such member or trustee, being
the person so entitled, not less than 21 days before the date of the meeting:

A
provision is now made for a situation where the required copies are sent less
than 21 days before the date of the meeting. Accordingly, If the copies of
the documents are sent less than 21 days before the date of the meeting, they
shall, notwithstanding that fact, be deemed to have been duly sent if it is
so agreed by members—

(a)
holding, if the company has a share capital, majority in number entitled to
vote and who represent not less than 95% of such part of the paid-up share
capital of the company as gives a right to vote at the meeting; or

(b)
having, if the company has no share capital, not less than 95% of the total
voting power exercisable at the meeting:

Amendment
to sub-section (1) of section 136 provides that copies of audited financial
statements and other documents may be sent at shorter notice if ninety-five
percent of members entitled to vote at the meeting agree for the same.

Section
101 of the Act provides that the consent of members holding at least
ninety-five percent of the voting power be obtained to call a general meeting
at a notice shorter than twenty-one days.

For
circulation of annual accounts to members, the MCA had clarified by way of a
circular dated 21^stJuly 2015 that the shorter notice period would
also apply to the circulation of annual accounts. It is now provided in the
Amendment Bill itself.

Appointment
and Ratification:

It
was provided that every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.

It
was further required that the company shall place the matter relating to such
appointment for ratification by members at

every
annual general meeting.( Section 139)

The
requirement to place the matter

relating
to such appointment for

ratification
by members at every annual general meeting has been removed.

In
view of this amendment, controversy as to whether the form is required to be
filed with ROC after every ratification stands resolved.

Besides,
inconsistency between removal (which required Special Resolution and Central
Government Approval) and non ratification (which required only Board
Approval) stands resolved.

Resignation
of auditor:

The
penalty for non-filing of the return of resignation with the Registrar made
the auditor punishable with fine, not less than fifty thousand rupees but
which may extend to five lakh rupees.( Section 140)

The
penalty for non-filing of the return of resignation with the Registrar shall
now make the auditor punishable with fine not be less than fifty thousand
rupees or the remuneration of the auditor,

whichever
is less.

This
form filing requirement was to be complied by the Auditor who was resigning.
(Form ADT 3).

Eligibility
:

Presently,
it was provided in Section 141(3)(i) as under: The following persons shall
not be eligible for appointment as an auditor of a company, namely:-

(i)
any person whose subsidiary or associate company or any other form of entity,
is engaged as on the date of appointment in consulting and specialised
services as provided in section 144.

In
section 141 of the principal Act, in sub-section (3), for clause (i), the
following clause shall be substituted namely:-

(i)
a person who, directly or indirectly, renders any service referred to in
Section 144 to the company or its holding company or its subsidiary company.

Explanation.—For
the purposes of this clause, the term “directly or indirectly”
shall have the meaning assigned to it in the Explanation to section 144.‘

Existing
provisions were not very happily worded and gave an impression that Auditor
could not provide services referred to in Section 144 to any other company.

Amendment
now made makes it clear that such services are not to be provided to auditee
company or its holding or subsidiary company.

Access
to the records :

Presently
the proviso to Section 143(1) reads as under :

Provided
that the auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates
to the consolidation of its financial statements with that of its
subsidiaries.

(i)
in sub-section (1), in the proviso, for the words “its
subsidiaries”, at both the places, the words “its subsidiaries and
associate companies” shall be substituted;

The
change now made will enable auditors of the holding company to have right to access records of
associate companies.

As
associate includes, Joint Venture (JV), access will now be available to the
records of JVs also.

Internal
Financial Controls:

Presently
as per the provisions of Section 143(3)(i) auditor is required to report :

whether
the company has adequate internal financial controls system in place and the
operating effectiveness of such controls.

Amendment
provides as under:

in
sub-section (3), in clause (i) for the words “internal financial
controls system”, the words “internal financial controls with
reference to financial statements” shall be substituted;

This
amendment is in pursuance of the suggestion of Companies Law Committee in
Para 10.11which are worth noting:

Section
143 (3) (i) requires the auditor to state in his report whether the company
has adequate internal financial controls system in place and the operating
effectiveness of such controls. This has to be read with Section 134 (5) (e)
on the Directors’ Responsibility Statement which also defines internal
financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014.
Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the
requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory
from FY 15-16 onwards. It has been expressed that auditing internal financial
control systems by auditors would be an onerous responsibility. It was also
expressed that their responsibility should be limited to the auditing of the
systems with respect to financial statements only and that this cannot be
compared with the responsibility of directors which is wider and can be
discharged as they have other resources like internal auditors, etc. who can
be used for this purpose. In this regard, the Committee recommended that the
reporting obligations of auditors should be with reference to the financial
statements.

Thus
this amendment is now brought in line with the Guidance Note issued by
ICAI.

VIII: Corporate Social Responsibility (CSR) (Section 135):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Applicability : Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an Independent Director.	In section 135 of the principal Act,— in sub-section (1) – (a) for the words “any financial year”, the words “the immediately preceding financial year” shall be substituted; (b) the following proviso shall be inserted, namely:— “Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”;	Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. Currently this eligibility is decided based on preceding three financial years. In case of a company which is not required to appoint an Independent Director and such company is required to appoint CSR Committee, such committee can be constituted with two or more directors.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Applicability
:

Every
company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or
more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors,
out of which at least one director shall be an Independent Director.

In
section 135 of the principal Act,—

in
sub-section (1) –

(a)
for the words “any financial year”, the words “the immediately
preceding financial year” shall be substituted;

(b)
the following proviso shall be inserted, namely:—

“Provided
that where a company is not required to appoint an independent director under
sub-section (4) of section 149, it shall have in its Corporate Social
Responsibility Committee two or more directors.”;

Eligibility
criteria for the purpose of constituting the corporate social responsibility
committee and incurring expenditure towards CSR is proposed to be calculated
based on immediately preceding financial year. Currently this eligibility is
decided based on preceding three financial years.

In
case of a company which is not required to appoint an Independent Director
and such company is required to appoint CSR Committee, such committee can be
constituted with two or more directors.

IX: Remuneration of Managerial Persons (Section 197):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Remuneration of Managerial Personnel ( Section 197)
First Proviso to Subsection 1 allowed the company in general meeting ( with the approval of the Central Government) to authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to provisions of Schedule V.	The requirement of taking approval from Central Government has been done away with.	CLC has observed in Para 13.5 of the report as under : Currently, the law in countries like the US, the UK and Switzerland, does not require the company to approach government authorities for approving remuneration payable to their managerial personnel, even in a scenario where they have losses or inadequate profits and empowers the Board of the companies to decide the remuneration payable to Directors. Further, the Committee also recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead. Keeping in line this philosophy, Approval of Central Government is dispensed with and Special Resolution is replaced in the place.
Second Proviso allowed companies to pass ordinary resolution in general meeting and prescribe remuneration in excess of limits specified therein.	The second proviso has been amended by replacing ordinary resolution by special resolution	This amendment is consequential.
	Additionally a third proviso has been inserted which provides that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 3 : Provided that in case a company had no profits or its profits were inadequate, the company could not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5) except in accordance with the provisions of Schedule V and if it was not able to comply with such provisions, with the previous approval of the Central Government.	the words “and if it is not able to comply with such provisions, with the previous approval of the Central Government” shall be omitted.	This amendment is consequential.
Sub Section 9: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.	Sub Section 9 is amended as under: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.”;	Period of Recovery in the event of excess remuneration now stands extended to 2 years subject to passing of Special Resolution. Existing section did not provide for any time limit within which such excess remuneration paid was to be recovered.
Sub Section 10: The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government	Sub Section 10 The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable	Presently, act did not provide time limit within which refund of excess remuneration was to be made. This amendment is consequential to the amendment made in the previous clause.
	Proviso inserted : Provided that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining approval of such waiver.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 11: In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company‘s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.	Sub Section 11: the words “and if such conditions are not being complied, the approval of the Central Government had been obtained” shall be omitted;	Thus in such cases, special resolution of the company in general meeting will suffice. The theme of the law makers now seems to be shifting to the self regulation rather than government approvals.
	Sub Section 16: The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed.	Presently clause xi of CARO 2015 has mandated for this reporting which is now brought under the provisions of the act. This will possibly lead to duplication of reporting unless MCA clarifies the position .
	Sub Section 17: On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section [as it stood before such commencement], which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended.”	This provision is enabling provision which deals with approvals pending as on the date of the commencement of new section. This also shows lesser indulgence of the government in the approval process.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Remuneration
of Managerial Personnel ( Section 197)

First
Proviso to Subsection 1 allowed the
company in general meeting ( with the approval of the Central Government) to
authorise the payment of remuneration exceeding 11% of the net profits of the
company, subject to provisions of Schedule V.

The
requirement of taking approval from Central Government has been done away
with.

CLC
has observed in Para 13.5 of the report as under :

Currently,
the law in countries like the US, the UK and Switzerland, does not require
the company to approach government authorities for approving remuneration
payable to their managerial personnel, even in a scenario where they have
losses or inadequate profits and empowers the Board of the companies to
decide the remuneration payable to Directors.

Further,
the Committee also recommended that the requirement for government approval
may be omitted altogether, and necessary safeguards in the form of additional
disclosures, audit, higher penalties, etc. may be prescribed instead.

Keeping
in line this philosophy, Approval of Central Government is dispensed with and
Special Resolution is replaced in the place.

Second
Proviso allowed companies to pass
ordinary resolution in general meeting and prescribe remuneration in excess
of limits specified therein.

The
second proviso has been amended by replacing ordinary resolution by special
resolution

This
amendment is consequential.

Additionally
a third proviso has been inserted which provides that, where the company has defaulted in
payment of dues to any bank or public financial institution or non-convertible
debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible
debenture holders or other secured creditor, as the case may be, shall be
obtained by the company before obtaining the approval in the general meeting.

Equity
demands that parties affected by any decision should be consulted prior to
taking of such decisions. Although most lenders have such clauses as a part
of their agreement, legal compulsion was lacking which is now provided for in
the section itself.

Sub
Section 3 :

Provided
that in case a company had no profits or its profits were inadequate, the
company could not pay to its directors, including any managing or whole-time

director
or manager, by way of remuneration any sum exclusive of any fees payable to
directors under sub-section (5) except in accordance with the provisions of
Schedule V and if it was not able to comply with such provisions, with the
previous approval of the Central Government.

the
words “and if it is not able to comply with such provisions, with the
previous approval of the Central Government” shall be omitted.

This
amendment is consequential.

Sub
Section 9:

If
any director draws or receives, directly or indirectly, by way of
remuneration any such sums in excess of the limit prescribed by this section
or without the prior sanction of the Central Government, where it is
required, he shall refund such sums to the company and until such sum
is refunded, hold it in trust for the company.

Sub
Section 9 is amended as under:

If
any director draws or receives, directly or indirectly, by way of

remuneration
any such sums in excess of the limit prescribed by this section or without approval
required under this section, he shall refund such sums to the

company,
within two years or such lesser period as may be allowed by the company,
and until such sum is refunded, hold it in trust for the company.”;

Period
of Recovery in the event of excess remuneration now stands extended to 2 years
subject to passing of Special Resolution. Existing section did not provide
for any time limit within which such excess remuneration paid was to be
recovered.

Sub
Section 10:

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless permitted by the Central Government

Sub
Section 10

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless approved by the company by special resolution within
two years from the date the sum becomes refundable

Presently,
act did not provide time limit within which refund of excess remuneration was
to be made. This amendment is consequential to the amendment made in the
previous clause.

Proviso
inserted :

Provided
that where the company has defaulted in payment of dues to any bank or public
financial institution or non-convertible debenture holders or any other
secured creditor, the prior approval of the bank or public financial
institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining approval of such waiver.

Sub
Section 11:

In
cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which
purports to increase or has the effect of increasing the amount thereof,
whether the provision be contained in the company‘s memorandum or articles,
or in an agreement entered into by it, or in any resolution passed by the
company in general meeting or its Board, shall not have any effect unless
such increase is in accordance with the conditions specified in that Schedule
and if such conditions are not being complied, the approval of the Central
Government had been obtained.

Sub
Section 11:

the
words “and
if such conditions are not being complied, the approval of the Central
Government had been obtained” shall be omitted;

Thus
in such cases, special resolution of the company in general meeting will
suffice. The theme of the law makers now seems to be shifting to the self
regulation rather than government approvals.

Sub
Section 16:

The
auditor of the company shall, in his report under section 143, make a
statement as to whether the remuneration paid by the company to its directors
is in accordance with the provisions of this section, whether remuneration
paid to any director is in excess of the limit laid down under this

section
and give such other details as may be prescribed.

Presently
clause xi of CARO 2015 has mandated for this reporting which is now
brought under the provisions of the act.
This will possibly lead to duplication of reporting unless MCA
clarifies the position .

Sub
Section 17:

On
and from the commencement of the Companies (Amendment) Act, 2017, any
application made to the Central Government under the provisions of this
section [as it stood before such commencement], which is pending with that
Government shall abate, and the company shall, within one year of such
commencement, obtain the approval in accordance with the provisions of this
section, as so amended.”

This
provision is enabling provision which deals with approvals pending as on the
date of the commencement of new section. This also shows lesser indulgence of the government in the
approval process.

X: Calculation of Profits (Section 198):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 198 : Calculation of profits.		Section 198 : Calculation of profits.
(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company;	(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company unless the company is an investment company as referred to in clause (a) of the Explanation to section 186	CLC in Para 13.9 observed as under: Section 198(4) requires that while calculating profits for managerial remuneration, the profits on sale of investments be deducted. The Committee agreed to the argument that Investment Companies, whose principal business was sale and purchase of investments, would not be using the correct profit figures, and may need to comply with the requirements of Schedule V to pay remuneration to its managerial personnel. It was recommended, that specific provisions for such companies be incorporated in the Act.
	3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— “(f) any amount representing unrealised gains, notional gains or revaluation of assets.”;	This clause is newly added consequent upon Ind AS applicability to the companies. In Para 13.7 of its report, CLC observed as under: The Committee examined Section 198 as to whether it has outlived its utility in current times where the Accounting Standards prescribe a robust framework for the determination of yearly profit or loss for the company, and the possibility of using the net profit before tax as presented in the financial statements, for basing the determination of managerial remuneration. Alternative formulations were considered, but found to be more complex, and further the present formulation is well accepted. Therefore, no change, other than on account of requirement of Ind AS, was recommended. This amendment is consistent with the amendment related to distributable profits for the purposes of dividends discussed above under Dividends.
(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained; ( Portion marked in bold is omitted after amendment)	(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;	CLC in Para 13.8 has observed as under : Section 198(4)(l) mandates the deduction of ‘brought forward losses’ of the company while calculating the net profit, for the purpose of computing managerial remuneration in the subsequent years. However, the clause did not provide for the deduction of brought forward losses of the years prior to the commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended Section 198(4)(l), to include brought forward losses of the years subsequent to the enactment of the Companies (Amendment) Act, 1960 and inadvertent omission existing is corrected .

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
198 : Calculation of profits.

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company;

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company unless the company is an investment company as
referred to in clause (a) of the Explanation to section 186

CLC
in Para 13.9 observed as under:

Section
198(4) requires that while calculating profits for managerial remuneration,
the profits on sale of investments be deducted. The Committee agreed to the
argument that Investment Companies, whose principal business was sale and
purchase of investments, would not be using the correct profit figures, and
may need to comply with the requirements of Schedule V to pay remuneration to
its managerial personnel. It was recommended, that specific provisions for
such companies be incorporated in the Act.

3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

“(f)
any amount representing unrealised gains, notional gains or revaluation of
assets.”;

This
clause is newly added consequent upon Ind AS applicability to the companies.

In
Para 13.7 of its report, CLC observed as under:

The
Committee examined Section 198 as to whether it has outlived its utility in current times where the
Accounting Standards prescribe a robust framework for the determination of
yearly profit or loss for the company, and the possibility of using the net
profit before tax as presented in the financial statements, for basing the determination
of managerial remuneration. Alternative formulations were considered, but
found to be more complex, and further the present formulation is well
accepted. Therefore, no change, other than on account of requirement of
Ind AS, was recommended.

This
amendment is consistent with the amendment related to distributable profits
for the purposes of dividends discussed above under Dividends.

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

(l)
the excess of expenditure over income, which had arisen in computing the net
profits in accordance with this section in any year which begins at or
after the commencement of this Act, in so far as such excess has not been
deducted in any subsequent year preceding the year in respect of which
the net profits have to be ascertained;

(
Portion marked in bold is omitted after amendment)

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

CLC
in Para 13.8 has observed as under :

Section
198(4)(l) mandates the deduction of ‘brought forward losses’ of the company
while calculating the net profit, for the purpose of computing managerial
remuneration in the subsequent years. However, the clause did not provide for
the deduction of brought forward losses of the years prior to the
commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended
Section 198(4)(l), to include brought forward losses of the years subsequent
to the enactment of the Companies (Amendment) Act, 1960 and inadvertent
omission existing is corrected .

If one looks at the amendments discussed
hereinabove, various difficulties which were experienced at the time of
implementation of the provisions are sought to be removed. Amendments are made
to clarify the position which was ambiguous. Some of the provisions which were
inconsistent when read with the Rules are amended so as to bring these
inconsistencies to an end and thus an objective of rectifying omissions and
inconsistencies is largely achieved. _

shailesh.kwebmaker

Public Trusts in Maharashtra : The Changing Legal landscape Recent Amendments to the Maharashtra Public Trusts Act, 1950

The Maharashtra Public Trusts Act, 1950 (‘MPT
Act’) was recently amended by the Maharashtra Public Trusts (Second
Amendment) Act, 2017 (‘Amendment Act’), which came into force on October
10, 2017. In this article, we discuss some of the key conceptual changes that
the Amendment Act has made to the MPT Act.

Background

The MPT Act was first enacted with the
objective of regulation and administration of public religious and charitable
trusts in, what was then, the State of Bombay. ¹Originally called
the Bombay Public Trusts Act, 1950, its title was changed with retrospective
effect in 2012 to the Maharashtra Public Trusts Act, 1950. Today, the MPT Act
applies to the whole of Maharashtra and regulates more than eight lakh public
religious and charitable organisations registered under it². There
are only a few states in India that have enacted legislation to regulate public
trusts, with Maharashtra being prominent on account of the MPT Act.

In recent years, the focus on regulating the
non-profit space in India has increased as governments are becoming
increasingly wary that non-governmental organisations (‘NGOs’) are being
misused for undesirable activities that range from tax evasion to funding of
terrorism. With a view to regulating such NGOs, the Central Government is even
considering (with some helpful prompting from the Supreme Court) the framing of
a central legislation for this purpose³.

It is in this environment that the
Maharashtra Government constituted a committee on January 13, 2016, under the
chairmanship of Mr. A. J. Dholakiya, former Charity Commissioner and comprising
Mr. S. B. Savle, the Charity Commissioner and other officers, to review the MPT
Act and propose amendments to it. The Dholakiya Committee’s report suggested
comprehensive amendments to the MPT Act, leading to the enactment of the
Amendment Act⁴.

_____________________________________________________

1 Preamble
to the MPT Act.

2 Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

3
Economic Times, August 17, 2017: http://economictimes.indiatimes.com/articleshow/60100358.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4 Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

Key Amendments

From a reading of the provisions of the
Amendment Act, it appears that the purpose of its enactment is mainly
three-fold: preventing misuse of the MPT Act, reducing delays in proceedings
which impact the functioning of NGOs, and streamlining processes to improve
effectiveness. The key conceptual changes which give effect to this purpose are
discussed below.

(i) Introduction of definition
of ‘beneficiary’

Background

The term ‘beneficiary’, although used in the
MPT Act, was not defined earlier. A definition has now been inserted in section
2 of the MPT Act, which is as follows: ““beneficiary” means any person
entitled to any of the benefit as per the objects of the trust explained in the
trust deed or the scheme made as per this Act and constitution of the trust and
no other person.”

The term ‘beneficiary’ acquires significance
because, in the case of a public charitable trust (not a society)⁵ ,
a beneficiary is regarded as a ‘person having interest’ in such trust (refer
section 2(10)). Consequently, a beneficiary can apply for certain significant
reliefs in respect of such trusts such as seeking institution of an inquiry,
applying for appropriate orders for protection of trust property, institution
of suits in relation to the public trust, and applying for framing of a scheme
for the trust. This definition is not relevant for a society because in the
case of a society, its members are regarded as ‘person having interest’.

The likely objective behind insertion of the
definition of ‘beneficiary’ appears to be to aid the Charity Commissioner’s
office in determination of whether the person seeking the above reliefs was
indeed a beneficiary/person having interest in the trust who had locus to make
the application. Unfortunately the definition may not serve the desired
purpose.

_____________________________________________________________________

5 Unless specified otherwise, the term ‘public
trust’ as used in this article includes a ‘society’ registered under the
Societies Registration Act, 1860 and the MPT Act

Analysis

The primary challenge in determining
beneficiaries of a public trust stems from the inherent limitation in identifying
and segregating them – as one of the essential characteristics of a public
trust (and which distinguishes it from a private trust) is that its
beneficiaries are the general public or a class thereof, and constitute a body
which is incapable of ascertainment (as observed by the Supreme Court in Deoki
Nandan vs. Murlidhar, AIR 1957 SC 133).

The second challenge is that the language of
the definition is ambiguous – although this can be said to be a consequence of
the inherent limitation discussed above. Any person who is ‘entitled’ to any of
the benefits as per the objects of the trust is regarded as a beneficiary. This
encompasses not only those who have received some benefits from the public
trust, but also those who are ‘entitled’ to them.

The term ‘entitle’ means to give a claim,
right, or title to; to give a right to demand or receive, to furnish with
grounds for claiming. The term ‘entitled to’ means ‘having a title to’ (both as
defined in The Law Lexicon, P. Ramanatha Aiyar, 3^rd Edition).

Thus, it can be said that any person who has
a potential or theoretical ‘claim’ or‘right’ to any of the benefits as per the
objects of the trust is regarded as a beneficiary. However, this interpretation
is not without doubt:

– Firstly,
can it be said that any person has the ‘claim’ or ‘right’ to receive any
benefit from a public trust – or conversely, the trust is duty bound to benefit
such person?

– Even
if the response is in the affirmative, given that the definition uses the term
‘objects’ and not ‘activities’, can a person claim as of right that he is a
beneficiary of the trust even if the trust has not commenced activities in
relation to a particular object?

Therefore, although the language of the
definition presumes that the phrase ‘a person who is entitled to any of the
benefits as per the objects of the trust’ constitutes an objective and
limited criterion on the basis of which it can be determined with certainty
whether a person is or is not a beneficiary, in our view, this is not the case.

Example

The above difficulties can be explained with
the aid of an example. A public charitable trust set up with the objects of
‘medical relief for the poor’ and ‘promoting primary education’, operates a
hospital for treatment of the poor, without any restriction as to religion,
community, etc. Therefore, all poor persons in India are free to seek treatment
from this hospital.

The first difficulty arises in determining
whether such poor persons are ‘entitled’ to benefits as per the objects of the
trust. Can it be said that all poor persons have the ‘right’ to seek treatment
from this hospital –would it not be within the hospital’s right to refuse to
treat someone, for instance if there is no vacancy?

Assuming this view can be taken, an odd
situation arises wherein all poor persons in India could be regarded as
entitled to benefits as per the objects of the trust, and therefore, be
classified as beneficiaries of the trust – even though they may not actually
have sought treatment from the hospital.

Moreover, the trust may not have started any
primary school in furtherance of its object of ‘promoting primary education’.
Yet, it could be argued that all children in the country who are aged between 4
and 14 years would be persons who are entitled to benefits as per the ‘objects’
of the trust – thus, as noted above, entirely defeating the purpose for
insertion of the definition of ‘beneficiary’ in the MPT Act.

(ii) Amendments to ‘change report’
provisions

(a) Extension
of time for filing change report

Background

Under section 22 of the MPT Act, any change
in the particulars (such as in respect of the trustees or the properties) of a
public trust as set out in the Register of Public Trusts under the MPT Act is
required to be reported by the trustees to the Deputy or Assistant Charity
Commissioner in charge of the Public Trusts Registration Office where such
register is kept. Such report is commonly known as the ‘change report’.

A change report is required to be filed
within 90 days from the date of the occurrence of the change required to be
reported. A trustee who fails to file a change report is, on conviction,
punishable with a fine of up to Rs. 10,000, u/s. 66 of the MPT Act.

Previously, the MPT Act did not expressly
provide for an extension of time for filing change report or condonation of
delay in filing it. Pursuant to the Amendment Act, a proviso has been inserted
in section 22(1) which empowers the Deputy or Assistant Charity Commissioner to
extend the period of 90 days for filing change report on being satisfied that
there was sufficient cause for delay in filing, subject to payment of costs by
the reporting trustee, which are to be credited to the Public Trust
Administration Fund.

Interestingly, even prior to insertion of
the proviso, trustees were known to apply for condonation of delay for late
filing of change report – in some cases after many years – to the relevant
Deputy or Assistant Charity Commissioner. In fact, the Bombay High Court had
validated the permissibility of such applications under the general provisions
of section 5 of the Limitation Act, 1963 (Rajkumar s/o Pundlikrao Zape &
Ors. vs. Shantaram Amrutrao Waghmare & Ors., 2008 (3) MhLJ 209).
Therefore, the benefits of insertion of the new proviso appear to be that it
might help eliminate wasteful litigation and the Deputy or Assistant Charity
Commissioner will be able to seek costs from errant trustees for late filing of
change reports.

Analysis

Similar to section 5 of the Limitation Act,
1963, the new proviso to section 22(1) permits extension of time if ‘sufficient
cause’ is shown. This scope and purport of this expression has been extensively
considered by the Courts which have laid down the following broad principles:

– It
is not possible to lay down precisely what facts or matters would constitute
‘sufficient cause’ u/s. 5 of the Limitation Act, 1963;

– That said, delay in filing an appeal should not
have been for reasons which indicate the party’s negligence in not taking
necessary steps, which it could have or should have taken (State of West
Bengal vs. Administrator, Howrah Municipality, AIR 1972 SC 749);

– The
words ‘sufficient cause’ should receive a liberal construction so as to advance
substantial justice (State of Karnataka vs. Y. Moideen Kunhi (dead) by Lrs.
and Ors.,AIR 2009 SC 2577);

– Length
of delay is irrelevant and acceptability of the explanation is the only
criterion for extension of time (N. Balakrishnan vs. M. Krishnamurthy,
AIR 1998 SC 3222).

Thus, each application for extension of time
will have to be considered by the Deputy or Assistant Charity Commissioner on the facts and circumstances of the case.

There are also some other aspects relevant
for consideration in relation to this proviso. First, it does not set out a
formula or cap for computation of costs for late filing, which could lead to a
situation where determination of costs is at the discretion of each individual
Deputy or Assistant Charity Commissioner. Secondly, the costs are to be borne
‘by the reporting trustee’– this position differs from that set out in sections
79A and 79B under which certain costs, charges and expenses are payable out of
the ‘property or funds of the public trust’.

(b)
Provisional acceptance of change reports

Background

Once a change report is filed, the Deputy or
Assistant Charity Commissioner may⁶ hold an inquiry in the
prescribed manner to verify whether the change which is reported has occurred.
After completion of the inquiry, he must record his findings as to whether or
not he is satisfied that the change has occurred. If he is satisfied and
records the same in the Register of Public Trusts, he is said to accept the
change report.

Although this process is useful as, in
theory, it helps ensure transparency and honesty in the functioning of public
trusts, in practice it is time consuming and results in a huge pendency of
matters. It is believed that there are some change reports which are pending
for several years, although efforts have been made recently to dispose of old
reports at the earliest.

Such delay could obstruct the functioning of
trusts – in particular where the change which has occurred pertains to the
constitution of trustees. In such cases, the Charity Commissioner’s office may
be wary to permit applications under other provisions of the MPT Act (such as
for alienation of trust property) by the new trustees whose report is pending.
Although the Bombay High Court has held that a change of trustees becomes
effective from the date when it was brought into effect in accordance with law,
and not from the date of acceptance of the change report (Chembur Trombay
Education Society vs. D.K. Marathe and Ors., 2002 (3) BomCR 161), in
practice, the Charity Commissioner’s office may be hesitant to permit
applications by such trustees regarding whose appointment change reports are
pending.

____________________________________________________

6 Although
section 22 uses the term ‘may’ for holding an inquiry, the Bombay High Court
has held that a change report, whether contested or not, has to be decided
after holding an inquiry – refer Rajabhau Damodar Raikar vs. The Assistant
Charity Commissioner and Ors. (2016(1)BomCR233).

The fact that the pendency in change report
cases is of concern, and has prompted the enactment of the Amendment Act, has
been recognised Statement of Objects and Reasons in the Bill pertaining to the
Amendment Act as under:

“The State Government is concerned with
the huge pendency of cases before the authorities under the Act, especially the
change reports, more particularly the uncontested change reports, to make
entries in the registers kept u/s. 17 of the said Act.

… to promote swift disposal and arrest
the pendency of the change reports u/s. 22, certain provisos are proposed to be
added to s/s. (2) to mandate the decision on the change reports within the
stipulated period, and also provide for a mechanism for provisional acceptance
of change reports and attach finality to
the orders of provisional acceptance of change in uncontested matters.”

Summary

Thus, in order to facilitate the functioning
of public trusts, the Amendment Act has inserted three provisos to section
22(2) of the MPT Act, which introduce the concept of provisional acceptance of
change reports in case of change in the names or addresses of trustees and
managers or the mode of succession to their office. The process is summarised
as follows:

– When
such a change report is filed, the Deputy or Assistant Charity Commissioner may
pass an order provisionally accepting the change within period of 15 working
days and issue a notice inviting objections to such change within 30 days from
the date of publication of such notice;

– If no
objections are received within the said period of 30 days, the provisional
acceptance shall become final;

– If
objections are received within the said period, then he may hold an inquiry and
record his findings within 3 months from the date of filing objections, as to
whether the changes have occurred or not;

– If
he is satisfied that the changes have occurred, then he must make the
corresponding changes in the Register of Public Trusts.

(iii) Ex-post facto
sanction

Background

Under section 36 of the MPT Act, sanction of
the Charity Commissioner is required for the sale, exchange or gift of any
immovable property of a public trust, as well as for a lease for a period
exceeding ten years in the case of agricultural land and for a period exceeding
three years in the case of non-agricultural land or a building.

Although the Charity Commissioner had, in
circular no. 169 dated February 1, 1973, indicated that ex-post facto sanction
could be granted u/s. 36, the Bombay High Court has taken the view that only
prior sanction could be granted u/s. 36 and post facto sanction of the
Charity Commissioner is not permitted (Central Hindu Military Social
Education Society vs. Joint Charity Commissioner and Anr., 2009 (2) BomCR
499).

This dichotomy has now been settled by the
Amendment Act which has introduced sub-section (5) to section 36 to permit ex-post
facto sanction of the Charity Commissioner. As per this provision, the
Charity Commissioner may grant ex-post facto sanction to the transfer of
the trust property by the trustees in exceptional and extraordinary situations
where the absence of previous sanction results in hardship to the trust, a
large body of persons or a bona fide purchaser for value, if he is
satisfied that the following conditions are met,—

(a) there was an emergent
situation which warranted such transfer,

(b) there was compelling
necessity for the said transfer,

(d) the property was
transferred for consideration which was not less than prevalent market value of
the property so transferred, to be certified by the expert,

(e) there was reasonable
effort on the part of trustees to secure the best price,

(f) the trustees’ actions,
during the course of the entire transaction, were bonafide and they have
not derived any benefit, either pecuniary or otherwise, out of the said
transaction, and

(g) the transfer was effected
by executing a registered instrument, if a document is required to be
registered under the law for the time being in force.

The said
section has been further amended by the Maharashtra Public Trusts (Amendment)
Ordinance, 2017 (‘Ordinance’) promulgated on October 10, 2017, to
provide that ex-post facto sanction may only be granted in respect of
trust property transferred after the commencement of the Amendment Act (i.e.
October 10, 2017).

Analysis

The presence of the term ‘and’ after clause
(f) above indicates that the criteria are cumulative. Further, this power is
not to be exercised routinely but only in ‘exceptional and extraordinary
situations’. Very few transfers are, therefore, likely to satisfy the
requirements of this provision for granting ex-post facto sanction.
Moreover, as per the Ordinance, only those transfers which have been effected
on or after October 10, 2017 will be eligible for such sanction.

This provision may lead to a problematic
situation in cases where a transfer of trust property is effected by trustees
on the bona fide assumption that it is a fit case for grant of post
facto sanction, but the sanction is not thereafter granted by the Charity
Commissioner because he is not satisfied that the necessary criteria are met.
As no time limit has been specified for the Charity Commissioner to dispose of
an application for ex-post facto sanction, it may even take years for an
acceptance or rejection. Unwinding the transfer after a long period of time,
particularly if there has been construction on the property post the transfer,
will not only be practically difficult but could also lead to an anomalous
legal situation if the transfer was effected under a registered instrument.

Given these risks, this provision may be
reduced to a paper provision as every diligent buyer of property is likely to
insist on prior approval to eliminate threat to title.

Apart from section 36, the concept of ex-post
facto sanction has been introduced in section 36A which requires trustees
to obtain the sanction of the Charity Commissioner to borrow money (whether by
way of mortgage or otherwise) for the purpose of or on behalf of the trust.
Sub-section (3A) has been introduced in this section to permit the Charity
Commissioner to grant ex-post facto sanction to the trustees to borrow
money from any nationalised bank or scheduled bank, in exceptional and
extraordinary situations where the absence of previous sanction results in
hardship to the trust, beneficiary or bona fide third party.

(iv) Streamlining
processes

Background

The MPT Act, before the amendment, had
created a hierarchy of authorities and courts to hear various
applications/matters, with different processes for each application/matter. The
Amendment Act has sought to streamline some of these processes and also reduce
the number of appeals permitted so that cases may be disposed of more
efficiently.

The Statement of Objects and Reasons in the
Bill pertaining to the Amendment Act summarises the rationale for these changes
as under:

“It was further noticed that the said Act
has created a hierarchy of authorities and courts, with a series of appeals,
applications or revisions. Orders of the Charity Commissioner, for instance,
have been made subject to challenge before the District Court, the Maharashtra
Revenue Tribunal and Divisional Commissioner. This multiplicity of proceedings
and forums under the Act, when a substantial number of judicial officers of the
rank of District Judge, discharge the functions of Charity Commissioner and
Joint Charity Commissioner has been found to be unwarranted and even
anomalous.”

In this regard,
a number of amendments have been carried out in the MPT Act, some of which are
explained below:

– Under
erstwhile section 50A of the MPT Act, schemes were framed and modified by the
Charity Commissioner, against which order an application could be made to the
City Civil Court in Mumbai and District Court elsewhere in Maharashtra. Now,
the power to frame and modify schemes has been granted to the Deputy Charity
Commissioner and Assistant Charity Commissioner, and such order may be appealed
before the Charity Commissioner;

– Under
section 51, if the Charity Commissioner refuses his consent to the institution of
a suit, then the appeal will lie before the High Court instead of the
Divisional Commissioner;

– In
the Cy pres provisions under sections 55 and 56, the power conferred on
the court originally has now been conferred on the Charity Commissioner. Thus,
earlier if inter alia a trust had failed, the Charity Commissioner could
require the trustees to apply for directions to the court, and if they failed
to apply, he could himself apply. The court could then give necessary
directions to give effect to the original intention of the author of the public
trust or object for which the public trust was created – and if the same was
not expedient, practicable, desirable, necessary or proper in public interest,
then the court could direct the property or income of the trust to be applied cy
pres to any other charitable object.

Now, the power has been conferred on the
Assistant Charity Commissioner and Deputy Charity Commissioner to pass
appropriate orders after making an inquiry and to make a report to the Charity
Commissioner; the Charity Commissioner may suo motu or on the report of
Assistant or Deputy Charity Commissioner, give the necessary directions;

– The
High Court replaces the City Civil Court in Mumbai and District Court elsewhere
as the first appellate court under the MPT Act;

– Accordingly,
the language of the definition of “Court” has been replaced by “High Court
of Judicature at Bombay” from “in the Greater Bombay, the City Civil Court and
elsewhere, the District Court”.

Tabular
summary

The following table sets out the changes to
the processes in respect of key provisions:

Key:

D
or ACC = Deputy or Assistant Charity Commissioner

CC
= Charity Commissioner

District
Court = City Civil Court in Mumbai, District Court elsewhere in Maharashtra

HC
= High Court

District
Court / HC = Application to District Court from whose decision an appeal lies
before HC

Old

New

Section

Application

Authority/Court

Appellate authority

Authority/Court

Appellate authority

18-20

Registration
of public trust

D
or ACC

u CC

u Then District Court / HC

No
change

Filing
change report / deregistration of trust

D
or ACC

u CC

u Then District Court / HC

No
change

Order
of surcharge

District
Court / HC

No
change

—

41D

Suspension,
removal and dismissal of trustees

District
Court / HC

No
change

41E

Order
for protection of charities

District
Court

No
change

50A

Power
to frame schemes

District
Court / HC

D
or ACC

Consent
for suit

Divisional
Commissioner

No
change

55,
56

Cypres

CC
directs that an application be made to District Court, or will make the
application himself. Thereafter, the said court will hear the application

HC
against order of District Court

D
or ACC will report to CC who will give directions

Decision
of property as public trust property

D
or ACC

u CC

u Then District Court / HC

No
change

Other amendments

The Amendment Act has also carried out a
number of other modifications to the MPT Act – some of these are briefly
summarised below:

(i) Conditions on
alienation: As noted above, u/s. 36 of the MPT Act, sanction of the Charity
Commissioner is required for alienation of immovable property of the public
trust. Such sanction may be accorded subject to such condition as the Charity
Commissioner may think fit considering the interest, benefit or protection of
the trust.

Pursuant to the Amendment
Act, the Charity Commissioner has been empowered to modify the
conditions imposed by him prior to the transaction for which sanction is given
is completed. Further, although he can revoke a sanction in specified
circumstances, he cannot do so after the execution of the conveyance in respect
of the immovable property except on the ground that such sanction was obtained
by fraud before the grant of such sanction.

Further, the Charity Commissioner has been
prohibited from sanctioning any lease of immovable property of a public trust
for a period exceeding 30 years.

(ii) Fixed timelines: To
reduce delays by the Charity Commissioner in processing of applications such as
for (a) granting trustees permission for investing trust funds in any manner
other than that permitted under the MPT Act (section 35); and (b) issuing
directions for the proper administration of the trust (section 41A), the
Charity Commissioner has been enjoined to decide such application within three
months from the date of receipt of such application and if it is not
practicable to do so, to record the reasons for the same.

(iii) Revised process for suspension of trustees etc.: The process for suspension, removal or dismissal
of trustees u/s. 41D of the MPT Act has been revised for the benefit of
incumbent trustees. Earlier, upon receipt of an application for this purpose,
the Charity Commissioner could frame charges and take appropriate action as set
out in the provision. Post the amendment, the Charity Commissioner must notify
such trustee and give him an opportunity to be heard before framing such
charges. Further, he can only issue such notice only when he finds that there is
‘prima facie material’ to proceed against the said person.

(iv) Advice
or direction of the Court: The Amendment Act has deleted section 56A of the
MPT Act under which any trustee of a public trust could apply to the court for
the opinion, advice or direction of the Court on any question affecting the
management or administration of the trust property or income. However, deletion
of this section 56A will not preclude trustees or beneficiaries from applying
for the issue of an Originating Summons in the Bombay High Court for such
advice or direction, in accordance with Chapter XVII of the Bombay High Court
(Original Side) Rules.

In conclusion

In conclusion, the amendments to the MPT Act
are a positive development and are likely to assist the earnest efforts made by
the Charity Commissioner’s office recently to improve the implementation of the
MPT Act and reduce backlog of matters.

On a separate note, we find that NGOs in
India are increasing in scale and stature, and are exploring more sophisticated
structures and arrangements for their functioning, dealings and holding of
assets. They are also seeking to professionalise their operations by adopting
corporate best practices.

When the MPT Act is next reviewed, we
suggest that some amendments which assist with this evolution, but also
maintain adequate checks and balances, be considered. These include
introduction of stricter governance standards, express inclusion of section 8
companies within the ambit of the MPT Act, facilitation of appointment of professional
trustee companies, easing of mergers of public trusts with societies,
regulating related party transactions, permitting investments in safe market
securities, and so on. _

shailesh.kwebmaker

What Type Of SEBI Orders Are Appealable? Supreme Court Decides

The Supreme Court has laid to rest
a controversial and important issue. That is on the issue as to what orders
passed by the Securities and Exchange Board of India securities laws are
appealable. SEBI has both general and specific powers. SEBI passes orders on
several issues. SEBI also issues circulars, directions, etc. which have
significant impact on persons connected with market operations. Since it is an
expert body dealing with a field which is complex, courts give a lot of freedom
to SEBI. If one reads the powers of SEBI, SEBI has almost been given a carte
blanche on how it can deal with the operation of the securities markets.

SEBI has powers
:

– to make rules and regulations, that too,
except for some administrative and parliament overseeing, are largely
self-determined.

– to give directions to stock exchanges, listed
entities, intermediaries, etc.

– to punish and levy penalties,

– to disgorge wrongfully made profits,

– to make parties buy shares or sell shares etc
and

– to debar entities to approach the financial
markets for a specified period.

The question before the Supreme
Court was : whether all orders passed by SEBI are appealable or are there any
exceptions – that is – some orders are not appealable?

The right to appeal is important.
The first appeal is to the Securities Appellate Tribunal (“SAT”). SAT has a
great record of disposing appeals fast with not many of its rulings being
overturned by the Supreme Court (the next appellate body). SAT is an expert
body well versed with the functioning of the securities market and hence
aggrieved parties can expect a quick relief from an authority which has an
indepth grasp of finer issues of this complex field. The Supreme Court in the
case of Clariant (Clariant International Limited vs. SEBI (2004) 54 SCL 519
(SC)) has observed, “The Board is indisputably an expert body. But when it
exercises its quasi-judicial functions, its decisions are subject to appeal. The
Appellate Tribunal is also an expert Tribunal.” (emphasis supplied).

In the past, appeals have been
liberally admitted. Even letters of SEBI, if they affected rights of a party,
have been held to be appealable. However, when a Chartered Accountant appealed
to SAT on the ground that SEBI should not have referred his name to ICAI, it
was rejected since it was merely a reference.

However it was felt that clarity
was lacking as to what orders were appealable as the same was not clearly
defined. Another issue which required clarification was: whether circulars
which affected a group of parties adversely were appealable. The decision in
the case of NSDL vs. SEBI ((2017) 79 taxmann.com 247 (SC) deals with
such issues.

Facts of the case

The
facts of the case are fairly simple. SEBI had issued a circular to depositories
directing them to restrict their charges in the manner and to the extent
prescribed in the circular. Obviously, the depositories were aggrieved as the
circular directly affected their finances. NSDL, a depository, appealed against
the circular/direction to SAT. Preliminary issue raised before SAT was whether
such a circular/direction is appealable. SAT on merits, rejected the appeal and
held the circular/directions to be valid. In other words, circulars /
directions issued by SEBI were appealable. Both parties appealed against the
order of SAT to the Supreme Court. SEBI appealed against the part where SAT had
held that such a circular/direction was appealable. The depositories appealed
against the part where on merits its appeal was rejected.

The Supreme Court decided to deal
first with the part of the SAT order where it was held that such a circular was
appealable. Obviously, if the Court found that such a circular was not
appealable, then the part relating to merits would not require consideration.

Analysis of orders passed by SEBI
into categories

To decide whether the circular
issued by SEBI was appealable or not, the Supreme Court divided various types
of circulars, orders, directions, etc. that SEBI was empowered to issue into
three categories:-

1. Orders that are in
exercise of administrative functions

2. Orders that are in
exercise of its legislative functions

3. Orders that are in
exercise of its quasi-judicial functions.

The Supreme Court held that it was
only the third category, i.e. orders that are issued in exercise of its quasi-judicial
functions, were the ones that were appealable.

The Court then, firstly, gave
reasons why it held that only such category or orders were appealable.
Secondly, it explained meticulously how to determine whether an order falls
under which category. The decision even pointed out the provisions in the SEBI
Act that dealt with powers relating to each category of functions. On facts, it
held that the circular was issued in exercise of administrative functions and
hence it was not appealable.

Why are only orders issued by
SEBI in exercise of quasi-judicial functions appealable under the SEBI Act?

The Court meticulously analysed
the provisions of the Act to show that the Act provided and intended to allow
appeal only against quasi-judicial orders.

Firstly, it highlighted the
constitution of SAT. It noted that the Presiding Officer has to be a retired
judge. That showed that only quasi-judicial orders were intended to be
appealable.

Secondly, it noted that in case of
appeals against orders passed by an adjudication order, appeal could be made by
an aggrieved party within 45 days of the day when such order is “received by
him”. The Court observed that “Generally administrative orders and legislative
regulations made by the Board are never received personally by ‘the person
aggrieved’”. Hence, once again, it was only quasi-judicial orders that were
intended to be appealed.

The Court then observed that, as
held in its earlier decision in Clariant’s case that the powers of SAT were
co-extensive with that of SEBI while reviewing in appeal SEBI’s orders. Hence,
once again, such orders can only be quasi-judicial in nature.

Even the procedure relating to
appeal pointed towards this. The order passed by SAT on appeal had to be sent
to the parties to the appeal (i.e. the aggrieved party) and the adjudicating
officer. Once again, this shows, the Court held, that the scheme of the Act was
to allow appeal only against quasi judicial orders.

The fact that appeals against
orders of SAT to the Supreme Court are allowed only on questions of law was
held to be yet another pointer in this direction.

Hence, the Court concluded that :

1. appeals are allowable only
against quasi-judicial orders of SEBI. Appeals against orders in exercise of
legislative functions is obviously beyond the appellate function of SAT which
itself is a creature of the Act.

2. Orders in exercise of
administrative functions too cannot be appealed against before SAT but petition
for judicial review may be filed in Court.

How to determine whether an
order is in exercise of administrative/legislative/quasi-judicial functions?

The above analysis brings us to
the important point of how to determine whether a particular order is in
exercise of quasi-judicial functions and thus appealable or whether it is in
exercise of administrative or legislative functions and hence not appealable.
Here again, the Court meticulously analysed the issue on first principles.

It cited the classic case of The
King vs. Electricity Commissioners [(1924) 1 KB 171] where Lord Justice
Atkin defined a quasi-judicial order as:-

“Whenever
any body of persons having legal authority to determine questions affecting
rights of subjects, and having the duty to act judicially, act in excess of
their legal authority, they are subject to the controlling jurisdiction of the
King’s Bench Division exercised in these writs.”

The
Court further observed that the above decision was applied in another decision,
and the following guidelines were given to decide whether an order of an
administrative body is a quasi-judicial one:-

“(i) There must be legal
authority; ?

(ii) This authority must
be to determine questions affecting the rights of subjects; and

(iii) There must be a
duty to act judicially.”

The Court further qualified and
explained the principle that a mere absence of a lis between the parties
does not make the order one that is not quasi-judicial. So long as the
aforesaid 3 conditions are satisfied, the order is a quasi judicial one. It
observed, “..the absence of a lis between the parties would not
necessarily lead to the conclusion that the power conferred on an
administrative body would not be quasi-judicial – so long as the aforesaid
three tests are followed, the power is quasi-judicial.”

What also matters is the nature of
the final order. Thus, if the order does not determine the rights of parties
and, for example, makes a report after giving the parties a hearing, the order
is not a quasi-judicial one.

What are the specific
provisions in the SEBI Act, orders under which can be appealed against?

To make its order even more
comprehensive and thus be helpful to be applied in specific provisions without
ambiguity, the Court then listed the various provisions of the SEBI Act under
which SEBI can pass orders. Of these, it then analysed which of such orders are
quasi-judicial and hence appealable. It also specified which of them provide
for administrative powers or legislative powers and hence not appealable to the
SAT. It observed as follows:-

“It may be stated that both Rules made u/s. 29 as
well as Regulations made u/s. 30 have to be placed before Parliament u/s. 31 of
the Act. It is clear on a conspectus of the
authorities that it is orders referable to sections 11(4), 11(b), 11(d), 12(3)
and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders
made under the Rules and Regulations that are the subject matter of appeal u/s.
15T. Administrative orders such as circulars issued under the present case
referable to section 11(1) of the Act are obviously outside the appellate
jurisdiction of the Tribunal for the reasons given by us above.” (emphasis supplied).

Accordingly, the Court set aside the
order of SAT and held that the circular was issued in exercise of
administrative functions by SEBI and hence not appealable to SAT. It,
however, clarified that the parties were free to challenge the circular and
seek judicial review.

Conclusion

Thus, an important matter has been set to rest
and that too in a comprehensive way. It will help parties and SAT decipher
which orders are appealable. Further, parties will also know how to deal with
powers of SEBI that are classified as law making powers or administrative
powers. The decision aims to lend clarity, avoid litigation and ensure speedier
decisions.

shailesh.kwebmaker

RERA: An Overview

Introduction

On
1^stMay 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect. This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member.

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1^st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31^stJuly 2017.

Registration
is not required for the following type of projects:

(a) Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b) Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act.

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a) Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b) Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c) 3 years’ Annual
Accounts Reports of the Promoter.

d) Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e) Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f) One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website.

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1) The Promoter must provide all details of
registration with the RERA and update his inventory
position on a quarterly basis.

(2) The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3) The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4) The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5) The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6) The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7) Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8) The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9) If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10) The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11) Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12) The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3^rdparty without prior written consent from 2/3^rd
of the allottees and prior written approval of the RERA.

(13) Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14) If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a) in accordance with
the Agreement for Sale; or

(b) due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15) He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16) The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall.

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17) The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18) If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable.

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1^stproject.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30^th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1^st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

shailesh.kwebmaker

Insider Trading – A Recent Comprehensive Case

There are some provisions of
Securities Laws that need a regular refresh for the reason that they are found
to be frequently violated and entail penalties etc. Insider Trading is
one such provision which one can say is regularly violated. Senior management
and even professionals who ought to know better are found to be on the wrong
side of the law. A recent order of the Securities and Exchange Board of India
(SEBI) is worth considering. It reviews the law relating to Insider Trading.
The case deals with the law prior to amendment of 2015. However, the principles
remain the same even under the amended law. The case covers several types of
acts that are treated to be violative of the SEBI (Prohibition of Insider
Trading) Regulations 1992 (the 1992 Regulations were replaced by the 2015
Regulations). The case is in the matter of CR Rajesh Nair – Managing
Director of Sigrun Holdings Limited (Adjudication Order number AK/AO-14/2017
dated 16^th June 2017).

Broad facts of the case

The facts of the case are
interesting and also contentious since SEBI had to arrive at findings that were
against what the party claimed the facts were. The facts and conclusions as
reported in the SEBI Order are summarised here.

The party against whom the order
was passed was Managing Director of Sigrun Holdings Limited, a listed company.
It was alleged that he carried out several acts in violation of the
Regulations. He sold shares during a time when there was unpublished price
sensitive information (“UPSI”) that he had access to. The Regulations
prohibit an insider having access to or in possession of UPSI to deal in the
shares of the company. The obvious reason for such prohibition is that a person
in possession of unpublished price sensitive information (UPSI) has an edge
over the shareholders/public generally and would unfairly profit from the same.
He is entrusted with such information in good faith and it will be a betrayal
of `good’ faith if he seeks to profit from it. Hence, he is banned from dealing
in the shares in such circumstances.

As proving insider trading is a
comparatively difficult task, the regulations have provided for a blanket ban
over making opposite trades by an insider during the next six months. In other
words if an insider makes a purchase or sale of shares of the company, he is
debarred from making a sale or purchase for the next six months. SEBI, through
detailed investigation including the questioning of the broker, established
that :

– shares were sold within six months of purchase

– shares were sold on the basis of UPSI

– shares were sold just before the declaration
of operational results which exhibited substantial reduction resulting in
decline of share price

– shares were sold during the period when
trading window was closed

– shares were sold without obtaining
pre-clearance of the Compliance Officer.

Hence, there were multiple
violations of the regulations.

SEBI then computed in detail the
losses he avoided by selling shares earlier by comparing the sale price on the
date of sale with the sale price at the end of six months period.

Investigation, response of MD/broker and
confirmation of findings

SEBI pursued the MD and the broker
concerned to obtain detailed information regarding the trades. The defense put
forth in respect of certain sales was that the MD had not really sold the
shares voluntarily but sales were made by the broker to meet certain “mark to
market” losses incurred by him. Thus, the effective contention was that there
was no violation of the Regulations since this was not within the control of
the MD. However, SEBI examined the facts of the case, the need for margin
money, etc. and found that this contention was not correct and
underlying facts did not match with such contention. Hence, this submission was
rejected and a finding given that the MD had sold the shares within six months
in violation of the regulations.

Ascertainment of profiting from insider
trading

Insider Trading, by definition, is
an attempt to profit from UPSI that gives an edge to an insider. The profits
made are usually demonstrated by actual movement of the price on release of the
UPSI.

However, it has been accepted that
it is not necessary, to conclude that Insider Trading has taken place, that the
market price should have actually moved in the expected direction. Violation of
the Regulations takes place as soon as the insider deals whilst in possession
of the UPSI.

Having said that, the penalty for
insider trading is also related to the profits made – higher the profits made,
higher is the penalty. For this purpose, losses avoided are treated as profits
made. However, there is a stiff penalty of upto Rs. 25 crore where profits
cannot be computed directly.

In the present case, SEBI worked
out in detail the losses avoided. There were two types of trades. One set of
trades while there was sale when trading window was closed. The losses avoided
by sale of the shares by working out the price at which the shares were sold
and the price after release of the UPSI was calculated. The other set of trades
were sales made within six months of purchase. In this case, the sale price for
each lot sold within such six months period was compared with the sale price
immediately at the end of the six month period. The losses so avoided were
calculated.

As a side note, there is an
interesting aspect here. The rule that reverse trades shall not be carried out
for the following six months has an intention, it appears, of ensuring that
insiders do not quickly deal in the shares as this would help control Insider
Trading to some extent. An insider, thus, who buys 1,000 shares on 1^st
January should not sell these shares till 1^st July. The rule is
absolute. If one buys even 1 share, he cannot sell any number of shares till
six months. This is probably not wholly consistent with what appears to be the
intention. In the present case too, the MD had bought 1,00,000 shares on 5^th
February 2010. However, in the following six months he sold 8,81,307 shares. In
the normal course, the ban should apply only to 1,00,000 shares that he
purchased and not to his entire shareholding. To put in other words, the ban
should apply only to the first 1,00,000 shares he sells and not to any further
sale of shares. However, the law, as literally read, applies to all of his
shareholding and hence any quantity of shares sold would attract this ban, and,
hence, the disgorgement of profits. Thus, profit on sale of all 8,81,307 shares have thus been ordered to be disgorged.

Levy of penalty

It is reiterated that the following
violations were held to have been made:-

1. Dealing while in
possession of UPSI

2. Sale of shares within six
months of purchase

3. Sale of shares without
taking pre-clearance of the Compliance Officer.

The losses avoided through sale of
shares in violation of the Regulations were just about Rs. 2 crore.

SEBI noted that a Managing Director
has grave and higher responsibility of complying with such Regulations and
violation of it should deserve a higher penalty. It relied on the following
observation of the Securities Appellate Tribunal (in Harish K. Vaid vs.
SEBI, order dated 3^rdOctober 2012):-

“It was then argued by the learned counsel for the appellants that
keeping in view the quantum of shares purchased, the penalty imposed by the
Board is excessive. The appellant has not derived any benefit as there was no
sale of shares based on UPSI. The adjudicating officer, while imposing the penalty,
although noted provisions of section 15J of the Act regarding factors to be
taken into account while adjudging the quantum of penalty, he has not applied
them correctly to the facts of the case. We have given our thoughtful
consideration to this aspect and are unable to accept the argument of the
learned counsel for the appellant. The evil of insider trading is well
recognized. The purpose of the insider trading regulations is to prohibit
trading to which an insider gets advantage by virtue of his access to price
sensitive information. The appellant is the Company Secretary and Compliance
Officer of the company who was involved in the finalization of quarterly
financial results and was fully aware of the regulatory framework and code of
conduct of the company. Under such circumstances, when there is a total
prohibition on an insider to deal in the shares of the company while in
possession of UPSI, the quantity of shares traded by him becomes immaterial.
Section 15G of the Act prescribes the penalty of twenty-five crore rupees or
three times the amount of profit made out of the insider trading, whichever is
higher. Section 15HB of the Act prescribes a penalty which may extend to one
crore rupees. However, the adjudicating officer has imposed a penalty of Rs. 10
lakh only on each of the violators. In the facts and circumstances of the case,
we are not inclined to interfere even with the quantum of penalty imposed.”

Accordingly,
penalties aggregating to Rs. 6.08 crore were levied on the Managing Director.

Conclusion

This Order is a good case study on
how meticulous investigation is made by SEBI particularly in the face of, no
response from the party and incorrect replies from the broker. The contentions
were systematically refuted and it was established that there were violations.
The actual calculation of the losses that were avoided was also made in detail.
The working adopted and principles applied, though simple and logical, are also
relevant and illustrate the methods and principles involved.

The intent of the Regulations which
deal with multiple ways of preventing and deeming acts of Insider Trading are
clarified in this order. As stated earlier, the ban on reverse trade within six
months, need for pre-clearance from Compliance officer and ban on trade when
trading window is closed, are examples of in-built checks and balances.

The case also demonstrates how the
UPSI benefit is to be determined in terms of worsening performance of a company
which was made public only after the sale of shares.

In
conclusion, the case also demonstrates levy of stiff and deterrent penalty
which sets an example for would-be violators.

shailesh.kwebmaker

RERA: Some Issues

Introduction

After an Overview of the Real Estate (Regulation and Development) Act, 2016 (“the Act”) in last month’s Feature, let us examine some critical issues under the same as applicable in the State of Maharashtra. It may be noted that the RERA is a State Regulator and hence, each State and each State’s RERA is empowered to issue their own Rules and Regulations respectively. This Article restricts itself to the State of Maharashtra.

At the outset, it must be confessed, that the Act is an evolving statute and at this stage, there may be more questions than answers. Having said that, the RERA in the State of Maharashtra (“MahaRERA”) is quite proactive and has been issuing clarifications on several issues.

Promoter: Land Owners also covered

The Act requires a Promoter to register a real estate project with the RERA. As on the deadline of 31st July, 2017, over 10,000 projects were registered with the MahaRERA.

The Act defines a Promoter in an exhaustive manner by giving a very far reaching definition. It covers any person who acts (himself) as a builder, coloniser, contractor, developer, estate developer or who claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale.

An interesting issue arises as to what would be the position of a land owner who enters into a joint development agreement with a developer for say, a share in the revenue from the sale of flats or a share in the area to be developed? For instance, a landowner executes a development rights agreement with a developer and in lieu of the same would receive a 40% share of the revenues ( to be) received from the Project. Alternatively, he agrees to receive 40% of the built-up area in the project. Would such a land owner also be treated as a Promoter? The answer to this is Yes! The MahaRERA in its Order has coined the definition of the term “Co-Promoter” and defined it to mean and includes any person(s) or organisation(s) who, under any agreement or arrangement with the Promoter of a Real Estate Project is allotted or entitled to a share of the total revenue generated from the sale of apartments or share of the total area developed in the real estate project. Thus, every land owner who receives an area / revenue share would be treated as a Promoter of the real estate project. It would be permissible for the liabilities of such Co-Promoters to be as per the joint development agreement with the developer. However, for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real Estate Project. The land owner would be required to give an undertaking to the RERA, including an undertaking relating to the title to land and the date of completion of the project. Consequently and most vitally, the Order holds that the cost of land payable to land owners by the Promoter cannot be regarded as cost of Project and cannot be withdrawn from the RERA Account and that such land owners must open a separate bank account for deposit of 70% of the sale proceeds from the allottees! An intriguing part about this Order is its interplay with the Act. Section 4 of the Act mandates that 70% of the realisations from flat allottees shall be deposited in a separate designated account which would be used only to cover the cost of construction and the land cost. In a joint development agreement, the share payable to a land owner by a developer is the developer’s land cost. However, the MahaRERA’s Order expressly prohibits payment of this land cost from the separate designated account!

Recently, some land owners have approached the Bombay High Court challenging this Order of the MahaRERA. The final outcome of this case would be eagerly awaited by several land owners.

After the advanced capital gains tax liability on a land owner (started by the decision of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom)) and indirect taxes (GST/VAT/service tax as on a works contract) for the portion constructed by the developer for the land owner, this would be the final straw which breaks the proverbial camel’s back! Of course, the newly introduced section 45(5A) of the Income-tax Act seeks to provide some solace to land owners who are individuals and HUFs by postponing the capital gains tax liability. However, for a great majority of land owners they would be staring at a scenario, where on the one hand, they are asked to pay capital gains tax on the execution of a development agreement once the conditions specified in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom) are triggered and on the other hand, they cannot withdraw the money received from the flat allottees!! It may be noted that this is a restriction imposed by the MahaRERA and hence, only applies in the State of Maharashtra and not in other States (unless the Authorities in other States also issue a similar Order). Further, this Order only applies when the consideration for the land owner is in the form of a revenue / area share. If the transaction is one of an outright sale / conveyance, then this restriction is not applicable and the developer can easily use the sale proceeds to pay off the land owner. Having said that, finding a developer, in the current real estate market, willing to buy a land on an outright basis is akin to finding a needle in several haystacks. Something which even google.com would find very difficult to search. If a land owner does find such a developer, then he kills 3 birds with one stone – he can pay tax (since he has the funds), there would not be any GST liability (since there is no works contract component) and he would not be classified as a Promoter under the RERA Order. Truly an Utopian scenario!

Promoters: Contractors
A question arises whether a building contractor is required to be registered as a Promoter? The definition includes a contractor or person by any name who acts as the holder of a power of attorney from the land owner on which the building / apartment is constructed. However, the overarching requirement for registration is that the Promoter must sell one or some of the apartments. Section 3 which mandates registration makes it clear that no Promoter shall sell or offer for sale any apartment or building without prior registration. Hence, if there is no sale or offer for sale, then there should not be any requirement for registration as a Promoter. Section 3 similarly provides that any renovation, repair or redevelopment which does not involve marketing, sale or new allotment of any apartments would not require registration. Hence, a building redevelopment which does not have any free sale component would be outside the purview of registration. The FAQs issued by the MahaRERA also support this view where the answer given states that if there are 16 apartments in a society redevelopment project, registration would be required provided there are some apartments which are for sale. Hence, it stands to reason that if there is no sale component, then there would not be any requirement for registration.

Promoters: Financiers and Private Equity Funds
A similar predicament as that of the land owners may also be experienced by lenders / private equity funds who have contributed funds to the real estate project. In most cases, such financiers have step-in rights, i.e., in the event that the developer is unable to complete the project, then they would step-in to his shoes and complete the project. In addition, financiers more often than not, have strong investor protection rights which enable them to participate in the control and management of the developer’s entity. The definition of the term Promoter is extremely wide. Hence, it is a moot point whether such financiers may also be roped in within the definition of a Promoter / Co-Promoter? This may even hamper any exit to be provided by the developer to the financier since payments to Promoters do not fall within the permissible uses from a designated bank account. It may be possible to contend that mere presence of such rights may not make a lender to be treated as a Promoter till they are actually exercised.

This may force financiers to utilise secured debt structures in which only the project is mortgaged in their favour without any exotic rights. In such an event, the financier would not be treated as a Promoter and the designated bank account can be used to repay the lender. In any case, the obligations would be attracted once the mortgage is foreclosed and the financier proceeds with the incomplete tasks.

Designated Account to be maintained

The Act requires that the Promoter must maintain a separate designated bank account. 70% of all realisations from flat allottees must be deposited in this account to cover the cost of construction and the land cost and must be utilised for that purpose only. The balance 30% may be withdrawn without routing the same to the designated account. For making withdrawals from this account, 3 Certificates are required. The provisions applicable in the State of Maharashtra in this respect are spread over the Central Act, the Rules (framed by the Maharashtra State Government), the Regulations (framed by the Maharashtra RERA), the Forms (issued by the Maharashtra RERA) and the Clarifications (issued by the Maharashtra RERA). All these diverse provisions have been harmonised and analysed below for the ease of ready reference:

(a) Designated Bank Account – 70% of all amounts realised for the real estate project from the allottees, shall be deposited in a separate bank account to cover the cost of construction and the land cost and shall be used only for that purpose. These deposits may include advances received against allotment.

(b) Procedure for Withdrawals – The Promoter is entitled to withdraw amounts from the designated bank account, to cover the cost of the project (land and construction and borrowing), in proportion to the percentage of completion of the project. Withdrawal is permissible only after it is backed by 3 certificates stating that the withdrawal is in proportion to % completion of the project. The Promoter is required to submit the following 3 certificates to the bank operating the designated account:

– Firstly, a certificate in Form 1 from the project Architect certifying the % completion of construction work of each of the buildings/wings of the project;

– Secondly, a certificate in Form 2 from the Engineer for the actual cost incurred on the construction work of each of the buildings/wings of the project; and

– Thirdly, a certificate in Form 3 from a practicing Chartered Accountant, for the cost incurred on construction and the land . The practicing Chartered Accountant shall also certify the proportion of the cost incurred on construction and land to the total estimated cost of the project. The total estimated cost of the project multiplied by such proportion shall determine the maximum amount which can be withdrawn by the Promoter from the separate account.

The Promoter is required to follow the above at the time of every withdrawal from the separate account till Occupancy Certificate in respect of the project is obtained. On receipt of the Completion Certificate in respect of the project, the entire balance amount lying in the separate account can be withdrawn by the Promoter.

However, as a concession, MahaRERA has allowed a Promoter to do away with the practice of submitting 3 certificates for every withdrawal from the designated bank account. He may obtain the same and retain them on record and furnish them to the auditor at the time of the annual audit. The Promoter would have to submit a self-declaration to the bank once every quarter and this would suffice for the withdrawals.

– Total Estimated Cost (Land Cost + Construction Cost) of the project based on the Form 2 issued by the engineer.

– Total Cost Incurred (Land Cost + Construction Cost) of the Real Estate Project based on an actual verification of the books of account by the CA.

– % completion of Construction Work (as per the Architect’s Certificate in Form 1). However, the MahaRERA has clarified that this need not be filled in by the CA for all ongoing certificates and should be filled in only in the final certificate issued after 100% of the construction work has been completed.

– Proportion of the Cost incurred on Land Cost and Construction Cost to the Total Estimated Cost. (Total Cost Incurred / Total Estimated Cost).

– Amount which can be withdrawn from the Designated Account (Total Estimated Cost * Total Cost Incurred / Total Estimated Cost)

Less: Amount withdrawn till date of this certificate as per the Books of Accounts and Bank Statements

– Resulting figure is the Net Amount which can be withdrawn from the Designated Bank Account

The CA certifying Form 3 should be different than the statutory auditor of the Promoter’s enterprise.

(d) Components of Form 3:

(A) Land Cost includes all costs incurred by the Promoter for acquisition of ownership and title of the land, including premium payment; Premium for TDR/ FSI; stamp duty, transfer charges, etc.

In cases, where the Promoter, due to inheritance, gift or otherwise, is not required to incur any cost for the land, then his cost is determined on the basis of the Stamp Duty Ready Reckoner value of the land prevailing on the date of registration of the real estate project with the MahaRERA.

In respect of the land cost, the MahaRERA has clarified that the fair market value of the acquisition cost shall be the indexed cost of acquisition of the land computed as per the Income-tax Act provisions. One wonders how should this indexation be applied while issuing a certificate because the term “fair market value of the indexed cost” is not to be found in Form 3. A suitable clarification on this would be appreciated.

Further, it has been clarified that interest specifically done for land acquisition should be added. Interest for construction of rehab component in a project is also treated as land cost. Costs incurred for slum rehab, relocation of tenants in a redevelopment project, etc., are all includible in land cost.

(B) The Cost of Construction includes all costs, incurred by the Promoter, towards the on-site and off-site expenditure for the development of the Real Estate project, including payment to any Authority and the Principal sum and interest, paid to certain lenders.

In respect of the Cost of Construction, the MahaRERA has clarified that:

(i) The term “incurred” means products or services received creating a debt in favour of the supplier or received against a payment made. It is a moot point whether payment of advances towards cost is permissible? A suitable clarification on this would be appreciated.

(ii) The development / construction cost should not include marketing, brokerage expenses incurred for the sale of flats. These, though part of the project cost, should not be met out of the designated account but should be met from the other accounts / funds of the Promoter.

(iii) While principal sum should be shown in brackets it must not be treated as a part of the construction cost.

(iv)Income-tax payable by the Promoter is not a part of the construction cost.

(v) Cancellation amounts paid to allottees who cancel their bookings can be treated as a part of the construction cost and can be withdrawn from the designated account.

(e) Annual Audit; The Promoter must get his accounts audited by 30th September of every financial year and must produce a statement of accounts duly certified and signed by auditor to the MahaRERA. The Annual Report on statement of accounts must be in Form 5.

Form 5 requires the auditor to certify that the amounts collected for a particular project have been utilised for that project alone and that the withdrawal from the designated bank account has been in accordance with the proportion to the percentage of completion of the project. If not, then the Form must specify the amount withdrawn in excess of the eligible amount or any other exceptions. MahaRERA has clarified that auditor must certify that 70% of the realisations have been used for the project (the balance 30% could be used for any purpose).

(f) Mismatch in Certificates and Audit: The Regulations contain a very important provision. They state that if the Form 5 issued by the auditor reveals that any Certificate issued by the project architect (Form 1), engineer (Form 2) or the chartered accountant
(Form 3):

– Has false or incorrect information and

– the amounts collected for a particular project have not been utilised for the project and

– the withdrawal has not been in compliance with the proportion to the percentage of completion of the project,

then the MahaRERA, in addition to taking penal actions as contemplated in the Act and the Rules, shall also take up the matter with the concerned regulatory body of the said professionals of the architect, engineer or chartered accountant, for necessary penal action against them, including dismemberment.

Thus, while % of completion of work needs to be mentioned in ongoing Form 3 issued by a CA (as per the relaxations given by the MahaRERA), the withdrawals must be in sync with the proportion to the percentage of completion of the project. In fact, the Auditor is required to specifically report on this issue and if it is found that this condition has been violated, then the RERA may even complain to the ICAI against the CA issuing Form 3. Thus, there is a unique scenario where the CA need not report on % completion but he must ensure withdrawal is in compliance with % completion. Hence, it would be in the interest of the CA to always ensure that his certificate clearly specifies whether the withdrawal is in proportion with the percentage of completion of the project.

The abovementioned rules will have to be followed by the co-promoter as well, to the extent applicable.

Conclusion

The Act is a major reform in India’s real estate sector and as is the case with any transformation, there are bound to be teething problems and unsolved queries. As the sector progresses on the learning curve, lessons will be learnt and issues may get resolved.

At this stage, it would be worthwhile to alert CAs issuing certificates under the Act, to remember Shakespeare’s quote “Discretion is the Better Part of Valour!” Thus, they should exercise due care and caution while certifying and in cases of doubt or ambiguity, consider asking the Promoter to obtain a legal opinion. Avoid acting in haste and repenting in leisure!!

shailesh.kwebmaker

Threats to RTI

Those who wish to proclaim the great impact of Right to
Information say that it is responsible for creating the culture of transparency
in the government. The widespread usage of RTI is proof of this. This claim is
reasonable and is obvious in the empowerment of citizens and the scams it has
exposed. There is a strong feeling that corruption is unacceptable and there is
a great resolve to curb it. This is in line with the declaration in the
preamble of the constitution.

However, accountability and transparency have not yet
become embedded in the DNA of those with power, and this is a change that is
being resisted. There are signs that we may have reached a point of
stagnation, which could lead to RTI’s regression. This cannot be good for the
citizens and democracy. Many techniques have been developed by the officers to
stall RTI queries. At times, absurdly high charges in tens of thousands are
sought as costs for gathering the information. Another way is to offer piles of
files for inspection without indexing and pagination. I once asked a government
department about a list of transfers of senior officers in violation of Act 21
of 2006; they sent it to over 30 different offices. One more technique is to
transfer the application multiple times. All these are against the letter and
spirit of the law.

First let us analyse the reasons for RTI’s success and wide
proliferation. The main reason was the fact that it was reasonably well crafted
because of active civil society intervention and participation. There were
people’s movements like Mazdoor Kisan Shakti Sangathan which had championed
this law. The teeth of the act were the penalty provisions which for the
first time provided for a financial penalty up to Rs. 25000 to be paid by a
public information officer, if he/she did not provide information without
reasonable cause. This for the first time recognized the sovereignty of the
individual citizen.

Civil society organizations and individuals very
enthusiastically took upon themselves the job of educating people. Citizens
took ownership of this law. Government officials feared the Information
Commissions and felt they would have a difficult time if the matters went to
courts in writs. Among the first few cases which went to courts, various high
courts acknowledged that this was a fundamental right of citizens which had
been earlier defined in various Supreme Court judgements, such as those in Raj
Narain case, R. Rajagopal, SP Gupta, ADR-PUCL and others.

However, after the first few years of this honeymoon, the resistance
to RTI began building up within the establishment. The establishment soon
realized that it had unleashed a genie, which curbs its powers for
arbitrariness and corruption. In less than a year, the government decided to
amend the act to dilute its effectiveness. There were intense protests across
the country by citizens and the government had to retract. After that there
were at least two more efforts to dilute the Act but these too failed. The last
time was when the Central Information Commission ruled that six major political
parties were ‘public authorities’ as defined by the law and hence would have to
give information in RTI. The parties ganged up together so that they could
carry on with their opaque operations with black money, undemocratic working
and in contravention of their constitutions. Citizen opposition managed to
again stop this. But political parties have jointly decided to defy the
orders of the Commission to display their pompous arrogance. They have refused
to appoint Public Information Officers or give any information in RTI. They are
disregarding the orders of the Commission without even a fig leaf of getting a
stay from a Court.

Most state and central governments are showing great
reluctance to follow the RTI Act. They have developed techniques to wear out
the applicant. The lackadaisical ways of the Information Commissions have
helped and emboldened them. It has been noticed that most Information
Commissions impose penalties in the rarest of cases, as if they are imposing a
death penalty. Governments often do not appoint Commissioners.

Amongst the few times that the former PM spoke he had
mentioned his distress at what he called ‘frivolous and vexatious’ RTI
applications and the time taken up in these. A RTI query about this revealed
that it was a casual observation based on his perception and irritation with
pestering RTI queries by the powerless citizen. There was no evidence. The
present PMO refused to even provide information about the visitors to the PM!
Why should this be so? The PM works round the clock in the service of people
and such reluctance appears suspicious. Will revealing those names reveal
some dark secrets?

The governments appear to be institutionalizing mechanisms
whereby citizens know only what the government wants them to know. It is
absurd that citizens who are mature enough to elect those who should govern the
nation are not considered mature enough to be trusted about information on
those who represent them. This claim is made by those who are in power, and who
do not understand and subscribe to democratic working. After getting power,
people’s mindset undergoes a transformation. It is a matter of deep distress
that even the present CM of Delhi Arvind Kejriwal, who became nationally famous
for his work in the RTI campaign, has not brought about any significant change
in his government towards transparency.

Information Commissioners are mainly selected as an act of
political patronage. Many of them have no predilection for transparency,
though they may pay lip service to it. The lack of effective working,
accountability and transparency at most of the commissions is heart wrenching.
Many commissioners do not understand the law, nor the basic rationale for
transparency or democracy. Apart from
this the lazy way in which many work has built up mounting pendencies, and it
appears that they will be largely responsible for frustrating RTI.

It is unfortunate that the last few years have seen decisions
by most quasi-judicial and judicial bodies expanding the interpretations of the
exemptions and constricting the citizen’s right. Former Supreme Court judge,
Justice Markandey Katju has said “I therefore submit that an amendment be made
to the RTI Act by providing that an RTI query should be first examined
carefully by the RTI officer, and only if he is prima facie satisfied on
merits, for reasons to be recorded in writing that the query has some substance
that he should call upon the authority concerned to reply. Frivolous and
vexatious queries should be rejected forthwith and heavy costs should be
imposed on the person making them.” A former Chief Justice of India said in
April 2012, “The RTI Act is a good law but there has to be a limit to it.”
At this rate and logic, we may be asked to justify why we wish to speak or express
ourselves! A study of all the Supreme Court judgements by this writer
appears to show that the Right to Information is being constructed by gross
misinterpretation. Government departments get stays from Courts to many
progressive orders of the Information Commissions. Citizens do not have the
wherewithal to fight protracted legal battles. While parliament’s attempts to
dilute the RTI Act were thwarted by the sovereign citizens, its emasculation by
adjudicators is happening at a brisk pace. Many decisions are blunting the law
of its power to curb corruption.

One of the most
problematic statements by the Supreme Court in a RTI case is quoted in many
places: “Indiscriminate and impractical demands or directions under RTI Act
for disclosure of all and sundry information (unrelated to transparency and
accountability in the functioning of public authorities and eradication of
corruption) would be counter-productive as it will adversely affect the
efficiency of the administration and result in the executive getting bogged
down with the non-productive work of collecting and furnishing information. The
Act should not be allowed to be misused or abused, to become a tool to obstruct
the national development and integration, or to destroy the peace, tranquillity
and harmony among its citizens. Nor should it be converted into a tool of
oppression or intimidation of honest officials striving to do their duty. The
nation does not want a scenario where 75% of the staff of public authorities
spends 75% of their time in collecting and furnishing information to applicants
instead of discharging their regular duties. “

This needs to be contested. The statement “should not be
allowed to be misused or abused, to become a tool to obstruct the national
development and integration, or to destroy the peace, tranquillity and harmony
among its citizens” would be appropriate for terrorists, not citizens using
their fundamental right to information. There is no evidence of RTI damaging
the nation. As for the accusation of RTI taking up 75% of time, I did the
following calculation: By all accounts, the total number of RTI applications in
India is less than 10 million annually. The total number of all government
employees is over 20 million. Assuming a 6-hour working day for all employees
for 250 working days, it would be seen that there are 30,000 million working
hours. Even if an average of 3 hours is spent per RTI application (the average
is likely to be less than two hours) 10 million applications would require 30
million hours, which is 0.1% of the total working hours. This means it would
require 3.2% staff working for 3.2% of their time in furnishing information to
citizens. This too could be reduced drastically if computerised working and
automatic updating of information was done as specified in section 4 of the RTI
Act. It is unfortunate that the apex court has not thought it fit to castigate
public authorities for their brazen flouting of their obligations u/s. 4, but
upbraided the sovereign citizens using their fundamental right.

I would submit that the powerful find RTI upsetting their
arrogance and hence try to discredit it by often talking about its misuse.
There are many eminent persons in the country, who berate RTI and say there
should be some limit to it. It is accepted widely that freedom of speech is
often used to abuse or defame people. It is also used by small papers to resort
to blackmail. The concept of paid news has been too well recorded. Despite all
these there is never a demand to constrict freedom of speech. But there is a
growing tendency from those with power to misinterpret the RTI Act almost to a
point where it does not really represent what the law says. There is widespread
acceptance of the idea that statements, books and works of literature and art
are covered by Article 19 (1) (a) of the constitution, and any attempt to curb
it meets with very stiff resistance. However, there is no murmur when users of
RTI are being labelled deprecatingly, though it is covered by the same article
of the constitution. Everyone with power appears to say: “I would risk my
life for your right to express your views, but damn you if you use RTI to seek
information which would expose my arbitrary or illegal actions.” An
information seeker can only seek information on records.

I would also submit that such frivolous attitude
towards our fundamental right is leading to an impression that RTI needs to be
curbed and its activists maybe deprecated, attacked or murdered. The citizen’s
fundamental right to information is now facing strong challenges, owing to its
great success and the fact that it has changed the discourse and paradigm of
power. Our democracy is at a crossroads. The next decade could result in
increasing the scope of transparency to result in a true democracy. However, if
the forces opposing transparency gain over the demos, a regression can
take place. If this happens, those in power must note that the citizen will not
stand for it. Citizen groups must take active measures to defend their right,
including demanding a transparent process of selecting commissioners and making
the political leadership aware that they will resist any dilution of the law. RTI
must be saved and allowed to flower. At this juncture as the nation celebrates
70 years of independence it must hold samvads (dialogues) across the nation to
restore RTI to its pristine glory. Parliament with citizen inputs made a law
which ranks amongst the top five in the world in terms of its provisions.
However, we rank at a poor 66 in terms of implementation. It is our duty to
create adequate public opinion to safeguard our Right to Information.

shailesh.kwebmaker

Insolvency and Bankruptcy Code 2016 – Challenges and Opportunities

The enactment of the ‘The Insolvency and Bankruptcy Code
2016’ (IBC) on May 26, 2016 is perhaps one of the biggest reforms along with
GST undertaken by India in recent times. The Code unifies and streamlines the
laws relating to recovery of debts and insolvency for both corporate and
non-corporate persons, including individuals.

The preamble to the Act introduces the Act as

– An Act to consolidate and amend the laws
relating to reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals

– To fix time periods for execution of the law
in a time bound manner

– To maximise the value of assets of interested
persons

– To promote entrepreneurship

– To increase availability of credit

– Balance the interests of all stakeholders
including alteration in the order of priority of Government dues.

The vision of the new law is to encourage entrepreneurship
and innovation. Some business ventures will always fail but they will be
handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on
instead of being bogged down with decisions taken in the past.

The Code repeals or overrides around 11 laws and promises to
bring a sea change in how debt recovery and insolvency are handled in India,
drawing from the success of such law in other countries.

Insolvency, Bankruptcy and Liquidation

Bankruptcy and Liquidation share in common the concept of
‘Insolvency’. This means that it takes a person or a company becoming
‘Insolvent’ to trigger a Bankruptcy or Liquidation.

Having said that, not all Liquidation occurs as a result of
Insolvency (i.e., Members Voluntary Liquidations occurs when the shareholders
of a solvent company elect to liquidate the company, simply because that
company has achieved its purpose).

To address the question directly, Insolvency is the common
link to Bankruptcy and Liquidation. Let me unpack these concepts.

Applicability of the Code

The provisions of the Code shall apply for insolvency,
liquidation, voluntary liquidation or bankruptcy of the following entities:

1. Any company incorporated under the Companies
Act 2013, or under any previous law

2. Any other company governed by any special act
for the time being in force, except insofar as the said provision is
inconsistent with the provisions of such Special Act

3. Any Limited Liability Partnership under the
LLP Act 2008

4. Any other body incorporated under any law for
the time being in force, as the Central Government may by notification specify
in this behalf

5. Partnership firms and individuals.

There is an exception to the applicability of the Code that
it shall not apply to corporate persons who are regulated financial service
providers like Banks, Financial Institutions and Insurance companies.

Institutional set up under
the code

With a view to improve Ease of doing business in India, the
code provides for a time bound process for speedy disposal and also the manner
for maximisation of value of assets. It will create a win-win situation not
only for the creditor and debtor companies, but it will also benefit the
overall economy.

The IBC provides an institutional set-up comprising of the
following five pillars:

I. Insolvency Professionals (‘IP’) –To
conduct the corporate insolvency resolution process and includes an interim
resolution professional; the role of the IP encompasses a wide range of
functions, which includes adhering to procedure of the law, as well as accounting
and finance functions.

II. Insolvency Professional Agencies (‘IPA’)
–To enroll and regulate insolvency professional as its member in accordance
with the Insolvency and Bankruptcy Code 2016 and read with regulations.

III. Information Utilities – to collect,
collate and disseminate financial information to facilitate insolvency
resolution.

IV. Insolvency and Bankruptcy Board of India
(‘IBBI’) – A Regulator who will oversee these entities and to perform
legislative, executive and quasi-judicial functions with respect to the
Insolvency Professionals, Insolvency Professional Agencies and Information
Utilities.

V. Adjudicating Authority – The National
Company Law Tribunal (NCLT), established under the Companies Act, 2013 would
function as an adjudicator on insolvency matters under the Code.

The implementation of any system does not only depend on the
law, but also on the institutions involved in administration and execution of
the same. It depends on the effective functioning of all the institutions but
the Insolvency Professionals have a vital role to play in the insolvency and
bankruptcy resolution process.

Distinguishing Features of the IBC

The Code provides a comprehensive and time bound mechanism to
either put a distressed person on a firm revival path or timely liquidation of
assets. The interests of all stakeholders have been taken care of. Some of the
salient features of the code are as follows:-

1. Dedicated Adjudicating and Appellant
Authority:

The adjudicating authority for Corporates
shall be National Company Law Tribunal (NCLT) and for others shall be Debt
Recovery Tribunal (DRT).The first appeal shall lie with NCLAT and DRAT
respectively and the final appeal shall lie with the Supreme Court. No other
Court shall have any jurisdiction to grant any stay or injunction in respect of
matters within the domain of NCLT, DRT, NCLAT and DRAT. This would provide a
specialised mechanism to resolve stressed accounts problem.

Further, a separate regulator i.e. the
IBBI is set up to regulate various matters under the Code.

2. Time Bound Process: The Code provides that
the insolvency resolution shall have to be completed within 180 days (maximum
one extension of 90 days allowed) from the date of admission of application for
insolvency resolution. If no resolution is reached in the above time frame, the
Code provides for automatic liquidation. Hence, once default happens and
insolvency resolution application is filed by any stakeholder, financial
creditors would be forced to make intelligible choices so as to maximise
economic value of business or face liquidation. At the same time, promoters
should get sensitive about managing cash flows as default would straight lead
to loss of control over business.

3. Preserving Value of Business: Once the
application for insolvency resolution is admitted, there shall be complete
moratorium till completion of insolvency proceedings. Board of Directors shall
remain suspended and affairs of the company shall come under the control of the
Resolution Professional. Though the entity shall remain a going concern.
Creditors shall be precluded from taking any action against the Company
including enforcement of security under SARFAESI Act during this period. Even a
lessor cannot take possession of leased assets back during the moratorium
period. Thus it shall provide an opportunity for the creditors to discuss
sensible restructuring that can provide a better value than straight
liquidation even while business and its assets are preserved during this
period.

4. Failure to Pay is the new Trigger: Existing
mechanisms under SICA and Companies Act are tuned to provide for interjection
when the borrower’s ability to pay is demonstrably impaired. Whereas under the
Code, a creditor can trigger insolvency resolution process just on default.
Thus a defaulter can be dragged into insolvency resolution process without
waiting for its net-worth to get eroded or for the account to be classified as
NPA. This would be a big deterrent for able debtors to arm-twist small
creditors.

Therefore, the Code will have an effect
of early identification of distress. It will instill discipline among promoters
or else they will risk losing management control and also face liquidation.

5. Professionalisation of Insolvency
Management:

The Insolvency Professionals shall be
regulated and licensed professionals and will have a critical role in the
process. During the process of Insolvency Resolution, the management of the
borrower shall be taken over by the Insolvency Resolution Professional. This
will help preserve the value of business and assets of the debtor during the
insolvency resolution process. Lenders will no longer be worried about
mismanagement by promoters of distressed corporates. As of now, the only option
lenders had was to convert debt into equity and take over the management for
which they may not be having the requisite competency.

6. New Priority Order of Payment: A welcome
change brought in by the Code is that the statutory dues are relegated to the 5^thposition in the priority of payment from the current 1^st
position. Herein, even unsecured financial creditors shall be paid before
clearance of dues of the Central and State Governments. This provision is
likely to boost corporate bond market as well as debt funding of SMEs and
startups.

7. All Creditors empowered to trigger
Insolvency: All creditors whether domestic or foreign, whether secured or
unsecured and whether financial or operational can apply for insolvency
resolution. The defaulting debtor himself may also apply. Thus for the first
time, structured mechanism for redressal of defaults is being provided to
operational creditors such as suppliers, employees etc. Similarly, the
foreign lenders and unsecured lenders shall find a mechanism to enforce their
debts in a fair and transparent process. This no doubt will deepen the credit
markets in India.

8. Enforcement of Personal Guarantees: If any
corporate debt is secured by means of personal guarantee, then the bankruptcy
of the personal guarantor shall be dealt with by same NCLT rather than DRT.
Thus, there will be a common forum for a creditor to enforce debt from both
borrower and guarantor.

9. Information Utilities: There is an enabling
provision to facilitate creation of Information Utilities which will house
comprehensive credit data relating to debtors, their creditors and securities
created. This will improve transparency and better decision making at all
levels.

10. Fresh Start: A non-corporate debtor on finding
himself unable to pay his debts may apply for a fresh start by discharge from
certain debts, provided he satisfies the following conditions:-

– Gross annual income of the debtor is not
exceeding Rs 60,00/-

– Aggregate value of debtor is not exceeding
Rs. 20,000/-

– Aggregate value of debts is not exceeding Rs.
35,000/-

– Debtor is not undercharged bankrupt

– Debtor does not own a dwelling unit
(encumbered or not )

No Fresh Start Order in the last 12 months
prior to the date of application.

Brief Overview of Corporates Insolvency Resolution Process

In the following flowchart, we can see an overview of the
Corporate Insolvency Resolution Process.

Who can become an Insolvency Professional?

Category I – Any Chartered Accountant, Company Secretary,
Cost Accountant and Advocate who has passed the Limited Insolvency Examination
and has 10 years of experience and enrolled as a member of the respective
Institute/Bar Council; or a Graduate who has passed the Limited Insolvency
Examination and has 15 years of experience in management, after he received a
Bachelor’s degree from a University established or recognised by law.

The IBBI has notified the syllabus for the Limited Insolvency
Examination. For syllabus, enrollment process for the examination, etc.,
kindly visit: http://www.ibbi.gov.in/limited-insolvency.html or www.iiipicai.in

The ICAI has also set up a section 8 company and its website
contains an interesting E Learning platform covering the entire gamut of IBC
including mock tests. (www.iiipicai.in)

Category II – Any other individual on passing the
National Insolvency Examination.

The IBBI is yet to notify the syllabus for the National
Insolvency Examination.

The IPs are regulated by the code set out by the IBBI.
Section 208 (2) sets out code that needs to be followed by every insolvency
professional.

Further, the duties of the IP are laid out in the Model Bye
Laws [IBBI – (Model Bye-Laws and Governing Board of Insolvency Professional
Agencies) Regulations 2016, Clause VII of Schedule – Regulation 13].

Opportunities for Chartered Accountants (CAs)

The passage of the Insolvency and Bankruptcy Code, 2016 has
thrown up a tremendous set of new opportunities for CAs. On an analysis of the major responsibilities
of the IPs to the Debtors and Creditors, the IPs should be well versed with
aspects of Company Law, Taxation, Banking and Finance, Stakeholder Management,
Valuation/Sale of assets, Cash flow management and Commercial and business
acumen.

Considering the onerous responsibilities on the IP, it would
be very difficult for an individual to possess such multiple skills and hence
the IBC has brought in a concept of Insolvency Professional Entities (IPEs)
which can be registered as partnerships, limited liability partnerships and
corporate entities.

Such IPEs can be expected to have the capacity to offer the
diverse skill sets on a single platform to facilitate the Insolvency and
Bankruptcy practice.

IPE presents opportunities to CAs to team up their
counterparts, Company Secretaries, Cost Accountants and Lawyers and present a
complete solution to their clients.

Based on precedents of the last 6 months, and a view of this
author, in case of insolvency cases filed by Financial creditors, IPs can earn
between Rs. 2 lakh to Rs. 4 lakh per month and in case of cases filed by
creditors or by the corporates, IPs can earn between Rs. 50,000 to Rs. 2 lakh
per month depending upon the size of business and complexity of each case.

With the recent push by the Reserve Bank of India (‘RBI’) to
the Banks to file for Insolvency on the top 500 defaulters/NPAs under the new
IBC, banks have moved fast and started the process in the right earnest and the
process is expected to pick up speed. Further, with large scale media coverage
on the IBC, the creditors have also filed numerous cases for Insolvency on
Debtors and have received favourable closures in a short span of time. Both
these would throw up numerous and multiple opportunities for Professionals in a
short span of time and the first mover advantage will always help in quickly
building up the credentials in this space.

As on date, approximately 800-1,000 IPs have been
registered with IBBI and there is an estimate of more than 1 lakh cases of
defaulters/NPA pending only with Banks at various stages. Hence, there exists a
significant gap between the potential demand of IPs expected in the near future
versus the supply of IPs.

Problem Areas under IBC

As the Indian corporate sector and business community get
more aware of the IBC due to push by the Government to the banks to file for
insolvency and widespread media coverage, financial creditors (primarily
unsecured lenders) and operational creditors are using the IBC as a pressure
tactic on the Corporate Debtor to pay their due sums. During the last few
months, there have been numerous cases filed by operational creditors with NCLT
under the IBC, however, many such cases filed by operational creditors have not
been admitted by NCLT due to various reasons. However, at the same time, under
the fear of IBC, many cases of operational creditors have been settled by the
Corporate Debtor to avoid being referred to NCLT under the IBC. Hence, as we
get more judicial precedence of cases not being admitted by NCLT, sense should
prevail and only genuine cases would be filed under IBC. Further, business
practices amongst the Indian corporate sector and business community especially
with respect to operational creditors should definitely see a significant
improvement in the years to come.

Conclusion

This Code is currently in early stages of
implementation and is focused on revival of business and putting idle resources
of the economy to use, this can bring a huge change in lives, livelihoods and
prospects of both creditors, debtors and professionals. It is one of the most
challenging and equally rewarding career options. In this era of major reforms
in uncharted territories, it throws up a big opportunity to work as an
Insolvency Professional and get an early mover advantage.

shailesh.kwebmaker

Ingredients for Crafting a Model Policy On Dealing With Related Party Transactions

Introduction

Related Party Transactions (RPTs) have been a contentious
issue since the advent of Companies. Separation of ownership and control
combined with diffused ownership in companies provides a fertile ground for the
unscrupulous elements to unjustly enrich themselves. More than 200 years ago,
Lord Cranworth in the landmark case of York Building Company vs. McKenzie
highlighted the reason for RPTs invoking distrust. In 1795, he noted

‘No man can serve two masters.
He that is entrusted with the interest of others, cannot be allowed to make the
business an object of interest to himself; because from the frailty of nature,
one who has the power, will be too readily seized with the inclination to use
the opportunity for serving his own interest at the expense of those for whom
he is entrusted.’

A critical strand in the history of corporate law is the
evolution of regulations dealing with RPT, for mal-governance often manifests
itself through RPTs. Despite its role in hampering good governance, RPTs are
not banned anywhere in the world, as this ‘cure’ is more harmful than the
‘disease’ itself.

Given the interdependence, a key element of good governance
is evidenced in the way in which RPTs are regulated. While legal compliance is
the minimum expected of any corporate citizen, good governance practices go
beyond the minimum and set higher standards to inspire shareholders’ and
stakeholders’ confidence in building a profitable and sustainable business.

Regulating RPTs has three critical parts, namely Formulating
a Policy for Dealing with RPTs, Implementing the Policy that is formulated, and
Disclosure of RPTs to their shareholders. This article attempts to provide
insights into crafting a model ‘Policy on Dealing with Related Party
Transactions’ by drawing on the history of regulating RPTs, analysing the
Indian statutes and learning from the practices of the Nifty 50 companies.

A Brief History of Regulating RPTs

One of the earliest recorded RPT disputes involves the East
India Company and Robert Clive. Following the Battle of Plassey, Robert Clive
privately negotiated for himself an annual income of £30,000 for installing Mir
Jaffar as the Nawab of Bengal. In 1765, Laurence Sulivan, the Chairman of East
India Company, who wanted to weed out corruption in the company, initiated the
move to cancel this annual payment as unjustified, resulting in a fight for the
control of East India Company. As it looks, this does not seem to be the first
disputed RPT as joint stock companies were in existence from the 16th century.
However, fighting for the control of the company seemed to be the only method
available to shareholders for redressing their grievances. As RPTs became
avenues for fraud, regulators had to move in to regulate them. Even in events
as recent as 2004, when the US-SEC initiated proceedings against Parmalat of
Italy on what it called ‘the largest financial fraud in history’, RPTs had a
role, revealing a close nexus between frauds and RPTs

After 1844 AD, when companies could be registered under
specific laws, RPT regulations has evolved rapidly. A major factor prodding on
this evolution is the conflicting economic theories that viewed RPTs from
different perspective. While the Conflict of Interest Theory viewed it
negatively, the Efficient Transaction Theory viewed RPTs positively. Their
difference was in what they viewed as primary to the transaction. In the
Conflict Theory, relationship between Directors and Shareholders in creating
shareholder value was considered of paramount importance, however in the
Efficient Transaction Theory, the business and the business outcome was placed
in the centre stage.

Between the two extremes, corporate law has evolved to
regulate RPTs rather than ban them altogether. Occasionally, on the backdrop of
a large corporate scandal, given the damage they have inflicted on business
confidence, proposals to ban RPTs are mooted and debated at length. However, in
almost all cases, with the passage of time these proposals get diluted as the
ease of doing business assumes importance, resulting in higher disclosures and
more stringent approval processes mandated to prevent misuse of RPTs.

Table 1: Evolution of Regulations for Dealing with Related
Party Transactions

Stage

Year / Country

Status of RPT

Basis

Content

1845

Directors disqualified on
entering into RPT but the Act silent on the
effect of RPTs enforceability

Companies Clauses
Consolidation Act, 1845

As per Section 86, a
Director who held an office of profit or profited from any work done for the
company would cease from voting or acting as a Director.

1855

RPTs void Ab-initio

Aberdeen Railway Co. vs.
Blaikie Bros.

‘The ground on which the
disability or disqualification rests, is no other than the principle which
dictates that a person can be both judge and party.’

1856

RPT permitted if not
invalidated by the Articles of Association

The Companies Act, 1856

In this Act, a clause was
introduced in the model Articles of Association (which is optional for
companies to adopt) that made Directors with RPTs vacate their office. Many
companies which were incorporated during this period chose to delete this
clause thereby permitting RPTs.

1913

India

Board to approve RPT after
the Director declares their interest

The Companies Act, 1913

Section 91 A requires a
Director to provide disclosure of interest in any contract or arrangement
entered into by or on behalf of the company.

1936

India

Disinterested Board to
approve RPT with disclosure to shareholders

The Companies (Amendment)
Act, 1936

Section 91 B prohibited an
interested director from voting on any contract or arrangement in which he is
directly or indirectly concerned or interested.

1956

India

Central Government to
approve RPTs in certain companies

The Companies Act, 1956

Section 297 required
companies with share capital of Rs.1 crore and above to get Central
Government’s approval for RPTs.

2013

India

Disinterested shareholders
to approve RPT with disclosures to
shareholders

The Companies Act, 2013

Section 188 of the Act,
introduced the concept of interested shareholders.

RPT Regulations in India

The Companies Act, 2013 regulates RPTs for all companies in India. Further
listed entities are also required to comply with the SEBI’s (Listing
Obligations and Disclosure Requirements) Regulations, 2015. Taken together, the
two regulations provide a comprehensive framework for dealing with RPTs.

The Companies Act, 2013 that defines a related party, which in addition
to relatives of Directors & Key Managerial Personnel and body corporates
controlled by them and their companies has a distinct category in clause (vii)
of section 2 (76). This clause includes ‘any person on whose advice, directions
or instructions a director or manager is accustomed to act’. Explanatory
statement to this clause specifically excludes professionals who advice the
directors or managers. Given this exclusion, the persons covered by this clause
can be colloquially categorized as ‘friends, philosophers and guides’. In
practice, this clause may come into effect in financial transactions with
former promoters, Chairman and Chief Executives who acting as unofficial
advisors and mentors could be wielding soft-power over the current decision
makers.

In line with the globally established practice of regulating RPTs and
not banning them, the Companies Act, 2013 too regulates RPTs through section
177 and section 188. Section 188 requires the Board of Directors to approve all
RPTs in both public and private companies. Contrary to the popular
perception, all provisions regulating RPTs specified in the Companies Act, 2013
apply to both the public and the private limited companies equally. The
only concession provided to the private company is vide a notification issued
on June 5, 2015, where the related party in a RPT is permitted to vote on their
transactions in both the Board and Shareholder meetings.

The Act for approving RPTs uses the lens of ‘Ordinary Course of
Business’ and ‘At arm’s length’ basis. As these two terms are not defined in
the Act or by SEBI, a working definition is attempted here. A transaction in
the ordinary course of business would have many other comparable transactions
with multiple unrelated parties thereby making RPTs comparable. Likewise, a
transaction at arm’s length is one in which all the economic benefits and
rewards are embedded in the transaction itself and thereby stand the test of
market place.

Given its comparability and market based pricing, a transaction that is
in the ordinary course of business and at arm’s length basis requires only the
audit committee’s prior approval (section 177). Extending this principle
further, the Audit committee can provide a blanket approval for repetitive
transactions that have a valid reason necessitating prior approval.

Where a transaction does not meet either one of the two
criteria-ordinary course of business or at arm’s length basis, approval of the
Board of Directors is required in a duly conveyed meeting. Hence, this approval
cannot be given by them passing a Circular Resolution. Further, where the
transaction size exceeds defined threshold levels, approval of the Shareholders
is required either in a physical meeting or through the postal ballot. Rule 15 of the Company (Meeting of the Board
and its Powers) Rules 2014 details these thresholds, which is quite elaborate,
capturing different types of transactions like sales and purchase of goods,
availing or rendering services, buying, selling or leasing of property, with
specific absolute and relative limits for each one of them.

The provisions of the Companies Act, 2013 as detailed above are quite
technical and require considerable analysis to identify the approval process
required. Good governance requires transparency and clarity. Probably taking
this cue, Regulation 23 of the SEBI’s LODR Regulation 2015 provides for the
formulation of a Policy on Materiality of RPTs and on dealing with RPTs to help
decision makers interpret the law and provide operational guidelines for
implementing it. Further, Regulation 46 requires this policy to be displayed on
the Company’s website inviting public scrutiny. Considering its availability,
we have reviewed all the policies that were displayed in the month of May 2017
by Nifty 50 companies to arrive a model policy.

Lessons from the Practices of Nifty 50 Companies in Drafting
their Policy for Dealing with RPTs

Our review of the Policies on dealing with RPTs of the Nifty 50
companies revealed five critical clauses that define the quality of their policy,
namely:

1. Objective of the policy,

2. Basis for giving Omnibus Approvals,

3. Effect of RPTs not approved,

4. Criteria for Granting Approvals to RPTs, and

5. Disclosures required of RPTs.

For each of these clauses, we have picked out one of the exemplary
extracts from the Nifty 50 companies as possible role model for adoption.

I. Objective of
the Policy

To effectively deal with RPTs, the policy objectives need to be clearly
articulated as illustrated in the example given by highlighting it in bold.

Reliance Industries Limited.

“Reliance Industries Limited (the “Company” or “RIL”) recognises that
related party transactions can present potential or actual conflicts of
interest and may raise questions about whether such transactions are consistent
with the Company’s and its stakeholders’ best interests.”

II. Omnibus
Approval

The clarity and specificity of conditions attached to granting omnibus
approval and its subsequent reporting should be unambiguous of what is expected
from the Audit Committee and the management team of the company as seen in the
example given here.

Bosch Ltd.

“In the case of frequent /
regular / repetitive transactions which are in the normal course of business
of the Company, the Audit Committee may grant standing pre-approval / omnibus
approval. While granting the approval, the Audit Committee shall satisfy
itself of the need for the omnibus approval and that the same is in the
interest of the Company. The omnibus approval shall specify the following:

a. Name of the related
party.

b. Nature of the
transaction.

c. Period of the
transaction.

d. Maximum amount of the
transactions that can be entered into.

e. Indicative base price
/ current contracted price and formula for variation in price, if any.

f. Such other
conditions as the Audit Committee may deem fit.

Such transactions will be deemed to be pre-approved and may not
require any further approval of the Audit Committee for each specific
transaction. The thresholds and limitations set forth by the Committee would
have to be strictly complied with, and any variation thereto including to
the price, value or material terms of the contract or arrangement shall require
the prior approval of the Audit Committee.

Further, where the need of the related party transaction cannot be
foreseen and all prescribed details (as aforementioned) are not available, the
Audit Committee may grant omnibus approval subject to the value per transaction
not exceeding Rs.1,00,00,000/- (Rupees One Crore only). The details of such
transaction shall be reported at the next meeting of the Audit Committee for
ratification.

Further, the Audit Committee shall, on a quarterly basis, review and
assess such transactions including the limits to ensure that they are in
compliance with this Policy. The omnibus approval shall be valid for a
period of one year and fresh approval shall be obtained after the expiry of one
year.”

III. Effect of RPT
not approved

The options available to the Audit Committee on dealing with a RPT needs
to be explicitly spelt out. This could include seeking the related parties to
pay compensation for loss suffered in addition to examining the reasons for this lapse in reporting and suggesting measures to rectify it.

Tata Motors Ltd., Tata Steel Ltd., Tata Power Ltd.

“In the event the Company becomes aware of a
transaction with a related party that has not been approved in accordance with
this Policy prior to its consummation, the matter shall be reviewed by the
Audit Committee. The Audit Committee shall consider all of the relevant
facts and circumstances regarding the related party transaction, and shall
evaluate all options available to the Company, including ratification, revision
or termination of the related party transaction. The Audit Committee shall also
examine the facts and circumstances pertaining to the failure of reporting such
related party transaction to the Audit Committee under this Policy and failure
of the internal control systems, and shall take any such action it deems
appropriate.

In any case, where the Audit Committee determines not to ratify a
related party transaction that has been commenced without approval, the
Audit Committee, as appropriate, may direct additional actions including, but
not limited to, discontinuation of the transaction or seeking the approval of
the shareholders, payment of compensation for the loss suffered by the related
party etc. In connection with any review/approval of a related party
transaction, the Audit Committee has authority to modify or waive any
procedural requirements of this Policy.”

IV. Criteria for
approval

The criteria captured for approval here is a brief and succinct summary
of the complex legal provisions.

Axis Bank

“All Material Related Party Transactions shall
require approval of the shareholders through ordinary resolution and the
Related Parties shall abstain from voting on such resolutions. The approval
policy framework is given below:

– Audit Committee- All Related Party Transactions

– Board Approval- All Related Party Transactions referred by
Audit Committee for approval of the Board to be considered and Related Part
Transactions as required by the statute

– Shareholders’ Approval- Approval by Ordinary Resolution
for:

i. Material Related
Party Transaction

ii. Related Party
Transactions not in Ordinary Course of Business or not on Arm’s Length basis
and crosses threshold limit as prescribed under the statute.

Related Party
Transactions will be referred to the Audit Committee for review and prior
approval. Any member of the Committee who has a potential interest in any
Related Party Transaction will recuse himself or herself and abstain from
discussion and voting on the approval of the Related Party Transaction.

In determining whether to approve, ratify, disapprove or reject a
Related Party Transaction, the Audit Committee, shall take into account all the
factors it deems appropriate.

To review a Related Party Transaction, the Audit Committee is provided
with all relevant material information of the Related Party Transaction,
including the terms of the transaction, the business purpose of the
transaction, the benefits to the Bank and to the Related Party, and any
other relevant matters.”

V. Disclosures

The scope and extent of disclosures of RPTs needs to be captured
comprehensively by including all employees concerned with implementation.

Aurobindo Pharma Ltd.

“The particulars of contracts or arrangement with Related Parties
referred to in section 188(1) shall be disclosed in the Board’s report for the
financial year commencing on or after April 1, 2014 in Form AOC-2
enclosed as Annexure-I and the form shall be signed by the persons who have
signed the Board’s report.

Further the particulars of contracts or arrangement with Related Parties
shall also be entered in the Register of Contracts as per the provisions
of section 189 of the Act and the Rules made there under.

All Material RPTs that are entered into with effect from October 1,
2014, shall be disclosed quarterly along with the compliance report on
corporate governance.

The Company shall disclose this Policy on its website and also a web
link thereto shall be provided in in its annual report. The Policy shall also
be communicated to all operational employees and other concerned persons of
the Company.”

Conclusion

In today’s world, there is no company that can eliminate RPTs totally,
as they are an integral part of the commercial world. Given that all RPTs do
not dilute shareholder value or reflect mal-governance or fraud, it is
important to have a transparent and clear policy in dealing with them. While
compliance with law is the minimum that is expected of any corporate citizen,
good governance practices should go beyond the minimum and set new standards.
In the context of dealing with RPTs, this can begin with investing time and
effort in crafting a clear, comprehensive and concise policy that will enrich
shareholder value creation for the company in addition to significantly
enhancing its sustainability.

shailesh.kwebmaker

Do Facebook Friendships Make Parties Co-Conspirators? – SEBI Passes Yet Another Order

SEBI has
passed yet another order* holding
that being ‘friends’ on Facebook is ground enough to allege that the two
parties are connected and thus guilty for insider trading violations. Based on
this, SEBI has passed an interim order requiring such ‘connected person’ to
deposit the allegedly ill-gotten gains and also initiated proceedings for
debarment. About two years back, by an order dated 4^th February
2016, SEBI had made a similar ruling that was discussed in this column.
However, in that case, the social media connection was not the sole connection.
Such orders raise several concerns since people are increasingly connected in
social media to friends, relatives and even strangers.

Summary
of some relevant provisions of law relating to insider trading

Insider
trading is believed to be rampant not just in India but also in other
countries. Proving that there was insider trading the guilty is a difficult
task. In India, it is also perceived that lack of adequate powers with SEBI to
determine “connections” between parties makes Regulators’ job a little more
difficult. Primarily, SEBI has to show that a person is connected with the
company or persons close to it. Further, it has to also show that unpublished
price sensitive information existed that was used to deal in shares and make
profit. In many cases, close insiders like executives, directors, etc. get
access to valuable price sensitive information and fall to temptation of easy
profits. Such cases are easier to investigate, compile sufficient and direct
evidence and punish the wrong doer.

However,
capital markets also attract sophisticated operators who use advanced tools and
techniques to avoid detection. Information can be increasingly shared in a
manner difficult to even detect, much less prove, more so with fast developing
technology, encryption, etc.

The SEBI
(Prohibition of Insider Trading) Regulations, 2015 does use several deeming
provisions that help establish a basic case. Some of these presumptions can be
rebutted by showing facts to the contrary.

To determine
whether there was insider trading in such cases, certain facts/circumstances
would have to be established. Firstly, it would have to be shown that there was
price sensitive information relating to the company that was not yet made available
to the public. Then, it would have to be shown that the suspected person is
‘connected’ to the company or certain insiders. Several categories of persons
are deemed to be connected. Alternatively, if the suspect is an unconnected
person, then he should be shown to have received such information from the
company or a connected person or otherwise. Then it would have to be shown that
such person dealt in the securities of the company while such information was
not yet made public.

Proving
“connection”

As discussed
above, there are some categories of persons that are deemed to be connected.
Directors, employees, auditors, etc. are, for example, deemed to be
connected if their position enables them access to unpublished price sensitive
information (“UPSI”).

Then there
are persons who are in “frequent communication with its officers” which enables
them access to UPSI. And so on.

Proving
contractual connection of directors, auditors, etc. would be relatively
easy. Proving that their position enables them access to UPSI requires
compiling of relevant information such as their nature of duties, their
position in the company, the nature of information that was UPSI, etc.
This information can be compiled with the help of the company.

Difficulty
arises in proving connection of persons who are not so closely associated with
the company. It would have to be proved, for example, that he was in frequent
communication with the officers, etc. of the company. This may be
possible if SEBI is able to establish, for example, a pattern of communication
of such person with the officers, etc. Alternatively, it would have to
be shown that the person was in possession of such UPSI, which is often more
difficult, more considering that parties may use sophisticated
techniques/technology to communicate.

What
happened in the present case?

Before going
into the details of this case, it is emphasised that this is an interim order.
There are no final findings and the statements made therein are allegations,
though after a certain level of investigation and also inquiring and obtaining
information from the parties concerned.

SEBI found
that the Managing Director (“MD”) of the listed company in question had
acquired a significant quantity of shares of the company. These purchases were
made when certain price sensitive information existed but was not published. It
appears that SEBI also found that certain other persons had also dealt in the
shares of the company during this time and made significant profits.

The price
sensitive information concerned certain large contracts received by the
company. SEBI found that, during this period, the company had been awarded
large contracts of hiring of oil drilling rigs through a process of tender. The
process of tendering broadly involved certain stages. The first stage was
invitation of the bids and due submission of bids by the company. The second
stage was, in one case, revision of the bid to satisfy certain requirements. Thereafter,
the bids were opened and the top bidder (termed as L1) was declared. A formal
and final award of the order followed thereafter. SEBI held that declaration as
top bidder made it more or less certain that the contract would be awarded to
such person. Hence, SEBI decided that this was the time when price sensitive
information came into being. Till such information was formally published by
the company, the information remained UPSI and hence, insiders were barred from
dealing in the shares of the company.

It may be
added here that the contracts so awarded constituted a very significant portion
of the turnover of the company and hence, SEBI held that this information was
price sensitive. It also demonstrated that the price of the equity shares of
the company on stock exchanges increased when the information was made public.

The MD and
certain other persons were found to have purchased/dealt in the shares of the
company during this period.

Showing
that the MD was connected and dealt in the shares of the Company

SEBI held
that the MD was closely involved in the bidding process and indeed present at
the time when the bids were opened. The MD was thus held to be `an insider’.

It was then
shown that he had purchased shares of the company during this period and before
the information was made public. SEBI concluded that the MD had engaged in
insider trading.

Showing
that the other persons were connected and that they dealt in the shares of the
Company

SEBI found
that two other persons had dealt in the shares of the company during this same
period and made substantial profits. They had purchased shares of the company
before the UPSI was made public and sold the shares thereafter.

The
individual, Sujay Hamlai, was 50% owner of shares and director of a private
limited company, while his brother held the remaining 50% shares and was also
its director. Sujay and his company had dealt in the shares of the company.

When the MD
and these persons were asked whether they were connected to each other, their
reply, to paraphrase, was that they had no business connection but as
individuals they were socially acquainted.

SEBI checked
the Facebook profiles of such persons and found that the MD was ‘friends’ with
Sujay and his brother/spouse. Further, they had ‘liked’ each other’s photos
that were posted on this social media site. No other connection was found by
SEBI. However, SEBI held that this was sufficient for it to allege and hold for
the purposes of this order that they were connected and thus insiders.

Order
by SEBI

Having held
that the parties were insiders and that they had dealt in the shares of the
company while there was UPSI, it passed certain interim orders. It ordered them
to deposit in an escrow account the profits made with simple interest at 12%
per annum.

The interim
order also doubled up as a show cause notice, since, as mentioned earlier, the
findings of SEBI were meant to be allegations subject to reply/rebuttal by the
parties. Thus, the parties were asked to reply to these allegations and also
why adverse directions should not be passed against them. Such adverse
directions would be three. Firstly, the amount so deposited would be formally
disgorged/forfeited. Secondly, the parties may be debarred from accessing
capital market. Finally, the parties may be prohibited from dealing in
securities for a specified term.

Determination
of profits and total amount to be deposited

The
determination of profits is demonstrative of how working out of profits for
purposes of insider trading follows a particular method and hence worth a
review. SEBI first determined the purchase price of the shares by the parties.

In the MD’s
case, since he had not sold the shares. SEBI thus determined the closing price
of the equity shares immediately after the UPSI was made public. The
difference, the increase, was deemed to be the profit and the value of such
profit for the shares was held to be profits from insider trading.

Sujay and
his company had sold the shares some time after the UPSI was made public.
However, the method of determining profits from insider trading was the same as
for the MD. The difference between the closing price of the shares immediately
after the publishing of the UPSI and the purchase price was deemed to be the
profit from insider trading.

To such
profits, simple interest @ 12% per annum was added till the date of the Order.
Adjustment was also made for dividends received during this period.

The total
amount so arrived, being Rs. 175.58 lakhs for the MD, Rs. 18.20 lakhs for Sujay
and Rs. 47.86 lakhs for Sujay’s company, was ordered to be deposited in escrow
account pending final disposal of the proceedings. The parties were also
ordered not to alienate any of their assets till the amount was deposited.

Conclusion

It is seen
that in this case, the sole basis of alleging ‘connection’ between the MD and
Sujay/his company was their ‘connection’ on social media website Facebook.
There were of course other suspicious circumstances of timing of purchases by
Sujay, other factors listed in the order such as insignificant trades in other
shares, very recent opening of broker/demat account, etc. But the social
media connection seems to be the deciding factor.

Whatever may
be the final outcome in this particular case – whether in the final order of
SEBI after due reply by the parties and/or in appeal – some concerns come to
mind. SEBI uses social media activities and connections of parties to compile
information that it may be useful for its investigations in insider trading. It
is obvious that SEBI may do this also for other investigations where
connections are relevant such as price manipulations, frauds, takeovers, etc.
Even other authorities – regulators, police, etc. – would access social
media profiles of persons.

However, it is also common knowledge that more and
more people are on social media. There are also several other social media
websites apart from Facebook – viz., Twitter, Instagram, Linkedin, etc.
Connections are made not necessarily with persons whom one may know but even
with persons who are totally strangers. One may thus have thousands of
‘connections’. Making a connection is often a mere clicking on the ‘following’
button or ‘send’ or ‘confirm’ friend request and the like. The objective may be
to interact with such persons for online discussions or even to plainly
‘follow’ for knowing their views. It is possible that persons may end up facing
investigation purely on account of the activities of persons whom one may be
having such thin connections. While orders like these may be taken as a lesson
of caution for all of us as to whom we get ‘connected’ with, considering the
reality of social media, it is submitted that SEBI and other
regulators/authorities should come out with reasonable guidelines as to how
such ‘connections’ are treated and what presumptions are drawn.

*Order dated 16^th April 2018,
in the case of Deep Industries Limited

shailesh.kwebmaker

New Construction in Mumbai

Introduction

Real estate development is big
business in a metropolis such as Mumbai. However, what happens if all new real
estate development is abruptly halted by the High Court? A large part of the
economy would come to a grinding halt. However, this is what happened in Mumbai
on account of an Order passed by the Bombay High Court. The Order was passed to
tackle the growing problem of solid waste management in the City and the
inefficiency of the Municipal Corporation of Greater Mumbai (MCGM) in tackling
it. Nevertheless, it caused a great deal of issues and strife for the real
estate community. Now, a Supreme Court Order has given some respite from this.

Bombay
High Court’s Order

A Public Interest Litigation (PIL)
was filed before the Bombay High Court against the inefficient disposal of
solid waste arising during construction of real estate properties in the City
of Mumbai. Based on this, the Bombay High Court passed its Order in the case of
Municipal Corporation of Greater Mumbai vs. Pandurang Patil, CA No.
221/2013 Order dated 29.02.2016.

The Court observed that everyday
the MCGM was illegally dumping over 7,400 metric tonnes of solid waste at its
dumping sites in Mumbai. This figure was expected to significantly increase on
various counts, including the several buildings being constructed in the City.
This illegal dumping would cause increased pollution along with posing fire
hazards. On the other hand, there were a large number of constructions going on
in the city. In fact, the State Government had amended the Development Control
Regulations by providing for grant of more and more Floor Space Index (FSI).
Thus, the Court held that the State Government was encouraging unsustainable
growth.

Further, under earlier PILs, the
High Court had granted time to the MCGM to set up waste disposal and processing
facilities at the dumping grounds which time had also expired and nothing was
done by the MCGM. The Court held that something drastic needed to be done to
improve the situation, such as, to impose some restrictions on the unabated
development in the city. Moreover, it was the duty of the Court to ensure that
the provisions of the Environment Protection Act,1986 and the Municipal Solid
waste (Management and Handling) Rules, 2000 were implemented in as much as the
breach thereof would amount to depriving a large number of citizens of Mumbai a
fundamental right guaranteed under the Constitution of India, which was, the
right to live in a pollution free environment.

Accordingly, the High Court
extended the time granted to the MCGM for installing waste processing
facilities till 30^th June 2017. It noted that neither the said
Municipal Corporation nor the State Government had any solution whatsoever for
ensuring that the quantity of solid waste generated in the city should not
increase. Further, it was of the view, that the State Government was more
worried about the impact of imposing any restraint on the new constructions in
the city on the real estate industry. It felt that on one hand there was no
real possibility of any Authority complying with the Management of Solid Waste
Rules and on the other hand, the development by construction of buildings in
the city continued on a very large scale. There were also proposals for grant
of additional FSI by amending the Regulations. It therefore, was of the view
that, in case of certain development proposals, restrictions had to be imposed.
More so, because neither the State Government nor the Municipal Corporation has
bothered to make a scientific assessment of the impact of large scale
constructions going on in the city on the generation of the solid waste in the
city.

The Court was conscious of the fact
that in the city of Mumbai there were a large number of re-development projects
which were going on and the occupants of the existing premises might have
vacated their respective premises. Therefore, for the time being, it did not
impose any restrictions on the grant approval for proposals/applications for
the re-development projects including the construction of sale component
buildings under schemes sanctioned by the Slum Rehabilitation Authority (SRA).
However, it held that restrictions would have to be imposed on consideration of
fresh proposals/applications submitted for new construction of the buildings
for residential or commercial purposes.

Finally, the Bombay High Court
placed the following curbs on new development/construction in Mumbai:

(a) Development
permissions shall not be granted either by the MCGM or the State Government on
the applications/proposals submitted from 1^st March 2016 for
construction of new buildings for residential or commercial use including
malls, hotels and restaurants. Such applications would be processed, but the
commencement certificate shall not be issued. However, this condition would not
apply to all the redevelopment projects and to the buildings proposed to be
constructed for hospitals or educational institutions. It would also not apply
to proposals for repairs/reconstruction of the existing buildings which do not
involve use of any additional FSI in addition to the FSI already consumed.

(b) Even
if there was an amendment of the Regulations made hereafter providing for grant
of additional FSI in the city, the benefit of the same shall not be extended to
the building proposals/ Applications for development permissions including for
the re-development projects submitted on or after 1^st March 2016.

Supreme
Court’s Order

Aggrieved by this total ban on new
construction, the Maharashtra Chamber of Housing Industry approached the
Supreme Court by filing a Special Leave Petition. The Supreme Court gave its verdict
in Maharashtra Chamber of Housing Industry vs. Municipal Corporation of
Greater Mumbai, SLP(Civil) No. D23708/2017, Order dated 15^th March
2018.

We make it clear that this order is
not intended to set aside or modify the aforesaid impugned judgement. We have
considered the matter only in order to explore the possibility of safe method
of permitting certain constructions in the city of Mumbai for a limited period
to pave the way for further orders that may be passed. We are satisfied that a
total prohibition, though selective, has serious ramifications on housing
sector which is of great significance in a city like Mumbai. It also has a
serious impact on the financial loans which have been obtained by the
developers and builders. Such a ban makes serious inroads into the rights of
citizens under Article 19, 21 and 300A of the Constitution of India. It might
be equally true that the activities and the neglect in disposing of the debris
invades the rights of other citizens under Article 21 etc. That issue is
left open for a proper determination.

The Supreme Court passed an Order
presenting the following solution:

(a) It
directed that any construction that was permitted hereafter for the purpose of
this order would be only after adequate safeguards were employed by the
builders for preventing dispersal of particles through the air. This would be
incorporated in the building permissions.

(b) According
to the MCGM, 10 sites had been located for bringing debris onto such specified
locations which require to be filled with earth. In another words, these sites
require land filling which will be done by this debris.

(c) The
MCGM would permit a builder to carry on construction on its site by imposing
the conditions in the permission, that the construction debris generated from
the site, would be transported and deposited in specific site inspected and
approved by the MCGM.

(d) The
Municipal Corporation shall specify such a site meant for deposit of
construction debris in the building permission. Any breach would entail the
cancellation of the building permission and the work would be stopped
immediately.

(e) The
Municipal Corporation would not permit any construction unless it has first
located a landfill site and has obtained ‘No Objection Certification’ or consent
of the land owner that such debris may be deposited on that particular site.
The Municipal Corporation shall incorporate in the permission the condition
that the construction was being permitted only if such construction debris was
deposited.

(f) For
Small generators of Construction and Demolition Waste, the Waste would be
disposed of in accordance with the ‘Debris On-Call Scheme’ of the MCGM.

(g)
For Large generators of Construction and Demolition Waste, the waste would be
disposed of as per the Waste/Debris Management Plan submitted by the
owner/developer at the time of applying for permissions and as approved by the
BMC.

(h) Builders
applying for permissions would have to give a Bank Guarantee of amount ranging
from Rs.5 lakh to Rs.50 lakh depending upon the size of the project and mode of
development, which bank guarantee shall remain in force solely for the purpose
of ensuing compliance of the Waste Management Plan/Debris Management Plan
approved by the MCGM, till the grant/issuance of the Occupation Certificate.

(i) The
MCGM was instructed to submit a detailed report to the Supreme Court after the
expiry of 6 months from the date of the Order (i.e., 15^th September
2018) and till such time the Supreme Court’s Order would remain in force. It
also ordered that no construction debris would be carried for disposal to the
Deonar and Mulund dumping sites.

Conclusion

While
the High Court’s Order may appear harsh, sometimes desperate situations call
for desperate measures. At the same time, it is laudable that instead of
adopting a very technical or legal approach, the Supreme Court has come out
with a workable solution. One only wishes that the MCGM and the State
Government come out with a concrete action plan to tackle this menace of solid
waste management!

shailesh.kwebmaker

A Chartered Route to International Anti-Corruption Laws

Corruption has been seen as an immoral and unethical practice since biblical times. But, while the Bible condemned corrupt practices, ironically Chanakya in his teachings considered corruption as a sign of positive ambition.1 However, there can be no doubt that in modern business and commerce, corruption has a devastating and crippling effect. According to the Transparency International Corruption Perception Index, India is ranked 76 out of 167 nations. These statistics do not help India’s image as a destination for ease of doing business.

The growth of anti-corruption law can be traced through a number of milestone events that have led to the current state of the law, which has most recently been expanded by the entry into force in December 2005 of the sweeping United Nations International Convention against Corruption (UNAC). Spurred on by a growing number of high-profile enforcement actions, investigative reporting and broad media coverage, ongoing scrutiny by non-governmental organisations and the appearance of a new cottage industry of anti-corruption compliance programmes in multinational corporations, anti-corruption law and practice is rapidly coming of age.

While countries have for long had laws to punish their own corrupt officials and those who pay them bribes, national laws prohibiting a country’s own citizens and corporations from bribing public officials of other nations are a new phenomenon, less than a generation old.

The US Foreign Corrupt Practices Act (FCPA) was the first anti-corruption law that rigorously pursued cross border bribery. For more than 25 years, the United States was the only country in the world that through the extra territorial reach of its FCPA, rigorously investigated bribes paid outside of its own borders.

It was surpassed by The UK Bribery Act enacted by the UK government in 2010 and is arguably the most radical extra-territorial anti-graft law to date. This law was put into place by the UK Parliament after a demand from the Organization for Economic Cooperation and Development (OECD) in 2007 that the UK offer some explanation for its failure to abide by its OECD Anti-Bribery Convention obligations.

The United Kingdom has in 2010 enacted the robust United Kingdom Bribery Act (UKBA), that has created a new anti-corruption compliance regime which is even more powerful than the FCPA in many respects. Failure to adhere to anti-bribery compliance obligations based on these and other new anti-corruption laws can result in substantial and potentially debilitating fines being imposed against companies and their aids.

Both legislation and the business response to anti-corruption are now intensifying. On 11th May 2016, The Law Society of England and Wales; The Institute of Chartered Accountants in England and Wales, The Society of Trust and Estate Practitioners; The Law Society of Northern Ireland; The Law Society of Scotland; The International Federation of Accountants; The Association of Chartered Certified Accountants; The Chartered Institute of Public Finance and Accountancy; The Institute of Chartered Accountants of Scotland; Chartered Accountants Ireland, The Chartered Institute of Management Accountants; The Association of Taxation Technicians; The Association of International Accountants; The Chartered Institute of Taxation; The International Association of Book-Keepers; The Institute of Certified Bookkeepers; The Institute of Financial Accountants; UK200; The Association of Accounting Technicians issued the Anti-Corruption Statement by Professional Bodies – deploring corruption and the significant harm it causes. The statement acknowledges that criminals seek to abuse the services provided by Professional service providers such as Chartered Accountants to launder the proceeds of corruption and we are committed to ensuring the professionals are armed with the tools to thwart this abuse.2

Chartered accountants, either in business or in the profession, have to be well informed of the latest developments to ensure that they play a meaningful role in the prevention of corruption in the organisations which they serve.

THE PREVENTION OF CORRUPTION ACT 1988 (POCA)

In India, the law relating to corruption is broadly governed by the Indian Penal Code, 1860 (‘IPC’) and the Prevention of Corruption Act, 1988 (‘POCA’). Apart from the risk of criminal prosecution under POCA, there is also the risk of being blacklisted, debarred and subject to investigation for anti-competitive practices.

Sections 8, 9 and 10 of the POCA are applicable to arrest the supply side of corruption namely: Taking gratification, in order, by corrupt or illegal means, to influence public servant (Sec.8), Taking gratification for exercise of personal influence with public servant (Sec.9), Punishment for abetment by public servant of offences defined in Section 8 or 9 (Sec.10). Section 11 criminalises various acts of public servants and middlemen seeking to influence public servants.

In the case of H. Naginchand Kincha vs. Superintendent of Police Central Bureau of Investigation 3, the Karnataka High Court has clearly held that the words occurring at section 8 of the Act “Whoever accepts or obtains, or agrees to accept, or attempts to obtain, from any person, for himself or for any other person, any gratification…………”

covers the persons other than the public servants contemplated by definition clause (c) of section 2 of the Act and that does not require much elaboration.4

Unlike laws in some other jurisdictions, POCA makes no distinction between an illegal gratification and a facilitation payment. A payment is legal or illegal. This treatment applies to other laws and regulations in India as well.

PREVENTION OF CORRUPTION (AMENDMENT) BILL 2013–2011 TO 2016

After India ratified the United Nations Convention on Anti-Corruption, the Government of India initiated measures to amend POCA to bring it in line with international standards. Materially, these included –

a. Prosecuting private persons as well for offences, b. Providing time-limits for completing trials, c. Attachment of tainted property,

d. Prosecuting the act of offering a bribe.

In 2013, the Amendment Bill was introduced in Parliament, reviewed by the standing committee and Law commission of India.

One of the significant amendments proposed, to widen the scope of the Act beyond bribery of public servants, provides that irrespective of capacity in which the person performs services for or on behalf of the commercial organisation either as an agent, service provider, employee or subsidiary, the liability under POCA would follow. This places an organisation at considerable risk since illegal acts by employees even at the entry level can expose the organisation to prosecution.

The above proposed amendments are corroborated by the WhistleBlowers Protection Act, 2014 and section 177(9) of the Companies Act 2013 which provides for the establishment of a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

While the Companies Act, 2013 provides that companies should have a vigil mechanism, the Companies Act does not provide for consequences if a vigil mechanism is in place. In any event, companies may adopt measures provided in international documents like the UNCAC which provides for implementation of preventive anti-corruption policies and practices.

UNCAC provides for liability of legal persons. While commercial organisations and key officers should be prosecuted, there needs to be certainty and clarity in relation to the scope of such provisions. The UNAC further provides for the right of an aggrieved party to seek compensation/ damages for loss caused due to corrupt practices.

In light of the above, most commercial organisations may adopt measures provided in international documents and implement Anti-corruption compliance procedures which would not only be preventive in nature but would also assist in nailing the offender under law and fixing his liability. This would not only reduce the impact of the instance on the organisation by showing the bonafide of the organisation as a whole and bring to book corrupt individuals.

THE UNITEDSTATES FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA)

For many years, the FCPA has been the world champion of ethical corporate behaviour on the part of companies registered in, or associated with, the United States (US). The combined determination of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) requires big business to take rigorous measures to thwart corporate bribery, or face substantial penalties.

The FCPA, which is an US federal law, targets the payment of bribes by businesses linked to the US to foreign government officials. The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments, or foreign political parties, with the intent of obtaining or retaining business. It also requires businesses to keep proper books and records. It also prohibits the payment of bribes indirectly through a third person. For these payments, coverage arises where the payment is made while knowing, that all or a part of the payment will be passed on to a foreign official.

Record penalties for corporate corruption were imposed against Siemens AG when the multi-national company settled FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office (i.e. in its home country Germany) and the SEC. These included multiple guilty pleas and $1.6 billion in fines and penalties, including $800 million in disgorgement of bribe-tainted profits to the US authorities. This case demonstrates how regulators in different jurisdictions are cooperating with each other more than ever. According to the DOJ, this was the largest monetary sanction ever imposed in an FCPA case.5

As is demonstrated by the Siemens settlement, there is no double-jeopardy defence for offenders, and the same set of facts can give rise to a multitude of prosecutions since the violations generally took place in subsidiaries in remote regions. This is an important factor for local companies, as many Indian corporates are expanding their business operations globally at a rapid rate. They will have to implement stern measures to manage the corruption risk and ensure that management in their remote subsidiaries avoid the payment of bribes or face the wrath of the not just the DOJ and SEC but also local judiciary.The DOJ signalled to companies that it would continue to book corporates on FCPA violations around the globe.

For violating anti-bribery provision, FCPA provides that;

corporations and other business entities are subject to a fine of up to $2 million;

Individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to

$250,000 and imprisonment for up to five years.

For violating accounting provision of the FCPA6

corporations and other business entities are subject to a fine of up to $25 million

Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.

Under the (US) Alternative Fines Act, courts may impose significantly higher fines than those provided by the FCPA—up to twice the benefit that the defendant obtained by making the corrupt payment, as long as the facts supporting the increased fines are included in the indictment and either proved to the jury beyond a reasonable doubt or admitted in a guilty plea proceeding.

The UK Bribery Act 2010

The Bribery Act 2010 expands its territorial applicability beyond the UK through section 6-Active bribery of a foreign official and section 7 Company failing to prevent bribery (corporate offense) (strict liability). Under section 11, the maximum penalties that can be imposed on an individual convicted of an offence u/s. 1, 2 or 6 is an unlimited fine and imprisonment for up to 10 years.

An organisation that can prove it has adequate procedures in place to prevent persons associated with it from bribing will have a defence to the Section 7 offence.

The guidance, provided u/s. 9 of the Act, will help commercial organisations of all sizes and sectors understand what sorts of procedures they can put in place to prevent bribery, as mentioned in section 7.

An organisation could also be liable where someone who performs services for it – like an employee, consultant or agent – pays a bribe specifically to get business, keep business, or gain a business advantage for the organisation. But the organisation will have a full defence for this particular offence, and can avoid prosecution, if the organisation can show it had adequate procedures in place to prevent bribery.

While under the Act there is no need for extensive written documentation or policies. organisations may have proportionate procedures through existing controls over company expenditure, accounting and commercial or agent/consultant contracts for example. In larger organisations, it will be important to ensure that management in charge of the day to day business is fully aware and committed to the objective of preventing bribery. In micro-businesses, it may be enough for simple oral reminders to keystaff about the organisation’s anti-bribery policies. In addition, although parties to a contract are of course free to agree whatever terms are appropriate, the Act does not require you to comply with the anti-bribery procedures of business partners in order to be able to rely on the defence.7

CONCLUSION

The principal problem in the modern corporation is mainly the separation of ownership and control in organisations, the managers have often different motives from the owners, the management often tries to find ways to conceal corrupt practices and/or any setbacks in the company’s performance. They postpone intimating the shareholders, or even to the board, waiting for things to improve. In these cases, transparency and full disclosure in financial reporting are often sacrificed.

Anti-corruption compliance is the new watch-phrase in global boardrooms, and chartered accountants have a responsibility to not only help organisations to develop meaningful and robust anti-corruption controls, but also to understand compliance obligations applicable to them and keep pace with any changes in the bribery risks and compliance mechanisms put in place by multi-national organisations. These mechanisms are intended to prevent the use of accounting practices to generate funds for bribery or to disguise bribery on a company’s books and records.

Violations of record-keeping requirements can provide a separate basis of liability for companies involved in foreign and domestic bribery. It is here that the Chartered Accountant would play an important role, of not just raising the red flag but refusing to sign the accounts until all questionable payments are explained to their satisfaction by the Company.

The role of Chartered Accountants (CAs) has been seen as promoting transparency and fairness. CAs are national-level watchdog. However, CAs are not specialised anti-corruption agencies: on the whole, they are not expressly charged with detecting or investigating corrupt activity, but they have expertise in auditing and reporting the facts. CAs have traditionally undertaken financial audits of organisations’ accounting procedures and financial statements, and compliance audits reviewing the legality of transactions made by the audited body, and it is this vigilance that is relied upon while bringing to task the bribe givers and takers.

Prevention of Corruption Act 1988, focuses on the legal definitions governing corruption, lacks the suggestive guidance of how best to implement in practice financial and other controls which would be effective to prevent corruption, and bring to light any questionable payments.It is through their detailed study of several financial systems adopted by their various clients that CA’s are equipped with the required information and can suggest best practices that may be incorporated by the Government in a Model anti-corruption vigilance mechanism which may serve as a guidance to various organisations, and a yard stick to assess the ethical quotient of any organisation.

1    Chanakya – His Teachings & Advice, Pundit Ashwani Sharma, Jaico Publishing House, 1998: In the forest, only those trees with curved trunks escape the woodcut-ter’s axe. The trees that stand straight and tall fall to the ground. This only illustrates that it is not too advisable to live in this world as an innocent, modest man.

2    ANTI-CORRUPTION STATEMENT BY PROFESSIONAL BODIES – ISSUED 11th MAY 2016; https://www.icaew.com/-/media/corporate/files/technical/legal-and-regulatory/business-crime-and-misconduct/anti-corruption-statement.ashx?la=en

3    http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/183651/1/CRL-RP1040-14-13-09-2017.pdf

4    http://bangaloremirror.indiatimes.com

5    U.S. v. Siemens Aktiengesellschaft, 2008 – Case No. 08-367.

6    Section 78(b) of the FCPA contains certain accounting provisions that are applicable only to issuers. These require issuers to make and keep accurate books and ac-counts as well as certain internal controls

7 https://www.justice.gov.uk/downloads/legislation/bribery-act-2010

shailesh.kwebmaker

PROPOSED AMENDMENTS TO INVESTOR ADVISERS’ REGULATIONS – WIDE RANGING IMPLICATIONS INCLUDING TO CHARTERED ACCOUNTANTS

SEBI has issued on 7^th October 2016 a consultation paper
proposing some amendments to regulations relating to investment advisors and
investment advice generally. Some of the proposed changes affect Chartered
Accountants, Company Secretaries, lawyers and other professionals directly. The
changes generally would make the regulations relating to investment advisors
much stricter. They will also make the categorisations between various types of
advisers sharper, so much so that they may end up being mutually exclusive.

Curiously, this paper has
invited widespread criticism on the grounds that SEBI perhaps did not expect.
Clearly, there were certain valid concerns SEBI has had to address through the
proposals. However, partly due to over-reach and partly due to
ill-drafted/ill-conceived proposals, there has been a strong opposition.
However, considering that amendments are inevitable, it is necessary to
consider the background and also the proposals as they presently stand.

Background of the provisions

SEBI had in 2013 notified regulations
relating to investment advisers (the SEBI (Investment Advisers) Regulations
2013 or “the Regulations”). These Regulations created a fresh category of
persons who assist investors in making investments. The others include
portfolio managers, mutual fund distributors, stock brokers, etc. This
category was created for a specific objective and to resolve certain conflicts
of interest that arose when the adviser was also the seller/distributor of
products.

An investor who approaches an
intermediary faces a concern about the objectivity of the intermediary. On one
hand, the investor expects that the intermediary will give him impartial advice
on which product he should invest in, taking into account his needs and
circumstances. On the other hand, the intermediary usually is paid by the
organisation (i.e., mutual fund, etc.) whose product he distributes. In
any case, he has his further own self interest to serve which may motivate him
to push those products that give him the highest of commissions/remuneration.
The result can not only be costly for the investor in terms of his effectively
paying high cost for making investments, but he may also end up holding
investments that are not suited to him. Mis-selling of units is such a serious
issue that it has actually been made a category of fraudulent practice under
the PFUTP Regulations. Generally, code of conduct relating to intermediaries
too lay stress on their taking into account interests of their clients above self-interest.

However, obviously, this is not
enough. So long as there is conflict of interest, temptations will remain and
no regulations can resolve it merely by mandating against it or banning it. The
Investment Advisers Regulations created a neat solution. It created a category
of intermediaries – Investment Advisers – who would focus on giving advice and
not distributing products. Thus, they will render skilled advice to clients
taking into account their needs and circumstances and thus suggest a portfolio
or investment products that serve their needs. More importantly, their fees
will be directly paid by such clients. The Investment Advisers thus have
motivation as well as interest in focussing only the interests of clients. They
are generally not permitted to accept remuneration/commission from entities
whose products they may recommend.

The Regulations go further and
mandate a higher level of professionalism in such Investment Advisers. They are
required to carry out proper client analysis and document it. Acting as
Investment Advisers would require prior registration. A certain level of
qualifications and also certification is also mandated for such persons.

However, while Investment
Advisers generally were required to obtain registration, exemption from
registration was given to certain persons. For example, persons who give
investment advice as part as incidental to their other activities are not
required to register. A good example is of Chartered Accountants who may give
such advice as part of their practice of rendering tax and related advice to
their clients. Similarly, distributors of products may also give such advice. Such persons are not required to be registered.

This may now undergo a
significant change as per the proposals made in the Consultation Paper.

No exemption to Chartered
Accountants and others who render investment advice incidentally

Chartered Accountants, Company
Secretaries, lawyers, stock brokers, etc. who give investment advice
incidental to their primary activity of professional practice will now require
registration as Investment Advisers. The result will be that such persons will
now have to focus on their core activity and cannot, even if asked, render
investment advice to their clients.

It is not as if such persons
are not qualified or otherwise unregulated. Further, it is also not as if they
have conflict of interest. Yet, this requirement is proposed.

It is possible that some such
persons may obtain the required registration to enable them to continue giving
such advice to their clients. However, it is more likely that the
categorisation of persons will become more distinct and separate with each group
focussing on their own activities.

Mutual Fund distributors to be
debarred from giving investment advice

As explained earlier,
intermediaries such as mutual fund distributors face the very conflict of
interest that is the focus of the Investment Advisers Regulations. They are
paid by the mutual fund/AMC whose products they sell though the investor may
expect that they are given impartial advice suited to their circumstances. Such
distributors under the Regulations were not required to be registered as Investment
Advisers, if they gave advice that is incidental to the selling of such
products. The Consultation Paper now proposes to wholly prohibit them from
giving such advice even incidental to selling.

Categorisation between Research
Analysts and Investment Advisers

Research Analysts and
Investment Advisers provide similar functions in relation to giving of
investment advice. However, the nature of their functions and approach is
significantly different and thus requirements relating to their registration
and functioning are covered under separate Regulations. A proposal now makes
this categorisation even sharper.

The Consultation Paper observes
that investment advice is often given in electronic and broadcasting media. A
certain level of exemption is presently provided under the Investment Advisers
Regulations to such advice that is widely available to public. It is now
proposed to divide such advice being given. Simply stated, generic advice in
such media to public at large can be given by research analysts while client
specific advice can be given by Investment Advisers.

Another recommendation further
clarifies this divide. Research Analysts would be required to send their
recommendations to all classes of its clients at the same time. The reason is that
their recommendations are generic and product related and not client specific.
Thereafter or independently, the role of the Investment Adviser would arise
where the investor would take the help of such Adviser to decide whether such
recommendation is suitable for his needs and circumstances.

Investment tips via social
media and the like

This proposal has seen very
strong criticism. While the criticism is justified, the evil that is sought to
be addressed also needs to be considered.

It is too often found – as
evidenced by several orders of SEBI – that there are persons who use the
internet and social media for giving tips in dubious scrips whose price and
trading are manipulated to trap unsuspecting investors. Tips are given by SMS,
whatsapp, social media, etc. Often, these scrips are what are known as
“penny stocks” who rarely have any intrinsic value but are quoted at low
prices. The price of the shares are manipulated and huge volume is also seen in
stock exchange which tempts investors into investing. The investing public may
be influenced by the low price and hence, there is expectation that loss too
can be low. The shares, after some time, see their price and volumes both
crashing with investors then left holding the valueless shares. In some cases,
SEBI has identified persons who carry out such manipulative/fraudulent
activities and debar/punish them. At other times, it may be difficult even to
identify who they are.

The Consultation Paper now
seeks to wholly debar giving of such tips unless such persons who give tips are
themselves registered as Investment Advisers and thus subjected to the
regulatory requirements. Moreover, giving of such tips in violation of such
requirements will be treated as a fraudulent act inviting stringent punishment.

This proposal has invited very
strong criticism. The objection obviously is not against action against such
dubious/fraudulent tippers. It is the blanket and overreaching ban against all
type of tips on internet and social media irrespective of who is giving such
types, of what type and in what manner. To give a most basic example, a person
may recommend in passing to his friend a particular share in a conversation
over WhatsApp. This may not be well researched and even accurate. Yet, such a thing is so common. Such a tip may attract severe punishment.

It is common to find
whatsapp/facebook groups where investment advice is freely taken/given amongst
like minded persons. There are countless blogs that discuss investments and it
is likely that some sort of recommendation may be given on such blogs. Critics
have given example of comments of persons like Warren Buffet and the like who
discuss their investments publicly.

It is felt that SEBI has not
thought through this issue well and their recommendation may restrain free
discussion of stocks and investments generally. It is even stated that such
restriction amounts to severe and unjustified restraint on freedom of speech.

One will have to see how SEBI
deals with this criticism and what modified form of regulation it comes out
with.

Ban on schemes, competition,
games, etc. relating to stock market

SEBI has observed that many
persons organise competition, games, etc. relating to stock market which
may involve predicting the price of shares on stock markets. The paper makes it
clear that SEBI does not approve or endorse such schemes and thus the public
may engage in such schemes at their own risk. However, SEBI goes a step beyond
such hands-off/caveat emptor approach and notes that the public may end up
suffering losses. Hence, the paper recommends a total ban on such schemes, etc.

Client Agreement by Investment
Advisers

Client agreements have always
been a concern in respect of intermediaries in securities markets. There may be
non-uniformity or even sheer non-existence of such agreements. Or the terms may
be one-sided or opaque. Certain minimum level of protection of clients may not
be provided. Hence, SEBI often provides for certain standard form of such
agreements with certain minimum requirements that cannot be deviated from. For
Investment Advisers, the paper recommends a “Rights and Obligation” document.
The paper recommends a certain minimum provisions in such document including
various disclosures by the Investment Adviser. The result would be that, while
avoiding over-formalisation, a certain level of protection as well as
disclosure would be available to the client.

Other recommendations

The Paper generally seeks to
make several other amendments. The Regulations particularly relating to Investment
Advisers will thus see substantial amendments.

Conclusion

Intermediaries are considered
to be the gatekeepers to securities markets who deal with investors directly.
It is then inevitable that such intermediaries will face considerable
regulation and supervision. It is also expected that SEBI would ensure that,
through registration, it creates a requirement whereby only qualified persons
who comply with certain basic requirements as well as ethics are only permitted
to operate. Further, conflicts of interests are also avoided. This has resulted
in not only multiple categories of such intermediaries but increasingly complex
regulatory requirements. Whatever shape the final requirements may come in
following the consultation paper, they will only increase such requirements
which eventually will also increase costs of compliance. The multiple
categories will ensure that there is sharp specialisation and many
intermediaries and even professionals like Chartered Accountants will have to
give up certain activities they may otherwise be engaging in. The investors
will have advantage of such specialisation but will then have to go to multiple
intermediaries to fulfill their simple desires of investing in capital market
products. _

shailesh.kwebmaker

Staying In Parents’ House – A Matter of Right?

Introduction

In the usual American/Western way
of life, a son stays with his parents till the age of 16 year and thereafter,
he goes to college in another State after which he lives in his own house.
Living with one’s parents in their home is very rare and unusual. However, in
India the matter is entirely opposite. An Indian son continues to live with his
parents in their home even after becoming a major and in several cases even
after starting a family of his own. Strange as it appears to several
Westerners, this is the usual way of life in India. However, what happens when the parents want
to evict their adult son from their home? Can they do so or does the son have a
vested right to reside in their house?

The Delhi High Court had an
occasion to consider such an interesting issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016.

Facts of the Case

A senior citizen couple were
residing on the ground floor of their two-storied home in Delhi. They had
allowed their married elder son and his wife to live on the 2^nd floor
and their married younger son and his wife on the 1^st floor. They did so on account of their natural love
and affection for their sons.

The parents claimed that the
entire house was self-acquired by them out of their own funds. The property
documents, i.e., the General Power of Attorney, the Agreement to Sell, the
Receipt and their Will all were in favour of the father. The sons did not have
any documentary evidence to prove that they were the rightful owners or that
the sons contributed to the purchase of the home.

The parents and their sons could
not get along due to constant quarrels. Matters came to such a headway that the
parents filed police complaints against their sons’ families. They also issued
a public notice disowning their sons and evicting them from their self acquired
property. The parents approached Court for a decree directing them to vacate
the two floors in their possession and also to restrain them from creating any
third party interest in the property.

The sons denied the parents’ claim
that the property was self acquired and also denied their claims of being the
exclusive owners. Their contention was that they have also contributed to the
purchase of the property and construction costs and hence, they should be
regarded as co-owners. Accordingly, the suit for eviction failed.

The Delhi High Court’s Judgment

The Court observed that the sons
were not able to substantiate any evidence to prove that the parents were not
exclusive owners of their property. Further, they have not denied that the
property stands in their father’s name and have not been able to claim any
ownership rights separate from their parents. They could not prove that they
have contributed to the purchase of the property.

The Court held that where the
house is a self acquired house of the parents, a son whether married or
unmarried, has no legal right to live in that house and he can live in that
house only at the mercy of his parents upto such time as his parents allow.
Merely because the parents have allowed him to live in the house so long as his
relations with the parents were cordial, does not mean that the parents have to
bear his burden throughout their life. Since there was no evidence to prove the
sons’ right in the property and on the contrary, there was evidence to prove
that the property was the sole property of the parents, it was clear that the
sons could be evicted by their parents.

This is an important and correct
verdict given by the Delhi High Court. There have been many instances of
children forcing their parents to allow them to reside in homes belonging to
their parents. This decision would come as a shot in the arm for such parents.
However, it must be noted that in case the property is ancestral or cost of
which is contributed by the sons then this decision would have no application.
Of course, what is ancestral is a question of fact and would depend upon the
circumstances of each case. Generally, ancestral property refers to property
belonging to at least 3 generations, i.e., one’s parents and grandparents.
However, it may be noted that in case the parents gift the house to the son
during their lifetime then he becomes the rightful owner and claim right of
ownership over the same.

Dwelling House

Another ancillary factor to be
borne in mind is the amendment by the Hindu Succession (Amendment) Act, 2005 to
the Hindu Succession Act, 1956 in respect to dwelling houses. The erstwhile
section 23 of the Hindu Succession Act, 1956
provided that when a Hindu dies without a will, i.e., intestate, and he
has left behind Class I male and female heirs and his property includes a
dwelling house, then the female heirs could not claim a partition of such
dwelling house till such time as the male heirs chose to divide their
respective shares then. However, she was entitled to a right of residence
therein. The erstwhile section carved out an exception that if such female heir
was a daughter, then she was entitled to a right to residence in the
dwelling-house only if she was unmarried or had been deserted / separated from
her husband, or was a widow. Hence, the
females were dependent on the males to
claim their right of partition. This provision was intended to ensure that sons
living in their parents’ home were not rendered homeless by a claim for
partition by their sisters. The Supreme Court in Narasimha Murti vs.
Susheelbai, AIR 1996 SC 1826 has defined the expression `dwelling
house’by stating that it is referable to the dwelling house in which the
intestate Hindu was living at the time of his/her death; he/she intended that
his/her children would continue to normally occupy and enjoy it; The intestate
Hindu regarded it as his permanent abode. It further held that section 23 (as
it stood before its deletion in 2005), limited
the right of the Class-I female heirs of a Hindu who died intestate
while both male and female heirs were entitled to a share in the property left
by the Hindu owner including the dwelling house. It was an exception to the
general partition. So long as the male heir(s) chose not to partition the
dwelling house, the female class-I heir had been denied the right to claim its
partition subject to a further exception, namely, the right to residence
therein by the female class-I heir under specified circumstances. In other
words, the dwelling house remained indivisible.
But the moment the male heir chose to let out the dwelling house to a
stranger/third party, as a tenant or a licensee, the dwelling house became
partible. Here, the conduct of the male heir was the cause and the entitlement
of the female Class-I heir was the effect and the latter’s claim for partition
got ripened into right as they were to sue for partition of the dwelling house,
whether or not the proviso came into play.

This section has been deleted
altogether with effect from 9^thSeptember 2005. Now, a female heir
can ask for a partition of the house property where the coparceners are
residing. Thus, this is another scenario where the sons could be rendered
homeless.

Conclusion

While it was apparent that a son can claim no
vested right in his parents’ self acquired property, this clear cut verdict
helps to clarify matters. Irrespective of his marital status, an adult son
cannot claim that he has a legal right to stay in his parents’ home.

shailesh.kwebmaker

Notification No. FEMA 5(R)/2016-RB dated September 8, 2016

CORRIGENDUM – G.S.R. 389(E) –
dated September 8, 2016

Foreign Exchange management
(deposit) Regulations, 2016

By a Corrigendum dated September
8, 2016 published in the Gazette of india, extraordinary, Part-ii, Section 3,
Sub-section (i), the following changes have been made to Notification No. FEMA
5(R)/2016-RB relating to Foreign exchange management (deposit) regulations,
2016:

Paragraph 6(3) of Schedule i has
been substituted as under:

“loans outside india – authorised dealers may allow
their branches/correspondents outside india to grant loans to or in favour of
non-resident depositor or to third parties at the request of depositor for bona
fide purpose against the security of funds held in the NRE accounts in india
and also agree for remittance of the funds from india, if necessary, for
liquidation of the outstanding.”

Previously, third party loans
could be given for bona fide purpose except for the purpose of relending or
carrying on agricultural / plantation activities or for investment in real
estate business. With this amendment restriction on user of funds has been
removed.

shailesh.kwebmaker

Exports – Write-Off, Netting off Etc

Background

The
Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued
thereunder came in force from 1^st June 2000. Since then, over last
16 years, they have undergone several changes.

Beginning
December 2015, RBI is issuing Revised Notifications in substitution of the
original Notifications issued on May 3, 2000. Previously, annually on July 1
RBI was issuing Master Circulars with shelf life of one year. In another
change, from January 1, 2016, most of the Master Circulars have been
discontinued and substituted with Master Directions (except in case of –
Foreign Investment in India, Money Transfer Service Scheme and Risk Management
and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions
will be updated on an ongoing basis, as and when any new Circular/Notification
is issued.
However, in case of any conflict between the relevant Notification and the
Master Direction, the relevant Notification will prevail.

Concept
and Scope

The
objective of this column is to revisit certain topics on a quarterly, covering
aspects or amendments in Rules or Regulations of FEMA (excluding the procedural
aspects) which may have practical significance for professional brethren. The
issues relating to write-off of export proceeds and some other issues connected
therewith are being discussed to begin with.

Export
of Goods and Services

Vide Notification No. FEMA
23(R)/2015-RB dated January 12, 2016, RBI notified Foreign Exchange Management
(Export of Goods and Services) Regulations, 2015. This Notification repeals and
substitutes Notification No. FEMA 23/2000-RB dated 3rd May 2000 which had
notified Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000.

This
Article discusses the following aspects in the context of exports by domestic
tariff area units (i.e., units other than those located in SEZ).

1. Reduction
in invoice value.

2. Extension
of time.

3. Write-off
of unrealised export bills.

4. Set-off
of export receivables against import payables.

1. Reduction in invoice value

a. On
account of prepayment of usance bills

Most
of the export transactions are on credit. Thus, the price negotiates also
includes certain credit period. However, sometimes the overseas importer may
desire to discharge purchase consideration before the due date if such
pre-payment is beneficial. The importer and the exporter negotiate the
consideration for such pre-payment. The consideration is generally linked to
the prevailing interest rates and the period and is by way of discount for
pre-payment by reduction in the invoice value.

Presently,
in case of pre-payment, FEMA permits an Indian exporter to reduce the invoice
value by allowing cash discount equivalent to the interest on the unexpired
period of usance. This discount is to be calculated at the rate of interest
stipulated in the export contract. If such rate is not stipulated in the
contract, prime rate/LIBOR of the currency of invoice is to be applied.

b. On
account of change of buyer / consignee

Sometimes,
after the goods are shipped, it may so happen that the original buyer defaults
or does not pay for the goods. Having the goods shipped back to India will
result in substantial expenses.

In
such case, the exporter may consider selling goods to another buyer. Therefore,
FEMA permits the exporter to transfer the goods to another buyer, whether in
the same country or any other country. Further, knowing the predicament of the
exporter, the new buyer will attempt to negotiate a lower price. Hence, for
change of buyer/consignee in such case, or selling the goods at a lower price,
the exporter is not required to obtain prior permission of RBI if the following
conditions are fulfilled.

i. The
reduction in value of the invoice due to such change is not more than 25% of
the value of the original invoice.

ii. The
export proceeds must be realised within 9 months from the date of export to the
original buyer/consignee.

However,
prior permission of RBI is required if either of the above conditions are not
fulfilled. RBI may grant such permission provided:

i. Exports
do not relate to export of commodities subject to floor price stipulations;

ii. Exporter
is not on the exporters’ caution list of the Reserve Bank; and

iii. Exporter
has surrendered proportionate export incentives availed of, if any.

c. In
any other case

This
category covers cases of exporters who are in the business of export for more
than three years and cases of other exporters.

In
case of exporters who are in the business of export for more than three years,
banks may permit reduction in invoice value without any limit if: –

i. Export
outstanding (excluding outstanding of exports made to countries facing
externalisation problems in cases where the buyers have made payments in local
currency) do not exceed 5% of the average annual export realisation during the
preceding three financial years.

ii. Exports
do not relate to export of commodities subject to floor price stipulations.

iii. Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any.

In
other cases, banks may permit reduction in invoice value if: –

i. Reduction
does not exceed 25% of the value of invoice.

ii. Exports
do not relate to export of commodities subject to floor price stipulations.

iii. Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any.

If
an exporters case is not covered in either of the above situations, prior
permission of RBI needs to be obtained before reducing the value of invoice.

2. Extension of time

Every
exporter of goods / software / services is required to realise and repatriate
the full value of exports (export proceeds) within nine months from the date of
export. In case of exports made to the exporter’s own warehouse outside India
the export proceeds must be realised within fifteen months from the date of
shipment of goods.

However,
many times it may not be possible to realise and repatriate the export proceeds
within the stipulated time. In such cases, banks are authorised to grant
extension of six months for realisation of export proceeds subject the
following conditions.

i. Export
transactions covered by the invoices are not under investigation by Directorate
of Enforcement/Central Bureau of Investigation or other investigating agencies.

ii. Banks
are satisfied that the exporter has not been able to realise export proceeds
for reasons beyond his control.

iii. Exporter
submits a declaration that the export proceeds will be realised during the
extended period.

iv. The
total outstanding of the exporter should not exceed US $ one million or 10% of
the average export realisations during the preceding three financial years,
whichever is higher. However, if the exporter has filed suits abroad against the buyer, extension can be granted by the banks irrespective of the amount
involved / outstanding.

If
an exporter’s case is not covered by any of the above situations, then
permission from concerned Regional
Office of RBI has to be obtained for extension of time for realization and
repatriation of export proceeds.

3. Write-off of unrealised export bills

Some
stakeholders appear to be under an impression that pursuant to liberalisation,
permission of RBI is no longer required for writing off unrealised export
proceeds. In practice, this is not the case. Unrealised export proceeds only
within certain limit can be written off without obtaining prior permission from
RBI, while certain amounts can be written off only after obtaining prior
approval from RBI.

It
is pertinent to know that there are no specific provisions / formats with
respect to export of services that need to be complied with / submitted.
However, the general principles governing export of goods relating to export
realisation, etc. also apply to export of services.

Write-offs
may be full write-offs or partial write-offs. This may be necessary due to
several reasons such as, non-receipt of payment, early receipt of payment,
damage to goods in transit, export of goods of a different quality, etc.

a. Write-off
due to non-receipt of payment

Sometimes,
it may not be possible for an exporter to realize the amounts due against the
export of goods / software / services. There may be varied reasons for this
non-realisation. In such cases the exporter is forced to write-off the
unrealised amount.

Depending
on the amount to be written off as well as certain other conditions, the
exporter can:

(a) write-off
the unrealised amount without obtaining permission from his bank or from RBI;
or

(b) approach
the bank which handled the relevant export documents and request permission to
write-off the unrealised amount; or

(c) approach
the concerned Regional Office of RBI through the bank which handled the
relevant export documents, for permission to write-off the unrealised amount.

To
qualify for write-off, either self write-off or otherwise: –

i. The
unrealised amount must be outstanding for more than one year.

ii. Exporter
must produce satisfactory documentary evidence to prove that he has made all
efforts to realise the unrealised amount.

iii. Non-realisation
must be for one of the following reasons: –

a) The overseas buyer is insolvent and a certificate
from the official liquidator indicating that there is no possibility of
recovery of export proceeds is obtained.

b) The
overseas buyer is not traceable over a reasonably long period of time.

c) The
goods exported have been auctioned or destroyed by the Port / Customs / Health
authorities in the importing country.

d) The
unrealised amount represents the balance due in a case settled through the
intervention of the Indian Embassy, Foreign Chamber of Commerce or similar
Organization.

e) The
unrealised amount represents the undrawn balance of an export bill (not
exceeding 10% of the invoice value) remaining outstanding and is unrealisable
despite all efforts made by the exporter.

f) The
cost of resorting to legal action is disproportionate to the unrealised amount
of the export bill.

g) The
exporter even after winning the Court case against the overseas buyer is not
able to execute the Court decree due to reasons beyond his control.

h) Bills
were drawn for the difference between the letter of credit value and actual
export value or between the provisional and the actual freight charges but the
amounts have remained unrealised consequent on dishonor of the bills by the
overseas buyer and there are no prospects of realisation.

It
may be noted that adequate documentary evidence may be required to be provided
to substantiate the write-off.

Write-off
will not be permitted in the following cases: –

i. Exports
have been made to countries with externalisation problem i.e. where the
overseas buyer has deposited the value of export in local currency but the
amount has not been allowed to be repatriated by the central banking
authorities of the country.

ii. Export
Declaration Form (EDF) is under investigation by agencies like, Enforcement
Directorate, Directorate of Revenue Intelligence, Central Bureau of
Investigation, etc.

iii. Outstanding
bills which are subject matter of civil / criminal suit.

Limits for write-offs (by self or through bank permission)

“Write-off”
by

Permitted write-off as a

% of the total export proceeds

realised during the

previous calendar year

Self “write-off” by an exporter (Other

than Status Holder Exporter)

Self “write-off” by Status Holder

Exporters

10%

“Write-off” by Bank which handled the

export documents

10%

The limits stated above are
related to total export proceeds realised during the previous calendar year and
are cumulatively available in a year.

Before write-off is possible, the
exporter has to surrender the export incentives, if any, availed in respect of
the amount to be written-off and submit documents evidencing the same to the
bank.

Also, in case of self write-off,
the exporter has to submit to the bank, a Chartered Accountant’s certificate,
containing the following information: –

i. Amount of export realisation in
the preceding calendar year.

ii. Amount of write-off already
availed of during the current year, if any.

iii. Details of the relevant EDF to
be written off.

iv. Details of invoice no., invoice
value, commodity exported, country of export.

v. Surrender of export benefits, if
any, availed in respect of the amount to be written-off.

Further, banks are required to
report the write-off of unrealised export proceeds (self-write-off or
otherwise) through EDPMS to RBI.

All cases of a write-off which are
not covered by the above criteria are to be referred to the concerned Regional
Office of RBI for its approval.

b. Write
off in cases of payment of claims by ECGC and private insurance companies
regulated by Insurance Regulatory and Development Authority (IRDA)

If though the Indian exporter had
not realised the export proceeds from the overseas buyer, but received the
corresponding amount from either ECGC or from an Insurance company, the bank
which handled the export documents can write-off the unrealised amount (without
any limit) after receiving an application along with supporting documentary
evidence from the exporter.

The surrender of export incentives
will be as provided in the Foreign Trade Policy (FTP). However, the amount so
realised / recovered from ECGC / insurance company by the Indian exporter will
not be treated as export realisation in foreign exchange.

c. Write-off
relaxation

In case of write-off other than
self-write-off, realisation of export proceeds will not be insisted upon under
any of the Export Promotion Schemes that are covered under FTP if: –

i. RBI / bank has permitted the
write off on the basis of merits, as per extant guidelines.

ii. The exporter produces a
certificate from the Foreign Mission of India concerned, about the fact of
non-recovery of export proceeds from the buyer.

In such case the Indian exporter
is not required to surrender the export incentives that have been availed by
him against such exports.

4. Netting off of export receivables against
import payables

At the outset, ONLY units in SEZs
are permitted to net off export receivables against import payments.

It may be noted that imports and
exports from group entities cannot be internally netted. Netting off can only
be done in cases where import / export is from / to the same entities i.e. the
two parties must be debtors and creditors of each other and not of their other
group entities.

An exporter is permitted to
set-off his export receivable against his import payable subject to the
following: –

i. Export / import transactions
are not with ACU countries.

ii. Set-off of export receivables against
import payments are in respect of the same overseas buyer and supplier.

iii. Consent for set-off has been
obtained from the overseas buyer and seller.

iv. Import is as per the Foreign
Trade Policy.

v. Invoices / Bills of Lading /
Airway Bills and Exchange Control copies of Bills of Entry for home consumption
have been submitted by the importer to the bank.

vi. Payment for the import is still
outstanding in the books of the importer.

vii. All the relevant documents have been submitted to the bank which will have to comply with all the regulatory requirements relating to the transactions.

shailesh.kwebmaker

Power of Attorney holder – Authorised for signing various documents – Suit filed by Power of Attorney holder – Power of Attorney holder deposing in court on his personal knowledge of each and every detail of transaction – Evidence of Power of Attorney holder of Plaintiff readiness and willingness admissible [Code of Civil Procedure, 1908, Order VI Rule 14, Order XLI Rule 27].

Santosh
Vaidya vs. Namdeo Budde and Ors AIR 2016 (NOC) 584 (BOM.)

Respondents-plaintiffs,
through their power of attorney holder by name Dhairyasheel, instituted Special
Civil Suit for specific performance of contract against the Appellant defendant
no. 1 and defendant no. 2.

The
case was that defendant no. 1 was the owner of field HR at Mouza
Hudkeshwar and he entered into an agreement in favour of the Plaintiff and
defendant no. 2 for the sale thereof. It
was also agreed that defendant no. 1 will execute the sale-deed within 1 1/2
years from the date of the agreement and remaining consideration would be paid
accordingly. It was further agreed that in case there was any legal impediment
in getting the sale- deed registered, further time of 1 1/2 years would be
extended. The defendant no. 1 having not complied with the obtaining of
permissions and no objections from the authorities, was not entitled to cancel
the agreement nor could he do so since the agreement itself provided for
extension by another 1 1/2 year. Plaintiffs and defendant no. 2 again informed
defendant no. 1 that they were ready and willing to get the sale-deed
registered and then defendant no. 1 also realised his mistake of not obtaining
the necessary documents of no objections etc. and agreed to make compliance.
however, defendant no. 1 still did not produce no objections from the competent
authority and therefore, Plaintiff had no alternative but to file suit for
specific performance of contract thereafter.

It
was held by the high Court that rule 14 of the Code of Civil Procedure
categorically shows that a person authorised is entitled to file and prosecute
the suit till its disposal. In the light of the above provision, it is not
possible to accept the submissions about the incompetence of the power of attorney
holder to file the suit.

The
counsel for the appellant then argued that the power of attorney holder had no
personal knowledge about the execution of agreement and, therefore, his
evidence is worthless and should not have been relied upon by the appellate
judge.

On perusal of the evidence of two witnesses of
the defen dant namely; appellant nos. 1 and 2, does not even show a semblance
of evidence that there was no readiness and willingness on the part of the
Plaintiff and defendant no. 2. It was clear from the entire record that the
power of attorney holder had full personal knowledge about the entire
transaction and that Plaintiff and defendant no. 2 were ready and willing to
perform their part of contract. In the wake of the above factual position in
this case, the power of attorney holder could validly depose about the
readiness and willingness. Accordingly, the appeal was dismissed.

shailesh.kwebmaker

Protected Tenant’s right to property – Landholder cannot sell the land without first offering the same to the ‘Protected Tenant’ – Land can be sold only if the ‘Protected Tenant’ does not exercise his right to purchase the said land. [Hyderabad Tenancy and Agricultural Lands Act (21 of 1950), Sections 40, 32; Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act, 1950 – Section 40]

B.
Bal Reddy vs. Teegala Narayana Reddy and Ors.. AIR 2016 SUPREME COURT 3810

One
teegala Shivaiah was a Protected tenant in respect of agricultural lands. The
respondents were the heirs and successors of said teegala Shivaiah who died
sometime in the year 1964. The land holders who were recorded as owners of the
said land sold the said land to various buyers who in turn further effected
sales.

Respondents, after
obtaining succession certificates from Dy. Collector and Mandal
Revenue Officer, filed an application u/s. 32 of the act for restoration of possession
of the said land. The deputy Collector mandal revenue Officer directed
restoration of the physical possession the Respondents. The succession
certificate as well as the order of restoration was set aside by the joint Collector. The high Court reversed the order
of the joint Collector on the point of
restoration of possession.

The
Supreme Court held that section 38-d of the act prescribes the procedure to be
followed when the land holder intends to sell the land held by a Protected
tenant. Accordingly, the land must first be offered by issuing a notice in
writing to the Protected tenant and it is only when the Protected tenant does
not exercise the right of purchase in accordance with the procedure, that the
land holder can sell such land to any other person. The court further held, it
is well settled that the interest of a Protected tenant continues to be
operative and subsisting so long as ‘protected tenancy’ is not validly
terminated. Even if such Protected tenant
has lost possession of the land in question, that by itself does not
terminate the ‘protected tenancy’.

Hence,
the appeals were dismissed.

shailesh.kwebmaker

Insurance claim– Cannot be denied on the ground that no premium had been paid – Notice to insured before the policy lapses, must be issued. [Insurance Act (4 of 1938)]

Jammu
and Kashmir Bank Ltd., Jammu vs. Tania Jamwal and Others. AIR 2016 JAMMU AND
KASHMIR 114

The
Claimants-respondents had an insurance
policy named, “jeevan Saral Policy”. As
per the arrangement/ authorisation of the deceased policy holder, the premium
amount was to be debited by the insurance company from the account of the
deceased policy holder through electronic clearing system, provided there were
sufficient funds in the bank account, which was being maintained by j & K
Bank ltd. This was an inter-se
arrangement between the Policy holder’s bank and the insurance company.

The
deceased policy holder passed away and the claimants claimed the amount of
insurance policy. the insurance company
rejected the claim on the ground that the policy had already lapsed due
to non-payment of premium.

The
high Court held that if for any reason the amount in question could not be
debited in time, it was the sole duty of the insurance company to appraise the
deceased policy holder. But in the present case, the insurance company did not
bring it to the notice of the deceased policy holder, moreover, the bank, while
rejecting the requisition of the insurance
company mentioned “miscellaneous” in its
reasons memo as a result of which the insurance company suffered a confusion.
if there was any procedural lapse/ wrong, the same was between the insurance
company and the bank
for which the
policy holder cannot
be held responsible.

shailesh.kwebmaker

Wide Scope of Insider Trading Regulations & Severity of Punishment for Violation – Recent Orders of SEBI and SAT

Background

A recent series of interesting SEBI orders has highlighted
two aspects of insider trading. One is, how broad the law can be and the types
of transactions and acts/omissions that are covered. The other is, how
stringent the punishment can be. These orders of SEBI have now also been
confirmed by the Securities Appellate Tribunal (“SAT”), with some changes.

Nature of Insider Trading as commonly perceived and the recent
Orders

Insider Trading is commonly seen to be of a particular
nature. There is an insider – who could be a director, officer or even auditor,
etc. who has close relations with the Company. He usually occupies a
position of trust and has access to inside information. Such information, if
made public, would result in the price of the shares going up or down. He can
thus profit from such information. This is deemed to be abuse of such trust and
the regulations that prohibit and prescribe punishment for insider trading.
However, as will be seen from the SEBI orders discussed herein, what may constitute
inside information and thus Insider Trading can be something not envisaged from
this common understanding.

Further, these SEBI orders also show that the punishment for
Insider Trading can be more severe than one may commonly expect. As will be
seen here, though the profits would have been in thousands, the penalty imposed
is in tens of lakhs of rupees and even in crores.

Whether information regarding open offer is inside information

The SEBI (Prohibition of Insider Trading) Regulations 2015
(which replaced the earlier 1992 Regulations) consider certain information to
be inside information. If such information is price sensitive and not made
public, then the Regulations require that insiders should not deal on basis of
such information (termed in the Regulations as Unpublished Price Sensitive
Information or “UPSI”). An example of this is receipt of large and profitable
orders by the Company. The head of sales, the Chief Financial Officer, the
Managing Director, etc. who become aware of this development would also
know that once this information is made public, the price of the shares may
rise. The Regulations thus rightly bar them from dealing in the shares of the
Company till such information remains is not shared with public. There can be
more examples of such information – a large dividend payment or bonus issue of
shares is decided on, an acquisition or divestiture of a business is being
considered, etc. However, in each of these cases, the matter concerns
something directly relating to the activities of the Company. When an insider
is entrusted with such confidential and material information, he is duty bound not to make use of it for his profit.

The question that arises is whether even information that
does not directly relate to activities of companies can also be inside
information. If, for example, the Promoters of a Company have entered into an
agreement to sell their shareholding to an acquirer, whether such information
would also be inside information under the Regulations? The peculiar nature of
such information can be seen. The information does not really relate to the
operations of the Company. It is also a proposed transaction by the Promoters
of a company independently of the Company. If the Company is wholly
professionally managed, it is possible that the Company and its officers may
not even come to know, till the last moment, of such agreement. Are the
Promoters duty bound not to trade on basis of such information?

The implications are not far to see. Such an acquisition
would have to result in an open offer from the public by the acquirer under the
SEBI Takeover Regulations. If the open offer price is higher than the current
ruling market price, the public shareholders would profit. However, if the
Promoters, being aware of such deal with the acquirer, acquire the shares from
the market at the ruling price, they may profit from such purchase. The
question is whether such dealing would be Insider Trading under the
Regulations.

SEBI Orders

The Orders dealt with in this article tackle this question
though partly. The Promoters of a listed company had entered into negotiations
with an acquirer whereby they would sell their shares and control over the
Company. The resultant open offer price seems to be, from limited facts given
in the SEBI orders, far higher than the ruling market price. The directors of
the Company were, as per findings of SEBI, aware of such transaction. Yet, they
and certain persons to whom such information was shared by such Directors, made
purchases of the shares from the market at the lower ruling price. Furthermore
they did not inform the stock exchanges promptly at end of board meeting where
such agreement for sale of shares/control was taken up. The resultant public
announcement of open offer was also delayed by a day. SEBI considered these as
violations of the Regulations and levied severe penalties. The Company, its
directors, its Company Secretary, the persons to whom such information was
shared, etc. were all proceeded against. These matters also went in
appeal before SAT. The orders of SEBI for each of these persons and the
decision of the SAT in appeal are discussed below. The decisions of SEBI are
all dated 7^thMarch 2014 and the decision of the Securities
Appellate Tribunal (“SAT”) is dated 30^th November 2016. The name of
the Company is Shelter Infra Projects Limited (“the Company”).

When did the UPSI arise?

An important relevant question was, when did the Unpublished
Price Sensitive Information (“UPSI”) arise? It is really from this time that
the insiders are prohibited from dealing in the shares of the Company. Often
developments may be in process. However, there would be a particular stage
after which the development has turned into such definite information that if
made known to the public would materially affect the price of the shares of the
Company. This is also relevant for determining the trading window closure date
too since before UPSI arises, the window should already be closed.

In the present case, the SAT eventually noted that there was
a meeting on 19^th June 2009 at which a decision was taken to go
ahead with the agreement of sale of shares/transfer of control. At this
meeting, a decision was also taken to finalise the transaction within a week.
SAT considered this date to be the date when UPSI arose.

Action against the Company Secretary and directors for not
closing trading window

The Regulations, read with Code of Conduct prescribed
thereunder which companies are also required to adopt, provide for closure of
trading window when price sensitive information is expected to be generated.
Thus, for example, during the time when the financial results of the Company
are being compiled, there may be persons in the Company who may have access to
such information. If they deal in the shares of the Company, then it is likely
they would take into account such information and thus enter into trades
favourable to them. The Regulations thus require that the Company should
prohibit trading during such period by specified insiders and such prohibition
is called closure of trading window. The Company Secretary of the Company is
required to notify such closure of trading window.

SEBI initiated action against the Company Secretary and
directors of the Company as the trading window was not closed during the time when
the sale of controlling interest was being decided upon. However, by this time,
the Company Secretary of the Company had passed away. SEBI noted that the
obligation for initiating closure of the trading window under the
Regulations/Code of Conduct was on the Company Secretary. On his death, the
proceedings against him abated. The other directors were also absolved.

On the other hand, a similar action was initiated against the
Company for not closing the trading window and a penalty of Rs. 50 lakh was levied
on it for such default. This penalty was upheld by the SAT on appeal.

Action against directors for dealing in shares of the Company
with (Unpublished Sensitive Information ) UPSI

The SEBI Orders
demonstrated how directors purchased shares while the price sensitive
information regarding proposed takeover was not published. In two cases,
directors were also held to have shared the information with their relatives
who dealt in the shares. The directors were penalised separately for sharing
information and for dealing. Such relatives too were penalised for the dealing.

The Chairman of the
Company and his wife were proceeded against. SEBI made a finding that the
Chairman had not only dealt in the shares himself by purchasing 10,200 shares
but also communicated the UPSI to his wife. The wife in turn also dealt in the
shares by purchasing 5,000 shares. The Chairman, however, died while the
proceedings were in progress and hence the action against him abated. SEBI,
however, levied a penalty of Rs. 1 crore on his wife for her dealing in the
shares. On appeal, SAT, considering the age of the wife and other relevant factors,
reduced the penalty to Rs. 30 lakh.

Another director was held to have shared the information with
a group he was associated with, which group in turn dealt in the shares of the
Company. For sharing such information, SEBI levied a penalty of Rs. 1 crore on
such director. For the persons to whom such UPSI was shared and who dealt in
such shares, a penalty of Rs. 2 crore was levied for such persons put together,
to be payable jointly and severally. Both of such penalties were confirmed by
SAT.

Similarly, a whole time director of the Company was held to
have dealt in the shares of the Company while in possession of UPSI and for
having communicating the UPSI to his son, who, in turn, dealt in the shares of
the Company. The Whole Time Director bought 1,246 shares for Rs. 41310 and sold
the same for Rs. 42151. This also involved violation of the rule of not
entering into opposite transaction within six months of the first transaction.
He was penalised Rs. 30 lakh for communicating UPSI and for dealing in the
shares. His son bought 2000 shares for Rs. 80,824. He was penalised Rs. 20
lakh.

Some such persons argued that they had only purchased shares
but did not sell them and hence did not realise any profits. This argument was
rejected and rightly so. Insider Trading arises when dealing takes place and
that may be merely one side of the transaction – purchase or sale.

Intimating stock exchanges regarding decision of takeover and making the public announcement as required by the
Takeover Regulations

It was found by SEBI that while the Company decided at a
meeting to go ahead with the takeover agreement, it did not promptly inform the
stock exchange as required by the Listing Agreement. Indeed, as SEBI pointed
out, the Company did not send the information to stock exchanges at all.

Further, a public announcement was required to be made under
the Takeover Regulations within four working days of having entered into the agreement for sale of shares/control. The
public announcement was made, however, after 5 working days, which incidentally
came to 7 week days.

A penalty of Rs. 50 lakh was levied by SEBI for not
intimating the stock exchange under the Listing Agreement and a further Rs. 50
lakh for not releasing the public announcement in the prescribed time. The
Company argued that the information was provided through the public
announcement in seven days and even otherwise the penalty for delayed information
is Rs. 1 lakh per day. The SAT, however, took a practical view and accepted the
contention that the public announcement also effectively released the required
information. Hence, the delay was limited to seven days. The SAT also applied
the penalty of Rs. 1 lakh per day u/s. 23(a) of the Securities Contracts
(Regulation) Act, 1956, and limited the penalty to Rs. 7 lakh.

Quantum of penalty

The penalties levied, as is seen, are fairly high. The
amounts involved of purchases are barely in thousands or tens of thousands
while the penalty is in tens of lakhs. It needs to be considered whether it is
disproportionate or whether such high penalties are necessary for punishing the
guilty for and also act as deterrent for others in the future. The Adjudicating
Officer of SEBI has not given any detailed working of how the penalty has been
arrived at. However, as can be seen, except where reduced by the SAT on facts,
the penalties have been confirmed.

Conclusion

The decision ought to make companies and
insiders of the sheer breadth of the Insider Trading Regulations. If one
reviews the definition of “insider” under the Regulations, the actual
implications are even broader. An insider includes any person who has received
any unpublished price sensitive information, irrespective of the source. Thus,
while in the decisions discussed in this article, insiders were close to the
Company and thus had access to inside information. Even the other persons
considered here had relations with such insiders. However, even if that were
not so, the Regulations may apply if even a third party had merely received
such information. For example, an outsider/third party who has inside
information that is price-sensitive would be deemed to be an insider and thus
face a bar on dealing on basis of such information.

shailesh.kwebmaker

SEBI Decision in Reliance’s Case – Allegations Of Serious Violations Including Fraud & Price Manipulation

Background

SEBI
has passed an order holding Reliance Industries Limited (“Reliance”) and 12
other entities to have violated certain provisions of Securities Laws including
those relating to fraud and price manipulation. This finding has been recorded
in its order dated 24^th March 2017 (“the Order”), in respect of its
dealings in the shares/futures of Reliance Petroleum Limited (“RPL”). SEBI has
ordered that the profit of Rs. 447.27 crore from such transactions be disgorged
along with interest @ 12% per annum from 29^th November 2007 till the
date of payment. The events as laid down in the Order are complex and certain
interesting issues and concerns have been raised therein. Concepts like hedging
have been discussed and applied. The decision has relevance also to any case
where a large quantity of shares are purchased or sold.

This
article narrates the findings and assertions made in the SEBI order. Needless
to add, considering the reportedly proposed appeal against the Order, it is
possible that there may be developments in the near future.

The
facts as narrated in the said SEBI Order including its reasoning as also
certain further comments are given in the following paragraphs.

Context of the proposed dealings in shares of RPL

Reliance
was the holder of 75% of the equity share capital of RPL. Reliance needed to
raise monies for its large new projects. To part meet such needs, it had
decided at its Board Meeting held in March 2007 to sell about 5% shares (about
22.50 crore shares) in RPL. It is the manner in which the sales were carried
out that raised concerns and eventually, after being seized of the matter for
nearly 10 years, SEBI has passed this Order.

Method adopted for sale of the equity shares in RPL

It
can be expected that when a relatively large quantity of shares are to be sold
in the market, the price of the shares may fall in the interim. This may result
in the seller getting a lower price. According to Reliance, to help make up for
such potential loss in the cash market, it decided to hedge in the futures
market. Accordingly, it argued, it sold futures in the shares of RPL. However,
as will be seen later, this contention that trades in futures were for hedging
was rejected by SEBI. SEBI also held that the whole purpose of and manner of
carrying out the futures trades through certain agents was to profit through
price manipulation and fraud.

Client wise limits in futures

Relevant
provisions under circulars of SEBI/National Stock Exchange and other relevant
bye-laws/regulations prescribe limits of quantum of futures trade that a single
client could enter into. Such limits are intended for purposes of market
integrity, ensuring wider market, etc. It was found, however, as will be
seen later, that Reliance, with the help of agents/front entities, carried out
future trades far in excess of the prescribed limits.

Future trades with the help of 12 ‘front entities’

Reliance
entered into agreements with 12 entities (“the front entities”) who would enter
into futures trades for the benefit of Reliance. This meant that the
profits/losses on account of such trades would accrue to Reliance while the
front entities would earn commission. Each of the entities, except one, entered
into future trades that were slightly lower than the permissible limit per
client. In one case, where this limit was exceeded, the said entity was
penalised by the stock exchange.

The
futures trades that the front entities entered into were to expire on 29^thNovember 2007. Accordingly, a party who had entered into such trades
could square off such trades on or before closing on 29^th November
2007. Alternatively, it could keep the trades as outstanding in which case they
would be compulsorily squared off at the weighted average price during the last
10 minutes of the closing day in the cash market.

The
front entities entered into future sale trades in the aggregate of 9.92 crore
shares. During this period, 1.95 crores of such trades were squared off leaving
a net of 7.97 crore of trades.

Sale in cash market

SEBI
recorded a finding that Reliance sold from 6^thNovember to 23^rd
November 2007 18.04 crore equity shares in the cash market. From 24^th
November 2007 to just before the last 10 minutes of trading of last day of
trading, it did not sell any shares. However, in the last 10 minutes of such
last trading day, it offered for sale 2.43 crore shares of RPL and actually was
able to sell 1.95 crore. SEBI alleged that this was done with an intent to
manipulate the price since heavy sales in the last 10 minutes would result in
reduction in price. This, as explained earlier, would affect the settlement
price for futures resulting in higher profit for Reliance.

Violation of client wise limits

The
first finding regarding violation of law was relating to effectively exceeding
of client limits. As seen earlier, the futures trades were carried out through
12 front entities. Each of such entities had entered into an agreement with
Reliance whereby the profits/losses of the futures would accrue to Reliance
while such front entities will earn commission. The quantity of trades of each
such entity, except one, was just below the client-wise limits as prescribed
under relevant circulars of the stock exchanges/SEBI and other regulations,
bye-laws, etc. SEBI held that this arrangement with such entities was
done to circumvent the prescribed limits.

Reliance
argued that the relevant provisions provided that each entity should be
considered separately for the purposes of calculating this limit and hence it
was not in violation of the circulars. SEBI however rejected this argument. It
held that it was Reliance who, through such agreements, was the entity that was
carrying out such trades and hence there was effectively only one party. It
also observed that all the front entities were represented by one single
individual who also happened to be an employee of a wholly owned subsidiary of
Reliance. Such person also placed orders in the cash market for the sales made
by Reliance. The trades were thus in violation of the limits. More importantly,
SEBI held that considering the large volumes of futures trades that had a high
percentage of market share, they were entered into “with the intention to
corner the F&O segment and were therefore fraudulent and manipulative in
nature”.

Finding by SEBI

SEBI
alleged that Reliance and the front entities had carried out manipulation and
fraud and thus was in violation of the relevant provisions of the SEBI Act and
Regulations. It also held that Reliance had violated the limits of client wise
trades and thus was in violation of the relevant circulars of the stock exchanges
thereby violating the provisions of the Securities Contracts (Regulation) Act,
1956.

Directions by SEBI

In
view of such finding of violation of laws, SEBI issued two directions which are
contained in its order.

Firstly,
it debarred Reliance and the 12 front entities from dealing in equity
derivatives directly or indirectly for a period of one year in the ‘Futures and
Options’ segment of stock exchanges. It, however, permitted them to square off
existing positions on the date of the Order.

Secondly,
it directed Reliance to disgorge the excess profits made out of the futures
trades in violation of law. For this purpose, the proportionate profits of the
futures trades over and above the permitted limit for one client were
calculated. Further, interest @ 12% per annum was required to be paid from the
date of earning of such profits till the date of payment. The profits thus
worked out to be Rs. 447.27 crore. To this, interest @ 12% per annum with
effect from 29^th November 2007 till the date of payment was to be
added.

Comments and conclusion

As
this article is being written, it has been reported that this Order will be
appealed against and Reliance has rejected such findings. Considering the
findings of fraud/manipulation are of a serious nature and considering also the
large amount, it is possible that the matter may even go for final decision to
the Supreme Court. The standards of proof required for serious allegations of
fraud/manipulation are high in law and it will be interesting to consider what
the appellate authorities have to say on the facts of this case and reasoning
applied by SEBI. This would add to the jurisprudence in Securities Laws through
the observations of the appellate authorities on the law.

The
decision is also interesting considering how SEBI has used data such as
quantity of futures/shares sold, the price at which trades took place
particularly relative to last traded price, the futures trades squared off and
generally how it made periodic comparison between the quantity of shares sold
in the cash market vs. the futures trades.

The
observations relating to hedging by SEBI are relevant too and considering that
it is an important defence offered, it is likely that there may be finding on
this issue by the appellate authorities. In passing, it may be observed that
such client-wise limits effectively defeat one of the objectives futures and
that being hedging.

The
present case was of a proposed sale of a large quantity of shares which
could have lowered the market price and hence the desire of hedging. A similar
situation can arise in case of proposed purchase of a large quantity
shares that may result in increase, at least in the short term, of the price of
the shares as quoted on stock exchanges. Such situations are dealt with in different
ways such as hedging or even warehousing where other parties are asked to
purchase shares that would eventually be transferred to the buyer. The present
order and its outcome would be of interest to such and other similar
transactions. Needless to say, it would be the facts of each case that would be
decisive. However, an element of wariness and proper planning would become
imperative by parties so as to avoid such action by SEBI.

In
the opinion of the author, there are some areas of concern in the Order. SEBI
has held that the fact that 12 front entities were used is a pointer of an
intent to manipulate/defraud. Whether this finding can be held to be
independently correct or has the benefit of hindsight of last 10 minutes of
heavy sales is, I submit, an area requiring more examination. Then there is the
fall in price in the last 10 minutes on account of the large sales in the cash
market. Even if it can be held that such fall was intended/manipulative,
whether the profits on account of only such fall can be treated as ill-gotten
profits? Or whether, as SEBI held, the whole of the profits on account of the
open futures trades should be held to be ill-gotten profits?

All in all, it would be
interesting to follow the case as it
develops further.

shailesh.kwebmaker

WhatsApp as Evidence….. What’s that?

Introduction

We are inundated by electronic
data and increasingly even by social media! Social media and Apps, such as,
WhatsApp, Facebook, LinkedIn are fast replacing other traditional forms of
communication and human interaction. However, one frontier which has yet not
been fully breached by the social media is the Indian courts. Can chats on
WhatsApp be admitted as evidence in a Court case? This was an issue which the
Bombay High Court recently had an occasion to consider in the case of Kross
Television India Pvt. Ltd vs. Vikhyat Chitra Production, Notice of Motion (L)
No. 572/2017. Certain other High Court judgments have also had an
occasion to rely on WhatsApp Chats as evidence. Let us examine some of these
interesting cases.

Background

Evidence in courts in India is
admissible provided it confirms to the contours of the Indian Evidence
Act, 1872. This Act applies to all judicial proceedings in or before
any court in India. It defines evidence as meaning and including all statements
which the court permits or requires to be made before it by witnesses in
respect of matters of fact which are under inquiry. Such evidence is known as
oral evidence. The Act also deals with documentary evidence. The definition of documentary
evidence in the Indian Evidence Act was modified by the Information
Technology Act, 2000 to provide that all documents including electronic
records produced for the inspection of the court would be known as documentary
evidence. Hence, electronic records have been given the status of evidence.
Section 2(1)(t) of the Information Technology Act defines an electronic record
to mean any data, record or data generated, image or sound stored, received or
sent in an electronic form or micro film or computer generated microfiche.

Section 65B of the Indian Evidence
Act deals with admissibility of electronic records as evidence. Any information
contained in an electronic record which is stored, recorded or copied in
optical / magnetic media (known as computer output) produced by a ‘computer’ is
also deemed to be a document provided 4 conditions are satisfied. Further, such
a document shall be admissible as evidence. The 4 conditions which must be
satisfied are (a) the computer output must be produced by the computer during
the period when the computer was used to store or process information by
persons having lawful control over it; (b) information of the kind contained in
the output was regularly fed into the computer; (c) the computer was operating
properly throughout the period; and (d) the information contained in the
electronic record reproduces information fed into the computer in the ordinary
course of activities.

The term ‘computer’ is not
defined in the Indian Evidence Act but the Information Technology Act defines
it to mean any electronic, magnetic, optical or other high-speed data
processing device or system which performs logical, arithmetic, and memory
functions by manipulations of electronic, magnetic or optical impulses. Thus,
this definition is wide enough to include a smartphone also!

The Delhi High Court in a criminal
case of State vs. Mohd. Afzal, 107(2003) DLT 385 has held that
computer generated electronic records are evidence and are admissible at a
trial if proved in the manner specified by section 65B of the Indian Evidence
Act. It has given a very vivid explanation of the law relating to electronic
records being admissible as evidence. It held that the normal rule of leading
documentary evidence is the production and proof of the original document
itself. Secondary evidence of the contents of a document can also be led under
the Evidence Act. Secondary evidence of the contents of a document can be led
when the original is of such a nature as not to be easily movable. Computerised
operating systems and support systems in industry cannot be moved to the court.
The information is stored in these computers on magnetic tapes (hard disc).
Electronic record produced there from has to be taken in the form of a print
out. Section 65B makes admissible without further proof, in evidence, print out
of a electronic record contained on a magnetic media a subject to the
satisfaction of the conditions mentioned in the section. Four conditions are
mentioned. Thus, compliance with the conditions of section 65B is enough to
make admissible and prove electronic records. It even makes admissible an
electronic record when certified that the contents of a computer printout are
generated by a computer satisfying the four conditions, the certificate being
signed by a person occupying a responsible official position in relation to the
operation of the device or the management of the relevant activities. Thus,
section 65B(4) provides for an alternative method to prove electronic record
and not the only method to prove electronic record. It further held that the
last few years of the 20^th century saw rapid strides in the field of
information and technology. The expanding horizon of science and technology
threw new challenges for the ones who had to deal with proof of facts in
disputes where advanced techniques in technology were used and brought in aid.
Storage, processing and transmission of date on magnetic and silicon medium
became cost effective and easy to handle. Conventional means of records and
data processing became outdated. Law had to respond and gallop with the
technical advancement. Hence, the Delhi
High Court concluded that electronic records are admissible as evidence in
Court cases.

In M/s. Sil Import, USA vs.
M/s. Exim Aides Silk Exporters, 1999 (4) SCC 567, the Supreme Court
held that a notice in writing for a bounced cheque must be given under the
Negotiable Instruments Act to the drawer of the bounced cheque. It held that
the legislature must be presumed to have been aware of the modern devices and
equipment already in vogue and also in store for future. If the court were to
interpret the words giving notice in writing in the section as restricted to
the customary mode of sending notice through postal service or even by personal
delivery, the interpretative process would fail to cope up with the change of
time. Accordingly, it allowed a notice to be served by fax.

WhatsApp relied on

There have been a few cases where
WhatsApp chats have been relied upon by the Courts while deciding cases. In a
bail application before the Bombay High Court in the case of Kaluram
Chaudhary vs. Union of India, Cr. WP No. 282/2016 the accused produced
a call record of WhatsApp communications between himself and his wife, which
showed that at the relevant time he was in communication of his wife on
WhatsApp, whereas the panchanama drawn showed that he was subjected to search
and seizure and his phone, bearing the same number on which his wife was
chatting with him as above, was shown as having being recovered from him. Thus,
he claimed that the arrest was perverse and the entire case was false. Although
the High Court rejected the bail application it held that the electronic
records of WhatsApp chats were matters of evidence, which would have to be
strictly proved in accordance with law at the trial stage.

Similarly, based on threats issued
to a person on WhatsApp, the Madras High Court directed the police to conduct
an enquiry in the case of H.B. Saravana Kumar vs. State, Crl. O.P. No.
10320/2015. The Court relied on a CD containing the WhatsApp chats as
evidence of the threats.

Recent case of Kross Television

The recent case of Kross
Television before the Bombay High Court was one pertaining to a case of plagiarism
and copyright violation. Kross Television had pleaded that Vikhyat Chitra
Production had made a Kannada movie, Pushpaka Vimana which in effect was
a copy of a Korean movie. Kross Television had purchased the official rights of
this Korean film but before they could make the movie, Vikhyat Chitra
had already plagiarised the original Korean film by making Pushpaka Vimana.
Accordingly, Kross moved the High Court seeking an injunction against Vikhyat Chitra. However, for this to
take place, first they needed to serve a Notice on Vikhyat Chitra so that it
would know that it has a case pending against it. They tried obtaining the
address of Vikhyat Chitra from various sources and sent couriers but the
defendant kept changing its address to avoid service of the Notice. They even
served the Notice on 2 email addresses belonging to the defendant. Ultimately,
they managed to call a mobile number of AR Vikhyat, the head of Vikhyat
Chitra and spoke with him. WhatsApp Chats with him showed that he stated
that he did not understand anything and would check with his legal team and
revert. However, there was still no response from Vikhyat Chitra.

Accordingly, Kross Television
moved the High Court for ex-parte injunction. In a scathing order, the
High Court has held that it did not see what more could be done for the
purposes of this Motion. It cannot be that rules and procedure are either so
ancient or so rigid (or both) that without some antiquated formal service mode
through a bailiff or even by beat of drum or pattaki, a party cannot be said to
have been ‘properly’ served. The purpose of service is put the other party to
notice and to give him a copy of the papers. The mode is surely irrelevant.
Courts have not formally approved of email and other modes as acceptable simply
because there are inherent limitations to proving service. Where an alternative
mode is used, however, and service is shown to be effected, and is
acknowledged, then surely it cannot be suggested that the Defendants had ‘no
notice’. To say that is untrue; they may not have had service by registered
post or through the bailiff, but they most certainly had notice. They had
copies of the papers. They were told of the next date. A copy of the previous
order was sent to them. Defendants who avoid and evade service by regular modes
cannot be permitted to take advantage of that evasion.

The High Court relied on the
WhatsApp chats with AR Vikhyat, the head of Vikhyat Chitra Production, as
evidence that he has received the Notice. It also relied on the fact that the
WhatsApp status of this head showed a picture of Pushpaka Vimana.
Further, (and probably for the first time), the High Court relied on TrueCaller
App which showed that the mobile number indeed belonged to AR Vikhyat.

Considering all these electronic
evidences, the High Court held that if Vikhyat Chitra believed they
could resort to these tactics to avoid service, they were wrong. They may
succeed in avoiding a bailiff; they may be able to avoid a courier or a postman
but they have reckoned without the invasiveness of information technology. Vikhyat
Chitra in particular did not seem to have cottoned on to the fact that when
somebody calls him and he responds, details can be obtained from in-phone apps
and services, and these are very hard to either obscure or disguise. There are
email exchanges. There are message exchanges. The Court held that none of these
established that the defendants were not adequately served. Accordingly, it
held that the defendants should bear the consequences of their actions.
Ultimately, the High Court granted an interim injunction against Vikhyat Chitra
Production from the showing the movie in all forms, cinema, TV, DVDs, etc.,
and also granted a host of other restrictions against it pending final disposal
of the suit.

Thus, in this case, the Bombay
High Court relied not just on WhatsApp chats but also on the TrueCaller App of
the defendant. This surely is one of the most revolutionary verdicts delivered
by the Courts.

In a similar development,
according to certain reports, the court of the Haryana Financial Commissioner
in the case of Satbir Singh vs. Krishan Kumar has served a
summons on a non-resident through WhatsApp since his physical address in India
was untraceable. The court ordered that the summons should be sent on the
defendant’s WhatsApp from the mobile of a counsel, who would produce proof of
electronic delivery via WhatsApp by taking a printout and duly authenticating
it by affixing his own signature.

Conclusion

The Delhi High Court has held that
the law did not sleep when the dawn of information technology broke on the
horizon. The world over statutes were enacted and rules relating to
admissibility of electronic evidence and its proof were enacted. It is
heartening to note that the Bombay High Court and the Madras High Court have
relied on WhatsApp chats and TrueCaller as evidence.

However, at the same time one would also like to
sound a note of caution since often the veracity and authenticity of social
media and Apps could be in doubt. Cyber security could often be compromised and
if the Court relies on hacked data then there could be serious consequences.
Nevertheless, a step in the right direction has been taken by the Courts! So
check your WhatsApp carefully next time, you might just have received a Court
summons!

shailesh.kwebmaker

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