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Category: Corporate And Other Laws

Can A Step-Son Be Treated As A Legal Heir?

Introduction

The Hindu Succession Act, 1956 (“the Act”) lays down the
succession pattern for intestate death of Hindu males and females. In the case
of a Hindu male dying intestate, section 8 of the Act states that his Heirs
being relatives in Class I of the Schedule to the Act are entitled to his
estate. Covered amongst the Class I Heirs are his mother, widow, son and
daughter. A question which arises is that whether a step-son can be treated as
a Class-I Heir for the purposes of the Act? The Act does not define the term
son.

 

This issue was raised before the Bombay High Court in the Chamber
Summons No. 495/2017 issued in the case of Dudhnath Kallu Yadav vs. Ramashankar Ramadhar Yadav, Suit No.
2219/2000. Let us analyse this interesting issue.

 

Facts

A Hindu male coparcener, who was party to a suit for an HUF Partition,
died intestate. On his death, his heirs were brought on record as defendants in
the said suit. A step-son of the deceased (son of his wife from her earlier
marriage) also filed a claim for being taken on record as a defendant in the
said suit since he claimed that he too was a legal heir of the deceased. Thus,
this became the issue before the Bombay High Court as to whether a step-son can
be treated as a legal heir of an intestate Hindu under the Hindu Succession
Act?

 

Bombay High Court’s decision

It may be noted that section 2 of the Income-tax Act, 1961, defines a
child to include a step-child and an adopted child. Hence, for purposes of the
Income-tax Act, a step child would be treated as a relative of an individual.
Accordingly, reliance was placed by the step-son on the income-tax definition
to assert his claim of being a legal heir. The Bombay High Court held that the
claim was clearly preposterous. It is important to note that the controversy
involved a claim to the property of a male Hindu dying intestate. The Schedule
to the Hindu Succession Act refers to Heirs in ClassI within the meaning of
section 8 of that   Act. A son was
included in Class I of the Schedule. The applicant, as son of the wife of the
deceased from her first marriage, could not claim as a son of the deceased. The
expression “son” appearing in the Hindu Succession Act did not include a
step-son. The expression “son” not having been defined under the Hindu
Succession Act, the definition of “son” under the General Clauses Act may be
appropriately referred to. In clause (57) of section 2 of the General Clauses
Act, the expression “son” included only an adopted son and not a step-son. It
held that even otherwise a “son” as understood in common parlance meant a
natural son born to a person after marriage. It is the direct
bloodrelationship, which is the essence of the term “son” as normally understood.
It also held that the Income-tax definition could not be imported into the
Hindu Succession Act.

 

The appellant relied on the Supreme Court’s decision in the case of K.
V. Muthu vs. Angamuthu Ammal (1997) 2 SCC 53, in which it had held that
“son” as understood in common parlance means as natural son born to a
person after marriage. It is the direct blood relationship which is the essence
of the term in which “Son” is usually understood, emphasis being on
legitimacy. In legal parlance, however, “son” has a little wider
connotation. It may include not only the natural son but also the grandson, and
where the personal law permits adoption, it also includes an adopted son. It
would appear that it is not in every case that a son who is not the real son of
a person would be treated to be a member of the family of that person but would
depend upon the facts and circumstances of a particular case. In this decision,
the Supreme Court held that a foster son would also be treated as a son. The
Bombay High Court held that this decision was not of help to the appellant. The
word “son” appearing in Class I of Schedule to the Act would include an adopted
son, but there was no warrant for including a step-son within the meaning of
the expression “son” used in Class I. The context in which the term “son” was
used in the Schedule did not admit of a step-son being included within it.

 

The Bombay High Court also referred to the Supreme Court decision in the
case of Lachman Singh vs. Kirpa Singh, 1987 SCR (2) 933 where the
Apex Court, in the context of another section of the Act, had held that a son
does not include a step-son. It held that the words ‘son’ and ‘step-son’ were
not defined in the Act. According to Collins English Dictionary, a ‘son’ meant
a male offspring and ‘step-son’ meant a son of one’s husband or wife by a
former union. Under the Act, a son of a female by her first marriage would not
succeed to the estate of her second husband on his dying intestate. Children of
any predeceased son or adopted son fell within the meaning of the expression
‘sons’.

 

However, if Parliament had felt that the word ‘sons’ should include
‘step-sons’ also, it would have said so in express terms. The Court noted that
it should be remembered that under the Hindu law as it stood prior to the
coming into force of the Act, a step-son, i.e., a son of the husband of a
female by another wife did not simultaneously succeed to the stridhana of the
female on her dying intestate. In that case the son born out of her womb had
precedence over a step-son.

 

Parliament would have made express provision in the Act if it intended
that there should be such a radical departure from the past. Hence, it
concluded that the word ‘sons’ in clause (a) of section 15(1) of the Act did
not include ‘step-sons’ and that step-sons did not fall in the category of the
heirs of the husband.

 

The Bombay High Court accordingly concluded that there was no merit in
the Applicant’s claim to be treated as a legal heir of the deceased defendant
and that he could not claim to defend the suit as such a legal heir.

 

Similar Verdicts

A similar view has been held by the Punjab & Haryana High Court in
the case of Mohinder Singh vs. Joginder Singh and Others, RSA No. 1350 of
1981, Order dated 5.12.2008 where the Court held that the heirs,
entitled to succeed to the estate of a deceased male Hindu were enumerated in
section 8 of the Hindu Succession Act, 1956 and did not include the son of a
wife from a previous marriage.Again, the Delhi High Court in Maharaja
Jagat Singh vs. Lt. Col. Sawai Bhawani Singh, I.A. NO.11365/2010, Order dated
05.12.2017 has also taken a similar view wherein it held that it was of
the opinion that the judgment of the Supreme Court in Lachman Singh’s case
(supra) was decisive on the question that step-children could not be
equated to children.

 

Again in Tarabai Dagdu Nitanware and Others vs. Narayan Keru
Nitanware, WP No. 14090 /2017 Order Dated 15.01.2018, the Bombay High
Court was faced with the issue of the succession pattern of a property of a
Hindu female who died intestate. She had received a property from her parents
and left behind her husband and his children from his earlier marriage. Thus,
she did not leave behind any biological children.  The Bombay High Court held that step-children
are not children for the purposes of the Act and hence, it would be treated as
if she died issueless. Accordingly, the Court held that the property would
revert to her parents’ heirs and not devolve upon her husband and her
step-children.

 

Outcome

It may be noted that these decisions only impact a case of an intestate
succession. A testamentary succession, i.e., one where a Will is made is on a
different footing. A person can make a Will in favour of any stranger let alone
a step-child. Hence, when it comes to making of a Will, the above decisions
have no say at all and it is only when a person dies without making a valid
Will that these cases would apply. Also, the Income-tax Act is very clear and
specific in as much as section 2 expressly covers a step-child within the ambit
of the term child. The definition of the term relative found in the Explanation
to section 56(2)(x) of the Act, does not use the word ‘child,’ but instead uses
the phrase lineal ascendant or descendant of the individual. The Indian
Succession Act defines a lineal descendant in relation to a person as lineal
consanguinity which subsists between two persons, one of whom is descended in a
direct line from the other, as between a man and his son, grandson, etc.,
in the direct descending line. Hence, it stands to reason that since a child
includes a step-child, the phrase lineal descendant which would include a
child, would also cover a step-child.

 

The above judgements could also have a bearing on the concessional stamp duty provided for gift deeds under the
Maharashtra Stamp Act, 1958. A concessional duty of Rs. 200 is provided for
gifts of residential house / agricultural properties made to a son / daughter.
A view may now be taken that this would not include step-children. The cases
would also be relevant in the context of Agricultural Laws, such as, the
Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961 which prescribes
a familywise ceiling on agricultural land and defines a family to include a son
of the agriculturist.

 

Conclusion

The issue of
whether a step-child can be considered to be a legal heir has always been a
vexed one. Considering the rise in the number of divorces and remarriages in
India, it may be worthwhile for the Parliament to have a relook at this issue
and consider amending the laws to expressly provide for succession by
step-children. There is some merit in the argument that after remarriage,
step-children should be entitled to be treated as legal heirs of their
step-father! However, at the same time, he would also be entitled to succeed to
the estate of his biological father since he continues to remain his legal
heir. Would he then become a Class I heir of two fathers? A fascinating
scenario indeed!!  





AMENDMENTS IN COMPANIES ACT BY AN ORDINANCE

1. 
Introduction 


The Companies Act, 2013, (Act) came into force on 1.4.2014.  There are 470 sections in this Act as
compared to more than 650 sections in the previous Companies Act, 1956.  Various sections of the present Act were
brought into force in a phased manner. 
This Act was amended by the Companies (Amendment) Act, 2015 and again by
the Companies (Amendment) Act, 2017. 
These amendments were brought into force in a phased manner.  Now, some important amendments are made in
the Act by the Companies (Amendment) Ordinance, 2018, which has been
promulgated by the Hon’ble President on 2nd November, 2018.  These amendments have come into force on 2nd
November, 2018.  Some of the important
amendments made by the Ordinance are discussed in this Article. 


2. FINANCIAL YEAR – SECTION 2(41)


(i)   The term “Financial Year” is
defined in section 2(41) of the Act. This section provides that the Financial
Year of a Company or a Body Corporate shall end on 31st March, every
year. However, a company or a body a company which is holding, subsidiary or
associate of a Foreign Company which is required to prepare financial
statements with different Financial Year for submission of consolidated
accounts outside India, according to the law of that country, can have a
different Financial  Year if  the National Company Law Tribunal
(Tribunal),  on application by such
company or body corporate, permits the same. 
In this case such company or body corporate can have a different
financial year for the purpose of consolidation of accounts.       


(ii)   By amendment of this section it is now
provided that on and after 2.11.2018 such application will have to be made to
the Central Government in the prescribed form. 
In other words, power to grant this permission is now transferred from
the Tribunal to the Central Government. 
All pending applications as on 2.11.2018 before the Tribunal can be
disposed of  by the Tribunal.


3. COMMENCEMENT OF BUSINESS BY A COMPANY – (NEW SECTION 10A AND SECTION 12)


(i)   At present there is no provision for giving
intimation  about commencement of
business by a company.  A new section 10A
is now inserted to provide that a company incorporated on or after 2.11.2018
and having a share capital shall not commence any business or exercise  any borrowing powers without complying with
the following procedure.


(a)  A declaration in the prescribed form should be
filed by a Director of the company within 180 days of the date of incorporation
with the ROC. In this declaration it should be stated and verified that every
subscriber to the Memorandum of Association has paid the value of the shares
agreed to be taken by him on the date of making such declaration.


(b)  Further, it is to be stated in the declaration
that the company has filed a verification of its Registered Office u/s. 12(2)
with the ROC.


(ii)   If the above declaration is not filed, the
company will be liable to penalty of Rs. 50,000/-.  Further, every officer who is in default will
be liable to pay penalty of Rs. 1,000/- per day during which the default continues
subject to a maximum of Rs. 1 Lakh.


(iii)  Further, if the above declaration is not filed
within 180 days of the date of incorporation and the ROC is satisfied that the
company is not carrying on any business or operations, he can remove the name
of  the company from the Register of
Companies as provided in Chapter XVIII of the Act.


(iv)  It may be noted that s/s. (9) is added in
section 12 to provide that if the ROC is satisfied that a company is not
carrying on any business or operations, he can make physical verification of
the Registered Office of the Company in the prescribed manner.  If the ROC is satisfied that no such
Registered Office is maintained by the company and no business or operations
are carried on by the company, he can remove the name of the company from the
Register of Companies as provided in the Chapter XVIII of the Act.


(v)  It may be noted that consequential amendment
is made in section 248 dealing with power of ROC to remove the name of the
company from the Register of Companies. 
It may further be noted that similar provision existed in this section
when enacted in 2013. However, this was omitted by the Companies (Amendment)
Act, 2015, w.e.f. 29.05.2015. The same provision is now brought back w.e.f.
2.11.2018 by amendment of section 248. 
Further, this power to remove the name of the company for the above
default applies to a Private or a small company having share capital.


(vi)  The above power appears to have been given to
the ROC to weed out some bogus or in operative companies which are formed by some
unscrupulous persons for money laundering and other anti-social activities.


4. CONVERSION OF PUBLIC COMPANY INTO PRIVATE COMPANY – (SECTION 14)


At present section
14(1) provides that a Public Company can be converted into a Private Company
with approval of the Tribunal.  This
section is now amended to provide that such conversion can be made only after
approval by the Central Government.  For
this purpose application should be made to the Central Government in the
prescribed form. It is also provided that all pending applications before the
Tribunal shall be disposed of by the Tribunal.


5. PROHIBITION ON ISSUE OF SHARES AT DISCOUNT – (SECTION 53)


(i)   At present the punishment for non-compliance
with the section is fine between Rs. 1 Lakh to Rs. 5 Lakh payable by the
company and imprisonment of officer in default for a period upto six months or Fine
between Rs. 1 Lakh and Rs. 5 Lakh or with both.


(ii)   This section is now amended to provide that
in the  event of non-compliance with the
provisions of the section, the company and every officer in default shall be
liable to Penalty upto an amount equal to the amount raised  through issue of shares at a discount or Rs.
5 Lakh whichever is less.


(iii)  Further, the company will have to refund all
monies  received from the persons who
have subscribed to  such shares with
interest at the rate of 12% P. A. from the date of receipt to the date of
refund .


(iv)  It may be noted that the
punishment by way of imprisonment of defaulting officers is now done away with. 


6. NOTICE TO BE GIVEN TO ROC FOR ALTERATION OF SHARE CAPITAL – (SECTION 64)


Under the existing
section 64(2) the Company and  every
officer in default has to pay Fine of Rs. 1,000/- per day during
which the default continues subject to maximum of Rs. 5 Lakh.  The amendment to this section provides that
the amount shall be payable as Penalty for contravention of the
section.


7. DUTY TO REGISTER CHARGES – (SECTION 77)


(i)   Section 77 provides that any charge created
by the company shall be registered with ROC within 30 days of such
creation.  If this is not done, the
charge can be registered within 300 days of creation of the charge on payment
of the prescribed additional fees.  If the
charge is not registered within this period of 300 days, the company can apply
for extension of time to the Central Government as provided in section 87.


(ii)   This provision for extension of time beyond
30 days is  now amended by amendment of
section 77 as under:


(a)  The ROC may allow, on application by the
company, to register charges created before 2.11.2018 and the same can be filed
within 300 days of the date of creation, if not filed within 30 days, on
payment of prescribed additional fees


(b)  If charge created before 2.11.2018 which has
not been filed within 300 days, the same can be filed within 6 months from
2.11.2018 on payment of such prescribed additional fees and different fees may
be prescribed for different classes of companies.


(c)  The ROC may allow, on application by the
company, to register charges created on or after 2.11.2018, if not filed within
30 days, and the same can now be filed with 60 days of creation on payment of
the prescribed additional fees.  It may
be noted that existing period of 300 days is now reduced to 60 days.


(d)  In the case of a charge created on or after
2.11.2018, if the charge is not filed within 60 days, the ROC, on application
made by the company, may allow registration of charge within a further period
of 60 days after payment of such advalorem fees as may be
prescribed.  This will mean that the fees
payable for the delay will be calculated as a percentage of the amount of the
charge.


(iii)  Existing section 86 provides for punishment to
the company and its officers in default for contravention of sections 77 to
85.  In addition to this punishment, this
section is now amended to provide that if any person willfully furnishes any
false or incorrect information or knowingly suppresses any material information
required to be registered u/s. 77, he shall be liable for action under section
447. U/s. 447 there is provision for levy of fine as well imprisonment of the
defaulting officer for specified period.


8. RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES – (SECTION 87)


The existing
section 87 is replaced by a new section 87 which provides as under:


(i)   The section provides for a situation in which
there is omission to give intimation to ROC of payment or satisfaction of a
charge within the stipulated time limit. 
It also deals with the omission or misstatement of any particulars with
respect to any such charge or modification or with respect to any memorandum of
satisfaction or other entries made as provided u/s. 82 or 83.


(ii)   With respect to the above, if the Central
Government is satisfied that such omission or misstatement was accidental or
due to inadvertence or some other sufficient cause or it is not prejudicial to
the position of creditors or shareholders, it may, give the following relief.


(a)  Extend time for giving intimation of payment
or satisfaction of debt.


(b)  Direct that the omission or misstatement be
rectified in the Register of Charges.


9. REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY – (SECTION 90)

(i)   A very comprehensive new section 90 was
introduced by the Companies (Amendment) Act, 2017.  Under this section a person having beneficial
interest of not less than 25% or, such percentage as may be prescribed in the
Shares of the Company or has right to exercise significant influence or control
as defined in section 2(27) has to give a declaration in the prescribed manner.
Section 90(9) provides that the company or the person aggrieved by the order of
the Tribunal passed u/s. 90(8) can make an application to the Tribunal for
relaxation or lifting of the restriction placed u/s. 90(8).


(ii)   Section 90(9) has now been
amended to provide that the above application can be made within one year from
the date of the order u/s. 90(8). 
Further, if no such application is made within one year, such shares as
referred to in section 90 shall be transferred to the authority constituted
u/s. 125(5), in such manner as may be prescribed. In other words, in the event
of delay  in filing the declaration under
this section, the shares may be transferred to Investor Education and
Protection Fund set up u/s. 125.


(iii)  Section 90(10) provides for punishment for
contravention of the provisions of section 90. 
This section is amended to provide that 
the person who fails to make the declaration of significant beneficial
ownership in the company u/s. 90 shall be punishable with imprisonment for a
term upto one year or with minimum fine of Rs. 1 Lakh which may extend to Rs.
10 Lakh or with both.  If the default
continues, a further fine upto Rs. 1,000/- per day will be payable for the
period of default.


(iv)  The above amendment appears to have been made
to deal with cases of benami shareholders in companies.


10. ANNUAL RETURN – (SECTION 92)


(i)   The existing section 92(5) provides for
punishment for delay in filing Annual Return within the time specified in section
92(4).  This punishment is by way of Fine
payable by the company and by way of imprisonment of officers in default or
with fine or both.


(ii)   The above provision for punishment is now
modified by amendment of section 92(5) as under:

  

   (a)  The
company and every officer in default will be liable to pay penalty of Rs.
50,000/-.


(b)  In case of continuing default, further penalty
of
Rs. 100/- per day subject to maximum of Rs. 5 Lakh is also payable.


It may be noted
that the provision for prosecution of the officer in default is now deleted.

 


11. STATEMENT TO BE ANNEXED TO SPECIAL NOTICE OF GENERAL MEETING – (SECTION 102) AND PROVISION FOR PROXIES – (SECTION 105)


In both the
sections 102 and 105 there is provision for punishment for contravention of the
provisions of the sections in the form of monetary payment by way of Fine.  By amendment of these sections it is now
provided the same monetary amount shall be payable as Penalty.


12. RESOLUTIONS AND AGREEMENTS TO BE FILED WITH ROC – (SECTION 117)


The existing
section 117 (2) provides for levy of Fine if the specified
Resolutions and Agreements to be filed with ROC are not filed within the
specified time. The monetary limits of Fine is reduced and it is
now provided that the following Penalty shall be payable for the
default.


(i)   The company shall be liable to pay penalty of
Rs. 1 Lakh and, in case of continuing default, further penalty of Rs. 500/- per
day of default, subject to maximum of Rs. 25 Lakh.


(ii)   Further, every officer in default (including
the Liquidator, if any) shall be liable to pay Penalty of Rs. 50,000/- and, in
case of continuing default, he shall be liable to pay a further penalty of Rs.
500/- per day, subject to maximum of Rs. 5 Lakh. 


13. REPORT ON AGM TO BE FILED WITH ROC – (SECTION 121)


U/s. 121 Report on
Annual General Meeting held by a listed public company is to be filed by such
company within the time provided in the section. U/s. 121(3) the company and
every officer in default is required to pay Fine for
non-compliance with the requirement of the section.  This provision is now amended and it is
provided that Penalty for this default will be payable as under:


(i)   The company will have to pay Penalty
of Rs. 1 Lakh and,  in case of continuing
default, further penalty of Rs. 500/- per day of default subject to maximum of
Rs. 5 Lakh will be payable.


(ii)   Further, every officer in default shall be
liable to pay penalty of Rs. 25,000/- and, in case of continuing default, a
further penalty of Rs. 500/- per day of default, subject to a maximum of Rs. 1
Lakh will be payable.


14. COPY OF FINANCIAL STATEMENTS TO BE FILED WITH ROC -(SECTION 137)


U/s. 137(3) the
company and the officers in default, as specified in the section, are liable to
pay fine of specified amount for non-compliance with the requirements of the
section. There is also provision for prosecution of the officers in
default.  These provisions are amended
and it is now provided for payment of Penalty as under:


(i)   The company shall be liable to pay Penalty of
Rs. 1,000/- per day during the period of default subject to  a maximum of Rs. 10 Lakh.


(ii)   Every officer in default, as specified in the
section, shall be liable to pay Penalty of Rs. 1 Lakh and,  in case of continuing default, further
penalty of Rs. 100/- per day of default shall be payable subject to  a maximum of Rs. 5 Lakhs. It may be noted
that the existing provision for imprisonment of the officer in default for a
specified period is now deleted from this section.


15. REMOVAL AND RESIGNATION OF AUDITOR – (SECTION 140)


Section 140 (2)
provides that an Auditor of a company has to file with ROC and the Company (C
& AG, if applicable) a Statement in the prescribed form (ADT-3) within 30
days about details of his resignation as Auditor. Section 140 (3) provides that
in the  event of failure to comply with
this requirement the Auditor will have to pay Fine of Rs.
50,000/- which may extend to Rs. 5 Lakh.


Section 140(3) is
now amended to provide that the Auditor will have to pay for non-compliance
with the provisions of section 140(2) Penalty of Rs. 50,000/- or
an amount equal to his remuneration as Auditor, whichever is less.  Further, in case of continuing default, a
further penalty of Rs. 500/- per day of default subject a maximum of Rs. 5 Lakh
will be payable.


16. COMPANY TO INFORM DIN TO ROC – (SECTION 157)


Section 157(1) provides for furnishing information about Director
Identification Number (DIN) to ROC and other prescribed authorities within the
specified time.  In the event of default
in complying with this requirement the company and the officers in default have
to pay Fine as stated in section 157 (2). The provisions of
section 157(2) have now been amended to provide for payment of Penalty
as under:


(i)   The Company shall be liable to pay penalty of
Rs.  25,000/-.  Further, in case of continuing default, a
further penalty of Rs. 100/- per day of default subject to maximum of Rs. 1
Lakh shall be payable.


(ii)   Further, every officer in default will be
liable to pay penalty of Rs. 25,000/- and a further penalty for continuing
default shall be payable at Rs. 100/- per day of default subject to a maximum
of Rs. 1 Lakh. 


17. PUNISHMENT FOR CONTRAVENTION OF SECTIONS 152,155 AND 156 – (SECTION 159)


The existing
section 159 providing for payment of Fine as well imprisonment of
the individual or Director in default has been replaced by a new section 159.
This new section 159 removes the provision for imprisonment of the Individual
or Director in default and provides for levy of penalty as under:


(i)   Penalty which may extend upto Rs. 50,000/-


(ii)   In case of continuing default, a further
penalty which may extend upto Rs. 500/- per day during the period when the
default continues.


The wording of the
above section indicates that a penalty of less than Rs. 50,000/- or less than
Rs. 500/- per day may be levied at the discretion of the concerned authority.


18. DISQUALIFICATIONS FOR APPOINMENT OF DIRECTOR – (SECTION 164)


Section 164 gives a
list of circumstances under which a director may be disqualified for
appointment as Director in any other company. 
The amendment of this section states that a person who has not complied
with the provisions of section 165(1) will now be disqualified for appointment
as Director of any other company.  It may
be noted that section 165(1) provides that a person will not be entitled to
become director of more than specified number of Companies.


19. NUMBER OF DIRECTORSHIPS – (SECTION 165)


U/s. 165(6), if a
person accepts an appointment as a director in contravention of the specified
number of directorships stated in section 165(1), he is liable to pay Fine
of specified amount. This provision is now modified by amendment of section
165(6).  It is now provided that such
person will be liable to pay Penalty of Rs. 5,000/- for each day
during which the default continues.


20. PAYMENT TO DIRECTOR FOR LOSS OF OFFICE – (SECTION 191)


U/s. 191(1) no
director can receive any compensation for loss of office under specified
circumstances.  If there is contravention
of this provision, section 191(5) provides for payment of Fine by
such Director of Rs. 25,000/- which may extend to Rs. 1 Lakh. This section is
now amended to provide for payment of Penalty of Rs. 1 Lakh by such Director
for contravention of the provisions of section 191.


21. MAXIMUM REMUNERATION PAYABLE TO MANAGERIAL PERSONNEL – (SECTION 197)


(i)   Section 197(7) provides that an Independent
Director shall not be entitled to receive any stock option from the
company.  He can only receive sitting
fees, commission and reimbursement of expenses. 
Now sub-section (7) of section 197 is omitted.  Effect of this amendment will be that besides
sitting fees, commission etc., an Independent Director can enjoy the benefit of
Stock Option from the Company.


(ii)   At present section 197(15) provides for
payment of Fine of specified amount by the person who contravenes
the provisions of this section.  By
amendment of this section the Penalty of Rs. 1 Lakh can be levied
on the person who contravenes the provisions of section 197.  Hitherto, no Fine was payable by the company.
By this amendment it is provided that if the company has contravened the
provisions of section 197, it will have to pay penalty of Rs. 5 Lakh.


22. APPOINTMENT OF KEY MANAGERIAL PERSONNEL – (SECTION 203)


The monetary limits
of Fine u/s. 203 (5) for non-compliance with section 203 have now
been modified by amendment of section 203(5) as under:


(i)   The company will be liable to pay Penalty of
Rs. 5 Lakhs


(ii)   Every Director and Key Managerial Personnel
who is in default shall be liable to pay penalty of Rs. 50,000/-.


(iii)  In case of continuing default, further penalty
of Rs. 1,000/- per day of default subject to maximum of Rs. 5 Lakh shall also
be payable.


23. REGISTRATION OF OFFER OF SCHEMES INVOLVING TRANSFER OF SHARES – (SECTION 238)


U/s. 238(3) the
Director who is in default is liable to pay Fine between Rs.
25,000/- to Rs. 5 Lakh. This is now changed to Penalty of Rs. 1
Lakh by amendment of this section.


24. COMPOUNDING OF CERTAIN OFFENCES – (SECTION 441)


(i)   At present section 441(1)(b) provides that an
offence  punishable under the Act with
Fine only which does not exceed Rs. 5 Lakh can be compounded by the Regional
Director. By amendment of this section this limit of Rs. 5 Lakh is increased to
Rs. 25 Lakh. Therefore, the Regional Director can now compound any offence
where the Fine is below the limit of Rs. 25 Lakhs. U/s. on 441(1) (a) the
Tribunal has power to compound an offence where the amount of Fine leviable is
of any amount (i.e. even more than Rs. 25 Lakh).


(ii)   Section 441(6) is now amended to provide that
any offence which is punishable under the Act with imprisonment only or with
imprisonment and also with Fine shall not be compoundable.  In the existing section 441(6) it was provided
in specified cases it was possible to compound the offence with the permission
of Special Court.  This concession is now
not available.


25. LESSER PENALTIES FOR ONE PERSON AND SMALLER COMPANIES – (SECTION 446B)


Section 446 B was
enacted by the Companies (Amendment) Act, 2017. 
It came into force on 9.2.2018. 
This section provided that if a One Person Company or a Small Company
fails to comply with provisions of section 92(5), 117(2) or 137(3), such
company or any officer in default shall be punishable with Fine or
Imprisonment, such Fine or Imprisonment shall not be more than half of the Fine
or half of the period of Imprisonment specified in the above sections.  Now this section is amended to provide that,
if the company or the officer in default is liable to penalty, the same shall
not be more than half of the penalty specified in the above sections.  This amendment is made as in the above
sections the punishment in the form of Fine and Imprisonment is now replaced by
the specified amount of penalty.


26. PUNISHMENT FOR FRAUD – (SECTION 447)


The second proviso
to section 447 provides that if fraud involves an amount of less than Rs. 10
Lakhs or one percent of the turnover of the company, whichever is less, and
does not involve public interest, such person may be awarded punishment by way
of imprisonment upto 5 years.  Further,
fine upto Rs. 20 Lakh can be levied.  By
amendment of this section the amount of the fine is now increased upto Rs. 50
Lakh. 


27. ADJUDICATION OF PENALTIES – (SECTION 454)


Section 454
provides for appointment of adjudicating officer for adjudging penalty under
the provisions of the Act in such manner as may be prescribed.  As per section 454(3) the adjudicating
officer may, by an order, impose a penalty on the company and the officer in
default.  Now, s/s. (3) is substituted by
another s/s. (3) granting power to adjudicating officer to impose penalty on
any other person in addition to company and officer in default. Further, it is
also provided that adjudicating officer may direct such company or officer in
default or any other person to rectify the default wherever he considers fit.


28. PENALTY FOR REPEATED DEFAULT – (NEW SECTION 454 A)


This new section
provides for levy of Penalty for repeated defaults.  It provides for levy of additional penalty on
the company, any officer in default or any other person in whose case any
penalty is levied under any provision of the Act, again commits such default
within 3 years from the date on which such penalty order is passed by the Adjudicating
Officer or the Regional Director.  In
such a case for a second or subsequent default, the amount of the Penalty shall
be an amount equal to twice the amount of penalty provided for such default in
the relevant section.  From the wording
of the section it appears that if penalty is once levied for non-compliance of
section 64, double the amount of penalty can be levied for subsequent default
for non-compliance of section 64 only and not for default under any other
section.  This new section is on the same
lines as section 451 which provides for levy of double the amount of Fine for
second or subsequent default. 


29. FINE VS. PENALTY


From some of the
amendments made by the above Ordinance it will be noticed that in some
sections, which provided for levy of Fine, the word “Fine” is replaced  by the word “Penalty”.  The distinction between the expression “Fine”
and “Penalty” can be explained as under;


(i)   Chapter XXVIII (sections 435 to 446A) deals
with appointment of Special Courts and their powers.  If we read these provisions it will be seem
that where the Act provides for punishment for contravention of any provision
by way of levy of  Fine on the company or
levy of Fine and or Imprisonment of any defaulting officer, the same can be
done by the Special Court only.  It is
also provided in section 441 that where only Fine can levied, the same can be
compounded by the Regional Director or the Tribunal.  This is a time consuming procedure.


(ii)   As compared to the above, where there is a
provision for levy of Penalty for default in complying with a particular
provision of Act, section 454 Provides that such Penalty can be levied by an
Adjudicating Officer appointed by the Central Government.  By a separate Notification, some Registrars
of Companies (ROC) are appointed as Adjudication Officers.  Thus, penalty leviable under different
sections can be levied by ROC.  Any
company or officer in default aggrieved by levy of penalty by ROC can file
appeal before Regional Director u/s. 454(5). 
This procedure will be less time consuming.


30. TO SUM UP


(i)   The above amendments in the
Companies Act, 2013, have been made by an Ordinance promulgated by the Hon’ble
President on 02.11.2018 on the basis of the recommendations of the expert panel
appointed by the Ministry of Corporate Affairs. 
This Panel was headed by the Corporate Affairs Secretary, Shri
Srinivas.  The Ordinance covers only some
of the suggestions made by the Panel which the Government considered to be of
urgent nature.  There are some more
recommendations by the Panel which are under consideration of the
Government.  It appears that some more
amendments may be made in the Companies Act during the coming months.


(ii)   It may be noticed from the amendments made in
some of the sections that punishment to officers in default by way of
imprisonment for specified period has been done away with.  These sections deal with procedural
lapses.   In some of the sections the
provision for Fine has been replaced by Penalty.  Since the Fine can be levied by a Court and
Penalty can be levied by ROC, the administration of the provision for levy of
penalty will be less time consuming. 


(iii)          Some
of the amendments made by this Ordinance are of procedural nature. Taking an
overall view, the amendments by this Ordinance are Welcome.  One area in which major amendments are
required relates to provisions applicable to private limited companies.  As these Companies experience difficulties in
complying with some of the stringent provisions of the Act, which apply to all
companies, there is need to make relaxation in these provisions so that there
is ease of doing business for small and medium size industries and traders and
their compliance burden in reduced.

 


ANSWERS TO SOME IMPORTANT RERA QUESTIONS

REGISTRATION


Q.1. A developer
wants to develop a land admeasuring 500 sq. meters having 8 apartments. He is
advised by RERA expert that in view of section 3(2) he does not need to
register that project. The Developer wants to know whether his Project will be
totally outside the purview of RERA and none of the provisions of the Act will
be applicable to his project.


Issue regarding the
applicability of RERA in respect of the projects which should have been
registered but not registered by the Promoter for any reason, as also the
projects which are not required to be registered under the provisions of
section 3(2) of RERA, has been subject of varying views with different
Authorities taking different approach in the matter.


According to one
view the regulatory power is exercised on the basis of information furnished by
the promoter in the application for registration. In the absence of
registration of project, the Authority will not get the required information.
Hence, many provisions of RERA would become unworkable e.g. provisions based on
the sale agreement as per proforma,quantum of penalty, conveyance etc.


The other view is
that RERA nowhere restricts its application to registered projects. The
definition of ‘Real Estate Project’ is not confined to registered projects only.
Registration is only one of the obligations cast on the promoter, default in
respect of which visits with penalty under the Act. Non- compliance with one of
the obligation by the promoter, does not absolve him from all other obligations
which are cast on him for safeguarding the interest of the buyers which happens
to be primarily object and purpose of the legislation. It cannot be the
legislative intent to deprive the buyers of the protection provided under RERA
because of the self-serving default of the promoter.


MahaRERA had
consistently taken the view as mentioned in FAQs that it will entertain
complaint only in respect of registered projects. In a Writ Petition Mohmd
Zain Khan vs. MahaRERA & Others W.P. lodged under No. 908 of 2018
decided on 31.07.2018 the High Court of Bombay directed the Authority to
entertain complaints even in respect of unregistered projects and consequently
MahaRERA agreed to upgrade its software to record such complaints.
Consequently, the complaints in respect of unregistered projects also are being
registered by MahaRERA.


This settles the
controversy about the projects that are required to be registered but not
registered, The High Court order did not make it clear whether it will apply to
the projects which are exempted from registration by virtue of section 3(2) of
the Act. A view is possible to be taken that what applies to unregistered
projects, equally apply to unregisterable projects as well. Certain projects,
considered small, have been exempted from the requirement of registration for
ease of operation. It cannot be the legislative intent to deprive the
purchasers of apartments in real estate projects, the protection granted to the
purchasers under the Act. There is also no specific provision in the Act to
exclude these projects from the operation of RERA nor are they kept out of the
meaning of real estate project.


Q.2. As per
section 3(2)(b) the registration of the project will not be required if the
promoter has received completion certificate before 01.05.2017. This implies
that the relevance of O.C. is only for ongoing projects and not for those
projects which commence on or after 01.05.2017. Can a promoter start a new
project without advertising and without registering if he sells all the
apartments only after getting O.C.?


Section 3(1)
provides that w.e.f. 1st May 2017 the Promoter can advertise and
sell the apartments only after registration of the project. As per section
3(2)(b), if promoter has received completion certificate before 1st
May 2017 then registration is not required. This indicates that relevance of OC
is only in respect of the ongoing projects. However, as per the answer received
by us, MahaRERA has clarified that if a project is constructed, OC is obtained
and till the date of OC the promoter has not made any advertisement, then such
projects do not require registration. It means OC is relevant for new projects
also. If this view is adopted, the builder can avoid registration provided he
does not give advertisement and does not sell apartments till the date of OC.
This way he can save GST also.


The clarification,
however, has to be taken with a bit of caution. Any legislation needs to be
understood and interpreted in the context of the object and purposes it seeks
to serve. RERA is designed to introduce professionalism and transparency in the
sector and to ensure that the interest of the buyers are safeguarded against
the prevalent malpractices of the promoters. A question arises as to whether
the receipt of OC leaves the promoter with no scope for any other malpractice
against which remedies are provided under the Act.


Q.3. Suppose a
new project was registered on 15.05.2017 mentioning possession date as
30.08.2017. The Promoter could not complete construction. Hence, he got
extension of one year upto 30.08.2018. He obtained OC in August, 2018 but could
not sell all apartments upto 30.08.2018. Can he sell his unsold apartments
after 30.08.2018 when the registration certificate is not valid?


It has been
clarified by MahaRERA that after OC, registration is not required for a project
of a single building. Hence, sale of Apartments in building with OC does not
require MahaRERA registration.


The validity of
dispensing with the requirement of registration after issue of OC is a debatable
issue. In the facts of the case in the question, technically speaking, there
should not be any sale without registration. However, considering the
unavoidable hardship to the promoter, the Authorities may take a lenient view.


JOINT DEVELOPMENT PROJECT


Q.4. In
redevelopment arrangement where the landowner and the developer join to develop
a project, who is the promoter when-


(i)   there is an arrangement of area sharing?


(ii)  there is arrangement for revenue sharing?


RERA defines the
promoter as one who constructs or causes to be constructed apartments for sale.
The Explanation, however, provides that if the person constructing and the
person selling the apartments are different persons, both will be considered as
promoter and will be jointly liable in the project. Applying this provision, in
a redevelopment arrangement based on area sharing, both the landowner as well
as the developer will be treated as promoters as, while the construction will
be carried on by the developer, the sale of the share coming to the landowner,
will be made by the landowner.


The position in a
redevelopment arrangement based on revenue sharing, however, appears to be
different. MahaRERA in its clarification has been treating the area sharing and
revenue sharing arrangements at par and treating both as promoter. There is no
provision in the Act which makes the landowner sharing the revenue, as the
promoter when the entire work of construction and sale is carried out by the
developer alone.


Q.5. Whether a
cooperative Housing Society which enters into redevelopment arrangement in
consideration of part of additional constructed area to be allotted to existing
members, will be a promoter jointly liable with the developer. If so, whether
the Society will be responsible to the buyers of apartments sold by the
developer?


The issue is in the
realm of uncertainty. As per the definition of Promoter, the construction is to
be for the purpose of sale. In a redevelopment arrangement for development of
society land, the society, generally, gets the apartments from the builder, not
for sale, but for allotment to its members in lieu of the flats that they were
occupying pre-development. Strictly speaking, in such a case the society should
not be treated as promoter. MahaRERA, however, in its clarifications has been
taking different view and holding the society also as a promoter.


In a recent case of
Jaycee Homes Pvt. Ltd.,[7713] the Authority has taken the view that the
society is also a promoter and is also liable to the purchasers of the free
sale area made available to the developer. The order appears to have raised a
controversial issue. It needs to be read in the context in which the view was
taken by the Authority. Jaycee Homes Pvt. Ltd. executed development agreement
with Udayachal Goregaon CHS Ltd. The Developer constructed up to 11th
floor out of 15 floors. It sold flats of his share. Meanwhile the society
terminated the agreements of the developer and refused to recognise the
purchasers of apartments from the developer. The purchasers filed a complaint
with MahaRERA and contended that their agreements are binding upon the society
as the society is also a promoter as per section 2(zk). Society relied upon the
judgement of Bombay High Court in the case of Vaidehi which held that as per MOFA,
the society is not a promoter. It was also contended that there was no privity
of contract between the society and the purchasers who purchased apartments
from the developer. But the Authority held that the society is a promoter and
liable to the purchasers.


In the facts of the
case above, the decision of the Authority seems to be influenced by the fact
that the development agreement having been terminated, the purchasers from the
developers were left in lurch and were without any remedy for no fault of
theirs. The society was brought within the meaning of ‘Promoter’ because of the
fact that by cancelling the development agreement of the developer and revoking
his power of attorney, the society regained the control and ownership of the
sales component. What the decision would have been, if the development of
building had gone in normal way without termination of the agreement, cannot be
said with any degree of certainty.


In our view, the
decision remains contentious. A cautious view is called for.


Q.6. Where the
person constructing and person selling are different, RERA makes both of them
promoters and make them jointly liable in respect of the project. In a
situation of redevelopment, on area sharing basis, whether it will be incumbent
on both to open separate specified bank accounts and deposit 70% of their
respective receipts in their accounts. If so, what will be the basis for the
landowner to withdraw from the bank account since no cost will be incurred by
him in the construction of the project and there will be no cost of land to the
project?


MahaRERA has taken
the stand that in such cases both the person being the promoter, should open
separate bank accounts and deposit 70% of their respective receipts in these
accounts. (Circular No. 12 ) In our view, the view needs reconsideration. The
law requires opening of the bank account for the project and not for the
promoter(s). In any case, the view leads to a position in which the landowner
having deposited 70% of the receipt from his share will not be able to withdraw
any amount as he will not be incurring any cost and as far as land owner is
concerned, there will be no land cost for the project. A view which results in
such situation of unintended hardship, can not be the legislative intent.


LEASE AGREEMENTS 


Q.7. Lavasa
Corporation Ltd. is developing a township at Lavasa. It is executing agreements
for transfer of apartments by charging substantial premiums and Re. 1/- lease
rent per annum for 999 years. Lavasa Corporation Ltd. is of the view that the
purchasers are given apartments on rent. Hence, Lavasa Corporation Ltd. is not
a promoter but Landlord.  Provisions of
RERA are not applicable to the lease of apartments by Lavasa Corporation Ltd.
What view can be taken in such matter?


A complaint was
filed before the Regulatory Authority against Lavasa Corporation Ltd. which was
dismissed by the Authority accepting the arguments of the promoter, for want of
jurisdiction. The learned member came to this conclusion on the basis of
definition of allottee given in section 2(d) of the Act. In the appeal filed by
the allottee before RERA Tribunal, it was held as under:


  • “10) The Respondent Lavasa
    by its conduct of filing reply did not object to the point of jurisdiction and
    also got its project registered with the RERA Authority is estopped in law in
    terms of sec. 115 of the Evidence Act. The conduct of Lavasa naturally made it
    believe to the customer / the Appellant that there was no bar to jurisdiction
    with the MahaRERA Authority. Again when the registration was caused on 28th
    July 2017 in the Schedule, the property or the apartment, where the Appellant
    has booked the flat is included. There is no exclusion at the time of
    registration of specific property in the Hill Station – the township of Lavasa.
    In the absence of such exclusion It is not open for Lavasa to canvass that the
    point of jurisdiction raised before the Ld. Adjudicating Member was just.”

 

  • “Section 18 of the Act
    contemplates as under:     18(1) if the promoter
    fails to complete or is unable to give possession In accordance with terms of
    Agreement for Sale or as the case maybe, duly completed by the date specified
    therein. The term “as the case may be”, necessarily indicate to the
    agreement which is subject of controversy. It means, depending on
    circumstances. The statement in the Section equally applies to two or more
    alternatives, Such Agreement in the situation cannot be by-passed or alleged to
    be a Rent Agreement. This is supported by overall effect of Agreement,
    referring Appellant to be a customer and not a tenant.”

 

  • “Sec. 105 of the Transfer
    of Property Act contemplates a lease of immovable property to be a transfer of
    right to enjoy immovable property for a certain time or in perpetuity in
    consideration of price paid or promised, in the instant case, the terms are for
    999 yrs. with an annual rental of Re. 1/-. The annual rental is of no
    consequence as the Agreement itself provides a deposit of Rs.50,000/- by the
    Appellant for meeting with exigencies. Consequently, there can’t be in
    perpetuity any breach of any payment or deposit of rentals. The amt. of
    Rs.43,77,600/- was accepted as premium naturally to provide freehold rights to
    the Appellants to enjoy the property subject to restrictions under the Development
    Control Authority or the Regulatory Authority of a township or the Hill Station
    Rules. However, that by itself would not tantamount to squeezing the rights of
    the Appellant to enjoy the property absolutely or to invoke the jurisdiction of
    RERA.”


Although the
decision is on the facts of the case, it can be taken to be the view in all
such matters where the property is transferred on long term lease with
substantial amount by way of premium and a very nominal amount as rent to give
it the colour of a lease. Following several other cases cited by the appellant,
the Tribunal has held that the premium is to provide freehold rights to enjoy
the property subject to restrictions under the applicable Acts. The allottee
cannot be deprived of the benefits of RERA merely because a different
nomenclature is given to the transactions. The decision may be of help in all
such cases of long-term leases where the amount of premium forms a significant
part, almost equal to the price, forming in substance, a substitute of the
price of the property.


MOFA AND RERA


Q.8. The local
laws dealing with real estate promotion and development which prevailed when
RERA was introduced have not been repealed. As a result of which two
legislations dealing with the same subject are in operation simultaneously. In
such a situation, when RERA regulates ongoing projects also, how will the
defaults in delivery of possession in respect of agreements executed prior to
1.5.2017 will be dealt with in the matters of –


(i)   Award of interest?


(ii)  Award of compensation?


(iii) Quitting the project?


It was held by the
Tribunal in Aparna Arvind Singh vs. Nitin Chapekar (10448) that the
ongoing project bring with them the legacy of rights and liabilities created
under the statute of the land in general and MOFA in particular. Section 88
provides that its provisions shall be in addition to and not in derogation of
the provisions of any other law. MOFA has not been repealed.


MahaRERA in Order
No.4 dated 27.06.2017 clarified that ongoing projects in which agreements were
executed prior to 1st May, 2017 shall be governed by the MOFA. Based
on this view, if the provisions of MOFA are applied, the position should be:-


Interest- Under MOFA, section 8 provides for payment of interest in case of
delay.at the rate of 9%. The Model agreement under MOFA also provides for
interest @ 9%. Hence, unless any other rate of interest is provided in the
agreement, that rate should be applied and in the absence of any rate, the rate
as per MOFA can be applied.


The question as to
whether the proposed date of completion should be as per the MOFA agreement or
the revised date informed under RERA. This question has been answered by the
Mumbai Tribunal in the case of Sea Princess Realty (0078) holding that
any extension of the date mentioned in the agreement is impermissible and the
promoter cannot give a go-by to solemn affirmation made at the time of
registration of the Agreement.


Compensation- There being no provision under MOFA for award of compensation in
case of default, award of compensation in accordance with RERA may not be
permissible.


Quitting the
Project- There being no provision under MOFA for
quitting the project, it is debatable whether an allottee can be permitted to
quit as per section 18 of RERA. Although, the Authority constituted under RERA
do allow the Allottees to quit and receive interest.


Section 88 of RERA
provides that the provision of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the time being
in force. With such a provision, in our view, it should not be impermissible to
decide the above issues in accordance with the provisions of the RERA and the
rules and regulations made thereunder.


ONGOING PROJECT


Q.9. Will a
project which was completed and occupied by the buyers but no OC was received
before 01.05.2017 qualify as an ongoing project required to be registered.
Also, whether the project which is completed with OC but the promised amenities
and facilities are yet to be provided, will qualify as ongoing?


MahaRERA in their
clarification through FAQs had taken the view that the projects which are
completed and occupied by the purchasers are not required to be registered as
ongoing projects, even if the OC has not been received. However, the Authority
in the decision, given by its Member Shri Kapadnis in Parag Pratap Mantri
vs. Green Space Developers has taken a different view holding that the
promoters of the buildings which are occupied by the residents without OC, must
register such projects with MahaRERA. The decision is of far reaching
consequence, at least in Mumbai where thousands of buildings are occupied but
are without the occupation certificate.


A view can be taken
that a project of a building with OC but without amenities like swimming pool
/office is not complete project. Such projects should be registered.


Q.10. If an
ongoing project is registered with MahaRERA, then will the Act be applicable
for the entire project or will it be applicable only to units sold after
registration?


Registration is of
the Project/Phase as a whole. The ongoing project is registered in its
entirety. Hence, the provisions of the Act are applicable to all units of the
Project/Phase irrespective of whether the agreement in respect of those
apartments was entered into prior to or post RERA.


REMEDIES U/S.18


Q.11. Does the
issue of OC debars the allottee to seek remedy u/s. 18 of RERA? Whether all the
provisions of RERA or certain provisions only, cease to apply after the receipt
of OC?


There is no
provision in the Act which takes away its jurisdiction in cases where OC is
received. The only exception is in respect of the project which were complete
before RERA came into force and OC was received.  The object of the Act is to safeguard the
interest of the apartment buyers and protect them against the default committed
by the promoters/agents irrespective of whether the OC was received or not when
they entered into contract with the promoter. Non-receipt of OC is a violation
of the provision by the promoter for which he is subjected to penalty. The law
does not discriminate between the buyer who files complaints before receipt of
OC and one who files complaints for getting remedy u/s. 18 after OC. In the
absence of any provision to this effect, the protections under RERA are
available to both.


In a decision
MahaRERA has based the order on the premise that once the project is completed,
the rights of the buyers for remedy u/s. 18 cease. If the project is complete
and OC received, the buyer will cease to have remedy u/s. 18 even if the
possession was not delivered in time. The Authority has relied on the word “
is” used in section 18 which, according to it, rules out its application in
case of defaults if the project is complete and OC issued. In our view, the
Authority has misconstrued the import of the word ís’ and has failed to
appreciate that every word in the statute which needs to be construed in the
context in which it occurs.


In our view, the
only provision that ceases to be applicable, after the issue of OC, is the
provision to deposit 70% of the proceeds in the separate bank account. It is
because once the project is complete, the very purpose of the provision ceases
to exist. The Rules also provide that the money remaining in the bank account
can be withdrawn after the OC is issued. All other provisions of the Act
continue to be applicable even after the issue of OC.


Q.12. Whether
relief u/s. 18 can be claimed where no date of possession is mentioned in the
agreement of sale executed before the coming into force of RERA?


In Aparna Arvind
Singh vs. Nitin Chaphekar (10448) where the agreement was made under MOFA
and no date of possession was mentioned in the agreement, the Mumbai Tribunal
applied the provisions of section 4(1A) of MOFA and held that the promoter
committed breach of the provision by not mentioning the date of possession in
the agreement.


Going by the
cumulative effect of section 71(1), 72(d), 79 and 88 of RERA and the provisions
of MOFA, it was held that effect will have to be given in favour of the cause
propounded by the affected party. Beneficial legislation cannot be extended in
favour of a deceit against the docile flat purchaser/allottee.


Q.13. Is it
possible to claim relief u/s. 18 and other sections of RERA on the basis of
allotment letters?


In Ashish
RajkumarBubna vs. S R Shah Developer [0251] where there was specific
reference of flat number., its area, consideration, mode of payment, date of
possession and other necessary details given in the allotment letter itself,
the Mumbai Tribunal held that the parties were under an obligation to adhere to
the allotment letter.


Q.14. Whether
the refund of money envisaged u/s. 18 on failure of the promoter to complete
the project and deliver possession in time includes refund of service tax, VAT
charged from the allottee?


There are contrary
decisions of the Mumbai Tribunal on this issue. In Venkatesh Mangalwedhe vs.
D. S. Kulkarni [10409] the promoter was directed to refund the amount of
VAT and Tax charged from the purchaser. In the later decision in Ashutosh
Suresh Bag vs. MahaRERA [0120] , the Tribunal held that the refund of VAT
could not be given by the promoter as the tax amount is credited to the State
government in the name of the allottee. The promoter cannot be held responsible
to refund the VAT amount.


In this connection,
it may be relevant to refer to the provisions of section 72 which contains the
factors which the Adjucating Officer is required to take into account in
adjudging the quantum of compensation or interest. Clause (b) of the section
mentions ‘the amount of loss caused as a result of the default’. On
cancellation of Agreement VAT, GST paid by the purchaser is a loss to the
purchaser but not a gain for the promoter. Hence, final verdict will depend
upon the view taken by the High Court.  .


CHANGES IN SANCTIONED LAYOUT

Q.15. Rule 4(4) 0f the Maharashtra Rules permit
inclusion of contiguous land parcel to the project land. Will it involve
obtaining written consent of at least two-third number of allottees and
revision of the original registration? Or, the contiguous land piece should be
registered as independent project or phase of the project even when the same is
dependent on the earlier project in certain matters including the right of way?


Since the rules
permit the amalgamation of a contiguous piece of land with the main project
land, there should be no legal necessity of obtaining the consent of at least
two-third of the number of allottees unless there will be changes in the
layout plan consequent to such amalgamation. The Rule permits separate
registration of the project either as independent project or as a phase of the
project.


Third proviso to Rule 4 states consent of 2/3rd allottees may not be
necessary for implementation of proposed plan disclosed in the agreement prior
to registration and for changes which are required to be made by the promoter
in compliance of any direction or order by any Statutory Authority.


Q.16. If due to
a change in government policy, the promoter is entitled to additional FSI etc.,
can the promoter build additional floors in a registered ongoing project where
initially those floors were not planned?


Yes, but subject to
the approval of the Competent Authority and the consent of at least two- third
number of allottees as required u/s. 14 of RERA.


Q.17. Can the
promoter change the plans of subsequent phases after registration of the 1st
phase?


If a subsequent
phase has not been registered, the promoter can change the plans of the
subsequent phase without obtaining consent of the allottees from the allottees
of registered phase. However, if the subsequent phase is also registered,
consent of allottees, of the concerned phase, would be needed if the change in
the subsequent plan impacts the interest of the allottees of the registered
phase.


There are
situations where, when a project is divided in phases and registered
separately, the amenities and facilities in respect of all the phases are
concentrated in the last phase In such a case any change in the sanctioned plan
of the last phase will necessitate the consent of atleast two-third of the
number of allottees of all the earlier phases.


END USER VS. INVESTOR


Q.18. Whether
RERA differentiates between the end-user and the investor in matter of
application?


In PIL
developers vs. S R Shah [10411], the purchaser purchased 11 flats and a
plea was taken by the promoter that the purchaser was not an allottee under the
Act, but an Investor. The Mumbai Tribunal held that the Act nowhere makes a
distinction between the investor and actual user.

POSSESSION


Q.19. Whether
possession given for fit out is to be treated as possession given to the
allottee under the Act?


In BhavanaDuvey
vs. Teerth Realities [054] the Mumbai Tribunal held that Fit out possession
without occupancy certificate is not the contemplated possession under the Act.
Under RERA/MOFA the Act, possession can be given only after the issue of OC and
any possession given for whatever purpose before the issue of OC will not be in
accordance with the law.


PAYMENT BEFORE AGREEMENT


Q.20. Sometimes
buyer is ready and gives undertaking that he is okay with giving money beyond
10% but he does not want to register the agreement and pay stamp duty. Should
it be allowed?


No. Section 13(1)
of the Act prohibits the promoter from taking more than 10% of the cost of
apartment without entering into a written agreement for sale, duly registered.


CONVEYANCE


Q.21. If a phase is considered up to certain
floors as envisaged in the rules, then how & when will conveyance take
place. Assuming the next phase approvals for upper floors are not obtained in a
timely manner, what will be the position for effecting conveyance for the
floors constructed for which O.C. received?


Conveyance of the
structure (floors) contained in the phase is possible. As per section 17 the promoter
shall execute conveyance of the structure in favour of the Allottees and common
areas to the association of the Allottees. Thus, conveyance of the structure of
existing floors is possible as per section 17 of RERA.


In case the
amenities and facilities and other common area is tagged on and can be
determined only after the upper floors are constructed, the apartments in the
phase can be conveyed but conveyance of the common area to the Apex society
will wait till they are constructed.


VARIATIONS BETWEEN PROVISIONS OF RERA AND RULES


Q.22. What
should be the approach in matters where the rules framed by the State
Legislature are at variance with the provisions of RERA?


The States, in exercise of their rule making
power, have, in certain matters made rules which are at variance with the
substantive provisions of the Act. As a general principle, Rules are
subordinate legislation and a subordinate legislation cannot override the
substantive law. However, the Central Government is silent over it. As the variations
are generally benefiting the promoters, there is little possibility that these
rules will be challenged. One should, however, be aware of the possibility of
the rules being struck down
if, there is a challenge.

Beneficial/Benami Holdings In Companies – Disclosure Requirements Notified

Background

Section 90 and related provisions of the
Companies Act, 2013, have finally been brought into force on 13th June
2018 along with related Rules. They apply to all companies, with a small set of
specified exceptions. “Significant beneficial owners” of such companies are
required to make certain declarations. The intention appears to be that those
natural persons (i.e. individuals) who have significant ownership of or
influence in or control of a company need to come forward and disclose their
names. From the point of view of transparency, it would be known who really
controls/owns the company, even if the ownership/control is through holding
entities such as companies, LLPs, Trusts, etc. or through contracts,
arrangements etc. The other major intention and consequence may be that
benami holdings could be identified, or at least required to be.

 

However, as we will see, the wording not
just of the provisions in the Act but also of the Rules has ambiguities and
uncertainties. This is owing to poor drafting, undefined important terms, etc.
which could lead to problems in implementation. Indeed, it is even difficult to
be clear what is the real intention. For example, is the intention to target
only those cases where the real owners are behind the scenes through certain
structures? Or is the intention to require that all persons with significant
ownership/control be brought on record? If the latter is the intention, there
will be a one-time massive exercise since lakhs of companies will have to make
such disclosures.

 

This column had discussed earlier some
issues on section 90, at a time when the new provisions were made part of the
Act through the Companies Amendment Act 2017 but were not brought in force. Now
that they have been duly notified and brought into force and require action,
and that the detailed Rules/Forms too are also released, the provisions and
their implications deserve a fresh and closer study.

 

It may be added that several other
provisions of law such as those relating to money laundering, certain
securities laws, etc. already have provisions requiring disclosures
under certain circumstances. The Benami Transactions (Prohibition) Act, 1988,
too deals with comparable provisions.

 

Relevant provisions

The relevant provisions are section 90 of
the Companies Act, 2013, with a definition of a term in section 89(10), and the
Companies (Significant Beneficial Owners) Rules, 2018. While the sections give
the primary requirements, the Rules provide for further definitions, the
benchmark at which a shareholder would be treated as a significant beneficial
owner, the process to be followed when shareholders are companies, LLPs, etc.
and the forms, records, etc.

 

Definition of a “Beneficial Interest”

Section 89 deals with disclosures by persons
with beneficial interests in shares. A person whose name is entered in the
register of members as the holder of shares but who does not hold the
beneficial interest is required to make disclosures. The term “beneficial
interest” has been defined quite broadly in section 89(10) and reads as
follows:

 

“(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.”

 

However, while Section 89 requires
disclosure for all cases of shareholding without beneficial interest, section
90 (read with Rules) requires disclosure where there is at least 10% beneficial
shareholding (which would make it a ‘significant beneficial holding’). Section
90 of course applies also to cases where a person has or exercises significant
influence or control.

 

Terms such as “through contract, arrangement
or otherwise” and “alone or together with any other person” are used but not
defined.

 

Requirements relating to disclosure

Section 90 (read with relevant Rules)
requires, to simplify a little, a “significant beneficial owner” to make
disclosure. This includes persons having at least 10% beneficial shareholding
or having the right to exercise or who actually exercises “significant
influence” or “control”.

 

The term “control” has been defined in
section 2(27). The term “significant influence” has not been defined in the Act
or Rules and hence there can be uncertainty. Interestingly, the definition of
the term “associate company” in section 2(6) does define this term, though for
purpose of that clause. It means having “control of at least twenty per cent of
total share capital, or of business decisions under an agreement”.

 

Holding in shares or other securities

While sections 89/90 refer to the beneficial
interest in shares, the Rules extend it also to global depository
receipts, compulsorily convertible preference shares and compulsorily
convertible debentures. However, no further details are given as to how these
will be applied.

 

Holding through companies, LLPs, etc.

The intention appears to be to ascertain
those natural persons (i.e., individuals) who are the real owners of a company
and who control it. If the shareholders are persons other than individuals, it
would be necessary to go behind these entities and find who are the significant
owners behind them. Hence, for this purpose, the Rules essentially require the
natural persons who have at least 10% interest in such entity. However, while
one can gauge the intention here, in practice, the wording does not seem to be
sufficient to unravel complex structure of holdings/control. 

 

The method to determine significant
beneficial owners (SBO) in such cases has been specified as follows.

 

Where the member is itself a company, SBOs
would be the natural persons who directly or indirectly or alongwith other
natural persons or through other persons/trusts hold at least 10% of the share
capital or who exercise significant influence or control through other means.
Where the member is a partnership firm, the principle is the same except that
the holding may be in terms of capital or entitlement to the profits. In any of
these two cases, if the SBOs can still not be ascertained, then the natural
person who is the senior managing official would be deemed to be the SBO. If
the shareholder is a Trust, the persons to be disclosed are the Trustees, the
beneficiaries who have at least 10% interest in the Trust, and any other
natural person “exercising ultimate effective control over the trust through a
chain of control or ownership”.

 

Residence of significant beneficial owner

The significant beneficial owner or
intermediary entities may be in India or abroad.

 

When are disclosures to be made?

The required disclosures have to be made to
the Company within 90 days of the new law coming into force. The Company would
then have to make disclosures to the Registrar within 30 days of receipt of
such disclosures.

 

There is a one time requirement of making
disclosures and thereafter, disclosures have to be made for changes as well as
for acquisition by new acquirers.

 

Applicable to which companies?

The new provisions are applicable to all
types of companies, small or big, public or private. The Rules make exceptions
for shareholdings of certain SEBI regulated entities. Clearly, then, lakhs of
companies will have to examine whether these new requirements apply to them.

 

Do only significant beneficial owners who
are not legal owners have to make disclosures?

Section 89 requires disclosure by a person
who holds shares in his name, but does not have the beneficial holding in them.
Section 90 contains no such limitation. The question then is whether a person
who holds 10% or shares legally and beneficially, would also be required to
disclose? If yes, then practically each and every company will see such
disclosures. The Rules define the term “significant beneficial owner” as a
person specified in section 90(1) who holds at least 10% beneficial holding in
shares, but “whose name is not entered in the register of members of a company
as the holder of such shares”. However, section 90 has much wider scope and,
for example, includes persons having significant influence or control. Hence,
while the Rules may have intended to specify disclosure where there are
beneficial holders who are not legal holders, the wording does not seem to be
clear enough.

 

Disclosure by institutional shareholders

Though the language is not wholly clear, it
appears that shareholders who are pooled investments funds (regulated under the
SEBI Act), such as the following, do not have to make disclosures under these
provisions:

 

1.  Mutual Funds

2.  Alternative Investment Funds

3.  Real Estate Investment Trusts

4.  Infrastructure Investment Trust

 

Obligation on company to inquire
into/report

Obligation has also been placed on the
Company to require persons to make disclosures if it has reason to believe that
such persons are covered by these provisions. If such persons still do not make
a disclosure, the Company has to refer the matter to the National Company Law
Tribunal for directions that may include restrictions over such shares.

 

Implications for non-disclosures/false
disclosures

If the persons who are obligated to make
disclosures – i.e., the significant beneficial owner and the company – do not
make the prescribed disclosures, they will be subject to fines. False
disclosures may result in prosecution that can be stringent.

 

Benami transactions

The provisions will surely apply to
legitimate significant beneficial owners. There may be persons who have reason
to hold shares through companies, trusts, etc. or through other complex
structures. However, they could also apply even to persons holding shares
benami as specified in the Benami Transactions Prohibition Act, if the
requirements of that Act are attracted. Disclosure by such persons may result
in very stringent consequences under that Act.

 

Conclusion

There are several other laws that already
require disclosure of those persons who are the ‘real’ owners/controllers of a
company. The object of each of these laws may be different ranging from
prevention of money laundering, to protection of shareholders, to preventing
tax evasion/corruption, etc. Some such as the Takeover Regulations are
fairly elaborate and while they are complex, the specific nature of provisions
leaves lesser aspects to uncertainty. In other cases, the requirements broadly
describe what is to be ascertained in general terms and then give detailed
clarifications which generally help cover a large variety of situations. The
newly introduced provisions in the Act/Rules make certain well meaning and
significant requirements. However, there are ambiguities in several places that
raise concerns whether the objective would be achieved at all. In many cases,
the provisions may be simple to apply and persons may even err on the side of
caution (even though the disclosures carry the risk of inviting inquiries).

 

There will however be several situations
where the provisions may be difficult to apply on the facts. One hopes that
clarifications/FAQs with examples of several alternative situations are given
so that there is clarity for at least the vast majority of companies.   

 

Property Tax

Introduction

The Municipal Corporation
of Greater Mumbai (“BMC”) has revised the Property Tax system applicable in the
city of Mumbai. Instead of the earlier rateable value system which was in
force, the property tax was quite low and remained constant for years together.
However, the BMC now has a Capital Value System for levying property tax which
levies tax on the basis of the Stamp Duty Ready Reckoner of the property. This
system is expected to garner substantial revenue for the BMC as it would link
the values to more realistic figures instead of the rent capitalisation values
which were quite low.

 

Capital Value based System

Under the new system,
property tax is computed as a percentage of the Stamp Duty Ready Reckoner Value
of the property. Currently, the Reckoner of 2015 is adopted as the basis for
this purpose. This value would be adopted for a period of 5 years starting from
1-4-2015. Hence, the capital value would remain unchanged for 5 years, i.e.,
till 2020. After 5 years, as per the present system the Reckoner Rates would be
increased. However, if a building is constructed after 2015, then the Reckoner
rate of the year in which it was constructed would be adopted and would remain
in force till 2020. The rates for levying tax on this capital value depends
upon the Category of the property and are as follows:

 

–    Residential
with metered water supply in City and suburbs @ 0.359%

 

–   Residential
with un-metered water supply in City @ 0.775%

 

–    Residential
with un-metered water supply in suburbs @ 0.552%

 

–    Shops
/ commercial / industrial with metered water supply in City and suburbs @
0.880%

 

–    Shops
/ commercial / industrial with un-metered water supply in City @ 1.90%

 

–   Shops
/ commercial / industrial with un-metered water supply in suburbs @ 1.280%

 

–    Open
Land with metered water supply in City and suburbs @ 1.630%

 

–    Open
Land with un-metered water supply in City @ 3.518%

 

–    Open
Land with un-metered water supply in Suburbs @ 2.370%

 

In
addition, the BMC has exempted houses in the city with a carpet area up to 500
sq. ft. from property tax. The BMC is also considering passing a proposal for
concession in property tax for houses measuring between 500 sq. ft. and 700 sq.
ft.

 

The BMC has announced that
soon, personalised property tax bills will be issued, to the people who own
flats in those buildings that have Occupancy Certificates (OCs). However,
property tax of the unsold flats and common areas, will be paid by the builder.
Under the earlier system, the BMC issued a common property tax bill to a
housing society, which then collected the tax dues from the flat owners and
paid the amount to the BMC. The main problem with the earlier system, was that
if a member failed to pay the property tax, then, all the members were
penalised. Now, in the personalised property tax billing system, this will
stop.

 

Valuation Rules

 

Valuation of Open Land

Capital Value of open land,
i.e., land which does not have anything built upon it and which is not
appurtenant to a building is computed as follows: Value of open land under the
Reckoner * Weightage of user category * FSI permitted * Area of Land. The
weightage factor is given separately in Schedule A to the Rules for different
types of properties.

 

Valuation of Building / Flat

The Rules for valuing a
building / flat / premises for computing property tax are as follows:

 

(a) Capital Value of a Building / Flat is computed
as follows:  Value of building under the
Stamp Duty Ready Reckoner * Weightage of user category (depending upon whether
the building falls under Part II, III or IV of Schedule A) * Weightage for Age
of Building * Weightage for Floor factor for Lift * Carpet Area of Building.
The weightage factors are given separately in Schedule A for different types of
properties.

 

There are eight major steps
to using the Stamp Duty Ready Reckoner which are as follows:

 

(i)      Find out the Village Number and Village
Name in which the property is located;

 

(ii)      Ascertain the Zone and the Sub-Zone;

 

(iii)     Find out the CTS No. of the property;

 

(iv)     Determine the type of property, e.g.,
Residential, Office, etc.;

 

(v)     Calculate the Carpet Area of the Flat /
Office. Stamp Duty is paid on the basis of Built-up Area but for Property Tax
the Carpet Area is adopted;

 

(vi)     Find out the Market Value for the type of
Property;

 

(vii)    Ascertain if there are any Special Factors
as prescribed in the Reckoner;

 

(viii) The
Market Value of the Property for Stamp Duty purposes = Adjusted Fair Market
Value * Carpet Area of the Property

(b) The following are the weightages given while
valuing a building or a flat or office:

 

(i)  User category

 

(ii)  Nature and type of building~ weights have been
assigned for open terrace, dry balcony, porch, etc.

 

(iii) Age of building

 

(iv) Floor factor of building with Lift

 

For
instance, in the case of a residential building the Schedule provides some
weightages in the following manner:

 

User Category of Building weightage to reckoner
Rate (UC)

Nature and Type of Building weightage (NTB)

Weightage for Age Factor of Building (AF)

Weightage for Floor Factor (FF)

Residential
user 0.50

RCC
1.00

0-5
years 1.00

Car
Park basement 0.70

Five
Star Hotel 1.00

Pucca
Building 0.70

5-10
years 0.95

Ground
Floor 1.00

Factory
1.25

Semi
permanent Building 0.50

10-15
years 0.90

1st
-10th  Floor 1.00

Shops
and Commercial 0.80

 

15-20
years 0.85

11th
-20th Floor – 1.05

 

 

20-25
years+ 0.80

21st
-30th Floor – 1.10

 

 

 

31st
– 50th Floor – 1.15

 

 

(c) The formula for
computing the Capital value of a Building is prescribed as follows:

 

CV = BV *
UC * NTB * AF * FF * CA

Where

CV = Capital Value of a
Building

BV = Base Value of the
building as per the Stamp Duty Ready Reckoner

UC = User category of
residential, shop, open land, etc.

NTB = Nature and Type of
Building, i.e., RCC, semi-pucca, etc.

AF = Age Factor
Depreciation

FF = Floor Factor
Adjustment for Building with Lift

CA = Carpet Area

(d) Some examples of computation of the capital
value of a property is as follows:

 

Illustration
-1: Carpet area of a Residential flat of 1000 sq.ft.on the 5th
floor of a RCC constructed building at Colaba. The building is 40 years old and
as per the Reckoner of 2015, it falls in Zone 1/3 where the rate for
residential building is Rs. 497,500 per sq. mt. The weightages of various
factors would be as follows:

 

Particulars

 

Weightage

Base
Value as per Reckoner (BV)

497,500

—

Carpet
area (CA)

1000 sq. ft / 92.90 sq. mt

 

Weightage
for User Category (UC)

Flat

0.50

Weightage
for Nature and Type of Building (NTB)

RCC Building

1.00

Weightage
for Floor Factor (FF)

5th -10th Floor

1.05

Weightage
for Age of Building (AF)

35-40 years

0.65

 

 

Thus, the Capital Value of
the Flat would be worked out as under:

 

497,500 * 0.50
*1.00*1.05*0.65* 92.90 =Rs. 1,57,71,807

 

On this Capital Value, the
Property Tax for a Residential property @ 0.359% would be Rs. 56,620 per year
or Rs. 4,718 per month.

 

Illustration-2:
Carpet area of an Office is 10,000 sq.ft. and is located on the 15th floor of a
RCC constructed building at Bandra Kurla Complex. The building is more than 10
years old and as per the Reckoner of 2015 it falls in Zone 31/72 where the rate
for an Office is Rs. 155,300 per sq. mt. The weightages of various factors
would be as follows:

 

Particulars

 

Weightage

Base
Value as per Reckoner (BV)

Rs.155,300

—

Carpet
area (CA)

10,000 sq. ft / 929.02 sq. mt.

 

Weightage
for User Category (UC)

Office

0.80

Weightage
for Nature and Type of Building (NTB)

RCC Building

1.00

Weightage
for Floor Factor (FF)

11th – 20th Floor

1.10

Weightage
for Age of Building (AF)

10-15 years

0.90

 

 

Thus, the Capital Value of
the Flat would be worked out as under:

 

155,300 * 0.80
*1.00*1.10*0.90* 929.02 =Rs. 11,42,67,230

 

On this Capital Value, the
Property Tax for an office property @ 0.880% would be Rs. 10,05,551 per year or
Rs. 83,796 per month.

 

Conclusion

The Capital value based
Property Tax system is based on the Ready Reckoner and hence, suffers from the
same flaws which the Reckoner is infamous for. However, a good part is that for
residential properties, only 50% of the reckoner rate is adopted. Nevertheless,
double rates for the same property, non-consideration of various factors, such
as, differences in areas / properties, condition of flats, etc., would
all apply even to this system.  

Economic War

1. Preface

This is a simple
and short article explaining ‘what is an economic war’. The term: “Trade War”
has become current term. Earlier popular term was “Currency War”. Economic War
is a broader term covering all these smaller wars.

    

Some common queries
may be: “Why this War?” “What may be the impact of a global economic war on
India/ on global economy?” “Can we protect India from the ill effects of a war
amongst other nations?” “How is it that President Trump imposed sanctions on
Turkey (In August 2018) and Indian Rupee went down?”

 

This article
presents:

 

(i)    Historical reasons leading to current
Trade War; and


(ii) A few probabilities as results of war. These are considered guesses.
I don’t know actually how future will unfold.

 

Global events like
Economic Wars are like “elephants”. Writers and observers are like “the
six blind men”. Everyone looks at one or two aspects. Warring parties
involved also create deliberate confusions. I am presenting my views. There are
several other views simultaneously prevalent. Some philosophical thoughts on
Wars are given in notes at the end of the article.

 

1.2  Definition: An
Economic War is fought mainly for economic benefits using economic instruments
as weapons. Its economic impact can be more devastating than a weapons war. And
yet, there may be no loss of life – at least directly due to war.

 

1.3  When the war is between a
giant like USA and a smaller country like Venezuela; the smaller nation may get
economically destroyed. When the war is between two giants like USA &
China, both may be damaged. If a full scale Economic World War erupts,
global economy can be seriously damaged. Whole world will be poorer.

Share markets should normally be the first victim. Yet, even now the market
indices have not fallen. This may be because: (i) the cartel of share market
giants may be convinced that all these “War Cries” are just Trump’s typical
style of negotiating. Once the declared opponents concede, there will be no
war. Or (ii) they may be offloading their stocks to the gullible retail
investors. Or (iii) the Cartel may have some other strategy.

 

1.4  Different economic
weapons are:

 

i)     Currency exchange rate manipulation or
currency dumping (also called Currency War);

 

(ii)   Globalisation & imposition of a particular
currency at the cost of others (Dollarisation);

 

(iii)   Tariffs (Custom duties);

 

(iv) Import restrictions of the licensing type &
others;

 

(v)   Nationalisation of assets & businesses
belonging to enemy Government and citizens of enemy country. US government has
done this repeatedly.

 

(vi) Sanctions; rhetoric & threats; etc.

 

(vii) Finally when
nothing works, weapons wars have been unleashed in the last few decades. The threat
of real weapons war makes rhetoric work. North Korean dictator Kim Jong-un knew
well that his fate will not be different from the fate of Iraq’s Saddam Hussein
and Libya’s Gaddafi. Hence, Kim came to the negotiating table.

 

1.5  Almost all wars
are fought for economic reasons (Greed of exploiting other nations’
resources for own benefit) and/or for ego issues. Even in today’s modern
world, large nations may go to war largely for ego. Generally many issues are
mixed up as the cause for a war. Mahabharat war was fought largely for
economics & ego. Duryodhan was greedy & egotist. He would not fulfil
his promise. War became necessary. Hitler started 2nd world war for
redeeming the German pride & for economic reasons. USA has started current
trade war with China & several other countries mainly for economic reasons.

 

1.6  Many people are
greedy. This applies to individuals, societies, corporates and countries.
They want economic benefits at the cost of others. Generally they will start
with exploitations. If the exploited person, group, market does not
understand, fine. If, even after understanding, the exploited group cannot
fight back, there is apparent peace – which in economics may be called “Equilibrium”.
When someone resists, the equilibrium is disturbed. Systems are established
to frustrate resistance. When systems do not work and exploited people/
countries fight back; there may be a weapons war. Generally the exploited lobby
is further destroyed. Rarely the exploited sections win & exploiters lose the
war. Historians
praise victors.

 

Two illustrations
of economic exploitation within a country are given below: paragraphs 1.7 &
1.9.

 

1.7  Illustration 1: In
India the “Upper Caste” developed an entire caste system of exploiting the
“Lower Castes”. Religion & mythology have been used to confuse &
confound the poor people; and to establish & continue the exploitative
caste system. Similarly, religion & gender bias have been used by men to
exploit women. They (‘lower’ caste people & women) were deprived of even
education beyond their occupation by birth. It worked for thousands of years.
No amount of social reforms by several reformers including Gandhiji has
effectively removed Casteism from our society. (People living in big cities may
not have the idea of deep rooted caste prejudices in smaller towns &
villages.) Indian Constitution gave equal rights to women; and to every
individual irrespective of caste. Every Indian has a right to education. This
single step has maximum positive impact.



Indian Supreme
Court has now given equal rights to LGBT community & declared
individual freedom as corner stone of our constitution. But even these have
still not completely removed caste based prejudices and exploitations from our
society.

 

This is an
explosive subject & can provoke heated discussions on several issues.

1.8  My purposes for giving illustrations here are
to show that:

 

(a)   Economic exploitation is all pervasive in
human life. Greed is almost like gravity – pulling every one down. Both
(Greed & Gravity) are not noticed in everyday life. Most people never
realise that they are: (i) exploiting others; and/or (ii) they are being
exploited. We Indians exploit others when we get opportunity. Exploitation is
not special to some people.

 

(b)   At the same time, there can be NO
generalisations. Most social reformers have come from men and ‘upper
castes’.

 

(c)   Exploitations have reversed also. As held by
Honourable SC in India, some backward caste people have abused the provisions
of The Scheduled Castes and Tribes (Prevention of Atrocities) Act, 1989. In
life there are several cross-currents.

 

1.9  Illustration 2:  In USA, whole population is exploited
by business lobbies. Pharmaceutical Lobby and Insurance
lobby – to name two. For anyone in doubt, ask for costs of medicines and
medical services in USA; and compare with the costs in India. You will realise
how US residents are being exploited by Pharma lobby & Insurance lobby.

 

Banking Lobby

In the past, US
Government tightly regulated banks & financial institutions which
used public money. They were not allowed to indulge in speculation & in
derivatives with depositors’ money. The banking lobby got the regulations modified
and openly used public savings for dangerous speculation including derivatives.
Banks & Financial Institutions together brought about the Great American
Economic Crisis of the years 2007 & onwards. Economists of the world
know that ‘greed of banks and financial institutions’ was the primary cause for
the crisis. Nothing happened to bankers or to banking laws. Whole focus as
“Cause for Crisis” was shifted to tax planning; and BEPS programme was started
by G20 & OECD.

 

In USA, the weapons
lobby (Pentagon) is of course most powerful. Whole of USA is being
exploited for continuing wars and weapons productions. In fact, world has
financed American wars. This statement may look unbelievable. I have explained
it in some of my past articles. For a short statement, listen to CNBC interview
of Jack Ma – chairman of Alibaba at:

 

https://www.cnbc.com/video/2017/01/25/alibaba-chairman-jack-ma-on-meeting-donald-trump.html?__source=sharebar%7Cemail&par=sharebar

 

Current US initiated Trade War

 

2.    Current
Trade War – started in July, 2018:

 

2.1  We come to current US
initiated Trade War. The Trade War has already started. So we are not
discussing empty theories. It is also possible that by the time, BCAS Journal
is printed and you read this article; a lot of developments would have taken
place.

 

2.2  To understand the
reason why Trump has started this trade war, we may consider several matters.

 

2.3  Trump’s theories:  Trump claims that USA is the most liberal
country and rest of the world is taking undue advantage of USA. This is at the
cost of GDP, trade deficits and employment in USA. Since other countries are
not responding to his appeals; war is necessary. He also claims that USA is the
most powerful economy as well as army. So the war will be won by USA.

 

2.4  Trump has conveniently forgotten
past strategies implemented by USA. Today, when those strategies have
resulted in unemployment in USA, Trump loves to blame China & others. (See
Jack Ma’s interview on link given under paragraph 1.9 above and also see
paragraphs 5 & 6 below.)

 

2.5  War mongering:   Every warrior – whether Individual or
Government – spreads several theories including incorrect theories that justify
the war. World has neither forgotten nor forgiven the campaign that US & UK
had spread when they decided to attack Iraq. They alleged after September 2001
(World Trade Centre attack by Al Qaeda) that Iraqi dictator Saddam Hussein had
accumulated “Weapons Of Mass Destruction” (WMD) which could be used
against..(?). It was known that Iraq neither had WMD nor the capability to
strike USA. It was later that the world realised that real purpose of attack
was – to punish Saddam Hussein – who defied US order to ‘sell oil only in US$’.
Saddam sold oil in Euro and got killed. Iraq got economically destroyed for not
obeying USA.

 

This is a clear
illustration of the hypothesis (Please see paragraph 1.6 above.) that: “when
economic exploitation is resisted, the victim is destroyed by weapons war”.
For eg., Saddam Hussein  resisted US
Dollarisation of Iraqi crude oil exports. And Iraq was attacked by US. And
the world remained a silent spectator.

 

2.6  Even a strong army
may not open war on all fronts. But initially it seemed that Trump
opened up war on several fronts. He blamed almost all – (i) known adversaries
of USA as well as (ii) countries that considered themselves as strong allies of
USA. (Please see Note 1 below.) This second category includes Mexico, Canada,
UK & European Union (EU). After a lot of war rhetoric against EU; on 24th
July, 2018, EU president Jean Claude Juncker met Trump and a temporary truce
has been signed. (Please see note No. 5 below.)

   

India has been
warned by Trump. But India is an insignificant trade partner of USA and hence
is on the low burner. (Don’t feel bad. We, Indians are still insignificant in
world economy.) There is also another equation of – using India to fight China.
So how USA behaves with India – is yet to be seen.

 

2.7  Some History: After 2nd
world war, USA turned benevolent to all war victim countries including the
countries attacked by USA – Germany and Japan. To protect Western Lobby from
Russian threat, NATO was formed. Under NATO and similar other
agreements, the US army is present in every West European country and many
others. 72 years after the end of World War II, and 26 years after
dismemberment of USSR, US army is still present in Europe and several other
countries. Hence even Germany observes restrain while protesting against US
policies. Others have to simply toe the line.

 

2.8  Truth under the surface:
In USA, the President is most conspicuous person. He is the spokesman
for the whole Government. But his real power and impact may be far less than
apparent. There is an Establishment of think tanks, bureaucrats & lobbies
that works. They continue to work irrespective of the President for the time
being.

 

Illustration: When, in 1981, Ronald Reagan became the President, many
observers wrote him off as an ineffective failure from film industry. In 1982,
preparations for an Economic War against USSR started. (For some
details, see Note 2 below.) Reagan retired in 1988. The Economic attack on USSR
was made in the year 1992. Credit for the great event – destruction of USSR –
is being given to Reagan. However, who actually fought the war? The Establishment
which remains behind curtains fought the real economic war.

 

 

US policies (Paragraphs 3 to 6 below):

 

3.    Super
Power No.1

 

3.1  It is US policy that US
should always remain Super Power No.1. All other countries should start from
No. 11 & onwards. If any country becomes so strong that it can challenge;
or does challenge US authority in some serious manner; it will be destroyed by
several alternatives available with USA. One of the alternatives is: Economic
War. Economic wars may take ten years preparations also.

 

3.2  I believe that an
action plan to hit China’s powers was already prepared long before Trump
decided to stand in election. Now that the Establishment has got a suitable
President, the war is started.

 

3.3  China has started
serious process to make Chinese Yuan a currency of international
trade. It has asked Russia, India and several countries to start their
bilateral trade in bilateral currencies. This is a challenge to the
Dollarisation of global trade.

 

China has started
serious endeavour to reduce its holding of US treasury bonds. China is
developing international foreign exchange markets in Yuan. This is a direct
challenge to Dollarisation of the international trade & investment.

 

China is today 2nd
largest economy. Chinese military and mind-set are the only powers on
earth that can say “No” to USA. (Apart from President Putin of
Russia.)  The “One Belt One Road”
project by China is an audacious plan to increase Chinese influence globally.
Expanding Chinese bases in South China Sea; building a chain of ports in
countries like Srilanka, Pakistan, Djibouti etc., is a threat to American ego
for its largest military presence all over the world.

 

These are more than
enough causes for USA to set in motion a plan to destroy China. The plan may or
may not be similar to the plan for USSR. The Establishment waited for
suitable opportunity and struck when suitable president was in chair. Further
plans will unfold as the days go by.

 

4.  Dollarisation of Global Trade:

It is another
unwritten order that whole world should do its international trade in US $.
When this order is not obeyed, see what happens:

 

4.1 Iran & Venezuela are facing allegations of being
terrorist nations. Severe sanctions are imposed on them crippling common life.
Their offense: exporting crude oil in currencies other than US$.

 

4.2  South East Asian
countries – Indonesia, Thailand, South Korea, Malaysia, Philippines – went
insolvent in the year 1997 because they started exporting their goods to Japan
in Japanese Yen instead of US $. President Suharto of Indonesia committed
another offense of disobeying US order of allowing independence to East Timor.
(Population 12,00,000.) Suharto lost his power and Indonesia lost East Timor.

 

4.3  Iraq was attacked
and destroyed because it was selling oil in Euro. European Union understands
fully well that this is an indirect attack on EURO. However, EU can’t do much
except being a silent spectator.

 

4.4  EU launched Euro on 1st
January, 1999. This was a challenge to Dollar  
monopoly of international currency. Hence EURO suffered a massive
economic attack. Its exchange rate dropped from “1 Euro = $ 1.2” to “1 Euro = $
0.8”.

 

These are just some
illustrations of how US enforces Dollarisation of global trade &
investments – by fighting economic wars on the world.

 

4.5  Having Dollarised
global financial settlements, now US has Weaponised Dollar. She is using
$ as a weapon. If any nation, any bank or financial institution disobeys US
dictates, its international payments will be crippled.  That entity’s international business will
almost be stopped.

 

5.    Using World for
outsourcing labour:

 

Outsourcing is done
for many decades. Computer software outsourcing through the internet made it
famous. However, outsourcing manufacturing functions is far older tradition.

 

5.1  There was a time
when the US Establishment adopted a policy. “Reserve US manufacturing for high
tech products and for weapons. Even for high tech items US MNCs need to own
only the technology. Manufacturing was shifted abroad and commoditised. All low
value manufacturing should be outsourced.” First outsourcing started with Japan.
Then major supplier of labour was China. The Establishment’s theory was
as under. Manufacturing within USA has high labour cost. China can provide
cheap labour. So let China manufacture goods. US want only sales and
distribution of cheap goods from abroad. This way, US consumers would get goods
at cheaper prices. And MNCs will make higher profits. Around 1980, China was
‘advised’ to devalue its currency. Chinese currency was devalued from Two
Yuan per $ to Four Yuan per $. By the year 1993, Yuan depreciated to Eight
Yuan per Dollar.

 

5.2  A devaluation of Chinese
currency means: (i) US gets same goods for much less dollars. (ii) Chinese
individual exporter –who counts his profits in Yuan, feels that he is still
making good profits. (iii) China as a whole suffers massive losses. In fact
devaluation meant poor Chinese people subsidising rich Americans.

 

American MNCs would
go to China and set up factories there. China would feel happy as “foreign
direct investment” was flowing into the country bringing precious dollars.
However, all low value products and environmentally harmful production was
being shifted to China.

 

5.3  This was an
elaborate plan. Explaining it in easier terms would mean several pages of
article. I would end this second US strategy in short here.

 

6.    Results of outsourcing were:

 

6.1  Americans were getting goods
at low prices. Inflation within USA was always under control.
American consumer was happy. American business made good profits in marketing
and distribution.

 

6.2  American labour
jobs were exported abroad. This was planned by US establishment. It was not
an unknown development. In a super capitalist country, it is a declared policy
that “there is no job security in USA.” Business creates several entry barriers
for competition and secures its safety. But as far as labour is concerned, it
has to simply hope. Simultaneously, even education is fully commercialised in USA.
It is very costly. Middle class and poor cannot afford higher education. Hence
supply of blue collar labour kept on increasing and employment opportunities
kept on going down.

 

6.3  This outsourcing
policy has gone on for a few decades. Whole generations of middle class have
become poorer than their parents. Trump realised this gap in US economic
system. He used it for his political advantage. Now, to fulfil his election
promise to bring jobs back to USA, he has to start a Trade War. This is what
the Establishment wants.

 

This is the
reason why USA has started a Trade War.

See preface
paragraph 1(i).

      

Summary so far: There is a serious challenge to USA’s Super Power status and
monopoly of Dollar. USA has started a pre-emptive strike before the challenge becomes
serious.

 

Note: US economic policies require decades of study to understand. It is
difficult to explain in one article. I have tried to simplify and summarise.
Another way of understanding real life economics is personal discussions at
BCAS study circle for International Economics.

 

7.   Indian Government:

Very few Indians
give due importance to Economics Wars. Fewer still understand it. In these
chaotic and dangerous times we need a Government that fully understands the
risks to which whole world is now exposed; and implements plans to protect
Indian economy. In my humble submission our present Prime Minister understands
these matters far better than most other PMs. He has the will power and the
capability to protect Indian economy.

 

We may remember
that in 1992 & 1997 a cartel did attack primarily USSR and South East Asia.
Attacks on Indian economy were incidental. The 2007 American Economic Crisis
spread over almost entire globe. In all three instances, it was primarily GOI
and RBI which managed and protected Indian economy. Government bureaucracy
continues to be same – probably, now more competent and empowered. We should be
able to sail through.

 

Sadly, we do not
have any private sector think tanks that can help GOI.

 

8.   Indian share market:

For a long period
Indian share market has behaved as if it has no connection with Indian economy.
In a war, such myths get exposed and destroyed. If the war is prolonged, Indian
share market can be badly affected.

 

9.  Can we estimate how the Trade War will proceed
further?

What will be the
results for Global economy?

 

See preface
paragraph 1(ii).

 

The war can go any
which way. It is difficult to guess how it will go. And yet, there are people
with huge investments in global markets. Apart from investors in shares and
securities, there are large industrial investments that can be seriously
affected. They would want considered estimates of the consequences of the
current Trade War. Can anyone advise them? I cannot advise. But I am presenting
some extreme opposite probabilities.

 

Some probable
results:

9.1  Trump made all
kinds of noises, insults and threats against several countries. But he settled
without firing a single bullet – with North Korea and Mexico. There is a
compromise of sorts with EU. Canada may soon fall. It is possible that Trump
may win the “War on the World” simply by threats. Only China refuses to
succumb.

 

9.2  Past Economic Wars – Instruments used:

 

Some of the past
Economic Wars have shown that these wars are fought by US Government using
following instruments:

 

(i) media for
public mind manipulation; (ii) IMF, UN & World Bank; (iii) cartel of banks
& financial institutions (iv) American Think Tanks (v) fact that Dollar is
the global currency.

 

We may refer to all
these together as Economic War Group. Note that only USA has all these
war instruments.

 

Secrecy of their strategy is their strength. They will never tell “what” is
their target; and “how” and “when” they will try to achieve the target.

The issue of “When”
is answered as the Trade War with China has already started.

 

Let us assume that
Chinese Government is fully aware of this strategy of economic wars. To fight
this strategy, China needs similar group of international institutions under
its control; control over global media; global currency; and so on. It is well
known that no country other than USA has this strength. So, how can China win
the war? Make your own guess.

 

9.3  China’s possible alternative response:

 

In absence of a
comparable Economic War Group, what can China do? What can be the consequences?

      

Consider the war
background before proceeding.

 

1.    USA is the largest debtor country.
Borrowing is now a compulsion. She needs to borrow every day $ 2 Bn. If the
world stops subscribing to US treasury bonds; US Government will stop
functioning.

 

2.    Several countries around the world are fed
up of US hegemony. But “Who will bell the cat?” Who will throw the first
salvo? Once a nation strikes against US Economic war; many nations may join.

 

3.    Trump is unpopular within and outside
USA. Long hand of law may catch up with Trump. Whether the next president will
be friendly with the “Establishment” or not; is an issue.

 

Possible
Response: Let us say, China takes following steps
& US responds step by step or at one stroke. (Note: This is pure
hypothesis. And yet, it is possible.) China owns largest quantity of US
treasury bonds and currency as its foreign exchange reserve.

 

CHINA

China dumps US
treasury bonds & currency worth one trillion Dollars in the market in
one day for cash settlement. Then China refuses to buy any further US treasury
bonds. China refuses to sell any goods to USA on credit or for $ payment. She
demands either gold or Yuan or commodities in payment for any export to USA.

 

USA

US Treasury bond
market can crash.

Or

US Government &
Economic War Group can try to buy entire stock on the same day. This may not be
practical because China would demand cash payment. This would not be a
“futures” transaction. This would be sale by China “in Cash” for immediate
payment.

 

EU, Canada &
Mexico may follow China and refuse to sell goods on credit to US customers.

 

US need to borrow
every day. If the funds are not available, Government machinery will stop. It
has now happened several times that US Govt. could not pay its expenses &
non-essential services had to be stopped. Then the Govt. increased borrowing
limits & paid its expenses out of borrowings. Fiscal Cliff has been
discussed several times. It is a serious reality for which no American
Government has any solution. Real financial position of USA is weaker than what
is made out.

 

Now, if the world
stops lending to USA, what can US do? She will have to finance expenses by
simply printing notes. If there is no outside taker of US notes, deficit
financing will cause immediate and significant inflation. A country that
has not seen more than 2% inflation, will be shocked by 10% inflation.

 

More important, a
lot of commodities that US public takes for granted, will simply not
be available. US talks of shifting production from China to USA. Can it
start fresh factories in a short time? There can be huge uproar within USA
making US Government fall. So far, all wars have been fought beyond American
land. This war will be fought within USA. For the first time Americans
may suffer consequences of the war.

 

China’s response to
Economic War – by an attack on US $ – may work better if Japan, EU, Canada
& Mexico etc., join in the Economic World War. Normally US would succeed in
“divide & rule policy” & won’t allow all of them to join
together. However, the way Trump behaves, probability of a combined front
against USA has improved. Against a combined front USA is doomed. In absence of
a combined front, ‘who will win’ becomes uncertain. Only certainty will be –
world economy will be damaged.

 

9.4  How long the world will go
on fighting?

How can world
avoid all wars?

 

One solution
appears. If there were a World Government, all wars would be
unnecessary. We have a good experience also. In India, at some time, there were
more than seven hundred kingdoms. Huge amount of their resources were spent on
war & defence. Now India is one country. All Kingdoms have merged into one.
There is no war within India. Of course, there are differences and troubles.
But these can’t be compared with wars.

 

Another solution
may be: At the root of all wars, there are greed and ego. Consider –
hypothetically, a solution where greed and ego are replaced by love &
spirituality. There would simply be no wars of any kind. Not a single soul
would go without food, medical services, education & home. Then the form of
Government would be irrelevant.

 

May God Bless human
kind.

 

Notes:

 

Note 1.             Allies:  (See para No. 2.4) India, Pakistan, Britain or
any other country may consider itself to be a friend of USA. However, in
economics as in politics; no one is a permanent enemy and no one is a permanent
friend. Britain and European Union (EU) realised this fact when US cartel
attacked Euro on 1st January, 1999 – the day of Euro’s launch.
Trump’s accusations against EU have made this fact abundantly clear.

 

Note 2.             Outsourcing & Exchange Rates:
Japan:

 

In the year 1940,
Japanese Yen to US $ rate was 4 yen = $1. After 2nd
world war defeat of Japan huge inflation took place in Japan. US occupied Japan
& controlled its economy. It is then that US outsourcing to Japan started.
Yen was depreciated to 360 Yen = $1.

 

After a few
decades, Japan grew in manufacturing strength. Japanese cars started winning
the competition with American cars. This is when Japan was asked to revalue its
currency. Eventually, it appreciated to 140 yen to a dollar in the year 1990.
And Japan went into deep recession. 1990s was called the lost decade for Japan.
By now rate has gone up to 112 yens per dollar.

 

US Strategy is: when a country is pure commodity supplier, its currency must be
down. When it starts competing with US manufacturers, its currency must
appreciate.

 

My observations: Japan is excellent in manufacturing and poor in international
economics. It followed the dictates of US Establishment in exchange rate policy
and suffers. China is refusing to obey the orders by the Establishment. Hence
the Trade War.

 

Note 3. An Illustration of past
Economic War: 1992 economic war on USSR.

 

In the year 1982
under president Reagan, US Establishment started preparations for economic war
against USSR. For the public & media consumption, “Star Wars” were started
to maintain US superiority in air war over USSR. Real strategy was – massive
expenditure in developing missiles and counter missiles made USSR insolvent, US
printed dollars & world grabbed dollars as $ was global currency. World
was financing US Star War. No one was buying USSR Rouble & hence no one
financed USSR in her Star War. Result was – USSR insolvency.

 

Reagan retired in
1989. In the year 1992 USSR was economically destabilised because of sudden
change from communist regime to democratic regime installed by President
Mikhail Gorbachev. KGB arrested Gorbachev and nation was thrown in chaos. At
that time the G4 – US, UK, France and Germany together with their cartel of
banks and financial institutions struck. USSR got divided into fifteen
countries and economically went insolvent. It got reduced from the position
of Super Power No. 2 to 11. USA won the Cold War without losing men or money.

 

Note 4. Strategies like outsourcing
may not be a Government of USA decision. Nor a one man decision. Initially,
businesses found it profitable to shift labour abroad. Then Government
supported it. Eventually it developed into a full national strategy.

 

Note 5. Trump’s negotiating
strategy is now famous. “First threaten the opponent with dire
consequences. When the opponent is mentally broken, negotiate on your own
terms.” This is what he did with North Korea and Mexico. This is how he
negotiated a temporary truce with European Union.

 

This truce has
given USA tremendous benefit. Consider the news that China was making overtures
with EU to make a joint attack on USA. EU was scared but was considering
joining hands with China. Now Trump has ensured that EU will stay with US.
China is the lonely warrior.

 

Note 6.             More and more
nations are disillusioned about US hegemony. Finance Minister of Germany
– Mr. Heiko Maas came out with clear statement that – US is
using $ monopoly for suppressing other nations. Even the global Swift Payment
system based in Belgium is using US$ for settlements. EU must come out with its
own international settlement system independent of US $. Prime Minister Ms.
Merkel of Germany quickly contradicted. She said: US defence deal with Germany
is far more important. See the link –
https://www.politico.eu/article/angela-merkel-quashes-german-foreign-minister-heiko-maas-anti-american-dream/.

 

Soon French
President stated that US defence deal is no longer reliable. EU must not depend
exclusively on US for its defence.

 

Note 7. Ego:     It is said: “Eleven Sadhus can stay in one
hut. But two Samrats cannot stay in one Samrajya”.

 

Note 8.  Advait:

1.    Indian philosophy of Advait has taught me
that “We are all one”. “?? ?? ?? ??” is a famous Indian slogan.

 

2.    Hence no one is my enemy. When “We are all
one”; the concept of enemy is void ab initio.

 

3.    We have to live in this practical Sansar
knowing the philosophy and yet being alert about people who, under the
influence of greed, are out to harm us. Protect ourselves. Protect the weak.
Hate none.

 

Note 9.  Geeta: 

Consider what Trump
representing US Government thinks: “I am the Super Power No. 1. I must get what
I demand. I can & will destroy all competition. Who can fight me?”

 

See here Geeta
chapter 16 shlok 14 as translated by Swami Chinmayanandji: (Without any
modification.)

 

“Businessmen in
the world, unknown to themselves, constantly chant this stanza in their heart
of hearts. “I destroyed one competitor in the market, and now I must destroy
the remaining competitors also.” …”In fact, what can those poor men do to stop
me from doing what I want?”… “Because there is none equal to me in any
respect…I am the Lord. I enjoy, I am the most successful man. I am strong in
influence, among political leaders, in my business connections, and in my bank
balance. I am strong and healthy….” This, in short, is the ego’s SONG OF
SUCCESS that is even hummed in the heart of a true materialist. Under the spell
of this Satanic lullaby, the higher instincts and the divine urges in man go
into a sleep of intoxication.

 

Most people keep
Geeta on one side while analysing commercial/ economic/ war matters. I
personally submit: Geeta is a way of life. Without incorporating principles of
Geeta in life, it (life) has no meaning at all. Consequences of a person’s
actions will be as projected in Geeta.

Nature has its own
way of dealing with any person (Individual, company or Government) who
continuously abuses others. Nature’s ways are unpredictable and beyond our
logic.

 

10. In my reading,
it is possible that the Trade wars started by USA – together will several other
factors; will bring about the downfall of USA. Then what? Some other greedy
people will exploit the world. Men have been fighting wars for thousands of
years. When will it stop?

 

Wars will stop when
people become free from forces of Maya – Greed and Ego. In other words, wars
will stop when people become spiritual.  

 

 

FAMILY SETTLEMENTS – PART II

We
continue with our analysis of family settlements….

 

Capital Gains Tax liability


Taxation
is always a key consideration in any transaction more so in a family settlement
which involves properties / assets changing hands. Under the Income-tax Act,
any profits or gains arising from the transfer of a capital asset are
chargeable to capital gains tax. Thus, the primary condition for levy of
capital gains tax is that there must be a “transfer” as
defined in section 2(47) of the I.T. Act. This primary condition must be
satisfied before a tax levy on a capital gain may come in (C.A. Natarajan
vs. CIT, 92 ITR 347 (Mad)). A family arrangement, in the interest of
settlement, may involve movement of property or payment of money from one
person to another. Several judgments have held that there is no “transfer”
involved in a family arrangement. Therefore, there is no question of capital
gains tax incidence under a family arrangement.   

 

The
following principles emerge from various cases:

 

(a) The transaction of a family settlement entered
into by the parties bona fide for the purpose of putting an end to the dispute
among family members, does not amount to a “transfer”. It is not also
the creation of an interest.

(b)  The assumption underlying the family arrangement is that the
parties had antecedent rights in all the assets and this proposition of law
leads to the legal inference that the same does not amount to any transfer of
title. Section 47 of the Income-tax Act excludes certain transfers and since
the family arrangement is not held to be a transfer, it would not require to be
listed in section 47 unlike a partition which is a transfer and had to be
specifically excluded from section 45. Since section 45 can apply only to
capital gains arising from transfers, family arrangements fall outside the
scope of section 45, in view of the legal position that a family arrangement is
not a transfer at all. 

(c) In a family settlement, the consideration for
assets received is the mutual relinquishment of the rights in joint property
and hence, cost of assets received on settlement is the cost to the previous
owner. 

(d) Even a married daughter can be made a
party to a family settlement between her paternal family members – State
of AP vs. M. Krishnaveni (2006) 7 SCC 365. If she surrenders shares
held by her pursuant to a family arrangement, then it would not be a taxable
transfer – P. Sheela, 308 ITR (AT) 350 (Bangl).

(e) In B.A. Mohota Textiles Traders (P.) Ltd.
[TS-234-HC-2017(BOM)], the Bombay High Court held that any transfer of
shares by a company would not be the same as transfer by its members even if
the transfer was pursuant to a family arrangement between the family members.

 

While
on the subject of income-tax, one should also bear in mind the applicability of
the provisions of section 56(2)(x) of the Income-tax Act, 1961, which treats
the value of certain property received without consideration / adequate
consideration by an individual donee as his income. The section applies to any
gift of cash, immovable property and certain types of movable property, such
as, shares, jewellery, arts and paintings, etc. While a gift between
specifiedrelatives is exempt, gifts received from other relatives is taxable.
Here an issue which arises is that whether an asset received from a non-defined
relative under a family settlement could be taxed under this section? Is not
the settlement of disputes a valid consideration for the receipt of the asset?
In this respect, the decisions in the case of DCIT vs. Paras D Gundecha,
(2015) 155 ITD 180 (Mum) andSKM Shree Shivkumar vs. ACIT(2014) 65 SOT 232
(Chen) have held that property received on family settlement is not
taxable u/s. 56(2).

 

Whether Registration and Stamp Duty is required?


One
of the main issues under a family settlement is that whether the instrument
which records the family arrangement between the family members requires
registration under the Registration Act, if it affects the rights or interests
in immovable properties. A natural corollary of registration is the payment of
stamp duty. Stamp duty is leviable as on rates as applicable on a conveyance.
In most states in India, the stamp duty rates on a conveyance are the highest
rates. For instance, in the State of Maharashtra, the rate of conveyance on
immovable properties is 5%. As with all principles which involve a family
settlement, the law relating to registration of family settlement instruments
have been laid down by various Supreme Court and High Court decisions. There
are no express decisions on the issue of whether stamp duty is leviable.
However, the decisions rendered in the context of the Registration Act are
equally applicable. The principles laid down by some important cases, such as, Ram
Charan Das vs. Girja Nandini Devi (1955) 2 SCWR 837; Tek Bahadur Bhujil vs.
Debi Singh Bhujil, (1966) 2 SCJ 290; K. V. Narayanan vs. K. V. Ranganadhan, AIR
1976 SC 1715; Chief Controlling Revenue Authority vs. Shri Abdul Karim Ebrahim
Balwa, (2000) 102 BOMLR 290, etc., are as under:

 

(a) If a person has an absolute title to the
property and he transfers the same to some other person, then it is treated as
a transfer of interest and hence, registration would be required.


(b) A family arrangement may be even oral in
which case no registration is necessary. The registration may be necessary only
if the terms of the family arrangement are reduced to writing. Here also, a
distinction should be made between a document containing the terms and recitals
of a family arrangement made under the document and a mere memorandum prepared
after the family arrangement has already been made either for the purpose of
the record or for information of the Court for making necessary mutation. In
such a case, the memorandum itself does not create or extinguish any rights in
immovable properties and is, therefore, not compulsorily registerable. 


(c) A family arrangement, the terms of which may be
recorded in a memorandum, need not be prepared for the purpose of being used as
a document on which future title of the parties are founded. When a document is
nothing but a memorandum of what had taken place, it is not a document which
would otherwise require compulsory registration. 


(d)  A family arrangement as such can be
arrived at orally.  Its terms may be
recorded in writing as a memorandum of what had been agreed upon between the
parties. The memorandum need not be prepared for the purpose of being used as a
document on which future title of the parties be founded. It is usually
prepared as a record of what had been agreed upon so that there be no hazy
notions about it in future. It is only when the parties reduce the family
arrangement to writing with the purpose of using that writing as a proof of
what they had arranged and, where the arrangement is brought about by the
document as such, that the document would require registration as it is then
that it would be a document of title declaring for future what rights in what
properties the parties possess.  


(e) If a document would serve the purpose of proof
or evidence of what had been decided between the family members and it was not
the basis of their rights in any form over the property which each member had
agreed to enjoy to the exclusion of the others, then in substance it only
records what has already been decided by the parties. Thus, it is nothing but a
memorandum of what had taken place and therefore, is not a document which would require compulsory registration u/s. 17 of the Registration Act.


(f) Registration is
necessary for a document recording a family arrangement regarding properties to
which the parties had no prior title. In one case, one of the parties claimed
the entire property and such claim was admitted by the others and the first one
obtained the property from that recognised owner by way of a gift or by way of
a conveyance. On these facts, the Court held that the person derived a title to
the property from the recognised owners and hence such a document would have to
satisfy the various formalities of law about the passing of title by transfer.


(g) If the document itself creates an interest
in an immovable property, the fact that it contemplates the execution of
another document will not exempt it from registration u/s. 17(2)(v) of the
Registration Act.


(h) If the family arrangement agreement is required
to be registered and it is not so registered, then the same is not admissible
as an evidence under the Registration Act in proof of the arrangement or under
the Evidence Act. However, the same document is admissible as a corroborative
of another evidence or as admission of the transaction, etc. 


(i)  The essence of the matter is whether the deed
is a part of the partition transaction or merely contains an incidental recital
of a previously completed transaction.

  

Reorganisation of Companies and Family Settlement


Very
often a Family Arrangement also seeks to make the family controlled companies
(whether public or private) as parties thereto so as to make the arrangement
(so far as it relates to family shareholdings in such companies) to be
effective and binding. The moot point here is, when there is a family
settlement which involves reorganisation of some of the properties of one or
more companies in the Group, whether the principles of family settlement would
be applicable even to such reorganisation? 
In other words, when there is a transfer of a property from a company to
another company or to an individual as a part of a family settlement, whether
it would be correct to say that there is no transfer of the property, and
therefore direct and indirect taxes would not apply? There is not much support
on this aspect.

 

The
decision of Sea Rock Investment Ltd., 317 ITR 253 (Karn), dealt
with the case of a company owned by the family members which was made a party
to the family arrangement and which transferred shares held by it to various
family members. The company claimed an exemption from capital gains by stating
that it was pursuant to a family arrangement. The High Court disallowed this
stand by holding that a Company was a separate legal entity distinct from the
family members and hence, it was liable to pay tax on this ground.

 

In
the case of Reliance Natural Resources Ltd vs. Reliance Industries Ltd,
(2010) 7 SCC 1, the Supreme Court held that a Family Settlement MOU,
signed by the key management personnel of a listed company, did not fall within
the corporate domain. It was neither approved by the shareholders nor was it
attached to the demerger scheme which demerged various undertakings from the
listed company. The Court held that technically, the MOU was not legally
binding on the listed companies.

 

It
is true that a company is a separate legal entity and has an existence
independent from its shareholders and therefore, in normal circumstances, the
property of a company cannot be treated as that of its shareholders. However,
as pointed out above in various Court judgments, Courts make every attempt to
sustain a family arrangement rather than to avoid it, having regard to the
broadest considerations of family peace, honour and security. If the principles
of family settlement are confined only to the properties owned by individuals
and not to those owned through corporate entities, then it would not be
possible to use the instrument of family settlement for settling disputes between
the members of the family and it would be necessary to go through the
litigations. It is submitted that a relook may be needed at the above decisions
or else we could have a plethora of family disputes clogging the legal system.   

 

STAMP DUTY ON OTHER INSTRUMENTS


Sometimes,
the parties to a family settlement may implement it through other modes, such
as a Release Deed, a Gift Deed, etc. Although these are not family settlement
awards in the strict sense of the term, but in the commercial sense they would
also be a part and parcel of the family settlement. Hence, the stamp duty
leviable on such instruments is also covered below.

 

Release Deed


A
release deed is a document by which a person relinquishes his share or interest
in a property in favour of another person. Under Article 55 of the Indian Stamp
Act, a release attracts duty at Rs. 5. However, various states have enacted
their own amendments to this Article. Earlier, a release deed attracted only
Rs. 200. For instance, in the state of Andhra Pradesh it is 3% of the
consideration or market value whichever is higher.

 

The
Bombay High Court, in the case of Asha Krishnalal Bajaj, 2001(2) Bom CR
(PB) 629 held that a Release Deed is not a conveyance and only
attracted stamp duty as on a release deed. In the case of Shailesh
Harilal Poonatar, 2004 (4) All MR 479, the Bombay High Court held that
a release deed without consideration under which one co-owner released his
share in favour of another in respect of a property received under a will, was
not a conveyance. Accordingly, it was liable to be stamped not as a conveyance
but as a release deed.

 

To
plug this loophole, in 2005 the duty in the State of Maharashtra was increased
on such instruments to Rs. 5 for every Rs. 500 of market value of the property.
The 2006 Amendment Act has once again made an amendment in Maharashtra to
provide that if the release is without consideration; in respect of ancestral
property and is executed by or in favour of the renouncer’s spouse, siblings,
parents, children, children of predeceased son, or the legal heirs of these
relatives, then the stamp duty would only be Rs. 200. In case of any other
Release Deed, the duty is equal to a conveyance. Thus, for immovable
properties, it would be @ 5% on the market value of the property. What is an
ancestral property becomes an important issue. E.g., if a son releases his
share in a property acquired by his deceased father, so that his mother can
become the sole owner, it would not be a release of an ancestral property.


Similar
provisions are found under the Karnataka Stamp Act. The duty on a release deed
between family members, i.e., spouse, children, parents, siblings, wife of a
predeceased son or children of a predeceased child, is Rs. 1,000. 

 

Gift Deed


Section
2(la) of the Maharashtra Stamp Act defines an “instrument of gift” to include,
in a case where the gift is not in writing, any instrument recording whether by
way of declaration or otherwise the making or acceptance of such oral gift. The
gift could be of movable or immovable property. The term gift has not been
defined and hence, one has to refer to the definition given u/s.122 of the
Transfer of Property Act, which is “a transfer of certain existing movable or
immovable property made voluntarily and without consideration.”

 

An
instrument of gift not being a Settlement or a Will or a Transfer attracts duty
under Article 34 of Schedule-I to the Maharashtra Stamp Act. A gift deed
attracts duty at the same rate as applicable to a Conveyance (under Article 25)
on the Market Value of the Property which is the subject matter of the
gift.  Almost all States whether under
the Indian Stamp Act or under their respective State Acts levy duty at the same
rate as applicable to a Conveyance on the Market Value of the Property which is
the subject matter of the gift.  

 

The
Maharashtra Stamp Act provides for a concession to gifts within the
family. Any gift of property to a family member (i.e., a spouse, sibling,
lineal ascendant / descendant) of the donor, shall attract duty @ 3% or as
specified above, whichever is less. However, if the gift is of a residential
house or an agricultural property and is to a spouse / child or a grandchild,
then the duty is a concessional sum of Rs. 200. In such a case, the
registration fees are also Rs. 200. Thus, there is a very large concession for
a gift of two types of properties, viz, a residential house or an agricultural
land made to six relatives. Both these conditions must be satisfied for the Rs.
200 concessional duty. For a gift of any other property made to any family
member, including these six relatives or for a gift of these two properties
made to any relative other than these six relatives, the concessional duty is
3% of the market value.   



One
misconception often faced is the coverage of lineal ascendants – are females
covered? Can a grandmother, mother and son be treated as a lineal line? The
answer is yes, there is no requirement that lineal ascendancy or descendancy is
limited only to male members or to the same gender. All that is required is
relatives in a straight line. The definition under the Maharashtra Stamp Act is
not as wide as u/s. 56(2) of the Income Tax Act. The relatives covered u/s. 56
of the Income-tax Act but not under the Stamp Act are spouses of siblings;
uncles and aunts; spouses of one’s lineal ascendant / Descendant; lineal
ascendant /descendant of spouse and their spouses.

 

The
Karnataka Stamp Act, 1957 also provides for a concession for gifts
within the family of the donor. The duty is only a flat sum of Rs. 1,000 to Rs.
5,000 depending upon where the property is located. The definition of family
for this purpose means father, mother, husband, wife, son, daughter,
daughter-in-law, brothers, sisters and grandchildren of the donor.

 

The
Rajasthan Stamp Act, 1998 provides a concessional rate of 2.5% for gifts
in favour of father, mother, son, brother, sister, daughter-in-law, husband,
son’s son, daughter’s son, son’s daughter, daughter’s daughter. Further, in
case of gifts in favour of wife or daughter the stamp duty is only 1% or Rs. 1
lakh, whichever is less. stamp duty for a gift in favour of widow by her
deceased husband’s mother, father, brother, or sister or by her own mother,
father, brother, sister, son or daughter is Nil.

 

Epilogue


From
the above discussion, it would be obvious that our present laws relating to
income-tax, stamp duty, registration, etc., are inadequate to deal with family
settlement and, in fact, instead of facilitating the family settlement, they
may hamper it. This is all the more strange given the fact that a large number
of businesses and assets are family owned in India and hence, the possibility
of there being a family dispute is quite high! Hence, it is necessary to make
suitable amendments in various laws so as to facilitate family settlement.

 

DIFFERENTIAL VOTING RIGHTS SHARES – AN INSTRUMENT WHOSE TIME HAS COME?

Differential Voting Rights
Shares (DVRS) are in the news again as SEBI has set up a committee to review
the law relating to them. It appears that SEBI may be considering removal of
some of the severe restrictions on them so as to make their issue easier. This
could bring life into this instrument that otherwise is more or less a dead
instrument due to regulatory constraints. 

 

This proposal has
surprisingly seen severe resistance even at this stage when the Committee is
merely set up. Opposition is of near paranoiac proportion. I submit that the
instrument by itself is useful and should be allowed with reasonable
conditions. It is of course not an instrument for all. It is not even anybody’s
case that this instrument will be very popular amongst corporate and/or
investors. But for many – companies, promoters and investors – it could work
well.

 

Let us first briefly
consider what DVRS are, what is broadly the current legal position, what are
the issues and opposition points and their possible answers and what could be
the way forward.

 

What
are DVRS?


DVRS are a variant of equity
shares. In other words, DVRS are equity shares. However, DVRS depart from
the usual equal-vote, equal-dividend features of ordinary equity shares.
Instead, they give differential voting and/or dividend rights. DVRS may thus
carry more – or less – voting rights than ordinary equity shares. Thus, for
example, one DVRS may carry just 1/10th voting right. 10 such DVRS would thus
carry one vote, compared to ordinary equity share which has one vote one share.
Or DVRS could carry more voting rights as for example, one DVRS having 10
votes.

 

Similarly DVRS could carry
more (or less) dividends than ordinary equity shares. DVRS could, for example,
be entitled to, say, 5% more dividends than ordinary equity shares. This helps
to compensate for lesser voting rights.Otherwise, such DVRS may carry all the
other features as ordinary equity shares. They may, for example, carry the same
rights on liquidation. There could be variants other than the normal
voting/dividends right however, this article focuses on variants of voting
rights and dividend rights only particularly in listed companies.

 

Legal provisions relating to DVRS


DVRS have always been
possible for private companies. However, flexible requirements for
public/listed companies have been a relatively recent phenomena. The provisions
relating to DVRS are contained in the Companies Act, 2013, rules made
thereunder, SEBI Regulations, circulars, etc. These have evolved over time.
Hence, the regulations are scattered and are cumbersome and time consuming.
Some features of the law can be summarised, albeit in a simplified manner.

 

Issue of DVRS would
generally require approval of shareholders by an ordinary resolution through
postal ballot. It generally would also require approval by SEBI. DVRS would
have to be offered to all shareholders proportionately – thus, DVRS would have
to be either in the form of right shares or as bonus shares. DVRS cannot be
more than 26% of the equity share capital. Existing equity shares cannot be
converted into DVRS.

 

Importantly, DVRS that have
right to a higher dividend or more voting rights than existing equity shares
cannot be issued. This restriction is obviously for protection of existing
shareholders whose rights would get diluted if new shares having more
dividends/voting rights are issued. These requirements end up being
restrictive, time consuming and even finally uncertain. This may also be one of
the major reasons why DVRS did not pick up in India and that the existing ones
are not successful. Even otherwise, the regulations for issue of DVRS are half
hearted. Most other provisions of law refer and provide for ordinary equity
shares and not DVRS. Thus, there is a legislative vacuum in respect of DVRS.
The Committee considering DVRS will thus need to recommend extensive amendments
to several laws.

 

DVRS
issued


Barely 5 companies have
issued DVRS in India. Except one, the other DVRS trade at prices that are at a
huge discount over the price of the corresponding ordinary equity shares. Tata
Motors DVRS, for example, trade at nearly 50% discount over the price of their
equity shares.

Future Enterprises Limited,
however, has its ordinary equity shares and DVRS trading at very small
differential. Part of this may be ascribed to the fact that their DVRS carry
25% less voting rights with right to 2% more dividends, as compared to ordinary
equity shares. The market liquidity of such DVRS is also generally poor.

 

Opposition
to DVRS and some possible responses


There has been severe
opposition to DVRS amongst certain circles, which is strong almost to the level
of being paranoiac/irrational. I submit that much of this opposition is
unjustified and can be refuted.

 

Much
of the fears and concerns can be dealt with if the DVRS are seen as just
another instrument whose value can be determined by informed parties using
relevant valuation models. Higher or lower dividend or voting rights would be
factored in the valuation. A company desiring to give lower voting rights can
compensate this loss by offering a lower issue price and/or with sweetener of
higher dividend rights. The point is that the market would generally take care
of the handicaps/advantages of differential rights by valuing the DVRS. Hence,
the opposition to DVRS would have to be considered in this light.

 

The core opposition to DVRS
is that it would help entrench existing management without their investing
money proportionate to their rights. Promoters and management would thus invest
lesser amount, take lesser risk and yet get higher control. This is
misconceived. Higher votes would result in higher price for such shares that
the promoters have to pay and lower price for the equity shares (DVRS) issued
to other shareholders. If investors consider the right to remove management as
very important to them, they will either pay a very low price for such shares
with lower rights or may not buy them altogether. So long as transparency is
maintained of the rights and disabilities on DVRS, the parties should be free
to work out the value amongst themselves either directly or through response to
public issue or through open markets.

 

It has been said that very
few companies have issued DVRS and these DVRS except 1 have badly performed.
The explanation for this can be several. One is educating the investors of this
instrument. Second is that the regulations themselves are complex and near
prohibitive. Finally, once again, the markets can be expected to take care of
the situation. If investors perceive that such instruments will give them
lesser return or have lower value, they will value them accordingly in the
market, as they would any other security. Banning or creating near prohibitive
conditions is not the answer.

 

Safeguards of corporate Governance and other provisions


Much has changed since the
time when the provisions relating to DVRS were introduced. We have extensive
corporate governance requirements and other new requirements that provide for
transparency and protection of various stakeholders. We have requirements
relating to a certain number of independent directors. The law provides for
extensive regulations relating to related party transactions. There are various
committees including Audit Committee, Nomination and Remuneration Committee,
etc. which look into certain issues. Shareholders earlier could rarely vote
because they could not attend general meetings physically since such meetings
were often held at remote or far off places. Postal ballot and electronic
voting has changed this situation a lot. Thus, there are many safeguards that
keep some check on majoritarian control.

 

Suggestions


As stated earlier, so long
as transparency is maintained and certain basic conditions are complied with,
DVRS should be allowed to be issued.

Rights on existing
instruments should not be changed without the approval of the holders. Take an
example. Presently a company has Rs. 10 crore of ordinary equity shares (1
crore equity shares of Rs. 10 each face value). Now, let us say the promoters
of the company hold 20 lakh ordinary equity shares of promoters. Thus, they are
entitled to 1/5th of the voting rights. If these 20 lakh ordinary equity shares
are converted into 20 lakh DVRS with each DVRS having 10 votes, the result
would be as follows. Total votes would be 280 lakh (200 lakh votes now held by
the promoters and 80 lakh votes by the others). The promoters would have 200
lakh votes which would be about 71%. Thus, their voting share jumped from 20%
to 71%. This results in loss of voting rights and thus value of the other
shareholders. This should not be permitted and the existing law does not permit
it.

 

In case of fresh issue, the
new shares should be offered to all. If it is proposed that the fresh issue is
to a special group, the issue should be transparently valued and the issue
price should not be lower than such price. SEBI could consider providing
formulae for this. The objective is that the value of existing shareholders
should not suffer because of such issue.

 

In the interim, till more
experience is gained, a cap can be placed on the number of DVRS. However,
unlike the present poorly drafted law that provides a cap on the maximum amount
of DVRS as a percentage of total capital, the cap should be on the maximum
voting rights that such DVRS carry. The cap of 26% of the capital could be
considered. The objective would be that the promoters/management, even if they
allot all the DVRS with higher voting rights to themselves, would be able to
hold only a certain maximum of voting rights through such DVRS.

 

Provisions could be made
whereby certain major decisions require approval by a higher majority. This
would give adequate say to a significant majority of shareholders. This will
help ensure that those in control with DVRS are not able to take such major
decisions that could affect the value of shareholders without their say. Like
certain preference shares, if there is no dividend paid for, say, 3 years, the
DVRS could be made entitled to voting rights.

 

Conclusion


Clearly, then, DVRS are an
instrument whose time has come. One hopes that, firstly, the Committee
wholeheartedly endorses this instrument. Further, it should propose extensive
rehaul of the various laws that deal with issue of securities and ensure that DVRS
are also provided for. They may also provide for conditions to ensure fair
play. In particular, there should be transparency and also education of
investors. Thereafter, the parties – companies, promoters and shareholders –
should be permitted to structure instruments as per their needs and desires and
at a value they mutually decide.   

 

A. P. (DIR Series) Circular No. 78 dated June 23, 2016

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Notification No. FEMA 365/2016-RB dated June 01, 2016

Permitting writing of options against contracted exposures by Indian Residents

This circular permits resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call and put option contracts against their contracted exposure, i.e. covered call and covered put respectively, with any bank in India subject to operational guidelines, terms and conditions annexed in Annex I to this circular.

A. P. (DIR Series) Circular No. 77[2]/10[R] dated June 23, 2016

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Given below are the highlights of certain RBI Circulars & Notifications

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015

This circular permits as under: –

1. An Indian start-up (as defined vide Notification No. GSR 180(E) dated February 17, 2016 issued by DIPP) having an overseas subsidiary can: –

a) Open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports / sales made by it or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports.

b) Credit payments received by it in foreign exchange against sales / exports made by it or its overseas subsidiaries to its EEFC account maintained in India.

2. Any insurance / reinsurance company registered with the Insurance Regulatory and Development Authority of India (IRDA) can open a foreign currency account with a bank outside India to carry out insurance / reinsurance business.

Evidence – Electronic records – Secondary evidence of electronic records inadmissible unless requirements of section 65B are satisfied. [Evidence Act, 1872, Section 65B]

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Anvar P.V. vs. P. K. Basheer & Ors AIR 2015 SC 180.

The Supreme Court was dealing with an appeal filed against order whereby High Court had dismissed election petition holding that corrupt practices pleaded in the petition were not proved and hence, election could not be set aside u/s. 100(1)(b) of the Representation of People Act, 1951. The corrupt practice alleged were use of objectionable speeches, songs and announcements which were recorded using other instruments and by feeding them into computer, CDs were made therefrom which were produced in the court. However, the same were produced without due certification in terms of section 65B of the Evidence Act 1872. It was held that in case of CD, VCD, chip, etc., same shall be accompanied by certificate in terms of section 65B of the Evidence Act obtained at the time of taking the document, without which, secondary evidence pertaining to electronic record is inadmissible in respect of CDs. Thus, whole case set up regarding corrupt practice using songs, announcements and speeches fall to ground.

Co-operative Society – Transfer of membership to flat by nomination or inheritance – Co-operative society bound to transfer to nominee where valid nomination made. [West Bengal co-operative Societies Act,1983, Section 80,79]

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Indrani Wahi vs. Registrar of Co-operative Societies and ors AIR 2016 SC 1969.

Nomination was made by the deceased father in the name of married daughter. Co-operative society implemented the nomination. Other legal heirs challenged the same before Dy. Registrar and succeeded. The single bench of the high court reversed the order of the Dy. Registrar. The division bench substantially set aside the order of the single bench. Hence, married daughter filed appeal to the Supreme Court.

The Supreme Court held as under :

(1) In view of section 79, where a member of a cooperative society nominates a person in consonance with the provisions of the Rules, on the death of such member, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee. (2) Rule 128 provides that only in the absence of a nominee, the transfer of the share or interest of the erstwhile member, would be made on the basis of a claim supported by an order of probate, a letter of administration or a succession certificate (issued by a Court of competent jurisdiction).

(4) Transfer of share or interest, based on a nomination u/s. 79 in favour of the nominee, is with reference to the concerned cooperative society, and is binding on the said society. The cooperative society has no option whatsoever, except to transfer the membership in the name of the nominee, in consonance with sections 79 and 80 of the 1983 Act (read with Rules 127 and 128 of the 1987 Rules). However, that would have no relevance to the issue of title between the inheritors or successors to the property of the deceased.

PART A: Decision of Supreme Court

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CBSE asked to provided answer sheets and scrupulously observe the directions of Supreme Court in C.A. No. 6454 of 2011

Even after the historic 2011 judgment of the Supreme Court, where procuring copies of answer sheets by students came under the Right to Information (RTI) Act, the Central Board of Secondary Education (CBSE) continued to defy it. In a reply to a RTI query, posed by Whistle for Public Interest (WHIP), comprising of a group of law students, the CBSE replied on 28 December 2015, that, it charges Rs700 per subject for providing copy of answer sheets. In addition, students were compulsorily required to go through the process of ‘Verification of Marks’ for which the CBSE has prescribed fee of Rs.300 per subject. This meant that a student had to pay Rs1,000 per subject, if she applied for a copy of the answer sheet.
This was in gross violation of the SC order of 2011, which held that “Answer-Sheet is an Information and therefore, examinees shall have the right to inspect their Answer-Sheets under RTI Act, 2005 and its Rules made there under which prescribes Rs10 as application fee for getting the information and Rs2 per page for the copies of such information.”
 
The Supreme Court directed the CBSE to “scrupulously observe” the directions made by the Court in 2011. The CBSE has been asked to provide evaluated answer-sheets to candidates under RTI Act in compliance with the Supreme Court’s Ruling in the matter of CBSE & Anr. Vs. Aditya Bandopadhyay & Ors – Civil Appeal No. 6454/2011.

All the state run institutions falling under the meaning of Public Authority defined under section 2(h) of the RTI Act are also obliged to provide answer-sheets under this transparency law.

E-Waste Disposal

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Introduction
There’s a new smart phone in the market and we buy it. A new laptop is introduced and we grab it. Ever wondered what happens to the old models which we sell, scrap or simply trash (in cases where they are no longer working)? How do these electronic items ultimately get disposed off? E-Waste or electronic waste is one of the largest sources of waste being generated in today’s waste. With newer models and variants of all gadgets being launched every day, the useful life of a technological gadget has reduced drastically thereby significantly increasing the e-waste generated everyday. For instance, did you know that a study states that India is the 5th largest producer of e-waste internationally. According to the Ministry of Environment, Forest and Climate Change, Government of India, India generates over 17 lakh tonnes of e-waste very year with an annual growth rate of 5% every year. India has over a billion mobile phones  and over 25% end up in e-waste every year.  Recognising this, the Central Government has recently framed the E-Waste (Management) Rules, 2016.  

Act
The mother statute for all things connected with the environment is the Environment (Protection) Act, 1986.  It is a Central Act for the protection and the improvement of the environment. It defines environment pollution  as the presence of any solid, liquid  or gaseous substance in the environment in such concentration as may be injurious to the environment.  Under s.3 of this Act, the Government has power to take all such measures as is necessary for protecting and improving the quality of the environment and for preventing environment pollution. This includes laying down Rules, procedures and safeguards for the handling of hazardous substances, i.e., any substance which by reason of its chemical properties is liable to cause harm to humans /  living  beings / environment, etc. Consequently, the  Central Government has notified the amended  E-Waste (Management) Rules, 2016(“the EWM Rules”) which shall come into force from the 1st October, 2016. The EWM Rules define e-waste to mean electrical and electronic equipment, in whole or in part discarded as waste by the consumer or bulk consumer as well as rejects from manufacturing, refurbishment and repair processes.

Coverage
The EWM Rules apply to various types of entities involved in the  manufacture, sale, transfer, purchase, collection, storage and processing of e-waste or specified electrical and electronic equipment, including their components, consumables, parts and spares which make the product operational. Some of these entities are as follows:

(a)Manufacturer – a manufacturer of electrical and electronic equipment
(b)Producer – any person who sells (in any manner) manufactured / assembled / imported electrical and electronic equipment
(c)Bulk Consumer – Bulk users of electrical and electronic equipment, e.g., Governments departments, Public Sector Undertakings, banks, educational institutions, MNCs, partnership firms and companies that are registered under the Factories Act, 1948 and the Companies Act, 2013 and health care facilities which have a turnover of more than Rs. 1 crore or employ more than 20 employees.  Althoughthis definition is not very happily worded, it appears that in order to be covered, firms and companies must satisfy the turnover or employee threshold. Registration under both Factories Act and Companies Act is not possible because in that case all firms would be excluded. Further, all IT companies which are the biggest generator of e-waste would be excluded, which cannot be the intention. This is an important definition since it casts certain reporting requirements on all bulk  consumers.
(d)Dealer – buyer or seller of specified electrical and electronic equipment. The definition is wide enough to include offline and online dealers.
(e)Recycler – any person engaged in recycling and reprocessing of e-waste as per guidelines  laid down by the Central Pollution Control Board.
(f)Consumer – one of the more important entities covered by the EWM Rules is a consumer which is defined to mean any person using any (and not just specified) electrical and electronic equipment but excludes bulk consumers. Hence, any individual or small office would also be covered if he/it is involved in manufacture, sale, transfer, processing or storage of specified electrical and electronic equipment. This is a very important step toward environment protection since it spreads the net very wide.  

However, the Rules do not apply to a micro enterprise as defined in the Micro, Small and Medium Enterprises Development Act, 2006. This is interesting since while a micro enterprise is exempted, an individual end user is not!

The specified electrical and electronic equipment enlisted in the EWM Rules are computers, laptops, mobile phones, refrigerators, washing machines, air conditioners, televisions, printers, lamps containing fluorescent and other mercury.  It even covers their components, consumables, parts and spares. Conspicuous by their absent from this list are several popular consumer electronic / electric equipment, such as,  music systems, heating systems, irons, DVD players, cameras, etc. Whether this omission is intentional or an oversight is something which time will tell?

Responsibilities of various entities
The Rules lay down responsibilities for different entities in relation to e-waste:

(a)Manufacturer – must collect e-waste generated during manufacturing of any electronic / electrical equipment and channelise it for recycling or disposal.  It must also maintain and file prescribed information returns. The Return includes information on category and quantity of e-waste generated / stored/ recycled/transported /refurbished /dismantled /treated and disposed.   The channelisation could be to authorised dismantlers or recyclers.
(b)Producers – must provide an Extended Producer Responsibility (EPR) for  equipment produced by them covering the channelisation of e-waste generated by their products. This could also be through dealers, collection centres, buyback arrangements, etc. EPR means a responsibility of any producer of electrical or electronic equipment, for channelisation of e-waste to ensure environmentally sound management of such waste. EPR may comprise of implementing take back system or setting up of collection centres or both and having agreed arrangements with authorised dismantler or recycler either individually or collectively through a Producer Responsibility Organisation. The Central Pollution Control Board will grant an EPR Authorisation for managing EPR with implementation plans and targets outlined therein.

Every producer must make an application to the Central Pollution Control Board for EPR Authorisation within a period of 90 days from 1st October, 2016.  Any producer who has been refused an EPR cannot sell any electronic or electric equipment.  This is a very important requirement for producers.

The producer must also create mass awareness of recycling. The Deposit Refund Scheme is another way of doing so in which the producer charges an additional deposit at the time of sale and returns the money back with interest when the product is returned for recycling. Various returns are to be filed by a producer also.
(c)Dealers – they can act as collection centres for producers’ products. They must ensure that e-waste generated is safely transported to recyclers or dismantlers. 
(d)Refurbishers / Dismantlers / Recyclers – Their facilities must be in accordance with guidelines laid down by the Central Pollution Control Board. They must maintain records and also obtain an authorisation from the State Pollution Control Board.
(e)Bulk Consumers –  bulkconsumers of specified electrical and electronic equipment shall ensurethat e-waste generated by them is channelised through collection centre or dealers of authorised producer or dismantler or recycler  and they shallmaintain specified records of e-waste generated by them. Further,  they must ensure  that such end-of-life electrical and electronic equipmentare not admixed with e-waste containing radioactive material as are covered under theprovisions of the Atomic Energy Act, 1962.
(f)Consumers – the responsibilities for consumers of specified electrical and electronic equipment are the same as those enlisted above for bulk consumers, except that they do not have to maintain any records.
(g)Storage Responsibility – Every manufacturer, producer, bulkconsumer, collection centre, dealer, refurbisher, dismantler and recycler may store thee-waste for a maximum of 182 days and shall maintain arecord of collection, sale, transfer and storage of e-wastes and make these recordsavailable for inspection. The State Pollution Control Board can extend this period to 365 days if the waste needs to be stored for recycling or reuse. Transportation of e-waste must be carried out after maintaining the prescribed documentation.

Penalties
No specific penalties are provided under the Rules but they do provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable for all damages caused to the environment or third party due to improper handling and management of the e-waste. They further provide that the manufacturer, producer, importer, transporter, refurbisher, dismantler and recycler shall be liable to pay financial penalties as levied for any violation of the provisions under these rules by the State Pollution Control Board with the prior approval of the Central Pollution Control Board.

The Environment (Protection) Act, 1986 provides a general penalty for anyone who fails to comply with or contravenes any of the provisions of the Act, or its rules. The penalty is, in respect of each failure or contravention, an imprisonment of up to 5 years and / or a fine of up to Rs. 1 lakh. In case the failure or contravention continues, then there would be an additional fine which may extend to Rs. 5,000 / day during which such failure or contravention continues after the conviction for the first such failure or contravention. If the failure or contravention continues beyond a period of 1 year after the date of conviction, the offender shall be punishable with imprisonment for a term which may extend to 7 years.

Responsibilities of Companies
Companies would be either bulk consumers or consumers. Depending upon their classification they need to comply with the provisions of the Rules.  

Conclusion
This is one more Regulation which businesses need to comply with. However, this is a welcome legislation which would help reduce the environmental pollution. One only hopes that this does not turn out into another means of red tapism and corruption.

Importance of Unity

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Arjun (A)

Shrikrishna Bhagwan, in Bhagwad Geeta,
you had told me about re-birth.

 

Shrikrishna
(S)

Yes dear.  I had mentioned that so far, you and I, and
all these people have taken innumerable rebirths.

 

Arjun

And whatever good or bad we do, we get
the fruit in the same birth or in next birth.

 

Shrikrishna

Yes. 
That is true.  But what makes
you ask this question?

 

Arjun

My friend is very innocent person,
very God-fearing.  Now practising in a
rural area.

 

Shrikrishna

What about him?

 

Arjun

He had done the audit of some company
5-6 years ago.  He left that work since
the company shifted elsewhere.

 

Shrikrishna

Ok. Then?

 

Arjun

A few months ago, all of a sudden,
survey party from income tax came to his office.  They harassed him for 3 days – asking
questions about that old client.

 

Shrikrishna

Oh! Why?

 

Arjun

They said they found two different
balance sheets signed by him for the 
same year – the last year of his audit.

 

Shrikrishna

Surprising!  But you said he is very innocent!

 

Arjun

Yes. 
I have no doubt about his innocence. 
Gentleman to the core!

 

Shrikrishna

What did they find?

 

Arjun

Actually, in village places, most of
the professionals work from residence only. 
They keep some room for office. 
So they searched the records in his house also.

 

Shrikrishna

But what did they get?

 

Arjun

Absolutely nothing.  Not even the remotest evidence.

 

Shrikrishna

So what did they finally do?

 

Arjun

They were completely satisfied.  But they said they had instructions to
investigate thoroughly.  They regretted
inconvenience caused to him!

 

Shrikrishna

Good. 
But there must be something else in the story.

 

Arjun

Yes. 
He showed them that he signed the same and the only balance-sheet that
was submitted to ROC and IT!  And the
alleged balance sheet which they got somewhere else was only photocopy.

 

Shrikrishna

They have to produce original.  But what was their grievance – when correct
balance sheet was filed with ITR?

 

Arjun

That’s precisely why I mentioned about
re-birth.  He must have committed some
sin in last birth.

 

Shrikrishna

Why?

 

Arjun

Actually, for subsequent years, there
were multiple financial statements for every year.  Different for ROC, different for IT and
something else to the Bank!

 

Shrikrishna

It was then a blatant fraud!

 

Arjun

Yes; true.  So subsequent years’ auditor is also in
trouble.

 

Shrikrishna

But where is the client?  What does he say?

 

Arjun

That’s another story.  The main director of that company is now
absconding.  That prompted them to go
to the CA’s office! He is the real culprit.

 

Shrikrishna

They must have recorded the statements
of both of them.

 

Arjun

Yes, obviously.  My friend flatly denied the
allegation.  But the subsequent auditor
succumbed to the pressure of survey people. 
But then immediately retracted it.

 

Shrikrishna

You mean to say your friend suffered
unnecessarily.  There was no fault on
his part.

 

Arjun

Exactly.  In the hospital, we see many small innocent
children suffering from terminal diseases. 
What sin they have committed?

 

Shrikrishna

You are right.  Your friend did not perhaps do anything
wrong; but somebody did it and the poor fellow suffered because of someone
else’s wrong deeds!

 

Arjun

And the irony is that the client is
very resourceful and influential.  He
will settle it with IT.  But the IT
people have forwarded the information to our Institute and my friend will
have to face the music for a few years!

 

Shrikrishna

I have sympathy for your friend.  But I had also explained to you the role of
fate or destiny in Bhagwad Geeta. Even Lord Shree Ram had to undergo hardship
for no fault on his part!

 

Arjun

I am more worried because in our
profession, there is hardly any opportunity to do a straight thing!  Everything is manipulation.  So what will happen in our next birth.

 

Shrikrishna

Dear Paartha, don’t be so negative.

 

Arjun

What shall we do?  Neither the clients whom we serve are clean
nor the authorities before whom we represent the clients are straight!

 

Shrikrishna

The only solution is the unity amongst
you all.  If you act collectively with
positive thinking and good leadership, you can improve the things.  You are educated professionals.  You should provide leadership to the
society.

 

Arjun

But what exactly we can do
collectively?

 

Shrikrishna

You can be more assertive.  You can afford to say ‘No’ to wrong
things.  Today, you have a fear that if
you refuse to oblige a client, some other CA will do it.  He will compromise on the standards.

Arjun

That’s true.  We can even develop good culture and
discipline iin the finance sector.

Shrikrishna

And you can establish the image and
credibility of the profession, so that no once can point a finger at you.

Arjun

I see a point in what you are
saying.  Since we are not united, no
one heeds to our feelings and suggestions. 
I think, all of us should seriously think on these lines.

 

Shrikrishna

I had already said in puranas that in Kaliyug, the real strength
lies in unity.  Please act unitedly and
you can change the world.

 

Arjun

Yes, My Lord!

Om Shanti.

Note:

The above
dialogue emphasises on importance of collective strength and how it is lacking
in our profession. The only solution to remain clean in the profession is to
have a good unity.

Precedent – Judicial Discipline – Departmental authorities bound by the judicial pronouncements of the Statutory Tribunals even if the decision of the Tribunal was not carried further in appeal on account of low tax effect [Central Excise Act, 1944 S. 35 and 35E].

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Lubi Industries LLP vs. Union of India (2016) 337 E.L.T. 179 (Guj.)(HC)

The petitioner manufactures and supplies submersible pumps to Government agencies. The contracts envisage pre-delivery inspection charges by third party agency at the cost of the buyer . However, initially the payment would be made by the petitioner and would be claimed from the Government. The contest between the petitioner and the Department is with respect to the inclusion of these charges towards the assessable value of the goods. This precise question in identical circumstances in case of this very petitioner came to be decided by CESTAT by judgement dated 16/06/2014, ruled in favour of the assessee.

When such a question arose again, the AO issued a show cause notice as to why the pre-delivery inspection charges should not be included in the assessable value and resultantly unpaid dues of Rs.1.37 lacs not be recovered. The petitioner heavily relied on its case decided in the Tribunal. The AO however confirmed the additions and relied on the judgement of the Supreme Court in the case of Commissioner of Central Excise, Tamil Nadu vs. Southern Structures Ltd. 2008 (229) E.L.T. 487.
The High Court held that, the Assistant Commissioner committed a serious error in ignoring the binding judgement of the superior Court that too in case of the same assessee. Even if the decision of the Tribunal in the present case was not carried further in appeal on account of low tax effect, it was not open for the adjudicating authority to ignore the ratio of such decision. An order that the adjucating authority may pass is appealable, even at the hands of the department. This is clearly provided in Section 35 read with section 35E of the Central Excise Act. Therefore, even if the adjucating authority passes an order in favour of the assessee on the basis of the decision of the Tribunal, it is always open to the Department to file appeal against such judgement of the adjucating authority.

Family Arrangement – Panchayat Resolution reduced in writing – Resulting in relinquishment of rights – could be taken as Family Arrangement – though not registered can be used as a piece of evidence for showing or explaining the conduct of the parties. [Registration Act, 1908, S. 49, 17; Evidence Act, 1872, S.91]

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Subraya M.N. v. Vittala M.N. & Others AIR 2016 Supreme Court 3236.

A suit for partition was filed. The defendants opposed the same on the ground that plaintiffs had relinquished their rights for consideration and this was recorded in Panchayat Resolution. The Trial Court as well as the High Court held that Panchayat Resolution cannot be construed as a Family Arrangement and was inadmissible in evidence as the same was not registered. On appeal, the Supreme Court held that, the Trial Court and the High Court were not right in brushing aside the oral and documentary evidence adduced by the defendant to prove that the plaintiffs had relinquished their right in the immovable property. There is no provision of Law requiring family settlements to be reduced to writing and registered though when reduced to writing the question of registration may arise. Binding family arrangements dealing with immovable property worth more than rupees hundred can be made orally and when so made, no question of registration arises. If, however, it is reduced to writing with the purpose that the terms should be evidenced by it, it requires registration and without registration it is inadmissible; but the said family arrangement can be used as corroborative piece of evidence for showing or explaining the conduct of the parties.

Accident claim – Can be filed by non-dependant legal representative of the deceased. [Motor Vehicles Act, 1988, S.166, 140]

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Dr. Gangaraju Sowmini v. Alavala Sudhakar Reddy & Another, 2016 AIR Hyderbad 162 (FB)

The reference was filed by the claimant (non-dependent of the deceased) seeking enhancement of compensation awarded by the chairman, Motor Vehicles Accidents Claims Tribunal. The said reference was opposed by the Insurance Company on the ground that amount of compensation would not be granted to a claimant who is not dependant on the deceased.  

It was held by the Full Bench of the Hyderabad High Court that in view of the plain language under Section 166 of the Motor Vehicles Act, 1988, which is a substantive provision for making application for compensation, it is clear that either the injured person or the legal representatives of the deceased are entitled to make an application for award of compensation. Dependency is a matter, which will have a bearing on the issue with regard to fixation of compensation and apportionment of compensation if there are more than one claimant, but at the same time, in view of the plain and unambiguous language used under Section 166 of the Motor Vehicles Act, the term ‘legal representative’ does not mean only a dependant. It is fairly well settled that the legal representative is one who can represent the estate of the deceased.

In the judgment of Hon’ble Supreme Court in Montford Brothers of ST. Gabriel and Another v. United India Insurance & Another, (2014) 3 SCC 394, it was held that it is common in the Indian society, where, the members of the family who are not even dependant also can extend their support monetarily and otherwise to the victims of accidents to meet the immediate expenditure for hospitalisation etc., in such cases, unless the legal representatives are allowed to continue the proceedings initiated by the person who succumbs to injuries subsequently, such claims will be defeated and that will also defeat the very object and intent of the Act. Any such measure would be wholly unequitable and unjust. Plainly, that would never be the intent of any piece of legislation. For the aforesaid reasons and in view of the language under Section 166 of the Motor Vehicles Act, 1988 r/w. Rule 2(g) of the A.P. Motor Vehicles Rules, 1989, we are of the view that even the legal representatives who are non-dependants can also lay a claim for payment of compensation by making application under Section 166 of the Motor Vehicles Act.

Appellate Tribunal – Registrar cannot refuse to accept the appeal though not maintainable – Order of Non-Maintainability to be passed by the Tribunal itself and not the registrar even if the petition was prima facie not maintainable. [Tripura Value Added Tax Act 2004, S.71]

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New Medical (Agartala) Pvt. Ltd. vs. Superintendent of Taxes, Charge-VI, Agartala & Ors. (2015) 82 VST 238 (Tripura) (HC).

The petitioner had filed 2 separate appeals before the Tripura Value Added Tax Tribunal, Agartala, Tripura, but these appeals were returned to the petitioner without passing an order by the Registrar of the Tripura Value Added Tax Tribunal on the ground that since the appeals filed before the Commissioner were dismissed in limine without issuing notice, no revision was maintainable before the Tribunal.

It was held that, the Registrar of the Tribunal may form a prima facie view and raise an objection that an appeal is maintainable or not and it will be for the assessee or the counsel to satisfy the Registrar that such revision is maintainable. Even if the Registrar holds against the assessee, the assessee will still have the right to claim it in the Tribunal which should decide that issue in accordance with Law.
Any Judicial or Quasi-Judicial action has to be based on reasons therefore whenever in future any such order has to be passed even by the Registrar or his subordinates, that order must be in writing and must be conveyed to the assessee so that the assessee knows why the appeal or revision is being returned by the Tribunal.

Can a trust be a beneficiary in another trust?

Sometime back a CA friend of mine
specializing in tax planning, who normally consults me on legal issues before
formulating any tax saving plan, casually asked me whether I had an occasion to
consider the question as to whether a trust can be named to be one of the
beneficiaries of another trust.


My friend being conscientious and
thorough does not recommend to any client of his any tax saving plan unless he
is fully satisfied with all applicable legal and other issues.  He had some reservation on this question and
added that a particular Big Four CA firm was 
using this idea in its tax saving recommendations.  As I needed research to answer the point, I
could not respond to the inquiry spontaneously. 
The result of the research undertaken by me was quite interesting.  The purpose of this article is to share with
the readers of your esteemed journal the result of my research on the issue.


Section 9 to the Indian Trusts Act,
1882 provides that every person capable of holding property may be a
beneficiary.  Therefore, the two basic
requirements of being a beneficiary is that (i) the beneficiary should be a
person and (ii) should also be capable of holding property.


The term “person” is not defined in the
Indian Trusts Act.  It is therefore,
necessary to look at the definition of the term under the General Clauses Act,
1897.  The said Act defines a large
number of words and expression and such definitions apply to all Central Acts
and Regulations thereunder. The said Act defines the term ‘a person’ to include
any company or association or body of individuals, whether incorporated or
not.  Even the Indian Penal Code, 1860
which also defines the term “person” gives same definition of the term to
include any company or association or a body of persons whether incorporated or
not.  It may be noted that both these
definitions are inclusive definitions and not exclusive. 

Therefore, to answer the question it is
necessary to determine whether a trust can be considered a “person”.


In the case of Abraham Memorial
Educational Trust  vs. C. Suresh Babu
reported in [2012] 175 Comp Cas 361 (Mad) the Madras High Court had occasion to
consider the meaning of the term “person”. 
It was a criminal case arising under Section 138 of the Negotiable
Instruments Act, 1881 and the court was required to interpret the meaning of
the term ‘company’ used in the Act. 
Section 141 of the said Act defines the word to mean ‘any body corporate
and includes a firm or other association of individuals’.   In that case the Court has held that
applying the doctrine of “ejusdem generis” and going by the purpose and
context, while interpreting the definition clause, a Public Charitable Trust
falls within the definition of the term “company”.  This definition will also apply in the
interpretation of the term ‘person’ in Section 11 of the Indian Penal Code and
Section 3(42) of the General Clauses Act.


In that case, the Hon’ble Court, inter alia, referred to
a passage from the decision of the Supreme Court in case of Shiromani Gurdwara
Prabandhak Committee  vs. Som Nath Dass
(reported in (2000) 4 SCL 146 para 19) as under:

“19.     Thus,
it is well settled and confirmed by the authorities on jurisprudence and courts
of various countries that for a bigger thrust of socio-political-scientific
development evolution of a fictional personality to be a juristic person became
inevitable.  This may be any entity,
living, inanimate, objects or things.  It
may be a religious institution or any such useful unit which may impel the
courts to recognise it.  This recognition
is for subserving the needs and faith of the society.  A juristic person, like any other natural
person is in law also conferred with rights and obligations and is dealt with
in accordance with law.  In other words,
the entity acts like a natural person but only through a designated person,
whose acts are processed within the ambit of law.”


After considering some other Supreme Court case law, the
Hon’ble Court held as follows:

“26.     From
the foregoing discussions, it is manifestly clear that the moment a Trust
(organisation) is formed with an obligation attached to the same, an artificial
person is born and because such artificial person is recognised by law,
conferring upon such artificial person right to own property, to enjoy certain
other rights and also to discharge certain obligations, it attains the status
of a “juristic person”.  Thus, a Trust,
whether private or public, is a juristic person who can sue / be sued or
prosecute / be prosecuted.”



The Court further considered the point whether omission
of the word ‘trust’ within the meaning of term ‘company’ had any effect and
held that:

“64.     When
there is omission to expressly mention the expression ‘Trust’ within the
meaning of the term ‘company’, by applying the principle of casus omissus,
whether this Court could fill up the said gap by reading the expression ‘Trust’
into the interpretation clause of Section 141 of the Act.  In this regard, I may refer to the
Constitution Bench Judgment of the Hon’ble Supreme Court in Punjab Land
Development and Reclamation Corporation Ltd., Chandigarh  Vs. 
Presiding Officer, Labour Court, Chandigarh reported in 1990 (3) SCC 682,
wherein the Hon’ble Supreme Court has held as follows:-

            However,
a judge facing such a problem of interpretation cannot simply fold his hands
and blame the draftsman.  Lord Denning in
his Discipline of Law says at p.12: “Whenever a statute comes up for
consideration it must be remembered that it is not within human powers to foresee
the manifold sets of facts which may arise, and, even if it were, it is not
possible to provide for them in terms free from all ambiguity.  The English language is not an instrument of
mathematical precision.  Our literature
would be much the poorer if it were. 
This is where the draftsman of Acts of Parliament have often been
unfairly criticised.  A judge, believing
himself to be lettered by the supposed rule that he must look to the language
and nothing else, laments that the draftsmen have not provided for this or
that, or have been guilty of some or other ambiguity.  It would certainly save the judges trouble if
Acts of Parliament were drafted with divine prescience and perfect clarity.  In the absence of it, when a defect appears a
judge cannot simply fold his hands and blame the draftsman.   He must set to work on the constructive task
of finding the intention of Parliament, and he must do this not only from the
language of the statute, but also from a consideration of the social conditions
which gave rise to it, and of the mischief which it was passed to remedy, and
then he must supplement the written word so as to give ‘force and life’ to the
intention of the legislature.”



Based on this discussion the Court held that:

“65.     Applying
the above law laid down by the Constitution Bench of the Hon’ble Supreme Court,
as I have already concluded, considering the intention of the Legislature while
bringing in Chapter – XVII of the Negotiable Instruments Act and the fact that
a Trust having two or more trustees will squarely fall within the ambit of
‘association of individuals’ which in turn will fall within the meaning of the
term ‘company’, I am of the view that a Trust having a single trustee should
also be brought within the definition of the term ‘company’.” 


Thus, based on the decision, a trust
(public or private) held to be a person and the first requirement condition of
being a beneficiary as required under Section 9 of the Indian Trusts Act is
satisfied.

Even otherwise, the Supreme Court had
many occasions to consider the meaning of the term ‘person’ under a number of
Central and State laws and has given very wide and extended meaning to the term
‘person’.  Illustratively, in Agarwal
Trading Corporation  v. Collector of
Customs, the word ‘person’ is held to include a company or association or body
of individuals whether incorporated or not. 
(See (1972) 1 SCC 553).  Again in
M M Ipoh v. CIT (1968) ISCR 65, it is held to include a firm so also in CIT v.
S.C. Angidi Chettiar (AIR 1962 S.C. 970). 
Moreover, while interpreting the word ‘person’ in Section 154(1) of U.P.
Zamindari Abolition and Land Reforming Act, 1950 the Supreme Court has held
that keeping in view the object of legislation and by applying the rule of
contextual interpretation it becomes clear that the same would include human
being and a body of individuals which have juridical or non-juridical status. (
See Oswal Fats & Oils Ltd. v. Commr. (Admn.), (2010)4SCC728. )


Therefore, the first requirement of the
legal provision being satisfied, we have to consider the second condition.  As far as the second requirement is
concerned, it does not need any elaboration to say that a trust is capable of
holding property.


Therefore, both the requirements to be
a beneficiary under Section 9 of the Indian Trusts Act are satisfied and a
trust can be a beneficiary in another trust.


Our trust laws mostly follow the
principles of English trust laws. 
Interestingly, however, the English Law does not recognise this
principle.  The general rule under
English Law is that a trust must have a ‘cestui que trust’.  A (private) trust to be valid must be for the
benefit of individuals …. or must be in that class of trusts for the benefit of
the public which the courts recognise as charitable in the legal sense of the
term (see Lewin on Trusts, 2008 edition, page 102 para 4.38).  The term ‘cestui que trust’ is defined to
mean ‘a beneficiary under / of a trust; one entitled to the income and profits
of trust funds; a person in whose favour the trust is created’ (see P. Ramanathan
Aiyar’s Law Lexicon 4th Edition Volume 2  page 1079). 
Halsbury’s Laws of England also provides that a trust may be created in
favour of any person to whom a gift can legally be made and a trust may also be
created for charitable purposes but not in general for a non-charitable purpose
or object or a non-human beneficiary … in general equity will refuse to
recognise a trust other than a charitable trust unless it is for benefit of
ascertained or ascertainable beneficiaries. 
Therefore, it is clear that under English Law a private trust has to be
for the benefit of individuals and that another trust cannot be named as a
beneficiary under a trust.


Accordingly, it is established that under Indian Law a
trust can be named as a beneficiary under another trust.

 

SEBI’s proposal to regulate Algo/Hi frequency trades

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Background
The Securities and Exchange Board of India has put up a discussion paper on 5th August 2016 for regulating algorithmic trading, hi-frequency trading, co-location and some related matters. It has described the background of the subject, highlighted the issues and has invited comments from the public, on certain measures for regulating such matters.

This has resulted in a vigorous debate in media, amongst stock brokers/investors and the public. There have been some views that SEBI should not regulate such matters at all since, amongst others, this creates hurdles in the development of technology . The suggested methods have also been critically analysed. On other hand, there have been other views that SEBI should indeed regulate such matters on ground such that some parties obtain  certain special and unfair advantages through such trading. There are also concerns that these are being abused in a manner that the public and perhaps even SEBI does not realize such abuse, considering the sheer complexity involved.

Algo trading has increased exponentially. Indeed, the volumes are so large that just two figures should highlight it. As per SEBI, 80% of all orders and 40% of all trades are now generated through computer algorithms.

However, algo/hi-frequency trading have a dark side too. There has been a history in the United States of it being abused by certain traders to make huge profits at the cost of investors. There has been a huge debate over this in India too when SEBI is said to be investigating the alleged role of National Stock Exchange in a similar context.

Algorithmic/hi-frequency trading (“Algo trading”) is also said to have resulted in market crises (notable amongst these is the so-called Flash Crash of 2010 in the USA).

On other hand, there are obvious advantages of Algo trading including that of higher liquidity, lower spreads, etc.

These types of trades are also not understood well by investors and the public generally. Hence, the recent SEBI consultation paper can be a good opportunity to consider the background of the subject and some related matters.

Some concepts
Algo trading is conceptually simple to understand though, in practice, the manner in which such trades are carried out can be quite complex. The SEBI paper has explained some basic terms that are worth a review. This will also help one understand the various measures suggested by SEBI for regulating them.

Algorithmic Trading
The paper describes it as – “Algorithmic trading (for brevity, Algo), in simple words, is a step-by-step instruction for trading actions taken by computers (automated systems). Typically, trading algorithms enable the traders to automate the process of taking trading decisions based on the preset rules / strategies.”.

To put it simply, in Algo trading, the process of placing trades is automated using computers. Software is developed incorporating detailed instructions when to buy/sell, etc. and it monitors market data and places trades accordingly. There is nil or minimal human intervention. There are several advantages. The first, obviously, is very high speed. The time taken by a human operator to press a few keys is in computing time astronomically higher than the time the algo trading software takes to place/execute the order. Secondly, in case of repetitive situations, where the decision making follows standard parameters, it does not make sense using human intermediaries. Further, this also enables traders to carry out large trades usually at microscopic margins.

Hi-frequency trading (HFT)
Hi-frequency trading is really a type of Algorithmic trading. Algo trading as explained earlier is software-based trading with nil or minimal human intervention. HFT involves carrying out of extremely fast trades in very small fraction of seconds often taking advantage of the edge in information over others. The paper explains HFT as:-

“High Frequency Trading (HFT) is a subset of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks, colocation, etc. to connect and trade on the trading platform. The growth and success of the high frequency trading (latency sensitive version of algorithmic trading) is largely attributed to their ability to react to trading opportunities that may last only for a very small fraction of a second.”

Co-location
Co-location (“Colo”) is considered to be a contentious issue. It basically means providing stock market intermediaries/hi-frequency traders’ servers a physical location that is very near stock market servers. Often, the servers are in the same building that the servers of the exchange are located in. Physical nearness to the exchange servers that receive and process trade data is critical since nearer the physical location to such servers, the faster can a intermediary/hi-frequency trader can receive and send back data. And thus act and profit on it, particularly if one is a hi-frequency trader.

High order-to-trade ratio
This means that the ratio of orders placed over actual trades executed is very high. The rest of orders are cancelled. This again is a common feature of HFT.

Issues faced
SEBI has identified the following issues that arise out of Algo trading and related aspects:-

(i) Unfair access or denial of faster access to persons not having co-location facility. To take a simple example, a person from New Delhi is physically quite far from the stock exchange servers in Mumbai and thus suffers a time disadvantage (even if of fraction of seconds) as compared to a person in Mumbai.

(ii) There is more price volatility.

(iii) HFT imposes costs on other market users

(iv) Algo trading results in a technological arms race.

(v) In times of high volatility, SEBI would get limited opportunities to intervene etc.

Solutions suggested by SEBI
SEBI has placed for discussion certain solutions. These are explained below with their advantages/disadvantages  including experience in regard to these solutions in other countries.

(i) Minimum resting time for orders:- Under this method, each order is not allowed to be modified/cancelled till a minimum resting time elapses. This will ensure that the order will be available for some time for execution and thus fleeting orders would be reduced. It is interesting to note that the resting time proposed is 500 milliseconds (1 second = 1000 milliseconds). Thus, this would affect only those parties whose orders undergo change in fractions of seconds.

(ii) Frequent batch auctions:- Orders for a specified period of time of 100 milliseconds will be grouped together and matched, instead of the continuous order matching mechanism. Thus, the advantage of time that a person may have over others owing to co-location, better technological equipment, etc. would be neutralised to an extent.

(iii) Random speed bumps:- This involves delaying orders randomly by a few milliseconds. The result is that this neutralises to some extent the speed advantages.

(iv) Randomization of orders received during a specified period of say 1-2 seconds:- Thus, the orders received during this period would be shuffled randomly and their time sequence altered. All orders within a specified period would have an equal chance and once again the speed advantage is neutralised.

(v) Maximum order to trade ratio:- This will ensure lesser fleeting orders and also that orders are entered into the system with a greater opportunity of their being converted into trades.

(vi) Separate queues for co-location and non-co-location orders:- One order from each queue would be taken alternatingly. Once again, the objective of neutralising speed advantage may be achieved to an extent.

(vii) Providing tick-by-tick feeds to all market participants:- Tick-by-tick data feed, as SEBI describes, “provides details relating to orders (addition+ modification + cancellation) and trades on a real-time basis”. This data is provided by exchanges for a fee. SEBI has suggested that data of top 20/30/50 bids/asks, market depth, etc. be provided to all. This would create a level playing field to all participants irrespective of their technological or financial strength.

Consideration of solutions
The opposition to regulating Algo trading is on various grounds. The first, of course, is that SEBI would be putting hurdles to technological developments and this would not be a wise thing to do. Further, each of the methods suggested create their own inequities. There would also be software and other changes required to provide for such solutions. There would need to be regulatory check to ensure that these solutions are in place. Interfering with such trading would also result in higher ask-put price differences, lower liquidity, etc. Some of the solutions offered, as SEBI itself points out in the paper, have been rejected in some places where they were originally proposed or adopted.

Having said that, there are abuses that need to be considered. While SEBI has already mandated fair, transparent and equitable rules in granting nearness to exchange servers, there have been concerns about this in one way or the other. Further, the sheer complexity of algo trading may result in a group of insiders abusing it to their advantage by prior arrangement particularly if the exchange or its staff plays truant. Thus, the measures suggested may, even if indirectly, help control such abuses. Further, SEBI may also need to regulate such trading to prevent such abuses.

Abuse of hi-frequency trading
Serious abuses have been pointed out from HFT arising out nexus between HFT traders on one hand, and brokers/exchanges on the other. Through a complicated mechanism including giving preferential treatment to HFT traders, it has been found internationally (and allegedly in India too to an extent) that HFT traders hugely profited at the cost of investors. By monitoring quotes on multiple stock exchanges, they came to know in advance impending orders. Effectively, they thus bought (or sold) cheap and sold high (or low) to investors who were not only slower but were also duped by alleged unfair underlying understanding. This has been described in lucid detail in the bestselling book Flashboys by Michael Lewis.

In India too, there is a shadow of this. A whistle blower wrote to SEBI and Moneylife (a financial magazine) about alleged irregularities by National Stock Exchange. It appears that SEBI is looking into this matter.

Thus, abuse of HFT trading can be a serious issue. The HFT traders, as described in the book Flashboys, do not profit in large amounts per trade. Their skimming is small amounts. But on a cumulative basis, they would make large amount of profits. There is a cascading effect of this. Investors end up paying higher price. In turn, this raises the cost of capital for companies seeking to raise capital from the markets. Generally, this would harm the crediblity of markets too.

Conclusion
In the author’s view, SEBI is wrong in proposing measures to slow down the speed of trades/data exchange. This would be restraining developments in technology. Indeed, it is submitted, this is not the real issue at all. The real issue is alleged inequitable access to speedy information and alleged abuse of algo trading through irregular means. For this purpose, SEBI would have to understand and keep pace with the technical developments in algo trading and closely monitor such trading and provide for mechanism to monitor trades and uncover abuses. While the existing Regulations of SEBI relating to frauds and unfair trade practices are general and perhaps broad enough to cover such abuses, SEBI may consider providing for certain matters specifically, describe them in detail and provide for punishment.

Part D: Ethics, Governance & Accountability

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Judicial Transperancy

‘Open letter to Chief Justice Thakur: The latest call for judicial transparency must not be ignored’

Former Central Information Commissioner Shailesh Gandhi asks why the judiciary is loath to implement the Right to Information Act.

Dear Sir,
I am writing this letter in the spirit of seeking an improvement in the working of the judiciary, and not as an exercise in criticism. India has not been able to deliver the fruits of democracy as per the aspirations of its people. I would submit that the responsibility lies with all the four estates – legislature, executive, judiciary and the press – as well as the citizens. One of the attributes on which we have been weak, is in recognising the citizen’s right to information. Despite Parliament passing a Right To Information Act, which rates among the best five laws as far its provisions are concerned, our global rank in implementing it is a poor 66.

It is well recognised that the first clarion call for transparency was given by Justice Mathew who wrote:
“The people of this country have a right to know every public act, everything that is done in a public way by their public functionaries. They are entitled to know the particulars of every public transaction in all its bearing. Their right to know, which is derived from the concept of freedom of speech, though not absolute, is a factor which should make one wary when secrecy is claimed for transactions which can at any rate have no repercussion on public security”.
— (State of UP vs Raj Narain, 1975.)

The only restrictions on this fundamental right under Article 19(1)(a) permitted by the Constitution are those specified in Article 19(2). The exemptions in the Right To Information Act cover all of these. Yet the performance of all three estates in implementation has not been very good. There was a hope that the judiciary with its pronouncements on Right to Information would be a role model and enforcer of this right. This hope has been belied. There are various instances that can be highlighted. Here are two:
1.    The rules for Right to Information framed by many courts are not in consonance with the Right to Information Act. In fact, the Bombay High Court did not even frame the rules for a year, and some courts have exemptions not in the law. Some high courts have kept Rs 500 as the application fee, while most other competent authorities charge Rs 10.
2.    The Supreme Court Public Information Officer challenged an order of the Central Information Commission in the High Court, and despite it being dismissed by a division bench it has been stayed by the Supreme Court. The Supreme Court has not heard this matter since 2010.
3.    
As Aniket Aga wrote in The Wire:
“While the government often comes under fire for not effectively implementing the RTI Act, few have noticed that India’s highest court violates the Act routinely, and with an impunity that makes the government’s evasion of the RTI Act seem benign.”

This is also evident in the way the court refuses to share information about the process of appointments and the reasoning behind it. Charges and complaints against judges are not shared with citizens, nor are the results of investigations. Lack of transparency and accountability are justified on the grounds of maintaining the independence of the judiciary. The little man – the citizen – is considered immature by the powerful to monitor them. Ills that afflict the other pillars of democracy are likely to be present in the judiciary as well. The best safeguard and disinfectant is transparency, and the demand for accountability that follows.

Justice Chelameswar has very boldly raised the issue of lack of transparency in the judiciary, and the nation is grateful to him. Please do not try to “sort it out”. You must take this opportunity to bring accountability and better governance to the nation. There is an urgent need to ensure that all judicial vacancies are filled by a proper, transparent process so that the faith of people in our democracy is restored. It is impossible that the judges can by themselves spare adequate time to select the new judges with proper diligence. You must be aware that the increase in backlog of cases is around 1.5% each year, whereas the vacancies in the judiciary are over 20%. This is the cause for pendencies. A proper process with adequate resource must do this job.

Please recognise Justice Chelameswar’s contribution to our democracy, take this opportunity to bring transparency to the judiciary and accept that mistakes may be made in all fields. A democracy providing an equitable and fair nation will evolve, not by having infallible public servants, but by devising institutional mechanisms that will correct the foibles of men.

We have lost the balance of the checks and balances designed by our Constitution. I beseech you sir, for the sake of our nation let us restore it with your authority and wisdom.

Yours truly

Shailesh Gandhi

RTI Clinic in October 2016: 2nd, 3rd, 4th Saturday, i.e. 8th, 15th, and 22nd 11.00 to 13.00 at BCAS premises.

PART C: Information on & Around

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Maharashtra Information Commission: Quick turnaround

Maharashtra’s information commission has set a blistering pace to tackle pending backlog, with a top official clearing a staggering 6,000 cases last year Anyone else would have thrown up their hands in despair on seeing over seven lakh right to information (RTI) applications at Maharashtra’s exceedingly busy information commission, but not the panel’s chief Ratnakar Gaikwad who took up the challenge and ensured that the cases were expedited. Ratnakar Gaikwad, the 64-year-old former Maharashtra chief secretary and IAS officer of 1975 batch, inherited a backlog of 4,074 cases of three years when he was named state chief information commissioner (CIC) in 2012. Within a month of joining, the bureaucrat came up with an ingenious solution – templates that helped speed up work. Gaikwad prepared 120 templates that fit a majority of the cases. It broadly covered certain legal provisions, and similar types of cases in which the facts are the same but the information may be different

RTI appeals pendency up 96 per cent in Pune as SIC shuttles between the city and Nashik

Of the seven SIC benches in the state, the ones in Nashik, Aurangabad and Amravati have been lying vacant.

Over the last few months, pendency of second appeals with the Pune bench of the State Information Commissionerate has seen a whopping 96 per cent rise. With 8,294 second appeals pending before it as of July 2016, the Pune bench has the second highest pendency in the state, the first being Amravati SIC bench having 8,340 appeals pending before it.
The SIC benches are practically the last stage of appeals for information seekers under the Right to Information (RTI) Act, 2005. Second appeals are filed after the information seeker has exhausted all efforts to obtain information with government offices. SICs have the power to fine/summon and order for information to be provided to the applicant.
At present, Maharashtra has seven SIC benches. State’s chief information commissioner Ratnakar Gaikwad is based in Mumbai.

Maharshtra government: Public Information Officers can’t answer RTIs seeking information on them

The onus of taking decisions about such applications has now been given to the public authorities or other public information officers (PIOs) and appellate authorities (AA).

In a move to address the long standing complaints of Right to Information (RTI) users, the state government has issued a circular which has now debarred public information officers (PIOs) and appellate authorities (AA) from hearing or taking decisions on RTI applications which seek personal information about them. The responsibility of taking decisions about such applications has now been given to the public authorities or other PIOs/AAs.
PIOS and AA are designated by the RTI Act to take decisions about the application requests from information seekers. In case of information related to PIO or AA, the decision is taken by those officials themselves. RTI activists had pointed out how this was in contravention to the set norms of jurisprudence. Judges are often known to refuse hearing of cases if they feel there would be a conflict of interest in them — “Not before me” — is the commonly used term in such cases.
The recent notification issued by the General Administrative Department (GAD) of the state government, other than barring the PIOS/AAs from hearing such applications, have issued several other directives. Such applications are to be duly registered and separate records should be kept of them. As mentioned above, the new notification has mandated that such applications would be heard by the public authority (this usually is the head of the establishment) or other PIOs/AAs.

(Source : News articles from Indian Express)

PART B: RTI Act, 2005

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Real time updates for Right to Information cases via email, SMS

The Central Information Commission (CIC) has taken an e-leap and would function like an e-court with all its case files moving digitally and the applicant being alerted about case hearings through an SMS and email. So now one can get real time updates while filing a complaint or appeal under Right to Information (RTI) Act.

Starting mid of September 2016, CIC would move to a new software, which would make the hearings faster and more convenient. As soon as an RTI applicant files an appeal or a complaint, he would be given a registration number and would get an alert on email and mobile phone about his case. The case would then be electronically transferred immediately to the concerned information commissioner’s registry electronically.

All this would be done within hours. At present, the process takes a few days.

The new system would also alert the RTI applicant about the date of hearing. An automatic SMS and email would be generated. Apart from this, the applicant would get an email in advance listing out the records given by him to CIC and the government’s submissions in his case. A senior CIC official told ET, “At present, the appellant and the ministry sometimes appear in the case without knowing what the submissions are. So this would help both sides in preparing for the case.”

The Commission would be able to expedite the processing of applications with the new software. At present, it also has to deal with complaints of loss of case files and non registration of cases. The facility would not only benefit the appellants but also information commissioners.

When a commissioner would open a case file on his computer, he would get a ready background of the specific case and also details about the appellant. The official said, “We would know if he has more appeals pending. This could facilitate hearing of multiple appeals of the same person on a given day. It would directly impact pendency as more cases would be disposed in a day.” CIC has already scanned 1.5 lakh files and converted them into electronic files.

(Source : Economic Times, September 05, 2016)

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].

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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.

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

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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.

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

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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/.

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

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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. 

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

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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.

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

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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.

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

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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.

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

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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.

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

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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.

Benami Transactions

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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.

Independence

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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.

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]

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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.

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]

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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.

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]

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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.

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]

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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.

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

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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.

TRIBUTE TO MR. NARAYAN VARMA, RTI ACTIVIST

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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.

Part D REMEMBERING NARAYAN VARMA

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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.

Adoption and Inheritance

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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.

(Balanced behaviour)

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(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.

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

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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.

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

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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.

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 ]

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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.

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].

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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.

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

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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.

CHANGING PARADIGMS OF CORPORATE SOCIAL RESPONSIBILITY

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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.

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

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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.

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

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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

ETHICS, GOVERNANCE & ACCOUNTABILITY

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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.

2 States: The Story of Mergers and Stamp Duty

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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.

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]

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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.

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].

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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.

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

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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.

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

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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.

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]

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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.

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

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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.

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

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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.

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

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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.

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

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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/.

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

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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.

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

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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).

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

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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.”

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

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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.

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

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

This circular 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.

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

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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.

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

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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.”

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

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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.

Euthanasia– The Right to Die

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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”.

(Gearing up!)

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(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.

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]

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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.

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.

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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.

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)]

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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.

Expectations from an Advisor

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“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.

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: 2nd, 3rd,
4th Saturday, i.e. 8th, 15th and 22nd
11.00 to 13.00 at BCAS premises.

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.  

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 9th September 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 20th 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., 9th 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

(c)  all daughters, married or unmarried, but
living as on this date. 

 

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 22nd 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 9th September 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 9th September 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 9th September
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 9th
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 20th 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., 9th 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 2nd 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.  

 

 

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

Date: 23rd February, 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 15th
September, 2003 of Study Group of the ICAI)

 

Study Group Report dated 15th September
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 1st July, 2013, no satisfactory
investigation has been done.

 

ICAI Expert Group Report dated 29th July
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 23rd 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
)


Liberalised Remittance Scheme

1.  Background

     Liberalised
Remittance Scheme [LRS / the Scheme] was introduced vide AP (DIR Series)
Circular No. 64 dated 4th February, 2004 read with Notification No.
207(E) dated 23rd 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 12th
April, 2017) [LRS Master Direction] and FAQs on LRS dated 11th August,
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 26th 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.

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 7th 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 9th 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.

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.

 

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)

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;

(c) to record
proceedings and prepare the minutes of the 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).

 


 

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 21st 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

 (c) Customs Duty, 1962 – Duty evasion

 (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., 21st April 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…!!

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 17th 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

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 9th 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 25th
March, 1989 to become coparceners. In other words, if a male Hindu has a
daughter born on any date prior to 25th 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 25th
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.

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 22nd 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 25th 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 20th June 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. _

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 1st
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;

 

(c)   criminal proceedings
pending, if any;

 

(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 23rd November,
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 1st 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. _

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.

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

2

Sections
Deleted

40

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

 

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

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 3rd January
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. _

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?

1

Arrested
for money laundering alone without attracting a scheduled offence

No
since Part A to Schedule does not apply

Yes

2

Arrested
for money laundering along with offence under Part B of the Schedule

No
since Part A to Schedule does not apply

Yes

3

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

4

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

No

 

 

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! _

 

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. 1st 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
10th day of the succeeding month, invoice wise details of inward
supplies to be filed (in GSTR-2) between 11th day and 15th
day of the succeeding month, and the final calculation of liability to be filed
(in GSTR-3) between 16th day and 20th 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?. _

 

 

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. _

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 15th December
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 15th 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 15th 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!

Is it Fair to thrust the avoidable burden of compliance under the GST?

Background:
On 1st 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. _

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

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;

(c)   maintenance of children and aged parents by their parents and children respectively; and

(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

(c)   widow who has not remarried

(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.