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Category: Corporate And Other Laws

When Negligence/Lapses Become Knowing Frauds? Lesson From The Price Waterhouse Order

SEBI’s Order – whether and when mere
negligence amounts to connivance to fraud?

SEBI’s order in Price Waterhouse’s case (of
10th January 2018) is a worrisome precedent not just for auditors,
but also for almost every person associated with securities markets including
independent directors and CFOs from whom certain standards of care are expected
in the discharge of their duties. The issues are :

 

1.  When can a person be held
to have committed fraud?

 

2.  Does not holding a person
guilty of fraud require a much higher and stricter benchmark of proving `mens
rea’ (i.e. guilty mind/wilful act) beyond reasonable doubt? SEBI has
held that in case of auditors, under certain circumstances proving `mens rea’
is not required.

 

Let us put this in a different way. What
would be the consequence to a person who has exercised less than `due care’
whilst performing his duties? The issue is : Would he be liable of negligence
or fraud? This is because the consequences for both would be different and they
can be more severe for fraud.

 

SEBI has effectively held that a series of
such negligent acts would amount to fraud under certain circumstances. This is
by applying a lower benchmark and test of ‘preponderance of probabilities’,
instead of proving mens rea beyond reasonable doubt.

 

The effect of this is far reaching. Take
another category, that is directors/independent directors. The Companies Act,
2013 and the SEBI LODR Regulations both provide for comprehensive duties of
directors. Will a director who performs his duties short of `due care’ be held
to have participated in `fraud’.

 

SEBI’s order is of course under challenge
and it could be some time before a final resolution as to whether the findings
in the order are upheld or reversed. However, considering that SEBI has relied
on relevant rulings of the Supreme Court and the Bombay High Court, it will be
necessary to examine the findings in the order and the reasoning for the
punishment. Needless to emphasise, for the purpose of this article, the
findings in the SEBI’s order are presumed to be true and the focus is on the
principles enunciated.

 

Brief background

While the Satyam case is widely known, SEBI
summarises some of its findings in the order. It is stated that a more than Rs.
5000 crore shown as cash/bank balances in balance sheet of Satyam was
non-existent and hence fraudulently stated. Similarly, the revenues and profits
too were overstated for several years, which resulted in over statement of
cash/bank balances. The question before SEBI was : whether the auditors were
aware of such falsification and connived with the management? or whether their
non-detection of such falsification was on account of being merely negligent?

 

Negligence vs. connivance

Why does it matter whether the role of the
auditors of Satyam (“the Auditors”) was of being merely negligent or whether
they had connived in such falsification? When SEBI initiated action against the
auditors, seeking to, inter alia, debar them from acting as auditors for
a specified period, the jurisdiction of SEBI to act against auditors was
challenged before the Bombay High Court. It was contended that only the
Institute of Chartered Accountants of India could act against auditors who are
chartered accountants, for not carrying out their duties in accordance with
professional standards, and not SEBI. However, the Bombay High Court rejected
this argument, but with a condition. It effectively held that if it was a mere
case of not adhering to prescribed professional standards while carrying out
the audit, SEBI may not have any jurisdiction. However, if it could be shown
that the auditors had knowingly participated or connived in the fraud, then
SEBI could have jurisdiction.

 

The Bombay High Court observed in Price
Waterhouse & Co. vs. SEBI ([2010] 103 SCL 96 (Bom.)), “If it is
unearthed during inquiry before SEBI that a particular Chartered Accountant in
connivance and in collusion with the Officers/Directors of the Company has
concocted false accounts, in our view, there is no reason as to why to protect
the interests of investors and regulate the securities market, such a person
cannot be prevented from dealing with the auditing of such a public listed Company.”

 

It further said, “In a given case, if
ultimately it is found that there was only some omission without any mens rea
or connivance with anyone in any manner, naturally on the basis of such
evidence the SEBI cannot give any further directions.” Thus, it is not
enough to show that the auditors had not followed the prescribed professional
standards but it is also necessary to establish that they had done this in
connivance with and in collusion with the management.

 

Supreme Court on “connivance” vs.
“negligence”

In SEBI vs. Kishore R. Ajmera ([2016] 66
taxmann.com 288 (SC)), the Supreme Court had examined this issue in context
of role of stock brokers vis-à-vis acts of their clients. Stock brokers
too have to follow certain norms and code of conduct. Stock brokers are of
course, unlike auditors, registered and regulated directly by SEBI. The
observations and conclusions of the Court on when negligence becomes connivance
are applicable in the present case too. The Court observed as follows (emphasis
supplied):

 “Direct proof of
such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of
preponderance of probabilities so far as adjudication of civil liability
arising out of violation of the Act or the provisions of the Regulations framed
thereunder is concerned. Prosecution under Section 24 of the Act for violation
of the provisions of any of the Regulations, of course, has to be on the basis
of proof beyond reasonable doubt. ……Upto an
extent such conduct on the part of the brokers/sub-brokers can be attributed to
negligence occasioned by lack of due care and caution. Beyond the same,
persistent trading would show a deliberate intention to play the market.”

 The Court thus laid down certain important
criteria. Firstly, it made a distinction between proceedings for adjudication
of civil liability and for prosecution. The present case, it may be
recollected, was not of prosecution. The Court said that the criteria here is
`preponderance of possibilities’. It also generally explained that to some extent,
a default can be attributed to negligence. But persistence of negligence will
show a deliberate intention to do so. This is the criteria SEBI applied in
SEBI’s Order.

           

How did SEBI hold the auditors to have acted
in connivance with management?

SEBI found that the Auditors had not carried
out the audit in accordance with the prescribed standards. The issue is : Does
this amount to mere negligence or does this amount to acting this in connivance
with the management? SEBI examined the audit process followed from time to time
and made the following pertinent observations and conclusions:

 

1.  “There can be only two
reasons for such a casual approach to statutory audit – either complacency
or complicity.”

 

2.  “I find that while the
Noticees have justified their acts by selectively quoting from various AAS, the
marked departures from the spelt-out Auditing standards and Guidance Notes are
too stark to ascribe the colossal lapses on the part of auditors to mere
negligence. It is inconceivable that the attitude of professional skepticism
was missing in the entire exercise spanning over 8 long years.”

 

3.  ?”All these factors turn the needle of suspicion away from negligence
to one of acquiescence and complicity on the part of the auditors.”

 

4.  “The preceding paragraphs
have unambiguously shown that there has been a total abdication by the auditors
of their duty to follow the minimum standards of diligence and care expected
from a statutory auditor, which compels me to draw an inference of malafide and
involvement on their part.

 

5.  “The auditors were well
aware of the consequences of their omissions which would make such accumulated
and aggregated acts of gross negligence scale up to an act of commission of
fraud for the purposes of the SEBI Act and the SEBI (PFUTP) Regulations.”

 Making the above observations, and recording
a finding of repetitive non-observance of certain professional auditing
standards, SEBI held that the acts/omissions were not merely negligence but
amounted to connivance in the commission of fraud. It thus issued directions of
debarment, disgorgement of fees, etc. against the Auditors.

 

Conclusion and relevance for other persons
associated with the securities markets

Though this is not the first case to be
dealt with in this manner, it is obvious, considering the detailed analysis and
the stakes involved, that those involved with listed companies are being
closely examined. Further, the principles now well settled will surely be
followed in future cases.

 

There are many persons – some registered
with SEBI and some not – who may need to take note of this. Any person who is
expected to observe some standards of behaviour whilst performing his duties in
relation to securities markets will have to take, if one may say, a little more
than `due care’.

 

Directors of companies, particularly
independent directors, are one such group of persons. The Companies Act, 2013
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
prescribe the role of the Board/directors/independent directors in great detail.
A director may not have actually participated in a fraud, but if he does not
perform his duty with diligence expected of a person of his
background/expertise and if this happens repeatedly, he may be subject to such
action by SEBI.

 

Registered intermediaries of various types
such as stock brokers, portfolio managers, investment advisors, etc. all
too would have cause for concern.

 

Compliance Officers and CFOs are yet another
category who have a prescribed role under various SEBI Regulations. Defaults by
them may make them subject to action by SEBI.

 

Needless to emphasise, much will also depend
on the facts of the case.

 

It needs to be reiterated for emphasis
that, for initiating prosecution, a higher standard of proving mens rea beyond
reasonable doubt is still required. However, the consequences of SEBI orders of
debarment/disgorgement by itself can be harsh enough in terms of loss of
livelihood, monetary loss and loss of reputation. _

Companies Act: Operation Delyening

Introduction

A bariatric surgeon is one who cuts away
layers of fat from an obese person in order to have a slimmer structure. The
Ministry of Corporate Affairs (“MCA”) has also donned the role of such a
surgeon by trimming away vertical layers of subsidiaries (or step-down
subsidiaries) in order to present a leaner and clearer corporate structure. Its
scalpel for this highly impactful operation was the Companies (Amendment
Act), 2017 to the Companies Act, 2013 (“the Act”) coupled with the
Rules issued under the Act. The Amendment Act has introduced several changes to
the Act but the one which had the most disruptive effect is in fact not a part
of the Amendment Act. Initially, the Amendment Bill had decided against
restricting vertical layers of subsidiaries but subsequently on account of the
action against shell firms and other similar events, the MCA decided to retain
the restriction in the Amendment Act. Thus, the Amendment Act does not amend
the existing position in the Companies Act, 2013 of restricting the number of
layers of vertical subsidiaries.

 

Amendment

The original definition of  section 2(87) of the Act which defined the
term “subsidiary” provided that a subsidiary in relation to a
company, which was the holding company, meant one in which the holding company
controlled the composition of the board of directors or exercised or controlled
more than half the total share capital either on its own or together with its
subsidiaries. The definition as it stood had generated several problems since
even a passive investor, e.g., a private equity investor, who owned more than
50% of the total share capital but not 50% of the total voting power was
treated as the holding company of the investee company. This created unique
problems for several investors and investees alike.

 

This definition was amended by the Amendment
Act to replace total share capital with total voting power.
Hence, the Amendment restores the old position, i.e., in order to be treated as
a subsidiary, the holding company must control more than 50% of the total
voting power and not merely 50% of the total capital. Accordingly, all shares
not carrying voting rights, e.g., non-voting shares, preference shares, etc.,
would be ignored while determining whether there is a holding-subsidiary
relationship between 2 companies.

 

The proviso to this definition provides that
such classes of holding companies as may be prescribed by the MCA shall not
have more than the prescribed number of layers of subsidiaries. The Companies
(Amendment) Bill, 2016 sought to delete this proviso and permit holding
companies to have as many layers as they desired. However, when the Bill was
passed by the Lok Sabha this deletion was dropped, i.e., the original position
of restriction in number of layers of subsidiaries, was retained. 

 

Rules

Pursuant to the proviso being retained, the
MCA notified the Companies (Restriction on Number of Layers) Rules,
2017 (“the Rules”) on 20th September 2017. The Rules
provide that on and from 20th September 2017, a company cannot have
more than 2 layers of subsidiaries. A layer in relation to a holding company
has been defined to mean one or more subsidiaries. A layer thus, is a vertical
layer of a subsidiary. However, in computing the limit of 2 layers, 1 layer
comprising of one or more wholly owned subsidiaries is excluded. Thus, the
total number of layers which a company can have is 1 + 2 = 3, i.e., 1 layer of
wholly owned subsidiaries + 2 layers of other subsidiaries which may or may not
be wholly owned. For instance, HCo has 5 wholly owned subsidiaries – A to E.
All of these would constitute 1 layer which would be exempted. Each of these
wholly owned subsidiaries can now incorporate 2 vertical layers, e.g., A can
incorporate A1 and A1, in turn, can have A2. A1 and A2 would constitute 2
vertical layers in relation to HCo. However, A2 cannot incorporate A3 since
that would mean that HCo would violate the prescribed limits. It may be noted
that the restriction is on vertical layers and not horizontal subsidiaries.
Thus, in the above example, instead of 5 subsidiaries, A to E, HCo can have
many more direct subsidiaries (whether 100% or less), say, A to Z. However, the
number of step-down subsidiaries would be limited as per the Rules.

 

Section 2(87) provides that company includes
a body corporate and hence, the definition of subsidiary would even encompass a
foreign body corporate which is a subsidiary of the Indian holding company.
Also, a subsidiary in the form of a Limited Liability Partnership, being a body
corporate, would be covered.

 

Gateways

The Rules do not apply to the following
types of companies:

(a)    a Bank

(b)    a Systemically Important
Non-Banking Finance Company, i.e., NBFCs whose asset size is of Rs. 500 cr. or
more as per its last audited balance sheet.

(c)    an Insurance Company

(d)    a Government Company

 

The Rules provide grandfathering to existing
layers of subsidiaries even if they are in excess of the limits prescribed by
the Rules. For availing of this protection, holding companies were required to
file a prescribed return with the Registrar of Companies latest by 17th February
2018. The protection further provided that after the commencement of the Rules,
such a holding company cannot have any additional layers over and above those
which have been grandfathered. Further, if the existing layers are reduced
after the commencement of the Rules, then it cannot have new layers over and
above the limit prescribed by the Rules. To give an illustration, HCo had 5
layers of subsidiaries prior to the enactment of the Rules. These layers would
be protected by the grandfathering provisions and can continue. However, HCo
cannot incorporate any fresh 6th layer of subsidiary.If HCo were to
sell the shares of one of the subsidiaries and be left with 4 layers then it
cannot now incorporate any fresh layer of subsidiaries since that would again
violate the provisions of the Rules, but it can continue with the 4 layers
which have been grandfathered.

 

Another exemption provided by the Rules is
that the limit of 2 layers would not affect a company from acquiring a company
incorporated abroad which already has subsidiaries beyond 2 layers and these
are allowed under the laws of such foreign country. However,  this exemption is not provided if such a
foreign company desires to subsequently set up multiple layers of foreign
subsidiaries. Thus, it would not be possible to have multiple foreign layers
even if the foreign laws were to permit them.

 

Impact Analysis

The Rules would severely impact the creation
of Special Purpose Vehicles (“SPVs”) which are very prevalent especially
in sectors such as, infrastructure, real estate, roads, etc. In these
sectors, it is a common practice to have multiple layers for different
projects. For instance, a real estate company may have 2 subsidiaries, one for
commercial projects and one for residential. Within each of them, there may be
holding companies for different regions, e.g., one for Mumbai, one for Delhi,
one for Chennai, etc. Under each regional holding company, there may be
an SPV for a specific project. The benefit of a layered structure is that it
facilitates value unlocking at multiple levels. A strategic investor/project
partner can invest at the SPV level. A financial investor who is interested
only in residential projects in Mumbai can invest at the Mumbai layer level
since he would then get access to all the projects in Mumbai. Similarly,
investors could invest at the residential level or even at the corporate level.Such
structuring would be constrained by the limit on the layers. Also, in a case
where the 1st layer is not of wholly owned subsidiaries, the limit
would be of only 2 layers and not 1+2 =3.

 

Another area which would be affected is that
of outbound investment. It is quite common for Indian companies to have
multiple layers when investing abroad. For instance, an Indian company may have
an Intermediate Holding Company (IHC) in a tax haven, followed by a Regional
Holding Company (RHC) say, one in a European country for housing all European
ventures and another in an African country for all African ventures. Under the
RHC would be the countrywise SPVs. These layers would now also have to toe the line
laid down under the Rules. However, on a related note, the Reserve Bank of
India also does not easily approve of multi-layered structures for outbound
investments involving the use of multiple layers of foreign SPVs. Thus, the
Companies Act restrictions and the RBI’s views under the Foreign Exchange
Management Act are now similar. 

 

Same Difference

A similar restriction already existed in
section186 (similar to section 372/372A of the Companies Act, 1956) of the Act.
According to this section, a company cannot make an investment through more
than two layers of investment companies. Thus, any company, desiring to make an
investment, can do so either directly or through an investment company or
through one investment company followed by a 2nd layer of investment
company. However, it cannot have a 3rd layer of investment company
under the 2nd layer of the investment company.

 

It may be noted that the prohibition is on
having more than 2 layers of investment companies and hence, we need to
ascertain what constitutes an investment company? The section
defines an ‘investment company’ to mean a company whose principal
business is acquisition of shares, debentures or securities.

 

Secondly, it must be a company whose principal
business is acquisition of securities. What is principal business has now
been defined by the Amendment Act. According to these tests, a principal
business is defined if it satisfies the following conditions as per its audited
accounts:

 

(i)  Its assets in the form of
investment in shares, debentures or other securities constitute not less than
50% of its total assets; OR

 

(ii) Its income from investment
business constitutes not less than 50% of its gross income.

 

The Act expressly provides that the
restriction on two layers of investment companies even applies to an NBFC whose
principal business is acquisition of securities.

 

The investor company could be an investment
or an operating company, but it cannot route its investment via more than 2
layers of investment companies. If the investment is routed through an
operating company or one whose principal business is not acquisition of
securities, then the restriction u/s. 186 on 2 layers would not apply.

 

The prohibition on making investments only
through a maximum of two layers of investment companies will not affect the
following two cases:

 

(i) a company from acquiring any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country; or

 

(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

 

Certain
Government companies have also been exempted from this provision.

 

The Rules u/s. 2(87) provide that they are
not in derogation to the exemptions contained u/s. 186(1). Thus, the Rules
would apply equally to an investment company as long as they are not in
derogation of the proviso to section 186(1).

 

One may compare the restrictions contained
in section 186 vs. section 2(87) as follows:

 

Details

Section 186

Section 2(87)

Restriction on

More than 2 layers of investment companies

More than 2 layers of subsidiaries 

Applies to

All companies, including NBFCs but excluding certain
Government companies.

All companies other than banks, NBFCs, insurance companies,
Government companies.

Type of layers prohibited

Only investment companies – not applicable to operating
companies

All types of subsidiaries, whether operating or investment.

Companies or body corporates?

Only companies

All types of subsidiaries, whether companies or body
corporates.

Effective from

1st April 2014

20th September 2017, the date from which the Rules were  notified.

 

 

Conclusion

India Inc. is going to find it tough to
grapple with these provisions more so when it is used to having multiple
layers. The objective seems to be to cut through the opacity haze of multiple
layers and provide more transparency to the regulators to find out who is the
real investor. Clearly, thin is in!! _

Companies (Amendment) Act, 2017 – Important Amendments Which Have Relevance From Audit

In the first part, I have covered
definitions along with its impact and also reasons/ background for such
amendments. In this article, I propose to cover amendments which are of
importance and relevance from Audit of small and medium-sized companies and issues
one may face while carrying their audit. I have thus avoided matters applicable
to listed companies

 

I.   Public deposits:

 

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently,
companies are required to deposit an amount of not less than 15% of the
deposits maturing during the financial year and financial year next following
which is to be kept in a Scheduled Bank and called as Deposit Repayment
Reserve Account. ( Section 73)

Companies
Amendment Act 2017 (CAA 2017) now provides that an amount of not less than
20% of the deposits maturing during the following financial year is to be
kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.

Companies
Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are
self-explanatory which read as under :

 

The
Committee felt that though the provision was a safeguard for depositors, it
would increase the cost of borrowing for the company as well as lock-up a
high percentage of the borrowed sums. Accordingly, the requirement for the
amount to be deposited and kept in a scheduled bank in a financial year
should be changed to not less than twenty percent of the amount of deposits
maturing during that financial year, which would mitigate the difficulties of
companies, while continuing with reasonable safeguards for the depositors who
have to receive money on maturity of their deposits.

 

Currently
Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that
amount of deposit pursuant to these rules shall not fall below fifteen per
cent. of the amount of deposits maturing, until the end of the current
financial year and the next financial year. 

 

This
provision in the case of larger deposit accepting companies required huge amount
to be blocked in deposits since it required two financial years to be
considered for maintenance of liquid assets . Thus amendment made now will
help in reducing the financial burden of deposit accepting companies
especially in the falling interest rate scenario. 

Presently,
companies accepting deposits are required to get the deposits insured.

This
requirement is done away with.

CLC
Observations in Para 5.2 of the report are self-explanatory which read as
under :

 

It
was also noted by the Committee that as on date none of the insurance
companies is offering such insurance products.

 

Considering
the above situation, the provisions of Section 73(2) (d) along with relevant
Rules are  omitted.

Presently,
companies accepting deposits are required to certify that the company has not
committed any default in the repayment of deposits accepted either before or
after the commencement of this Act or payment of interest on such deposits.(
Section 73)

CAA
2017 provides that companies accepting deposits are required to certify that
the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of
interest on such deposits and where a default had occurred, the company
has made good the default and a period of five years has elapsed since
the date of making good the default. 

Thus
post-amendment, Company can accept deposits after 5 years from the date of
making good such default (In repayment of deposit and/or interest). 

 

CLC
Observations in Para 5.3 of the report are self-explanatory which read as
under :

 

The
Committee noted that imposing a lifelong ban for a default anytime in the
past would be harsh. Therefore, it was recommended that the prohibition on
accepting further deposits should apply indefinitely only to a company that
had not rectified/made good earlier defaults.

 

However,
in case a company had made good an earlier default in the repayment of
deposits and the payment of interest due thereon, then it should be allowed
to accept further deposits after a period of five years from the date it
repaid the earlier defaulting amounts with full disclosures.

Currently,
deposits accepted and interest thereon, which remained unpaid at the commencement
of Companies Act, 2013 was required to be paid within one year or before the
expiry of the stipulated period, whichever was earlier.  ( Section 74)

CAA
2017 now provides that such amounts shall be repaid within three years or
before the expiry of the stipulated period, whichever was earlier.

Under
Companies Act 2013, deposits are allowed to be accepted by only eligible
companies and this has put lot of restrictions on the companies which had
accepted deposits under Companies Act 1956 . 

 

To
overcome the difficulties faced by such companies, repayment is now permitted
up to 3 years or maturity , whichever is earlier.     

Currently,
Section 76A(1)(a) provides that in respect of contraventions of Section 73 or
76, the company shall, in addition to the payment of the amount of deposit or
part thereof and the interest due, be punishable with fine which shall not be
less than one crore rupees but which may extend to ten crore rupees;

CAA
2017 provides that a company will be punishable with a fine of one crore
rupees or twice the amount of deposit accepted by the company, whichever is
lower.

Normally,
rules of Penalty require that Penalty be imposed with reference to the
quantum of offence committed. Thus flat penalties provided under the current
provisions were disproportionate to the offence committed and hence this
amendment seeks to correlate penalty with the underlying deposit.

Currently,
it is provided that an officer of the company who is in default shall be
punishable with imprisonment or fine.

Now
it is provided that an officer of the company who is in default shall be
punishable with imprisonment and fine.

In
the process, the offence has been made non-compoundable.

 

II. Registration and
Satisfaction of Charges:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Currently,
the charge holder can register the charge only in case the company fails to
do so within the period specified in section 77, which is 300 days.

CAA
2017 now provides that the person in whose favor the charge has been created
can file the charge on the expiry of 30 days from the creation of charge
where a company (borrower) fails to file such charge

This
amendment is welcome from the point of view of the lender.

 

Primary
obligation for registration was with the borrower u/s 77 which allowed
creation of charge up to 300 days on payment of additional fees. After such
period, application for condonation was required to be done by the company or
any other person interested in such charge. It was felt that the wordings of
the present section required a waiting period up to 300 days for creation of
charge by the lender. But in the process the charge remained to be registered
and as such loan under the charge remained unsecured. This anomaly is sought
to be removed by this amendment.   

A
company was required to report satisfaction of charge within a period of 30
days from the date of such satisfaction failing which an application for
condonation of delay had to be made before the Regional Director.( Section
82)

The
company can now report satisfaction of charge within a period of 300 days.

This
amendment now brings reporting period of satisfaction in line with creation
of charge and as such a welcome measure. 

 

III. Annual Returns to be filed by the Companies:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Section
92(1) Every company shall prepare a return (hereinafter referred to as the
annual return) in the prescribed form containing the particulars as they
stood on the close of the financial year regarding—

(c)
it’s indebtedness;

 

(j)details,
as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by them;

 

Provided
that in relation to One Person Company and small company, the annual return
shall be signed by the company secretary, or where there is no company
secretary, by the director of the company.

Section
92(1):

 

(a)
clause (c) shall be omitted;

 

(b)
in clause (j), the words “indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by
them” shall be omitted;

 

(c)
after the proviso, the following proviso shall be inserted, namely:—

 

“Provided
further that the Central Government may prescribe abridged form of annual
return for One Person Company, small Company and such other class or classes
of companies as may be prescribed”;

 

The
details related to disclosing indebtedness and details with respect to
name, address, country of incorporation etc. of FII in the annual return of
the company are also omitted.

 

It
is further provided that the Central Government may prescribe the abridged
form of annual return for One Person Company (‘OPC’), Small Company and such
other class or classes of companies as may be prescribed.

 

This
amendment thus seeks to achieve an objective of avoiding duplication of
information.

Further
proviso when implemented will achieve simplicity in the case of companies
proposed to be covered in the proviso.

 

 

 

 

Section
92(3)

An
extract of the annual return in such form as may be prescribed shall form
part of the Board‘s report.

 

Section
92(3)

 Every company shall place a copy of the
annual return on the website of the company if any, and the web-link of such
annual return shall be disclosed in the Board’s report.”

CAA
2017 has omitted the requirement of MGT-9 i.e. extract of annual return to
form part of the Board’s Report. The copy of annual return shall now be
uploaded on the website of the company if any, and its link shall be
disclosed in the Board’s report.

 

This
amendment was largely guided by the fact that report of the Board of Directors
was becoming very much lengthier and expensive especially for the listed
companies.

 

 

 

 

 

Time
limit of 270 days within which annual return could be filed on payment of the
additional fee has been done away with. It is further provided that a company
can file the annual return with ROC at any time on payment of a prescribed
additional fee.

All
the measures proposed hereinabove are expected to simplify Annual Return
filing process and avoid duplication of information.

;

 

 

 

IV. Dividend:

 

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently
dividend can be paid u/s 123(1) from :

Current
Year Profits or

Accumulated
Profits or

from
a and b above or

From
money provided by Central or State Governments pursuant to a guarantee given

 

A
proviso is added as under :

“Provided
that in computing profits any amount representing unrealized gains, notional
gains or revaluation of assets and any changes in carrying amount of an asset
or of a liability on measurement of the asset or the liability at fair value
shall be excluded;

 

Reserves
are clarified as “free reserves”   so
as to bring clarity as to the source of the dividend.

 

Consequent
upon Ind AS Applicability to Phase I and Phase II companies, this amendment
is clarificatory and a welcome measure.

 

This
has become essential since one of the sources for payment of dividend is free
reserves and definition of free reserves under Section 2 (43) excludes
unrealised or notional gains and l credits to such reserves on account of
measurement of assets and liabilities at fair value. Thus primary source of
reserves being profits are also sought to be brought in line with definition
of free reserves for the purpose of determination of distributable
profits. 

Section
123 (3)The Board of Directors of a company may declare interim dividend
during any financial year out of the surplus in the profit and loss account
and out of profits of the financial year in which such interim dividend is
sought to be declared:

 

Provided
that in case the company has incurred a loss during the current financial
year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared
at a rate higher than the

Section
123 (3) The Board of Directors of a company may declare interim dividend
during any financial year or at any time during the period from closure of
financial year till holding of the annual general meeting out of the surplus
in the profit and loss account or out of profits of the financial year for
which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of
declaration of the interim dividend:

 

 

Dividends
are usually payable for a financial year after the final accounts are ready
and the amount of distributable profits is available. The dividend for a
financial year of the company (which is called ‘final dividend’) is payable
only if it is declared by the company at its annual general meeting on the
recommendation of the Board of directors. Sometimes dividends are also paid
by the Board of directors between two annual general meetings without
declaring them at an annual general meeting

average
dividends declared by the company during the immediately preceding three
financial years.

 

Provided
that in case the company has incurred a loss during the current financial
year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared
at a rate higher than the average dividends declared by the company during
immediately preceding three financial years.”

 (which is called ‘interim dividend’).

 

[Source:
Monograph on Dividend by ICSI ]

Thus
it is now clarified that Interim dividend will not only mean dividend paid during
the financial year but also dividend declared from the closure of financial
year till holding of an AGM.

 

 

V. Financial Statements:

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
129(3)-

‘Where
a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub-section (2), prepare a consolidated financial
statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the annual general
meeting of the company along with the laying of its financial statement under
sub-section (2):

 

Revised
Section 129(3)-

“Where
a company has one or more subsidiaries or associate companies, it shall, in
addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries
and associate companies in the same form and manner as that of its own and in
accordance with applicable accounting standards, which shall also be laid
before the annual general meeting of the company along with the laying of its
financial statement under sub-section (2):

 

As
regards consolidation of accounts, main concern related to the inclusion of
associate companies in absence of the specific provisions. This concern now
is addressed and consolidation will have to be done even if there is no
subsidiary. 

 

The
consolidated financial statement of the company, its subsidiaries and
associates should be in accordance with the applicable accounting standards
which is now specifically provided in the section itself.

 

 

 

 

Explanation.—For the purposes of this
subsection, the word ?subsidiary?
shall include associate company and joint venture.

This
explanation stands deleted after the amendment

This
amendment is consequential to the changes mentioned hereinabove.

 

VI. Reopening of Accounts:

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Existing
Sec 130 of the Act provides that reopening can be done on the basis of an
order from court or tribunal. The said section provides that court or
tribunal will give a notice to various regulatory authorities and will take
into consideration representations made by such regulatory authorities. However,
the said section did not provide for an opportunity of representing to any
other concerned party.

CAA,
2017 has now amended the said section to give an opportunity to other persons
concerned of making a representation before an order is passed by the
tribunal or court.

Presently
in the case of reopening, notice was required to be given to various
regulatory authorities and court or tribunal is required to take into
consideration representations of such regulatory authorities . Surprisingly
it did not provide for representation to persons concerned such as auditors
even though court/ tribunal had an inherent power to give notice to any other
interested parties.      This amendment
will remove this anomaly since it is now provided in the section itself. 

 

 

 

Existing
section did not provide the time limit up to which reopening could be done

CAA,
2017 now provides that reopening cannot be done for a period earlier than 8
financial years immediately preceding the current financial year unless
Central Government has given a direction under Section 128(5) for maintaining
the accounts for a longer period.

Section
128(5) provides for the period for which books are required to be maintained
which cannot go beyond 8 financial years immediately preceding current
financial year except with the permission of the Central Government.

 

Thus
the amendment seeks to align the period of maintenance of books of accounts
with the reopening.

 

 

VII. Financial Statements, Board’s report etc.:

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board at least by the chairperson of the company where he is
authorised by the Board or by two directors out of which one shall be
managing director and the Chief Executive Officer, if he is a director in the
company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of a One Person Company,
only by one director, for submission to the auditor for his report thereon.(
Section 134) 

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director, if
any, and the Chief Executive Officer, the Chief Financial Officer and the
company secretary of the company, wherever they are appointed, or in the case
of One Person Company, only by one director, for submission to the auditor
for his report thereon .

The
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of the fact whether he is a director or not because
Chief Executive Officer is a Key Managerial Personnel, and is responsible for
the overall management of the company. Further, since the appointment of a
managing director is not mandatory for all companies, it is proposed to
insert the words “if any”, after the words “managing director”.

 

 

 

 

 

Presently
extract of Annual Return is required to be annexed to the Board’s Report. (
Section 134)

Now
annual return is to be placed on the website and web address is required to
be mentioned in the Board’s report.

The
Requirement of having an extract of Annual return (Form MGT-9) has been done
away with by placing the copy of annual return on the website of the company
(if any) and the web address/ link is to be provided. As mentioned in the
Annual Return part above, this seeks to avoid duplication and voluminous
information which was associated with report of the Board of Directors. 

 

 

 

Right
of member to copies of audited financial statement [ Section 136(1) ]

A
copy of the financial statements, including consolidated financial
statements, if any, auditor‘s report and every other document required by law
to be annexed or attached to the financial statements, which are to be laid
before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued
by the company, and to all persons other than such member or trustee, being
the person so entitled, not less than 21 days before the date of the meeting:

 

A
provision is now made for a situation where the required copies are sent less
than 21 days before the date of the meeting. Accordingly, If the copies of
the documents are sent less than 21 days before the date of the meeting, they
shall, notwithstanding that fact, be deemed to have been duly sent if it is
so agreed by members—

(a)
holding, if the company has a share capital, majority in number entitled to
vote and who represent not less than 95% of such part of the paid-up share
capital of the company as gives a right to vote at the meeting; or

(b)
having, if the company has no share capital, not less than 95% of the total
voting power exercisable at the meeting:

 

Amendment
to sub-section (1) of section 136 provides that copies of audited financial
statements and other documents may be sent at shorter notice if ninety-five
percent of members entitled to vote at the meeting agree for the same.

Section
101 of the Act provides that the consent of members holding at least
ninety-five percent of the voting power be obtained to call a general meeting
at a notice shorter than twenty-one days.

For
circulation of annual accounts to members, the MCA had clarified by way of a
circular dated 21st July 2015 that the shorter notice period would
also apply to the circulation of annual accounts. It is now provided in the
Amendment Bill itself.

 

 

 

 

Appointment
and Ratification:

It
was provided that every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.

It
was further required that the company shall place the matter relating to such
appointment for ratification by members at

every
annual general meeting.( Section 139)

 

The
requirement to place the matter

relating
to such appointment for

ratification
by members at every annual general meeting has been removed.

 

In
view of this amendment, controversy as to whether the form is required to be
filed with ROC after every ratification stands resolved.

 

Besides,
inconsistency between removal (which required Special Resolution and Central
Government Approval) and non ratification (which required only Board
Approval) stands resolved.

 

 

 

 

Resignation
of auditor:

The
penalty for non-filing of the return of resignation with the Registrar made
the auditor punishable with fine, not less than fifty thousand rupees but
which may extend to five lakh rupees.( Section 140)

 

The
penalty for non-filing of the return of resignation with the Registrar shall
now make the auditor punishable with fine not be less than fifty thousand
rupees or the remuneration of the auditor,

whichever
is less.

 

This
form filing requirement was to be complied by the Auditor who was resigning.
(Form ADT 3).

 

 

 

Eligibility
:

Presently,
it was provided in Section 141(3)(i) as under: The following persons shall
not be eligible for appointment as an auditor of a company, namely:-

(i)
any person whose subsidiary or associate company or any other form of entity,
is engaged as on the date of appointment in consulting and specialised
services as provided in section 144.

 

In
section 141 of the principal Act, in sub-section (3), for clause (i), the
following clause shall be substituted namely:-

(i)
a person who, directly or indirectly, renders any service referred to in
Section 144 to the company or its holding company or its subsidiary company.

Explanation.—For
the purposes of this clause, the term “directly or indirectly”
shall have the meaning assigned to it in the Explanation to section 144.‘

 

Existing
provisions were not very happily worded and gave an impression that Auditor
could not provide services referred to in Section 144 to any other company.

Amendment
now made makes it clear that such services are not to be provided to auditee
company or its holding or subsidiary company.

 

Access
to the records :

Presently
the proviso to Section 143(1) reads as under :

 

Provided
that the auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates
to the consolidation of its financial statements with that of its
subsidiaries.

(i)
in sub-section (1), in the proviso, for the words “its
subsidiaries”, at both the places, the words “its subsidiaries and
associate companies” shall be substituted;

The
change now made will enable auditors of the holding  company to have right to access records of
associate companies.

As
associate includes, Joint Venture (JV), access will now be available to the
records of JVs also.

 

Internal
Financial Controls:

Presently
as per the provisions of Section 143(3)(i) auditor is required to report :

whether
the company has adequate internal financial controls system in place and the
operating effectiveness of such controls.

 

Amendment
provides as under:

 

 

 

in
sub-section (3), in clause (i) for the words “internal financial
controls system”, the words “internal financial controls with
reference to financial statements” shall be substituted;

 

This
amendment is in pursuance of the suggestion of Companies Law Committee in
Para 10.11which are worth noting:

Section
143 (3) (i) requires the auditor to state in his report whether the company
has adequate internal financial controls system in place and the operating
effectiveness of such controls. This has to be read with Section 134 (5) (e)
on the Directors’ Responsibility Statement which also defines internal
financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014.
Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the
requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory
from FY 15-16 onwards. It has been expressed that auditing internal financial
control systems by auditors would be an onerous responsibility. It was also
expressed that their responsibility should be limited to the auditing of the
systems with respect to financial statements only and that this cannot be
compared with the responsibility of directors which is wider and can be
discharged as they have other resources like internal auditors, etc. who can
be used for this purpose. In this regard, the Committee recommended that the
reporting obligations of auditors should be with reference to the financial
statements.

Thus
this amendment is now brought in line with the Guidance Note issued by
ICAI. 

 

 

VIII: Corporate Social Responsibility (CSR) (Section 135):

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Applicability
:

Every
company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or
more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors,
out of which at least one director shall be an Independent Director.

 

In
section 135 of the principal Act,—

in
sub-section (1) –

(a)
for the words “any financial year”, the words “the immediately
preceding financial year” shall be substituted;

 

 

 

 

(b)
the following proviso shall be inserted, namely:—

“Provided
that where a company is not required to appoint an independent director under
sub-section (4) of section 149, it shall have in its Corporate Social
Responsibility Committee two or more directors.”;

 

Eligibility
criteria for the purpose of constituting the corporate social responsibility
committee and incurring expenditure towards CSR is proposed to be calculated
based on immediately preceding financial year. Currently this eligibility is
decided based on preceding three financial years.

 

 

 

In
case of a company which is not required to appoint an Independent Director
and such company is required to appoint CSR Committee, such committee can be
constituted with two or more directors. 

 

 

IX: Remuneration of Managerial Persons (Section 197):

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Remuneration
of Managerial Personnel ( Section 197)

 

 

First
Proviso to Subsection 1 allowed the
company in general meeting ( with the approval of the Central Government) to
authorise the payment of remuneration exceeding 11% of the net profits of the
company, subject to provisions of Schedule V.

The
requirement of taking approval from Central Government has been done away
with.

CLC
has observed in Para 13.5 of the report as under :

 

Currently,
the law in countries like the US, the UK and Switzerland, does not require
the company to approach government authorities for approving remuneration
payable to their managerial personnel, even in a scenario where they have
losses or inadequate profits and empowers the Board of the companies to
decide the remuneration payable to Directors.

 

Further,
the Committee also recommended that the requirement for government approval
may be omitted altogether, and necessary safeguards in the form of additional
disclosures, audit, higher penalties, etc. may be prescribed instead.

 

Keeping
in line this philosophy, Approval of Central Government is dispensed with and
Special Resolution is replaced in the place. 

 

Second
Proviso allowed companies to pass
ordinary resolution in general meeting and prescribe remuneration in excess
of limits specified therein.

The
second proviso has been amended by replacing ordinary resolution by special
resolution

This
amendment is consequential.

 

Additionally
a third proviso has been inserted which provides  that, where the company has defaulted in
payment of dues to any bank or public financial institution or non-convertible
debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible
debenture holders or other secured creditor, as the case may be, shall be
obtained by the company before obtaining the approval in the general meeting.

Equity
demands that parties affected by any decision should be consulted prior to
taking of such decisions. Although most lenders have such clauses as a part
of their agreement, legal compulsion was lacking which is now provided for in
the section itself.

Sub
Section 3 :

Provided
that in case a company had no profits or its profits were inadequate, the
company could not pay to its directors, including any managing or whole-time

director
or manager, by way of remuneration any sum exclusive of any fees payable to
directors under sub-section (5) except in accordance with the provisions of
Schedule V and if it was not able to comply with such provisions, with the
previous approval of the Central Government.

 

the
words “and if it is not able to comply with such provisions, with the
previous approval of the Central Government” shall be omitted.

This
amendment is consequential.

Sub
Section 9:

 

If
any director draws or receives, directly or indirectly, by way of
remuneration any such sums in excess of the limit prescribed by this section
or without the prior sanction of the Central Government, where it is
required, he shall refund such sums to the company and until such sum
is refunded, hold it in trust for the company.

 

Sub
Section 9 is amended as under:

If
any director draws or receives, directly or indirectly, by way of

remuneration
any such sums in excess of the limit prescribed by this section or without approval
required under this section, he shall refund such sums to the

company,
within two years or such lesser period as may be allowed by the company,
and until such sum is refunded, hold it in trust for the company.”;

 

Period
of Recovery in the event of excess remuneration now stands extended to 2 years
subject to passing of Special Resolution. Existing section did not provide
for any time limit within which such excess remuneration paid was to be
recovered. 

Sub
Section 10:

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless permitted by the Central Government

 

Sub
Section 10

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless approved by the company by special resolution within
two years from the date the sum becomes refundable

 

Presently,
act did not provide time limit within which refund of excess remuneration was
to be made. This amendment is consequential to the amendment made in the
previous clause.

 

Proviso
inserted :

Provided
that where the company has defaulted in payment of dues to any bank or public
financial institution or non-convertible debenture holders or any other
secured creditor, the prior approval of the bank or public financial
institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining approval of such waiver.

Equity
demands that parties affected by any decision should be consulted prior to
taking of such decisions. Although most lenders have such clauses as a part
of their agreement, legal compulsion was lacking which is now provided for in
the section itself.

Sub
Section 11:

In
cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which
purports to increase or has the effect of increasing the amount thereof,
whether the provision be contained in the company‘s memorandum or articles,
or in an agreement entered into by it, or in any resolution passed by the
company in general meeting or its Board, shall not have any effect unless
such increase is in accordance with the conditions specified in that Schedule
and if such conditions are not being complied, the approval of the Central
Government had been obtained.

 

Sub
Section 11:

 

 

 

 

 

 

 

 

 

 

 

the
words “and
if such conditions are not being complied, the approval of the Central
Government had been obtained” shall be omitted;

 

Thus
in such cases, special resolution of the company in general meeting will
suffice. The theme of the law makers now seems to be shifting to the self
regulation rather than government approvals.

 

 

 

Sub
Section 16:

The
auditor of the company shall, in his report under section 143, make a
statement as to whether the remuneration paid by the company to its directors
is in accordance with the provisions of this section, whether remuneration
paid to any director is in excess of the limit laid down under this

section
and give such other details as may be prescribed.

 

 

Presently
clause xi of CARO 2015 has mandated for this reporting which is now
brought under the provisions of the act.  
This will possibly lead to duplication of reporting unless MCA
clarifies the position .

 

Sub
Section 17:

On
and from the commencement of the Companies (Amendment) Act, 2017, any
application made to the Central Government under the provisions of this
section [as it stood before such commencement], which is pending with that
Government shall abate, and the company shall, within one year of such
commencement, obtain the approval in accordance with the provisions of this
section, as so amended.”

 

This
provision is enabling provision which deals with approvals pending as on the
date of the commencement of new section. This also shows lesser  indulgence of the government in the
approval process. 

 

X: Calculation of Profits (Section 198):

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
198 : Calculation of profits.

 

Section
198 : Calculation of profits.

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company;

 

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company unless the company is an investment company as
referred to in clause (a) of the Explanation to section 186

 

CLC
in Para 13.9 observed as under:

 

Section
198(4) requires that while calculating profits for managerial remuneration,
the profits on sale of investments be deducted. The Committee agreed to the
argument that Investment Companies, whose principal business was sale and
purchase of investments, would not be using the correct profit figures, and
may need to comply with the requirements of Schedule V to pay remuneration to
its managerial personnel. It was recommended, that specific provisions for
such companies be incorporated in the Act. 

 

 

3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

“(f)
any amount representing unrealised gains, notional gains or revaluation of
assets.”;

 

This
clause is newly added consequent upon Ind AS applicability to the companies.

In
Para 13.7 of its report, CLC observed as under:

 

The
Committee examined Section 198 as to whether it has outlived its utility in current times where the
Accounting Standards prescribe a robust framework for the determination of
yearly profit or loss for the company, and the possibility of using the net
profit before tax as presented in the financial statements, for basing the determination
of managerial remuneration. Alternative formulations were considered, but
found to be more complex, and further the present formulation is well
accepted. Therefore, no change, other than on account of requirement of
Ind AS, was recommended.

This
amendment is consistent with the amendment related to distributable profits
for the purposes of dividends discussed above under Dividends.  

 

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

(l)
the excess of expenditure over income, which had arisen in computing the net
profits in accordance with this section in any year which begins at or
after the commencement of this Act, in so far as such excess has not been
deducted in any subsequent year preceding the year in respect of which
the net profits have to be ascertained;

(
Portion marked in bold is omitted after amendment)

 

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

(l)
the excess of expenditure over income, which had arisen in computing the net
profits in accordance with this section in any year which begins at or
after the commencement of this Act, in so far as such excess has not been
deducted in any subsequent year preceding the year in respect of which the
net profits have to be ascertained;

 

CLC
in Para 13.8 has observed as under :

 

Section
198(4)(l) mandates the deduction of ‘brought forward losses’ of the company
while calculating the net profit, for the purpose of computing managerial
remuneration in the subsequent years. However, the clause did not provide for
the deduction of brought forward losses of the years prior to the
commencement of the Act, which may be an inadvertent omission.  Thus amendment now made has amended
Section 198(4)(l), to include brought forward losses of the years subsequent
to the enactment of the Companies (Amendment) Act, 1960 and inadvertent
omission existing is corrected .

 

 

If one looks at the amendments discussed
hereinabove, various difficulties which were experienced at the time of
implementation of the provisions are sought to be removed. Amendments are made
to clarify the position which was ambiguous. Some of the provisions which were
inconsistent when read with the Rules are amended so as to bring these
inconsistencies to an end and thus an objective of rectifying omissions and
inconsistencies is largely achieved. _

 

Public Trusts in Maharashtra : The Changing Legal landscape Recent Amendments to the Maharashtra Public Trusts Act, 1950

The Maharashtra Public Trusts Act, 1950 (‘MPT
Act’) was recently amended by the Maharashtra Public Trusts (Second
Amendment) Act, 2017 (‘Amendment Act’), which came into force on October
10, 2017. In this article, we discuss some of the key conceptual changes that
the Amendment Act has made to the MPT Act.

Background

The MPT Act was first enacted with the
objective of regulation and administration of public religious and charitable
trusts in, what was then, the State of Bombay. 1Originally called
the Bombay Public Trusts Act, 1950, its title was changed with retrospective
effect in 2012 to the Maharashtra Public Trusts Act, 1950. Today, the MPT Act
applies to the whole of Maharashtra and regulates more than eight lakh public
religious and charitable organisations registered under it2. There
are only a few states in India that have enacted legislation to regulate public
trusts, with Maharashtra being prominent on account of the MPT Act.

In recent years, the focus on regulating the
non-profit space in India has increased as governments are becoming
increasingly wary that non-governmental organisations (‘NGOs’) are being
misused for undesirable activities that range from tax evasion to funding of
terrorism. With a view to regulating such NGOs, the Central Government is even
considering (with some helpful prompting from the Supreme Court) the framing of
a central legislation for this purpose3.

It is in this environment that the
Maharashtra Government constituted a committee on January 13, 2016, under the
chairmanship of Mr. A. J. Dholakiya, former Charity Commissioner and comprising
Mr. S. B. Savle, the Charity Commissioner and other officers, to review the MPT
Act and propose amendments to it. The Dholakiya Committee’s report suggested
comprehensive amendments to the MPT Act, leading to the enactment of the
Amendment Act4.

_____________________________________________________

1   Preamble
to the MPT Act.

2   Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

 3 
Economic Times,  August 17, 2017: http://economictimes.indiatimes.com/articleshow/60100358.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4   Statement
of Objects and Reasons in the Maharashtra Public Trusts (Second Amendment)
Bill, 2017.

 

Key Amendments

From a reading of the provisions of the
Amendment Act, it appears that the purpose of its enactment is mainly
three-fold: preventing misuse of the MPT Act, reducing delays in proceedings
which impact the functioning of NGOs, and streamlining processes to improve
effectiveness. The key conceptual changes which give effect to this purpose are
discussed below.

(i) Introduction of definition
of ‘beneficiary’

Background

The term ‘beneficiary’, although used in the
MPT Act, was not defined earlier. A definition has now been inserted in section
2 of the MPT Act, which is as follows: ““beneficiary” means any person
entitled to any of the benefit as per the objects of the trust explained in the
trust deed or the scheme made as per this Act and constitution of the trust and
no other person.”

The term ‘beneficiary’ acquires significance
because, in the case of a public charitable trust (not a society)5 ,
a beneficiary is regarded as a ‘person having interest’ in such trust (refer
section 2(10)). Consequently, a beneficiary can apply for certain significant
reliefs in respect of such trusts such as seeking institution of an inquiry,
applying for appropriate orders for protection of trust property, institution
of suits in relation to the public trust, and applying for framing of a scheme
for the trust. This definition is not relevant for a society because in the
case of a society, its members are regarded as ‘person having interest’.

The likely objective behind insertion of the
definition of ‘beneficiary’ appears to be to aid the Charity Commissioner’s
office in determination of whether the person seeking the above reliefs was
indeed a beneficiary/person having interest in the trust who had locus to make
the application. Unfortunately the definition may not serve the desired
purpose.

_____________________________________________________________________

5 Unless specified otherwise, the term ‘public
trust’ as used in this article includes a ‘society’ registered under the
Societies Registration Act, 1860 and the MPT Act

Analysis

The primary challenge in determining
beneficiaries of a public trust stems from the inherent limitation in identifying
and segregating them – as one of the essential characteristics of a public
trust (and which distinguishes it from a private trust) is that its
beneficiaries are the general public or a class thereof, and constitute a body
which is incapable of ascertainment (as observed by the Supreme Court in Deoki
Nandan vs. Murlidhar, AIR 1957 SC 133).

The second challenge is that the language of
the definition is ambiguous – although this can be said to be a consequence of
the inherent limitation discussed above. Any person who is ‘entitled’ to any of
the benefits as per the objects of the trust is regarded as a beneficiary. This
encompasses not only those who have received some benefits from the public
trust, but also those who are ‘entitled’ to them.

The term ‘entitle’ means to give a claim,
right, or title to; to give a right to demand or receive, to furnish with
grounds for claiming. The term ‘entitled to’ means ‘having a title to’ (both as
defined in The Law Lexicon, P. Ramanatha Aiyar, 3rd Edition).

Thus, it can be said that any person who has
a potential or theoretical ‘claim’ or‘right’ to any of the benefits as per the
objects of the trust is regarded as a beneficiary. However, this interpretation
is not without doubt:

–  Firstly,
can it be said that any person has the ‘claim’ or ‘right’ to receive any
benefit from a public trust – or conversely, the trust is duty bound to benefit
such person?

–   Even
if the response is in the affirmative, given that the definition uses the term
‘objects’ and not ‘activities’, can a person claim as of right that he is a
beneficiary of the trust even if the trust has not commenced activities in
relation to a particular object?

Therefore, although the language of the
definition presumes that the phrase ‘a person who is entitled to any of the
benefits as per the objects of the trust’ constitutes an objective and
limited criterion on the basis of which it can be determined with certainty
whether a person is or is not a beneficiary, in our view, this is not the case.

Example

The above difficulties can be explained with
the aid of an example. A public charitable trust set up with the objects of
‘medical relief for the poor’ and ‘promoting primary education’, operates a
hospital for treatment of the poor, without any restriction as to religion,
community, etc. Therefore, all poor persons in India are free to seek treatment
from this hospital.

The first difficulty arises in determining
whether such poor persons are ‘entitled’ to benefits as per the objects of the
trust. Can it be said that all poor persons have the ‘right’ to seek treatment
from this hospital –would it not be within the hospital’s right to refuse to
treat someone, for instance if there is no vacancy?

Assuming this view can be taken, an odd
situation arises wherein all poor persons in India could be regarded as
entitled to benefits as per the objects of the trust, and therefore, be
classified as beneficiaries of the trust – even though they may not actually
have sought treatment from the hospital.

Moreover, the trust may not have started any
primary school in furtherance of its object of ‘promoting primary education’.
Yet, it could be argued that all children in the country who are aged between 4
and 14 years would be persons who are entitled to benefits as per the ‘objects’
of the trust – thus, as noted above, entirely defeating the purpose for
insertion of the definition of ‘beneficiary’ in the MPT Act.

(ii)  Amendments to ‘change report’
provisions

 (a)  Extension
of time for filing change report

Background

Under section 22 of the MPT Act, any change
in the particulars (such as in respect of the trustees or the properties) of a
public trust as set out in the Register of Public Trusts under the MPT Act is
required to be reported by the trustees to the Deputy or Assistant Charity
Commissioner in charge of the Public Trusts Registration Office where such
register is kept. Such report is commonly known as the ‘change report’.

A change report is required to be filed
within 90 days from the date of the occurrence of the change required to be
reported. A trustee who fails to file a change report is, on conviction,
punishable with a fine of up to Rs. 10,000, u/s. 66 of the MPT Act.

Previously, the MPT Act did not expressly
provide for an extension of time for filing change report or condonation of
delay in filing it. Pursuant to the Amendment Act, a proviso has been inserted
in section 22(1) which empowers the Deputy or Assistant Charity Commissioner to
extend the period of 90 days for filing change report on being satisfied that
there was sufficient cause for delay in filing, subject to payment of costs by
the reporting trustee, which are to be credited to the Public Trust
Administration Fund.

Interestingly, even prior to insertion of
the proviso, trustees were known to apply for condonation of delay for late
filing of change report – in some cases after many years – to the relevant
Deputy or Assistant Charity Commissioner. In fact, the Bombay High Court had
validated the permissibility of such applications under the general provisions
of section 5 of the Limitation Act, 1963 (Rajkumar s/o Pundlikrao Zape &
Ors. vs. Shantaram Amrutrao Waghmare & Ors., 2008 (3) MhLJ 209).
Therefore, the benefits of insertion of the new proviso appear to be that it
might help eliminate wasteful litigation and the Deputy or Assistant Charity
Commissioner will be able to seek costs from errant trustees for late filing of
change reports.

Analysis

Similar to section 5 of the Limitation Act,
1963, the new proviso to section 22(1) permits extension of time if ‘sufficient
cause’ is shown. This scope and purport of this expression has been extensively
considered by the Courts which have laid down the following broad principles:

–  It
is not possible to lay down precisely what facts or matters would constitute
‘sufficient cause’ u/s. 5 of the Limitation Act, 1963;

 –   That said, delay in filing an appeal should not
have been for reasons which indicate the party’s negligence in not taking
necessary steps, which it could have or should have taken (State of West
Bengal vs. Administrator, Howrah Municipality, AIR 1972 SC 749);

–  The
words ‘sufficient cause’ should receive a liberal construction so as to advance
substantial justice (State of Karnataka vs. Y. Moideen Kunhi (dead) by Lrs.
and Ors.,AIR 2009 SC 2577);

–  Length
of delay is irrelevant and acceptability of the explanation is the only
criterion for extension of time (N. Balakrishnan vs. M. Krishnamurthy,
AIR 1998 SC 3222).

Thus, each application for extension of time
will have to be considered by the Deputy or Assistant Charity Commissioner on the facts and circumstances of the case.

There are also some other aspects relevant
for consideration in relation to this proviso. First, it does not set out a
formula or cap for computation of costs for late filing, which could lead to a
situation where determination of costs is at the discretion of each individual
Deputy or Assistant Charity Commissioner. Secondly, the costs are to be borne
‘by the reporting trustee’– this position differs from that set out in sections
79A and 79B under which certain costs, charges and expenses are payable out of
the ‘property or funds of the public trust’.

 (b)
Provisional acceptance of change reports

Background

Once a change report is filed, the Deputy or
Assistant Charity Commissioner may6 hold an inquiry in the
prescribed manner to verify whether the change which is reported has occurred.
After completion of the inquiry, he must record his findings as to whether or
not he is satisfied that the change has occurred. If he is satisfied and
records the same in the Register of Public Trusts, he is said to accept the
change report.

Although this process is useful as, in
theory, it helps ensure transparency and honesty in the functioning of public
trusts, in practice it is time consuming and results in a huge pendency of
matters. It is believed that there are some change reports which are pending
for several years, although efforts have been made recently to dispose of old
reports at the earliest.

Such delay could obstruct the functioning of
trusts – in particular where the change which has occurred pertains to the
constitution of trustees. In such cases, the Charity Commissioner’s office may
be wary to permit applications under other provisions of the MPT Act (such as
for alienation of trust property) by the new trustees whose report is pending.
Although the Bombay High Court has held that a change of trustees becomes
effective from the date when it was brought into effect in accordance with law,
and not from the date of acceptance of the change report (Chembur Trombay
Education Society vs. D.K. Marathe and Ors., 2002 (3) BomCR 161), in
practice, the Charity Commissioner’s office may be hesitant to permit
applications by such trustees regarding whose appointment change reports are
pending.

____________________________________________________

6   Although
section 22 uses the term ‘may’ for holding an inquiry, the Bombay High Court
has held that a change report, whether contested or not, has to be decided
after holding an inquiry – refer Rajabhau Damodar Raikar vs. The Assistant
Charity Commissioner and Ors. (2016(1)BomCR233).

The fact that the pendency in change report
cases is of concern, and has prompted the enactment of the Amendment Act, has
been recognised Statement of Objects and Reasons in the Bill pertaining to the
Amendment Act as under:

“The State Government is concerned with
the huge pendency of cases before the authorities under the Act, especially the
change reports, more particularly the uncontested change reports, to make
entries in the registers kept u/s. 17 of the said Act.

 … to promote swift disposal and arrest
the pendency of the change reports u/s. 22, certain provisos are proposed to be
added to s/s. (2) to mandate the decision on the change reports within the
stipulated period, and also provide for a mechanism for provisional acceptance
of change reports and attach finality to
the orders of provisional acceptance of change in uncontested matters.”

Summary

Thus, in order to facilitate the functioning
of public trusts, the Amendment Act has inserted three provisos to section
22(2) of the MPT Act, which introduce the concept of provisional acceptance of
change reports in case of change in the names or addresses of trustees and
managers or the mode of succession to their office. The process is summarised
as follows:

–  When
such a change report is filed, the Deputy or Assistant Charity Commissioner may
pass an order provisionally accepting the change within period of 15 working
days and issue a notice inviting objections to such change within 30 days from
the date of publication of such notice;

  – If no
objections are received within the said period of 30 days, the provisional
acceptance shall become final;

–   If
objections are received within the said period, then he may hold an inquiry and
record his findings within 3 months from the date of filing objections, as to
whether the changes have occurred or not;

–   If
he is satisfied that the changes have occurred, then he must make the
corresponding changes in the Register of Public Trusts.

 (iii)  Ex-post facto
sanction

 Background

Under section 36 of the MPT Act, sanction of
the Charity Commissioner is required for the sale, exchange or gift of any
immovable property of a public trust, as well as for a lease for a period
exceeding ten years in the case of agricultural land and for a period exceeding
three years in the case of non-agricultural land or a building.

Although the Charity Commissioner had, in
circular no. 169 dated February 1, 1973, indicated that ex-post facto sanction
could be granted u/s. 36, the Bombay High Court has taken the view that only
prior sanction could be granted u/s. 36 and post facto sanction of the
Charity Commissioner is not permitted (Central Hindu Military Social
Education Society vs. Joint Charity Commissioner and Anr., 2009 (2) BomCR
499).

This dichotomy has now been settled by the
Amendment Act which has introduced sub-section (5) to section 36 to permit ex-post
facto sanction of the Charity Commissioner. As per this provision, the
Charity Commissioner may grant ex-post facto sanction to the transfer of
the trust property by the trustees in exceptional and extraordinary situations
where the absence of previous sanction results in hardship to the trust, a
large body of persons or a bona fide purchaser for value, if he is
satisfied that the following conditions are met,—

(a) there was an emergent
situation which warranted such transfer,

(b) there was compelling
necessity for the said transfer,

(c) the transfer was necessary
in the interest of trust,

(d)  the property was
transferred for consideration which was not less than prevalent market value of
the property so transferred, to be certified by the expert,

(e) there was reasonable
effort on the part of trustees to secure the best price,

(f)   the trustees’ actions,
during the course of the entire transaction, were bonafide and they have
not derived any benefit, either pecuniary or otherwise, out of the said
transaction, and

(g) the transfer was effected
by executing a registered instrument, if a document is required to be
registered under the law for the time being in force.

The said
section has been further amended by the Maharashtra Public Trusts (Amendment)
Ordinance, 2017 (‘Ordinance’) promulgated on October 10, 2017, to
provide that ex-post facto sanction may only be granted in respect of
trust property transferred after the commencement of the Amendment Act (i.e.
October 10, 2017).

Analysis

The presence of the term ‘and’ after clause
(f) above indicates that the criteria are cumulative. Further, this power is
not to be exercised routinely but only in ‘exceptional and extraordinary
situations’. Very few transfers are, therefore, likely to satisfy the
requirements of this provision for granting ex-post facto sanction.
Moreover, as per the Ordinance, only those transfers which have been effected
on or after October 10, 2017 will be eligible for such sanction.

This provision may lead to a problematic
situation in cases where a transfer of trust property is effected by trustees
on the bona fide assumption that it is a fit case for grant of post
facto sanction, but the sanction is not thereafter granted by the Charity
Commissioner because he is not satisfied that the necessary criteria are met.
As no time limit has been specified for the Charity Commissioner to dispose of
an application for ex-post facto sanction, it may even take years for an
acceptance or rejection. Unwinding the transfer after a long period of time,
particularly if there has been construction on the property post the transfer,
will not only be practically difficult but could also lead to an anomalous
legal situation if the transfer was effected under a registered instrument.

Given these risks, this provision may be
reduced to a paper provision as every diligent buyer of property is likely to
insist on prior approval to eliminate threat to title.

Apart from section 36, the concept of ex-post
facto sanction has been introduced in section 36A which requires trustees
to obtain the sanction of the Charity Commissioner to borrow money (whether by
way of mortgage or otherwise) for the purpose of or on behalf of the trust.
Sub-section (3A) has been introduced in this section to permit the Charity
Commissioner to grant ex-post facto sanction to the trustees to borrow
money from any nationalised bank or scheduled bank, in exceptional and
extraordinary situations where the absence of previous sanction results in
hardship to the trust, beneficiary or bona fide third party.

(iv)  Streamlining
processes

 Background

The MPT Act, before the amendment, had
created a hierarchy of authorities and courts to hear various
applications/matters, with different processes for each application/matter. The
Amendment Act has sought to streamline some of these processes and also reduce
the number of appeals permitted so that cases may be disposed of more
efficiently.

The Statement of Objects and Reasons in the
Bill pertaining to the Amendment Act summarises the rationale for these changes
as under:

“It was further noticed that the said Act
has created a hierarchy of authorities and courts, with a series of appeals,
applications or revisions. Orders of the Charity Commissioner, for instance,
have been made subject to challenge before the District Court, the Maharashtra
Revenue Tribunal and Divisional Commissioner. This multiplicity of proceedings
and forums under the Act, when a substantial number of judicial officers of the
rank of District Judge, discharge the functions of Charity Commissioner and
Joint Charity Commissioner has been found to be unwarranted and even
anomalous.”

In this regard,
a number of amendments have been carried out in the MPT Act, some of which are
explained below:

 –  Under
erstwhile section 50A of the MPT Act, schemes were framed and modified by the
Charity Commissioner, against which order an application could be made to the
City Civil Court in Mumbai and District Court elsewhere in Maharashtra. Now,
the power to frame and modify schemes has been granted to the Deputy Charity
Commissioner and Assistant Charity Commissioner, and such order may be appealed
before the Charity Commissioner;

–   Under
section 51, if the Charity Commissioner refuses his consent to the institution of
a suit, then the appeal will lie before the High Court instead of the
Divisional Commissioner;

–   In
the Cy pres provisions under sections 55 and 56, the power conferred on
the court originally has now been conferred on the Charity Commissioner. Thus,
earlier if inter alia a trust had failed, the Charity Commissioner could
require the trustees to apply for directions to the court, and if they failed
to apply, he could himself apply. The court could then give necessary
directions to give effect to the original intention of the author of the public
trust or object for which the public trust was created – and if the same was
not expedient, practicable, desirable, necessary or proper in public interest,
then the court could direct the property or income of the trust to be applied cy
pres to any other charitable object.

Now, the power has been conferred on the
Assistant Charity Commissioner and Deputy Charity Commissioner to pass
appropriate orders after making an inquiry and to make a report to the Charity
Commissioner; the Charity Commissioner may suo motu or on the report of
Assistant or Deputy Charity Commissioner, give the necessary directions;

– The
High Court replaces the City Civil Court in Mumbai and District Court elsewhere
as the first appellate court under the MPT Act;

–   Accordingly,
the language of the definition of “Court” has been replaced by “High Court
of Judicature at Bombay” from “in the Greater Bombay, the City Civil Court and
elsewhere, the District Court”.

 Tabular
summary

The following table sets out the changes to
the processes in respect of key provisions:

 

Key:

D
or ACC = Deputy or Assistant Charity Commissioner

CC
= Charity Commissioner

District
Court = City Civil Court in Mumbai, District Court elsewhere in Maharashtra

HC
= High Court

District
Court / HC = Application to District Court from whose decision an appeal lies
before HC

 

 

Old

New

Section

Application

Authority/Court

Appellate authority

Authority/Court

Appellate authority

18-20

Registration
of public trust

D
or ACC

u CC

u Then District Court / HC

No
change

CC

22

Filing
change report / deregistration of trust

D
or ACC

u CC

u Then District Court / HC

No
change

CC

41

Order
of surcharge

CC

District
Court / HC

No
change

—

41D

Suspension,
removal and dismissal of trustees

CC

District
Court / HC

No
change

HC

41E

Order
for protection of charities

CC

District
Court

No
change

HC

50A

Power
to frame schemes

CC

District
Court / HC

D
or ACC

CC

51

Consent
for suit

CC

Divisional
Commissioner

No
change

HC

55,
56

Cypres

CC
directs that an application be made to District Court, or will make the
application himself. Thereafter, the said court will hear the application

HC
against order of District Court

D
or ACC will report to CC who will give directions

HC

79

Decision
of property as public trust property

D
or ACC

u CC

u Then District Court / HC

No
change

CC

 

Other amendments

The Amendment Act has also carried out a
number of other modifications to the MPT Act – some of these are briefly
summarised below:

(i)  Conditions on
alienation: As noted above, u/s. 36 of the MPT Act, sanction of the Charity
Commissioner is required for alienation of immovable property of the public
trust. Such sanction may be accorded subject to such condition as the Charity
Commissioner may think fit considering the interest, benefit or protection of
the trust.

Pursuant to the  Amendment 
Act, the Charity Commissioner has been empowered to modify the
conditions imposed by him prior to the transaction for which sanction is given
is completed. Further, although he can revoke a sanction in specified
circumstances, he cannot do so after the execution of the conveyance in respect
of the immovable property except on the ground that such sanction was obtained
by fraud before the grant of such sanction.

Further, the Charity Commissioner has been
prohibited from sanctioning any lease of immovable property of a public trust
for a period exceeding 30 years.

(ii) Fixed timelines: To
reduce delays by the Charity Commissioner in processing of applications such as
for (a) granting trustees permission for investing trust funds in any manner
other than that permitted under the MPT Act (section 35); and (b) issuing
directions for the proper administration of the trust (section 41A), the
Charity Commissioner has been enjoined to decide such application within three
months from the date of receipt of such application and if it is not
practicable to do so, to record the reasons for the same.

 (iii) Revised process for suspension of trustees etc.: The process for suspension, removal or dismissal
of trustees u/s. 41D of the MPT Act has been revised for the benefit of
incumbent trustees. Earlier, upon receipt of an application for this purpose,
the Charity Commissioner could frame charges and take appropriate action as set
out in the provision. Post the amendment, the Charity Commissioner must notify
such trustee and give him an opportunity to be heard before framing such
charges. Further, he can only issue such notice only when he finds that there is
‘prima facie material’ to proceed against the said person.

 (iv) Advice
or direction of the Court: The Amendment Act has deleted section 56A of the
MPT Act under which any trustee of a public trust could apply to the court for
the opinion, advice or direction of the Court on any question affecting the
management or administration of the trust property or income. However, deletion
of this section 56A will not preclude trustees or beneficiaries from applying
for the issue of an Originating Summons in the Bombay High Court for such
advice or direction, in accordance with Chapter XVII of the Bombay High Court
(Original Side) Rules.

In conclusion

In conclusion, the amendments to the MPT Act
are a positive development and are likely to assist the earnest efforts made by
the Charity Commissioner’s office recently to improve the implementation of the
MPT Act and reduce backlog of matters.

On a separate note, we find that NGOs in
India are increasing in scale and stature, and are exploring more sophisticated
structures and arrangements for their functioning, dealings and holding of
assets. They are also seeking to professionalise their operations by adopting
corporate best practices.

When the MPT Act is next reviewed, we
suggest that some amendments which assist with this evolution, but also
maintain adequate checks and balances, be considered. These include
introduction of stricter governance standards, express inclusion of section 8
companies within the ambit of the MPT Act, facilitation of appointment of professional
trustee companies, easing of mergers of public trusts with societies,
regulating related party transactions, permitting investments in safe market
securities, and so on. _

What Type Of SEBI Orders Are Appealable? Supreme Court Decides

The Supreme Court has laid to rest
a controversial and important issue. That is on the issue as to what orders
passed by the Securities and Exchange Board of India securities laws are
appealable. SEBI has both general and specific powers. SEBI passes orders on
several issues. SEBI also issues circulars, directions, etc. which have
significant impact on persons connected with market operations. Since it is an
expert body dealing with a field which is complex, courts give a lot of freedom
to SEBI. If one reads the powers of SEBI, SEBI has almost been given a carte
blanche on how it can deal with the operation of the securities markets.

SEBI has powers
:

–   to make rules and regulations, that too,
except for some administrative and parliament overseeing, are largely
self-determined.

–   to give directions to stock exchanges, listed
entities, intermediaries, etc.

–   to punish and levy penalties,

–   to disgorge wrongfully made profits,

–   to make parties buy shares or sell shares etc
and

–   to debar entities to approach the financial
markets for a specified period.

The question before the Supreme
Court was : whether all orders passed by SEBI are appealable or are there any
exceptions – that is – some orders are not appealable?

The right to appeal is important.
The first appeal is to the Securities Appellate Tribunal (“SAT”). SAT has a
great record of disposing appeals fast with not many of its rulings being
overturned by the Supreme Court (the next appellate body). SAT is an expert
body well versed with the functioning of the securities market and hence
aggrieved parties can expect a quick relief from an authority which has an
indepth grasp of finer issues of this complex field. The Supreme Court in the
case of Clariant (Clariant International Limited vs. SEBI (2004) 54 SCL 519
(SC)) has observed, “The Board is indisputably an expert body. But when it
exercises its quasi-judicial functions, its decisions are subject to appeal. The
Appellate Tribunal is also an expert Tribunal.” (emphasis supplied).

In the past, appeals have been
liberally admitted. Even letters of SEBI, if they affected rights of a party,
have been held to be appealable. However, when a Chartered Accountant appealed
to SAT on the ground that SEBI should not have referred his name to ICAI, it
was rejected since it was merely a reference.

However it was felt that clarity
was lacking as to what orders were appealable as the same was not clearly
defined. Another issue which required clarification was: whether circulars
which affected a group of parties adversely were appealable. The decision in
the case of NSDL vs. SEBI ((2017) 79 taxmann.com 247 (SC) deals with
such issues.

Facts of the case

The
facts of the case are fairly simple. SEBI had issued a circular to depositories
directing them to restrict their charges in the manner and to the extent
prescribed in the circular. Obviously, the depositories were aggrieved as the
circular directly affected their finances. NSDL, a depository, appealed against
the circular/direction to SAT. Preliminary issue raised before SAT was whether
such a circular/direction is appealable. SAT on merits, rejected the appeal and
held the circular/directions to be valid. In other words, circulars /
directions issued by SEBI were appealable. Both parties appealed against the
order of SAT to the Supreme Court. SEBI appealed against the part where SAT had
held that such a circular/direction was appealable. The depositories appealed
against the part where on merits its appeal was rejected.

The Supreme Court decided to deal
first with the part of the SAT order where it was held that such a circular was
appealable. Obviously, if the Court found that such a circular was not
appealable, then the part relating to merits would not require consideration.

Analysis of orders passed by SEBI
into categories

To decide whether the circular
issued by SEBI was appealable or not, the Supreme Court divided various types
of circulars, orders, directions, etc. that SEBI was empowered to issue into
three categories:-

1. Orders that are in
exercise of administrative functions

2. Orders that are in
exercise of its legislative functions

3. Orders that are in
exercise of its quasi-judicial functions.

The Supreme Court held that it was
only the third category, i.e. orders that are issued in exercise of its quasi-judicial
functions, were the ones that were appealable.

The Court then, firstly, gave
reasons why it held that only such category or orders were appealable.
Secondly, it explained meticulously how to determine whether an order falls
under which category. The decision even pointed out the provisions in the SEBI
Act that dealt with powers relating to each category of functions. On facts, it
held that the circular was issued in exercise of administrative functions and
hence it was not appealable. 

Why are only orders issued by
SEBI in exercise of quasi-judicial functions appealable under the SEBI Act?

The Court meticulously analysed
the provisions of the Act to show that the Act provided and intended to allow
appeal only against quasi-judicial orders.

Firstly, it highlighted the
constitution of SAT. It noted that the Presiding Officer has to be a retired
judge. That showed that only quasi-judicial orders were intended to be
appealable.

Secondly, it noted that in case of
appeals against orders passed by an adjudication order, appeal could be made by
an aggrieved party within 45 days of the day when such order is “received by
him”. The Court observed that “Generally administrative orders and legislative
regulations made by the Board are never received personally by ‘the person
aggrieved’”. Hence, once again, it was only quasi-judicial orders that were
intended to be appealed.

The Court then observed that, as
held in its earlier decision in Clariant’s case that the powers of SAT were
co-extensive with that of SEBI while reviewing in appeal SEBI’s orders. Hence,
once again, such orders can only be quasi-judicial in nature.

Even the procedure relating to
appeal pointed towards this. The order passed by SAT on appeal had to be sent
to the parties to the appeal (i.e. the aggrieved party) and the adjudicating
officer. Once again, this shows, the Court held, that the scheme of the Act was
to allow appeal only against quasi judicial orders.

The fact that appeals against
orders of SAT to the Supreme Court are allowed only on questions of law was
held to be yet another pointer in this direction.

Hence, the Court concluded that :

1.  appeals are allowable only
against quasi-judicial orders of SEBI. Appeals against orders in exercise of
legislative functions is obviously beyond the appellate function of SAT which
itself is a creature of the Act.

2.  Orders in exercise of
administrative functions too cannot be appealed against before SAT but petition
for judicial review may be filed in Court.

How to determine whether an
order is in exercise of administrative/legislative/quasi-judicial functions?

The above analysis brings us to
the important point of how to determine whether a particular order is in
exercise of quasi-judicial functions and thus appealable or whether it is in
exercise of administrative or legislative functions and hence not appealable.
Here again, the Court meticulously analysed the issue on first principles.

It cited the classic case of The
King vs. Electricity Commissioners [(1924) 1 KB 171] where Lord Justice
Atkin defined a quasi-judicial order as:-

“Whenever
any body of persons having legal authority to determine questions affecting
rights of subjects, and having the duty to act judicially, act in excess of
their legal authority, they are subject to the controlling jurisdiction of the
King’s Bench Division exercised in these writs.”

The
Court further observed that the above decision was applied in another decision,
and the following guidelines were given to decide whether an order of an
administrative body is a quasi-judicial one:-

“(i) There must be legal
authority; ?

(ii) This authority must
be to determine questions affecting the rights of subjects; and

(iii) There must be a
duty to act judicially.”

The Court further qualified and
explained the principle that a mere absence of a lis between the parties
does not make the order one that is not quasi-judicial. So long as the
aforesaid 3 conditions are satisfied, the order is a quasi judicial one. It
observed, “..the absence of a lis between the parties would not
necessarily lead to the conclusion that the power conferred on an
administrative body would not be quasi-judicial – so long as the aforesaid
three tests are followed, the power is quasi-judicial.”

What also matters is the nature of
the final order. Thus, if the order does not determine the rights of parties
and, for example, makes a report after giving the parties a hearing, the order
is not a quasi-judicial one.

What are the specific
provisions in the SEBI Act, orders under which can be appealed against?

To make its order even more
comprehensive and thus be helpful to be applied in specific provisions without
ambiguity, the Court then listed the various provisions of the SEBI Act under
which SEBI can pass orders. Of these, it then analysed which of such orders are
quasi-judicial and hence appealable. It also specified which of them provide
for administrative powers or legislative powers and hence not appealable to the
SAT. It observed as follows:-

“It may be stated that both Rules made u/s. 29 as
well as Regulations made u/s. 30 have to be placed before Parliament u/s. 31 of
the Act. It is clear on a conspectus of the
authorities that it is orders referable to sections 11(4), 11(b), 11(d), 12(3)
and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders
made under the Rules and Regulations that are the subject matter of appeal u/s.
15T. Administrative orders such as circulars issued under the present case
referable to section 11(1) of the Act are obviously outside the appellate
jurisdiction of the Tribunal for the reasons given by us above.” (emphasis supplied).

Accordingly, the Court set aside the
order of SAT and held that the circular was issued in exercise of
administrative functions by SEBI and hence not appealable to SAT. It,
however, clarified that the parties were free to challenge the circular and
seek judicial review.

Conclusion

Thus, an important matter has been set to rest
and that too in a comprehensive way. It will help parties and SAT decipher
which orders are appealable. Further, parties will also know how to deal with
powers of SEBI that are classified as law making powers or administrative
powers. The decision aims to lend clarity, avoid litigation and ensure speedier
decisions.

RERA: An Overview

Introduction

On
1st May 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect.   This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.    

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member. 

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31st July 2017.

Registration
is not required for the following type of projects:

(a)    Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b)    Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.   

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act. 

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a)     Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b)     Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c)     3 years’ Annual
Accounts Reports of the Promoter.

d)     Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e)     Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f)     One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website. 

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1)    The Promoter must provide all details of
registration  with the RERA and update his inventory
position on a quarterly basis.

(2)    The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3)    The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4)    The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5)    The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6)    The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7)    Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8)    The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9)    If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10)  The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11)  Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12)  The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3rd party without prior written consent from 2/3rd
of the allottees and prior written approval of the RERA.

(13)  Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14)  If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a)    in accordance with
the Agreement for Sale; or

(b)    due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15)  He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16)  The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall. 

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17)  The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18)  If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable. 

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1st project.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

Insider Trading – A Recent Comprehensive Case

There are some provisions of
Securities Laws that need a regular refresh for the reason that they are found
to be frequently violated and entail penalties etc. Insider Trading is
one such provision which one can say is regularly violated. Senior management
and even professionals who ought to know better are found to be on the wrong
side of the law. A recent order of the Securities and Exchange Board of India
(SEBI) is worth considering. It reviews the law relating to Insider Trading.
The case deals with the law prior to amendment of 2015. However, the principles
remain the same even under the amended law. The case covers several types of
acts that are treated to be violative of the SEBI (Prohibition of Insider
Trading) Regulations 1992 (the 1992 Regulations were replaced by the 2015
Regulations). The case is in the matter of CR Rajesh Nair – Managing
Director of Sigrun Holdings Limited (Adjudication Order number AK/AO-14/2017
dated 16th June 2017).


Broad facts of the case

The facts of the case are
interesting and also contentious since SEBI had to arrive at findings that were
against what the party claimed the facts were. The facts and conclusions as
reported in the SEBI Order are summarised here.

 

The party against whom the order
was passed was Managing Director of Sigrun Holdings Limited, a listed company.
It was alleged that he carried out several acts in violation of the
Regulations. He sold shares during a time when there was unpublished price
sensitive information (“UPSI”) that he had access to. The Regulations
prohibit an insider having access to or in possession of UPSI to deal in the
shares of the company. The obvious reason for such prohibition is that a person
in possession of unpublished price sensitive information (UPSI) has an edge
over the shareholders/public generally and would unfairly profit from the same.
He is entrusted with such information in good faith and it will be a betrayal
of `good’ faith if he seeks to profit from it. Hence, he is banned from dealing
in the shares in such circumstances.

 

As proving insider trading is a
comparatively difficult task, the regulations have provided for a blanket ban
over making opposite trades by an insider during the next six months. In other
words if an insider makes a purchase or sale of shares of the company, he is
debarred from making a sale or purchase for the next six months. SEBI, through
detailed investigation including the questioning of the broker, established
that :

 

–  shares were sold within six months of purchase

–  shares were sold on the basis of UPSI

–  shares were sold just before the declaration
of operational results which exhibited substantial reduction resulting in
decline of share price

–  shares were sold during the period when
trading window was closed

–  shares were sold without obtaining
pre-clearance of the Compliance Officer.

 

Hence, there were multiple
violations of the regulations.

 

SEBI then computed in detail the
losses he avoided by selling shares earlier by comparing the sale price on the
date of sale with the sale price at the end of six months period.

 

Investigation, response of MD/broker and
confirmation of findings

SEBI pursued the MD and the broker
concerned to obtain detailed information regarding the trades. The defense put
forth in respect of certain sales was that the MD had not really sold the
shares voluntarily but sales were made by the broker to meet certain “mark to
market” losses incurred by him. Thus, the effective contention was that there
was no violation of the Regulations since this was not within the control of
the MD. However, SEBI examined the facts of the case, the need for margin
money, etc. and found that this contention was not correct and
underlying facts did not match with such contention. Hence, this submission was
rejected and a finding given that the MD had sold the shares within six months
in violation of the regulations.

 

Ascertainment of profiting from insider
trading

Insider Trading, by definition, is
an attempt to profit from UPSI that gives an edge to an insider. The profits
made are usually demonstrated by actual movement of the price on release of the
UPSI.

 

However, it has been accepted that
it is not necessary, to conclude that Insider Trading has taken place, that the
market price should have actually moved in the expected direction. Violation of
the Regulations takes place as soon as the insider deals whilst in possession
of the UPSI.

 

Having said that, the penalty for
insider trading is also related to the profits made – higher the profits made,
higher is the penalty. For this purpose, losses avoided are treated as profits
made. However, there is a stiff penalty of upto Rs. 25 crore where profits
cannot be computed directly.

 

In the present case, SEBI worked
out in detail the losses avoided. There were two types of trades. One set of
trades while there was sale when trading window was closed. The losses avoided
by sale of the shares by working out the price at which the shares were sold
and the price after release of the UPSI was calculated. The other set of trades
were sales made within six months of purchase. In this case, the sale price for
each lot sold within such six months period was compared with the sale price
immediately at the end of the six month period. The losses so avoided were
calculated.

 

As a side note, there is an
interesting aspect here. The rule that reverse trades shall not be carried out
for the following six months has an intention, it appears, of ensuring that
insiders do not quickly deal in the shares as this would help control Insider
Trading to some extent. An insider, thus, who buys 1,000 shares on 1st
January should not sell these shares till 1st July. The rule is
absolute. If one buys even 1 share, he cannot sell any number of shares till
six months. This is probably not wholly consistent with what appears to be the
intention. In the present case too, the MD had bought 1,00,000 shares on 5th
February 2010. However, in the following six months he sold 8,81,307 shares. In
the normal course, the ban should apply only to 1,00,000 shares that he
purchased and not to his entire shareholding. To put in other words, the ban
should apply only to the first 1,00,000 shares he sells and not to any further
sale of shares. However, the law, as literally read, applies to all of his
shareholding and hence any quantity of shares sold would attract this ban, and,
hence, the disgorgement of profits. Thus, profit on sale of all 8,81,307 shares have thus been ordered to be disgorged.

 

Levy of penalty

It is reiterated that the following
violations were held to have been made:-

1.  Dealing while in
possession of UPSI

2.  Sale of shares within six
months of purchase

3.  Sale of shares without
taking pre-clearance of the Compliance Officer.

 

The losses avoided through sale of
shares in violation of the Regulations were just about Rs. 2 crore.

 

SEBI noted that a Managing Director
has grave and higher responsibility of complying with such Regulations and
violation of it should deserve a higher penalty. It relied on the following
observation of the Securities Appellate Tribunal (in Harish K. Vaid vs.
SEBI, order dated 3rd October 2012):-

“It was then argued by the learned counsel for the appellants that
keeping in view the quantum of shares purchased, the penalty imposed by the
Board is excessive. The appellant has not derived any benefit as there was no
sale of shares based on UPSI. The adjudicating officer, while imposing the penalty,
although noted provisions of section 15J of the Act regarding factors to be
taken into account while adjudging the quantum of penalty, he has not applied
them correctly to the facts of the case. We have given our thoughtful
consideration to this aspect and are unable to accept the argument of the
learned counsel for the appellant. The evil of insider trading is well
recognized. The purpose of the insider trading regulations is to prohibit
trading to which an insider gets advantage by virtue of his access to price
sensitive information. The appellant is the Company Secretary and Compliance
Officer of the company who was involved in the finalization of quarterly
financial results and was fully aware of the regulatory framework and code of
conduct of the company. Under such circumstances, when there is a total
prohibition on an insider to deal in the shares of the company while in
possession of UPSI, the quantity of shares traded by him becomes immaterial.
Section 15G of the Act prescribes the penalty of twenty-five crore rupees or
three times the amount of profit made out of the insider trading, whichever is
higher. Section 15HB of the Act prescribes a penalty which may extend to one
crore rupees. However, the adjudicating officer has imposed a penalty of Rs. 10
lakh only on each of the violators. In the facts and circumstances of the case,
we are not inclined to interfere even with the quantum of penalty imposed.”

 

Accordingly,
penalties aggregating to Rs. 6.08 crore were levied on the Managing Director.

 

Conclusion

This Order is a good case study on
how meticulous investigation is made by SEBI particularly in the face of, no
response from the party and incorrect replies from the broker. The contentions
were systematically refuted and it was established that there were violations.
The actual calculation of the losses that were avoided was also made in detail.
The working adopted and principles applied, though simple and logical, are also
relevant and illustrate the methods and principles involved.

 

The intent of the Regulations which
deal with multiple ways of preventing and deeming acts of Insider Trading are
clarified in this order. As stated earlier, the ban on reverse trade within six
months, need for pre-clearance from Compliance officer and ban on trade when
trading window is closed, are examples of in-built checks and balances.

 

The case also demonstrates how the
UPSI benefit is to be determined in terms of worsening performance of a company
which was made public only after the sale of shares.

 

In
conclusion, the case also demonstrates levy of stiff and deterrent penalty
which sets an example for would-be violators.

RERA: Some Issues

Introduction

After an Overview of the Real Estate (Regulation and Development) Act, 2016 (“the Act”) in last month’s Feature, let us examine some critical issues under the same as applicable in the State of Maharashtra. It may be noted that the RERA is a State Regulator and hence, each State and each State’s RERA is empowered to issue their own Rules and Regulations respectively. This Article restricts itself to the State of Maharashtra.

At the outset, it must be confessed, that the Act is an evolving statute and at this stage, there may be more questions than answers. Having said that, the RERA in the State of Maharashtra (“MahaRERA”) is quite proactive and has been issuing clarifications on several issues.

Promoter: Land Owners also covered

The Act requires a Promoter to register a real estate project with the RERA. As on the deadline of 31st July, 2017, over 10,000 projects were registered with the MahaRERA.

The Act defines a Promoter in an exhaustive manner by giving a very far reaching definition. It covers any person who acts (himself) as a builder, coloniser, contractor, developer, estate developer or who claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale.

An interesting issue arises as to what would be the position of a land owner who enters into a joint development agreement with a developer for say, a share in the revenue from the sale of flats or a share in the area to be developed? For instance, a landowner executes a development rights agreement with a developer and in lieu of the same would receive a 40% share of the revenues ( to be)  received from the Project. Alternatively, he agrees to  receive 40% of the built-up area in the project. Would such a land owner also be treated as a Promoter? The answer to this is Yes! The MahaRERA in its Order has coined the definition of the term “Co-Promoter” and defined it to mean and includes any person(s) or organisation(s) who, under any agreement or arrangement with the Promoter of a Real Estate Project is allotted or entitled to a share of the total revenue generated from the sale of apartments or share of the total area developed in the real estate project. Thus, every land owner who receives an area / revenue share would be treated as a Promoter of the real estate project. It would be permissible for the liabilities of such Co-Promoters to be as per the joint development agreement with the developer. However, for withdrawal from the RERA Account, they shall be at par with the Promoter of the Real Estate Project. The land owner would be required to give an undertaking to the RERA, including an undertaking relating to the title to land and the date of completion of the project. Consequently and most vitally, the Order holds that the cost of land payable to land owners by the Promoter cannot be regarded as cost of Project and cannot be withdrawn from the RERA Account and that such land owners must open a separate bank account for deposit of 70% of the sale proceeds from the allottees! An intriguing part about this Order is its interplay with the Act. Section 4 of the Act mandates that 70% of the realisations from flat allottees shall be deposited in a separate designated account which would be used only to cover the cost of construction and the land cost. In a joint development agreement, the share payable to a land owner by a developer is the developer’s land cost. However, the MahaRERA’s Order expressly prohibits payment of this land cost from the separate designated account!

Recently, some land owners have approached the Bombay High Court challenging this Order of the MahaRERA. The final outcome of this case would be eagerly awaited by several land owners.

After the advanced capital gains tax liability on a land owner (started by the decision of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom)) and indirect taxes (GST/VAT/service tax as on a works contract) for the portion constructed by the developer for the land owner, this would be the final straw which breaks the proverbial camel’s back! Of course, the newly introduced section 45(5A) of the Income-tax Act seeks to provide some solace to land owners who are individuals and HUFs by postponing the capital gains tax liability. However, for a great majority of land owners they would be staring at a scenario, where on the one hand, they are asked to pay capital gains tax on the execution of a development agreement once the conditions specified in Chaturbhuj Dwarkadas Kapadia, 260 ITR 491 (Bom) are triggered and on the other hand, they cannot withdraw the money received from the flat allottees!! It may be noted that this is a restriction imposed by the MahaRERA and hence, only applies in the State of Maharashtra and not in other States (unless the Authorities in other States also issue a similar Order). Further, this Order only applies when the consideration for the land owner is in the form of a revenue / area share. If the transaction is one of an outright sale / conveyance, then this restriction is not applicable and the developer can easily use the sale proceeds to pay off the land owner. Having said that, finding a developer, in the current real estate market, willing to buy a land on an outright basis is akin to finding a needle in several haystacks. Something which even google.com would find very difficult to search. If a land owner does find such a developer, then he kills 3 birds with one stone – he can pay tax (since he has the funds), there would not be any GST liability (since there is no works contract component) and he would not be classified as a Promoter under the RERA Order. Truly an Utopian scenario!

Promoters: Contractors
A question arises whether a building contractor is required to be registered as a Promoter? The definition includes a contractor or person by any name who acts as the holder of a power of attorney from the land owner on which the building / apartment is constructed. However, the overarching requirement for registration is that the Promoter must sell one or some of the apartments. Section 3 which mandates registration makes it clear that no Promoter shall sell or offer for sale any apartment or building without prior registration. Hence, if there is no sale or offer for sale, then there should not be any requirement for registration as a Promoter. Section 3 similarly provides that any renovation, repair or redevelopment which does not involve marketing, sale or new allotment of any apartments would not require registration. Hence, a building redevelopment which does not have any free sale component would be outside the purview of registration. The FAQs issued by the MahaRERA also support this view where the answer given states that if there are 16 apartments in a society redevelopment project, registration would be required provided there are some apartments which are for sale. Hence, it stands to reason that if there is no sale component, then there would not be any requirement for registration. 

Promoters: Financiers and Private Equity Funds
A similar predicament as that of the land owners may also be experienced by lenders / private equity funds who have contributed funds to the real estate project. In most cases, such financiers have step-in rights, i.e., in the event that the developer is unable to complete the project, then they would step-in to his shoes and complete the project.  In addition, financiers more often than not, have strong investor protection rights which enable them to participate in the control and management of the developer’s entity.  The definition of the term Promoter is extremely wide. Hence, it is a moot point whether such financiers may also be roped in within the definition of a Promoter / Co-Promoter? This may even hamper any exit to be provided by the developer to the financier since payments to Promoters do not fall within the permissible uses from a designated bank account. It may be possible to contend that mere presence of such rights may not make a lender to be treated as a Promoter till they are actually exercised.

This may force financiers to utilise secured debt structures in which only the project is mortgaged in their favour without any exotic rights. In such an event, the financier would not be treated as a Promoter and the designated bank account can be used to repay the lender. In any case, the obligations would be attracted once the mortgage is foreclosed and the financier proceeds with the incomplete tasks.

Designated Account to be maintained

The Act requires that the Promoter must maintain a separate designated bank account. 70% of all realisations from flat allottees must be deposited in this account to cover the cost of construction and the land cost and must be utilised for that purpose only. The balance 30% may be withdrawn without routing the same to the designated account. For making withdrawals from this account, 3 Certificates are required. The provisions applicable in the State of Maharashtra in this respect are spread over the Central Act, the Rules (framed by the Maharashtra State Government), the Regulations  (framed by the Maharashtra RERA), the Forms (issued by the Maharashtra RERA) and the Clarifications (issued by the Maharashtra RERA). All these diverse provisions have been harmonised and analysed below for the ease of ready reference:

(a)   Designated Bank Account – 70% of all amounts realised for the real estate project from the allottees, shall be deposited in a separate bank account to cover the cost of construction and the land cost and shall be used only for that purpose. These deposits may include advances received against allotment.

(b)   Procedure for Withdrawals – The Promoter is entitled to withdraw amounts from the designated bank account, to cover the cost of the project (land and construction and borrowing), in proportion to the percentage of completion of the project. Withdrawal is permissible only after it is backed by 3 certificates stating that the withdrawal is in proportion to % completion of the project. The Promoter is required to submit the following 3 certificates to the bank operating the designated account:

–   Firstly, a certificate in Form 1 from the project Architect certifying the % completion of construction work of each of the buildings/wings of the project;

–   Secondly, a certificate in Form 2 from the Engineer for the actual cost incurred on the construction work of each of the buildings/wings of the project; and

–   Thirdly, a certificate in Form 3 from a practicing Chartered Accountant, for the cost incurred on construction and the land . The practicing Chartered Accountant shall also certify the proportion of the cost incurred on construction and land to the total estimated cost of the project. The total estimated cost of the project multiplied by such proportion shall determine the maximum amount which can be withdrawn by the Promoter from the separate account.

The Promoter is required to follow the above at the time of every withdrawal from the separate account till Occupancy Certificate in respect of the project is obtained. On receipt of the Completion Certificate in respect of the project, the entire balance amount lying in the separate account can be withdrawn by the Promoter.

However, as a concession, MahaRERA has allowed a Promoter to do away with the practice of submitting 3 certificates for every withdrawal from the designated bank account. He may obtain the same and retain them on record and furnish them to the auditor at the time of the annual audit. The Promoter would have to submit a self-declaration to the bank once every quarter and this would suffice for the withdrawals.

(c)   Contents of CA’s Certificate: Form 3 requires the CA to certify the following:

–   Total Estimated Cost (Land Cost + Construction Cost) of the project based on the Form 2 issued by the engineer.

–   Total Cost Incurred (Land Cost + Construction Cost) of the Real Estate Project based on an actual verification of the books of account by the CA.

–   % completion of Construction Work (as per the Architect’s Certificate in Form 1). However, the MahaRERA has clarified that this need not be filled in by the CA for all ongoing certificates and should be filled in only in the final certificate issued after 100% of the construction work has been completed.

–   Proportion of the Cost incurred on Land Cost and Construction Cost to the Total Estimated Cost. (Total Cost Incurred / Total Estimated Cost).

–   Amount which can be withdrawn from the Designated Account (Total Estimated Cost * Total Cost Incurred / Total Estimated Cost)

     Less: Amount withdrawn till date of this certificate as per the Books of Accounts and Bank Statements

–   Resulting figure is the Net Amount which can be withdrawn from the Designated Bank Account

The CA certifying Form 3 should be different than the statutory auditor of the Promoter’s enterprise.

(d)   Components of Form 3:

(A)  Land Cost includes all costs incurred by the Promoter for acquisition of ownership and title of the land, including premium payment; Premium for TDR/ FSI; stamp duty, transfer charges, etc.

In cases, where the Promoter, due to inheritance, gift or otherwise, is not required to incur any cost for the land, then his cost is determined on the basis of the Stamp Duty Ready Reckoner value of the land prevailing on the date of registration of the real estate project with the MahaRERA.

In respect of the land cost, the MahaRERA has clarified that the fair market value of the acquisition cost shall be the indexed cost of acquisition of the land computed as per the Income-tax Act provisions. One wonders how should this indexation be applied while issuing a certificate because the term “fair market value of the indexed cost” is not to be found in Form 3. A suitable clarification on this would be appreciated.

Further, it has been clarified that interest specifically done for land acquisition should be added. Interest for construction of rehab component in a project is also treated as land cost. Costs incurred for slum rehab, relocation of tenants in a redevelopment project, etc., are all includible in land cost.

(B) The Cost of Construction includes all costs, incurred by the Promoter, towards the on-site and off-site expenditure for the development of the Real Estate project, including payment to any Authority and the Principal sum and interest, paid to certain lenders.

     In respect of the Cost of Construction, the MahaRERA has clarified that:

(i)  The term “incurred” means products or services received creating a debt in favour of the supplier or received against a payment made. It is a moot point whether payment of advances towards cost is permissible? A suitable clarification on this would be appreciated.

(ii) The development / construction cost should not include marketing, brokerage expenses incurred for the sale of flats. These, though part of the project cost, should not be met out of the designated account but should be met from the other accounts / funds of the Promoter.

(iii) While principal sum should be shown in brackets it must not be treated as a part of the construction cost.

(iv)Income-tax payable by the Promoter is not a part of the construction cost.

(v) Cancellation amounts paid to allottees who cancel their bookings can be treated as a part of the construction cost and can be withdrawn from the designated account.

(e)   Annual Audit; The Promoter must get his accounts audited by 30th September of every financial year and must produce a statement of accounts duly certified and signed by auditor to the MahaRERA. The Annual Report on statement of accounts must be in Form 5.

Form 5 requires the auditor to certify that the amounts collected for a particular project have been utilised for that project alone and that the withdrawal from the designated bank account has been in accordance with the proportion to the percentage of completion of the project. If not, then the Form must specify the amount withdrawn in excess of the eligible amount or any other exceptions. MahaRERA has clarified that auditor must certify that 70% of the realisations have been used for the project (the balance 30% could be used for any purpose).

(f)   Mismatch  in  Certificates and  Audit: The Regulations contain a very important provision. They state that  if the  Form 5 issued by the auditor reveals that any Certificate issued by the project architect (Form 1), engineer (Form 2) or the chartered accountant
(Form 3):

–   Has false or incorrect information and

–   the amounts collected for a particular project have not been utilised for the project and

–   the withdrawal has not been in compliance with the proportion to the percentage of completion of the project,

then the MahaRERA, in addition to taking penal actions as contemplated in the Act and the Rules, shall also take up the matter with the concerned regulatory body of the said professionals of the architect, engineer or chartered accountant, for necessary penal action against them, including dismemberment.

Thus, while % of completion of work needs to be mentioned in ongoing Form 3 issued by a CA (as per the relaxations given by the MahaRERA), the withdrawals must be in sync with the proportion to the percentage of completion of the project. In fact, the Auditor is required to specifically report on this issue and if it is found that this condition has been violated, then the RERA may even complain to the ICAI against the CA issuing Form 3. Thus, there is a unique scenario where the CA need not report on % completion but he must ensure withdrawal is in compliance with % completion. Hence, it would be in the interest of the CA to always ensure that his certificate clearly specifies whether the withdrawal is in proportion with the percentage of completion of the project.

The abovementioned rules will have to be followed by the co-promoter as well, to the extent applicable.

Conclusion

The Act is a major reform in India’s real estate sector and as is the case with any transformation, there are bound to be teething problems and unsolved queries. As the sector progresses on the learning curve, lessons will be learnt and issues may get resolved.
 
At this stage, it would be worthwhile to alert CAs issuing certificates under the Act, to remember Shakespeare’s quote “Discretion is the Better Part of Valour!” Thus, they should exercise due care and caution while certifying and in cases of doubt or ambiguity, consider asking the Promoter to obtain a legal opinion. Avoid acting in haste and repenting in leisure!!

Threats to RTI

Those who wish to proclaim the great impact of Right to
Information say that it is responsible for creating the culture of transparency
in the government. The widespread usage of RTI is proof of this. This claim is
reasonable and is obvious in the empowerment of citizens and the scams it has
exposed. There is a strong feeling that corruption is unacceptable and there is
a great resolve to curb it. This is in line with the declaration in the
preamble of the constitution.

However, accountability and transparency have not yet
become embedded in the DNA of those with power, and this is a change that is
being resisted. There are signs that we may have reached a point of
stagnation, which could lead to RTI’s regression. This cannot be good for the
citizens and democracy. Many techniques have been developed by the officers to
stall RTI queries. At times, absurdly high charges in tens of thousands are
sought as costs for gathering the information. Another way is to offer piles of
files for inspection without indexing and pagination. I once asked a government
department about a list of transfers of senior officers in violation of Act 21
of 2006; they sent it to over 30 different offices. One more technique is to
transfer the application multiple times. All these are against the letter and
spirit of the law.

First let us analyse the reasons for RTI’s success and wide
proliferation. The main reason was the fact that it was reasonably well crafted
because of active civil society intervention and participation. There were
people’s movements like Mazdoor Kisan Shakti Sangathan which had championed
this law. The teeth of the act were the penalty provisions which for the
first time provided for a financial penalty up to Rs. 25000 to be paid by a
public information officer, if he/she did not provide information without
reasonable cause. This for the first time recognized the sovereignty of the
individual citizen.

Civil society organizations and individuals very
enthusiastically took upon themselves the job of educating people. Citizens
took ownership of this law. Government officials feared the Information
Commissions and felt they would have a difficult time if the matters went to
courts in writs. Among the first few cases which went to courts, various high
courts acknowledged that this was a fundamental right of citizens which had
been earlier defined in various Supreme Court judgements, such as those in Raj
Narain case, R. Rajagopal, SP Gupta, ADR-PUCL and others.

However, after the first few years of this honeymoon, the resistance
to RTI began building up within the establishment. The establishment soon
realized that it had unleashed a genie, which curbs its powers for
arbitrariness and corruption. In less than a year, the government decided to
amend the act to dilute its effectiveness. There were intense protests across
the country by citizens and the government had to retract. After that there
were at least two more efforts to dilute the Act but these too failed. The last
time was when the Central Information Commission ruled that six major political
parties were ‘public authorities’ as defined by the law and hence would have to
give information in RTI. The parties ganged up together so that they could
carry on with their opaque operations with black money, undemocratic working
and in contravention of their constitutions. Citizen opposition managed to
again stop this. But political parties have jointly decided to defy the
orders of the Commission to display their pompous arrogance. They have refused
to appoint Public Information Officers or give any information in RTI. They are
disregarding the orders of the Commission without even a fig leaf of getting a
stay from a Court.

Most state and central governments are showing great
reluctance to follow the RTI Act. They have developed techniques to wear out
the applicant. The lackadaisical ways of the Information Commissions have
helped and emboldened them. It has been noticed that most Information
Commissions impose penalties in the rarest of cases, as if they are imposing a
death penalty. Governments often do not appoint Commissioners.

Amongst the few times that the former PM spoke he had
mentioned his distress at what he called ‘frivolous and vexatious’ RTI
applications and the time taken up in these. A RTI query about this revealed
that it was a casual observation based on his perception and irritation with
pestering RTI queries by the powerless citizen. There was no evidence. The
present PMO refused to even provide information about the visitors to the PM!
Why should this be so? The PM works round the clock in the service of people
and such reluctance appears suspicious. Will revealing those names reveal
some dark secrets?

The governments appear to be institutionalizing mechanisms
whereby citizens know only what the government wants them to know. It is
absurd that citizens who are mature enough to elect those who should govern the
nation are not considered mature enough to be trusted about information on
those who represent them. This claim is made by those who are in power, and who
do not understand and subscribe to democratic working. After getting power,
people’s mindset undergoes a transformation. It is a matter of deep distress
that even the present CM of Delhi Arvind Kejriwal, who became nationally famous
for his work in the RTI campaign, has not brought about any significant change
in his government towards transparency.

Information Commissioners are mainly selected as an act of
political patronage. Many of them have no predilection for transparency,
though they may pay lip service to it. The lack of effective working,
accountability and transparency at most of the commissions is heart wrenching.
Many commissioners do not understand the law, nor the basic rationale for
transparency or democracy.  Apart from
this the lazy way in which many work has built up mounting pendencies, and it
appears that they will be largely responsible for frustrating RTI.

It is unfortunate that the last few years have seen decisions
by most quasi-judicial and judicial bodies expanding the interpretations of the
exemptions and constricting the citizen’s right. Former Supreme Court judge,
Justice Markandey Katju has said “I therefore submit that an amendment be made
to the RTI Act by providing that an RTI query should be first examined
carefully by the RTI officer, and only if he is prima facie satisfied on
merits, for reasons to be recorded in writing that the query has some substance
that he should call upon the authority concerned to reply. Frivolous and
vexatious queries should be rejected forthwith and heavy costs should be
imposed on the person making them.” A former Chief Justice of India said in
April 2012, “The RTI Act is a good law but there has to be a limit to it.”
At this rate and logic, we may be asked to justify why we wish to speak or express
ourselves! A study of all the Supreme Court judgements by this writer
appears to show that the Right to Information is being constructed by gross
misinterpretation. Government departments get stays from Courts to many
progressive orders of the Information Commissions. Citizens do not have the
wherewithal to fight protracted legal battles. While parliament’s attempts to
dilute the RTI Act were thwarted by the sovereign citizens, its emasculation by
adjudicators is happening at a brisk pace. Many decisions are blunting the law
of its power to curb corruption.

 One of the most
problematic statements by the Supreme Court in a RTI case is quoted in many
places: “Indiscriminate and impractical demands or directions under RTI Act
for disclosure of all and sundry information (unrelated to transparency and
accountability in the functioning of public authorities and eradication of
corruption) would be counter-productive as it will adversely affect the
efficiency of the administration and result in the executive getting bogged
down with the non-productive work of collecting and furnishing information. The
Act should not be allowed to be misused or abused, to become a tool to obstruct
the national development and integration, or to destroy the peace, tranquillity
and harmony among its citizens. Nor should it be converted into a tool of
oppression or intimidation of honest officials striving to do their duty. The
nation does not want a scenario where 75% of the staff of public authorities
spends 75% of their time in collecting and furnishing information to applicants
instead of discharging their regular duties. “

This needs to be contested. The statement “should not be
allowed to be misused or abused, to become a tool to obstruct the national
development and integration, or to destroy the peace, tranquillity and harmony
among its citizens” would be appropriate for terrorists, not citizens using
their fundamental right to information. There is no evidence of RTI damaging
the nation. As for the accusation of RTI taking up 75% of time, I did the
following calculation: By all accounts, the total number of RTI applications in
India is less than 10 million annually. The total number of all government
employees is over 20 million. Assuming a 6-hour working day for all employees
for 250 working days, it would be seen that there are 30,000 million working
hours. Even if an average of 3 hours is spent per RTI application (the average
is likely to be less than two hours) 10 million applications would require 30
million hours, which is 0.1% of the total working hours. This means it would
require 3.2% staff working for 3.2% of their time in furnishing information to
citizens. This too could be reduced drastically if computerised working and
automatic updating of information was done as specified in section 4 of the RTI
Act. It is unfortunate that the apex court has not thought it fit to castigate
public authorities for their brazen flouting of their obligations u/s. 4, but
upbraided the sovereign citizens using their fundamental right.

I would submit that the powerful find RTI upsetting their
arrogance and hence try to discredit it by often talking about its misuse.
There are many eminent persons in the country, who berate RTI and say there
should be some limit to it. It is accepted widely that freedom of speech is
often used to abuse or defame people. It is also used by small papers to resort
to blackmail. The concept of paid news has been too well recorded. Despite all
these there is never a demand to constrict freedom of speech. But there is a
growing tendency from those with power to misinterpret the RTI Act almost to a
point where it does not really represent what the law says. There is widespread
acceptance of the idea that statements, books and works of literature and art
are covered by Article 19 (1) (a) of the constitution, and any attempt to curb
it meets with very stiff resistance. However, there is no murmur when users of
RTI are being labelled deprecatingly, though it is covered by the same article
of the constitution. Everyone with power appears to say: “I would risk my
life for your right to express your views, but damn you if you use RTI to seek
information which would expose my arbitrary or illegal actions.” An
information seeker can only seek information on records.


I would also submit that such frivolous attitude
towards our fundamental right is leading to an impression that RTI needs to be
curbed and its activists maybe deprecated, attacked or murdered. The citizen’s
fundamental right to information is now facing strong challenges, owing to its
great success and the fact that it has changed the discourse and paradigm of
power. Our democracy is at a crossroads. The next decade could result in
increasing the scope of transparency to result in a true democracy. However, if
the forces opposing transparency gain over the demos, a regression can
take place. If this happens, those in power must note that the citizen will not
stand for it. Citizen groups must take active measures to defend their right,
including demanding a transparent process of selecting commissioners and making
the political leadership aware that they will resist any dilution of the law. RTI
must be saved and allowed to flower. At this juncture as the nation celebrates
70 years of independence it must hold samvads (dialogues) across the nation to
restore RTI to its pristine glory. Parliament with citizen inputs made a law
which ranks amongst the top five in the world in terms of its provisions.
However, we rank at a poor 66 in terms of implementation. It is our duty to
create adequate public opinion to safeguard our Right to Information.

Insolvency and Bankruptcy Code 2016 – Challenges and Opportunities

The enactment of the ‘The Insolvency and Bankruptcy Code
2016’ (IBC) on May 26, 2016 is perhaps one of the biggest reforms along with
GST undertaken by India in recent times. The Code unifies and streamlines the
laws relating to recovery of debts and insolvency for both corporate and
non-corporate persons, including individuals.

The preamble to the Act introduces the Act as

–   An Act to consolidate and amend the laws
relating to reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals

–   To fix time periods for execution of the law
in a time bound manner

–   To maximise the value of assets of interested
persons

–   To promote entrepreneurship

–   To increase availability of credit

–   Balance the interests of all stakeholders
including alteration in the order of priority of Government dues.

The vision of the new law is to encourage entrepreneurship
and innovation. Some business ventures will always fail but they will be
handled rapidly and swiftly. Entrepreneurs and lenders will be able to move on
instead of being bogged down with decisions taken in the past.

The Code repeals or overrides around 11 laws and promises to
bring a sea change in how debt recovery and insolvency are handled in India,
drawing from the success of such law in other countries.

Insolvency, Bankruptcy and Liquidation

Bankruptcy and Liquidation share in common the concept of
‘Insolvency’. This means that it takes a person or a company becoming
‘Insolvent’ to trigger a Bankruptcy or Liquidation.

Having said that, not all Liquidation occurs as a result of
Insolvency (i.e., Members Voluntary Liquidations occurs when the shareholders
of a solvent company elect to liquidate the company, simply because that
company has achieved its purpose).

To address the question directly, Insolvency is the common
link to Bankruptcy and Liquidation. Let me unpack these concepts.

Applicability of the Code

The provisions of the Code shall apply for insolvency,
liquidation, voluntary liquidation or bankruptcy of the following entities:

1.  Any company incorporated under the Companies
Act 2013, or under any previous law

2.  Any other company governed by any special act
for the time being in force, except insofar as the said provision is
inconsistent with the provisions of such Special Act

3.  Any Limited Liability Partnership under the
LLP Act 2008

4.  Any other body incorporated under any law for
the time being in force, as the Central Government may by notification specify
in this behalf

5.  Partnership firms and individuals.

There is an exception to the applicability of the Code that
it shall not apply to corporate persons who are regulated financial service
providers like Banks, Financial Institutions and Insurance companies.

Institutional set up under
the code

With a view to improve Ease of doing business in India, the
code provides for a time bound process for speedy disposal and also the manner
for maximisation of value of assets. It will create a win-win situation not
only for the creditor and debtor companies, but it will also benefit the
overall economy.

The IBC provides an institutional set-up comprising of the
following five pillars:

I.   Insolvency Professionals (‘IP’) –To
conduct the corporate insolvency resolution process and includes an interim
resolution professional; the role of the IP encompasses a wide range of
functions, which includes adhering to procedure of the law, as well as accounting
and finance functions.

II.  Insolvency Professional Agencies (‘IPA’)
–To enroll and regulate insolvency professional as its member in accordance
with the Insolvency and Bankruptcy Code 2016 and read with regulations.

III.  Information Utilities – to collect,
collate and disseminate financial information to facilitate insolvency
resolution.

IV. Insolvency and Bankruptcy Board of India
(‘IBBI’) – A Regulator who will oversee these entities and to perform
legislative, executive and quasi-judicial functions with respect to the
Insolvency Professionals, Insolvency Professional Agencies and Information
Utilities.

V. Adjudicating Authority – The National
Company Law Tribunal (NCLT), established under the Companies Act, 2013 would
function as an adjudicator on insolvency matters under the Code.

The implementation of any system does not only depend on the
law, but also on the institutions involved in administration and execution of
the same. It depends on the effective functioning of all the institutions but
the Insolvency Professionals have a vital role to play in the insolvency and
bankruptcy resolution process.

Distinguishing Features of the IBC

The Code provides a comprehensive and time bound mechanism to
either put a distressed person on a firm revival path or timely liquidation of
assets. The interests of all stakeholders have been taken care of. Some of the
salient features of the code are as follows:-

1.    Dedicated Adjudicating and Appellant
Authority:

       The adjudicating authority for Corporates
shall be National Company Law Tribunal (NCLT) and for others shall be Debt
Recovery Tribunal (DRT).The first appeal shall lie with NCLAT and DRAT
respectively and the final appeal shall lie with the Supreme Court. No other
Court shall have any jurisdiction to grant any stay or injunction in respect of
matters within the domain of NCLT, DRT, NCLAT and DRAT. This would provide a
specialised mechanism to resolve stressed accounts problem.

       Further, a separate regulator i.e. the
IBBI is set up to regulate various matters under the Code.

2.    Time Bound Process: The Code provides that
the insolvency resolution shall have to be completed within 180 days (maximum
one extension of 90 days allowed) from the date of admission of application for
insolvency resolution. If no resolution is reached in the above time frame, the
Code provides for automatic liquidation. Hence, once default happens and
insolvency resolution application is filed by any stakeholder, financial
creditors would be forced to make intelligible choices so as to maximise
economic value of business or face liquidation. At the same time, promoters
should get sensitive about managing cash flows as default would straight lead
to loss of control over business. 

3.    Preserving Value of Business: Once the
application for insolvency resolution is admitted, there shall be complete
moratorium till completion of insolvency proceedings. Board of Directors shall
remain suspended and affairs of the company shall come under the control of the
Resolution Professional. Though the entity shall remain a going concern.
Creditors shall be precluded from taking any action against the Company
including enforcement of security under SARFAESI Act during this period. Even a
lessor cannot take possession of leased assets back during the moratorium
period. Thus it shall provide an opportunity for the creditors to discuss
sensible restructuring that can provide a better value than straight
liquidation even while business and its assets are preserved during this
period.

4.    Failure to Pay is the new Trigger: Existing
mechanisms under SICA and Companies Act are tuned to provide for interjection
when the borrower’s ability to pay is demonstrably impaired. Whereas under the
Code, a creditor can trigger insolvency resolution process just on default.
Thus a defaulter can be dragged into insolvency resolution process without
waiting for its net-worth to get eroded or for the account to be classified as
NPA. This would be a big deterrent for able debtors to arm-twist small
creditors.

     Therefore, the Code will have an effect
of early identification of distress. It will instill discipline among promoters
or else they will risk losing management control and also face liquidation.

5.    Professionalisation of Insolvency
Management:

       The Insolvency Professionals shall be
regulated and licensed professionals and will have a critical role in the
process. During the process of Insolvency Resolution, the management of the
borrower shall be taken over by the Insolvency Resolution Professional. This
will help preserve the value of business and assets of the debtor during the
insolvency resolution process. Lenders will no longer be worried about
mismanagement by promoters of distressed corporates. As of now, the only option
lenders had was to convert debt into equity and take over the management for
which they may not be having the requisite competency.

6.    New Priority Order of Payment: A welcome
change brought in by the Code is that the statutory dues are relegated to the 5th
position in the priority of payment from the current 1st
position. Herein, even unsecured financial creditors shall be paid before
clearance of dues of the Central and State Governments. This provision is
likely to boost corporate bond market as well as debt funding of SMEs and
startups.

7.    All Creditors empowered to trigger
Insolvency: All creditors whether domestic or foreign, whether secured or
unsecured and whether financial or operational can apply for insolvency
resolution. The defaulting debtor himself may also apply. Thus for the first
time, structured mechanism for redressal of defaults is being provided to
operational creditors such as suppliers, employees etc. Similarly, the
foreign lenders and unsecured lenders shall find a mechanism to enforce their
debts in a fair and transparent process. This no doubt will deepen the credit
markets in India.

8.    Enforcement of Personal Guarantees: If any
corporate debt is secured by means of personal guarantee, then the bankruptcy
of the personal guarantor shall be dealt with by same NCLT rather than DRT.
Thus, there will be a common forum for a creditor to enforce debt from both
borrower and guarantor.

9.    Information Utilities: There is an enabling
provision to facilitate creation of Information Utilities which will house
comprehensive credit data relating to debtors, their creditors and securities
created. This will improve transparency and better decision making at all
levels.

10.  Fresh Start: A non-corporate debtor on finding
himself unable to pay his debts may apply for a fresh start by discharge from
certain debts, provided he satisfies the following conditions:-

–   Gross annual income of the debtor is not
exceeding Rs 60,00/-

–   Aggregate value of debtor is not exceeding
Rs. 20,000/-

–   Aggregate value of debts is not exceeding Rs.
35,000/-

–   Debtor is not undercharged bankrupt

–   Debtor does not own a dwelling unit
(encumbered or not )

    No Fresh Start Order in the last 12 months
prior to the date of application.

Brief Overview of Corporates Insolvency Resolution Process

In the following flowchart, we can see an overview of the
Corporate Insolvency Resolution Process.

Who can become an Insolvency Professional?

Category I – Any Chartered Accountant, Company Secretary,
Cost Accountant and Advocate who has passed the Limited Insolvency Examination
and has 10 years of experience and enrolled as a member of the respective
Institute/Bar Council; or a Graduate who has passed the Limited Insolvency
Examination and has 15 years of experience in management, after he received a
Bachelor’s degree from a University established or recognised by law.

The IBBI has notified the syllabus for the Limited Insolvency
Examination. For syllabus, enrollment process for the examination, etc.,
kindly visit: http://www.ibbi.gov.in/limited-insolvency.html or www.iiipicai.in

The ICAI has also set up a section 8 company and its website
contains an interesting E Learning platform covering the entire gamut of IBC
including mock tests. (www.iiipicai.in)

Category II – Any other individual on passing the
National Insolvency Examination.

The IBBI is yet to notify the syllabus for the National
Insolvency Examination.

The IPs are regulated by the code set out by the IBBI.
Section 208 (2) sets out code that needs to be followed by every insolvency
professional.

Further, the duties of the IP are laid out in the Model Bye
Laws [IBBI – (Model Bye-Laws and Governing Board of Insolvency Professional
Agencies) Regulations 2016, Clause VII of Schedule – Regulation 13].

Opportunities for Chartered Accountants (CAs)

The passage of the Insolvency and Bankruptcy Code, 2016 has
thrown up a tremendous set of new opportunities for CAs.  On an analysis of the major responsibilities
of the IPs to the Debtors and Creditors, the IPs should be well versed with
aspects of Company Law, Taxation, Banking and Finance, Stakeholder Management,
Valuation/Sale of assets, Cash flow management and Commercial and business
acumen.

Considering the onerous responsibilities on the IP, it would
be very difficult for an individual to possess such multiple skills and hence
the IBC has brought in a concept of Insolvency Professional Entities (IPEs)
which can be registered as partnerships, limited liability partnerships and
corporate entities.

Such IPEs can be expected to have the capacity to offer the
diverse skill sets on a single platform to facilitate the Insolvency and
Bankruptcy practice.

IPE presents opportunities to CAs to team up their
counterparts, Company Secretaries, Cost Accountants and Lawyers and present a
complete solution to their clients. 

Based on precedents of the last 6 months, and a view of this
author, in case of insolvency cases filed by Financial creditors, IPs can earn
between Rs. 2 lakh to Rs. 4 lakh per month and in case of cases filed by
creditors or by the corporates, IPs can earn between Rs. 50,000 to Rs. 2 lakh
per month depending upon the size of business and complexity of each case.

With the recent push by the Reserve Bank of India (‘RBI’) to
the Banks to file for Insolvency on the top 500 defaulters/NPAs under the new
IBC, banks have moved fast and started the process in the right earnest and the
process is expected to pick up speed. Further, with large scale media coverage
on the IBC, the creditors have also filed numerous cases for Insolvency on
Debtors and have received favourable closures in a short span of time. Both
these would throw up numerous and multiple opportunities for Professionals in a
short span of time and the first mover advantage will always help in quickly
building up the credentials in this space.

As on date, approximately 800-1,000 IPs have been
registered with IBBI and there is an estimate of more than 1 lakh cases of
defaulters/NPA pending only with Banks at various stages. Hence, there exists a
significant gap between the potential demand of IPs expected in the near future
versus the supply of IPs.

Problem Areas under IBC

As the Indian corporate sector and business community get
more aware of the IBC due to push by the Government to the banks to file for
insolvency and widespread media coverage, financial creditors (primarily
unsecured lenders) and operational creditors are using the IBC as a pressure
tactic on the Corporate Debtor to pay their due sums. During the last few
months, there have been numerous cases filed by operational creditors with NCLT
under the IBC, however, many such cases filed by operational creditors have not
been admitted by NCLT due to various reasons. However, at the same time, under
the fear of IBC, many cases of operational creditors have been settled by the
Corporate Debtor to avoid being referred to NCLT under the IBC. Hence, as we
get more judicial precedence of cases not being admitted by NCLT, sense should
prevail and only genuine cases would be filed under IBC. Further, business
practices amongst the Indian corporate sector and business community especially
with respect to operational creditors should definitely see a significant
improvement in the years to come.

Conclusion

This Code is currently in early stages of
implementation and is focused on revival of business and putting idle resources
of the economy to use, this can bring a huge change in lives, livelihoods and
prospects of both creditors, debtors and professionals. It is one of the most
challenging and equally rewarding career options. In this era of major reforms
in uncharted territories, it throws up a big opportunity to work as an
Insolvency Professional and get an early mover advantage.

Ingredients for Crafting a Model Policy On Dealing With Related Party Transactions

Introduction

Related Party Transactions (RPTs) have been a contentious
issue since the advent of Companies. Separation of ownership and control
combined with diffused ownership in companies provides a fertile ground for the
unscrupulous elements to unjustly enrich themselves. More than 200 years ago,
Lord Cranworth in the landmark case of York Building Company vs. McKenzie
highlighted the reason for RPTs invoking distrust. In 1795, he noted

‘No man can serve two masters.
He that is entrusted with the interest of others, cannot be allowed to make the
business an object of interest to himself; because from the frailty of nature,
one who has the power, will be too readily seized with the inclination to use
the opportunity for serving his own interest at the expense of those for whom
he is entrusted.’

A critical strand in the history of corporate law is the
evolution of regulations dealing with RPT, for mal-governance often manifests
itself through RPTs. Despite its role in hampering good governance, RPTs are
not banned anywhere in the world, as this ‘cure’ is more harmful than the
‘disease’ itself.

Given the interdependence, a key element of good governance
is evidenced in the way in which RPTs are regulated. While legal compliance is
the minimum expected of any corporate citizen, good governance practices go
beyond the minimum and set higher standards to inspire shareholders’ and
stakeholders’ confidence in building a profitable and sustainable business.

Regulating RPTs has three critical parts, namely Formulating
a Policy for Dealing with RPTs, Implementing the Policy that is formulated, and
Disclosure of RPTs to their shareholders. This article attempts to provide
insights into crafting a model ‘Policy on Dealing with Related Party
Transactions’ by drawing on the history of regulating RPTs, analysing the
Indian statutes and learning from the practices of the Nifty 50 companies.

A Brief History of Regulating RPTs

One of the earliest recorded RPT disputes involves the East
India Company and Robert Clive. Following the Battle of Plassey, Robert Clive
privately negotiated for himself an annual income of £30,000 for installing Mir
Jaffar as the Nawab of Bengal. In 1765, Laurence Sulivan, the Chairman of East
India Company, who wanted to weed out corruption in the company, initiated the
move to cancel this annual payment as unjustified, resulting in a fight for the
control of East India Company. As it looks, this does not seem to be the first
disputed RPT as joint stock companies were in existence from the 16th century.
However, fighting for the control of the company seemed to be the only method
available to shareholders for redressing their grievances. As RPTs became
avenues for fraud, regulators had to move in to regulate them. Even in events
as recent as 2004, when the US-SEC initiated proceedings against Parmalat of
Italy on what it called ‘the largest financial fraud in history’, RPTs had a
role, revealing a close nexus between frauds and RPTs  

After 1844 AD, when companies could be registered under
specific laws, RPT regulations has evolved rapidly. A major factor prodding on
this evolution is the conflicting economic theories that viewed RPTs from
different perspective. While the Conflict of Interest Theory viewed it
negatively, the Efficient Transaction Theory viewed RPTs positively. Their
difference was in what they viewed as primary to the transaction. In the
Conflict Theory, relationship between Directors and Shareholders in creating
shareholder value was considered of paramount importance, however in the
Efficient Transaction Theory, the business and the business outcome was placed
in the centre stage.

Between the two extremes, corporate law has evolved to
regulate RPTs rather than ban them altogether. Occasionally, on the backdrop of
a large corporate scandal, given the damage they have inflicted on business
confidence, proposals to ban RPTs are mooted and debated at length. However, in
almost all cases, with the passage of time these proposals get diluted as the
ease of doing business assumes importance, resulting in higher disclosures and
more stringent approval processes mandated to prevent misuse of RPTs.

Table 1: Evolution of Regulations for Dealing with Related
Party Transactions

Stage

Year / Country

Status of RPT

Basis

Content

1

1845

UK

Directors disqualified on
entering into RPT but the Act silent on the
effect of  RPTs enforceability

Companies Clauses
Consolidation Act, 1845

As per Section 86, a
Director who held an office of profit or profited from any work done for the
company would cease from voting or acting as a Director.

2

1855

UK

RPTs void Ab-initio

Aberdeen Railway Co. vs.
Blaikie Bros.

‘The ground on which the
disability or disqualification rests, is no other than the principle which
dictates that a person can be both judge and party.’

3

1856

UK

RPT permitted if not
invalidated by the Articles of Association

The Companies Act, 1856

In this Act, a clause was
introduced in the model Articles of Association (which is optional for
companies to adopt) that made Directors with RPTs vacate their office. Many
companies which were incorporated during this period chose to delete this
clause thereby permitting RPTs.

4

1913

India

Board to approve RPT after
the Director declares their interest

The Companies Act, 1913

Section 91 A requires a
Director to provide disclosure of interest in any contract or arrangement
entered into by or on behalf of the company.

5

1936

India

Disinterested Board to
approve RPT with disclosure to shareholders

The Companies (Amendment)
Act, 1936

Section 91 B prohibited an
interested director from voting on any contract or arrangement in which he is
directly or indirectly concerned or interested.

6

1956

India

Central Government to
approve RPTs in certain companies

The Companies Act, 1956

Section 297 required
companies with share capital of Rs.1 crore and above to get Central
Government’s approval for RPTs.

7

2013

India

Disinterested shareholders
to approve RPT with disclosures to 
shareholders

The Companies Act, 2013

Section 188 of the Act,
introduced the concept of interested shareholders.

RPT Regulations in India

The Companies Act, 2013 regulates RPTs for all companies in India. Further
listed entities are also required to comply with the SEBI’s (Listing
Obligations and Disclosure Requirements) Regulations, 2015. Taken together, the
two regulations provide a comprehensive framework for dealing with RPTs.

The Companies Act, 2013 that defines a related party, which in addition
to relatives of Directors & Key Managerial Personnel and body corporates
controlled by them and their companies has a distinct category in clause (vii)
of section 2 (76). This clause includes ‘any person on whose advice, directions
or instructions a director or manager is accustomed to act’. Explanatory
statement to this clause specifically excludes professionals who advice the
directors or managers. Given this exclusion, the persons covered by this clause
can be colloquially categorized as ‘friends, philosophers and guides’. In
practice, this clause may come into effect in financial transactions with
former promoters, Chairman and Chief Executives who acting as unofficial
advisors and mentors could be wielding soft-power over the current decision
makers.

In line with the globally established practice of regulating RPTs and
not banning them, the Companies Act, 2013 too regulates RPTs through section
177 and section 188. Section 188 requires the Board of Directors to approve all
RPTs in both public and private companies. Contrary to the popular
perception, all provisions regulating RPTs specified in the Companies Act, 2013
apply to both the public and the private limited companies equally. The
only concession provided to the private company is vide a notification issued
on June 5, 2015, where the related party in a RPT is permitted to vote on their
transactions in both the Board and Shareholder meetings.

The Act for approving RPTs uses the lens of ‘Ordinary Course of
Business’ and ‘At arm’s length’ basis. As these two terms are not defined in
the Act or by SEBI, a working definition is attempted here. A transaction in
the ordinary course of business would have many other comparable transactions
with multiple unrelated parties thereby making RPTs comparable. Likewise, a
transaction at arm’s length is one in which all the economic benefits and
rewards are embedded in the transaction itself and thereby stand the test of
market place.

Given its comparability and market based pricing, a transaction that is
in the ordinary course of business and at arm’s length basis requires only the
audit committee’s prior approval (section 177). Extending this principle
further, the Audit committee can provide a blanket approval for repetitive
transactions that have a valid reason necessitating prior approval.

Where a transaction does not meet either one of the two
criteria-ordinary course of business or at arm’s length basis, approval of the
Board of Directors is required in a duly conveyed meeting. Hence, this approval
cannot be given by them passing a Circular Resolution. Further, where the
transaction size exceeds defined threshold levels, approval of the Shareholders
is required either in a physical meeting or through the postal ballot.  Rule 15 of the Company (Meeting of the Board
and its Powers) Rules 2014 details these thresholds, which is quite elaborate,
capturing different types of transactions like sales and purchase of goods,
availing or rendering services, buying, selling or leasing of property, with
specific absolute and relative limits for each one of them.

The provisions of the Companies Act, 2013 as detailed above are quite
technical and require considerable analysis to identify the approval process
required. Good governance requires transparency and clarity. Probably taking
this cue, Regulation 23 of the SEBI’s LODR Regulation 2015 provides for the
formulation of a Policy on Materiality of RPTs and on dealing with RPTs to help
decision makers interpret the law and provide operational guidelines for
implementing it. Further, Regulation 46 requires this policy to be displayed on
the Company’s website inviting public scrutiny. Considering its availability,
we have reviewed all the policies that were displayed in the month of May 2017
by Nifty 50 companies to arrive a model policy. 

Lessons from the Practices of Nifty 50 Companies in Drafting
their Policy for Dealing with RPTs

Our review of the Policies on dealing with RPTs of the Nifty 50
companies revealed five critical clauses that define the quality of their policy,
namely:

1.  Objective of the policy,

2.  Basis for giving Omnibus Approvals,

3.  Effect of RPTs not approved,

4.  Criteria for Granting Approvals to RPTs, and

5.  Disclosures required of RPTs.

For each of these clauses, we have picked out one of the exemplary
extracts from the Nifty 50 companies as possible role model for adoption.

I.       Objective of
the Policy

To effectively deal with RPTs, the policy objectives need to be clearly
articulated as illustrated in the example given by highlighting it in bold. 

Reliance Industries Limited.

“Reliance Industries Limited (the “Company” or “RIL”) recognises that
related party transactions can present potential or actual conflicts of
interest and may raise questions about whether such transactions are consistent
with the Company’s and its stakeholders’ best interests.”

II.      Omnibus
Approval

The clarity and specificity of conditions attached to granting omnibus
approval and its subsequent reporting should be unambiguous of what is expected
from the Audit Committee and the management team of the company as seen in the
example given here.

Bosch Ltd.

“In the case  of frequent /
regular / repetitive transactions which are in the normal course of business
of the Company, the Audit Committee may grant standing pre-approval / omnibus
approval. While granting the approval, the Audit Committee shall satisfy
itself of the need for the omnibus approval and that the same is in the
interest of the Company. The omnibus approval shall specify the following:

a.  Name of the related
party.

b.  Nature of the
transaction.

c.  Period of the
transaction.

d.  Maximum amount of the
transactions that can be entered into.

e.  Indicative base price
/ current contracted price and formula for variation in price, if any.

f.   Such other
conditions as the Audit Committee may deem fit.

Such transactions will be deemed to be pre-approved and may not
require any further approval of the Audit Committee for each specific
transaction. The thresholds and limitations set forth by the Committee would
have to be strictly complied with, and any variation thereto including to
the price, value or material terms of the contract or arrangement shall require
the prior approval of the Audit Committee.

Further, where the need of the related party transaction cannot be
foreseen and all prescribed details (as aforementioned) are not available, the
Audit Committee may grant omnibus approval subject to the value per transaction
not exceeding Rs.1,00,00,000/- (Rupees One Crore only). The details of such
transaction shall be reported at the next meeting of the Audit Committee for
ratification.

Further, the Audit Committee shall, on a quarterly basis, review and
assess such transactions including the limits to ensure that they are in
compliance with this Policy. The omnibus approval shall be valid for a
period of one year and fresh approval shall be obtained after the expiry of one
year.” 

III.     Effect of  RPT
not approved

The options available to the Audit Committee on dealing with a RPT needs
to be explicitly spelt out. This could include seeking the related parties to
pay compensation for loss suffered in addition to examining the reasons for this lapse in reporting and suggesting measures to rectify it.

Tata Motors Ltd., Tata Steel Ltd., Tata Power Ltd.

“In the event the Company becomes aware of a
transaction with a related party that has not been approved in accordance with
this Policy prior to its consummation, the matter shall be reviewed by the
Audit Committee. The Audit Committee shall consider all of the relevant
facts and circumstances regarding the related party transaction, and shall
evaluate all options available to the Company, including ratification, revision
or termination of the related party transaction. The Audit Committee shall also
examine the facts and circumstances pertaining to the failure of reporting such
related party transaction to the Audit Committee under this Policy and failure
of the internal control systems, and shall take any such action it deems
appropriate.

In any case, where the Audit Committee determines not to ratify a
related party transaction that has been commenced without approval, the
Audit Committee, as appropriate, may direct additional actions including, but
not limited to, discontinuation of the transaction or seeking the approval of
the shareholders, payment of compensation for the loss suffered by the related
party etc. In connection with any review/approval of a related party
transaction, the Audit Committee has authority to modify or waive any
procedural requirements of this Policy.”

IV.     Criteria for
approval

The criteria captured for approval here is a brief and succinct summary
of the complex legal provisions.   

Axis Bank

“All Material Related Party Transactions shall
require approval of the shareholders through ordinary resolution and the
Related Parties shall abstain from voting on such resolutions. The approval
policy framework is given below:

–  Audit Committee- All Related Party Transactions

–  Board Approval- All Related Party Transactions referred by
Audit Committee for approval of the Board to be considered and Related Part
Transactions as required by the statute

–  Shareholders’ Approval- Approval by Ordinary Resolution
for:

i.   Material Related
Party Transaction

ii.  Related Party
Transactions not in Ordinary Course of Business or not on Arm’s Length basis
and crosses threshold limit as prescribed under the statute.

Related Party
Transactions will be referred to the Audit Committee for review and prior
approval. Any member of the Committee who has a potential interest in any
Related Party Transaction will recuse himself or herself and abstain from
discussion and voting on the approval of the Related Party Transaction.

In determining whether to approve, ratify, disapprove or reject a
Related Party Transaction, the Audit Committee, shall take into account all the
factors it deems appropriate.

To review a Related Party Transaction, the Audit Committee is provided
with all relevant material information of the Related Party Transaction,
including the terms of the transaction, the business purpose of the
transaction, the benefits to the Bank and to the Related Party, and any
other relevant matters.”

V.      Disclosures

The scope and extent of disclosures of RPTs needs to be captured
comprehensively by including all employees concerned with implementation.

Aurobindo Pharma Ltd.

“The particulars of contracts or arrangement with Related Parties
referred to in section 188(1) shall be disclosed in the Board’s report for the
financial year commencing on or after April 1, 2014 in Form AOC-2
enclosed as Annexure-I and the form shall be signed by the persons who have
signed the Board’s report.

Further the particulars of contracts or arrangement with Related Parties
shall also be entered in the Register of Contracts as per the provisions
of section 189 of the Act and the Rules made there under.

All Material RPTs that are entered into with effect from October 1,
2014, shall be disclosed quarterly along with the compliance report on
corporate governance.

The Company shall disclose this Policy on its website and also a web
link thereto shall be provided in in its annual report. The Policy shall also
be communicated to all operational employees and other concerned persons of
the Company.”

Conclusion     

In today’s world, there is no company that can eliminate RPTs totally,
as they are an integral part of the commercial world. Given that all RPTs do
not dilute shareholder value or reflect mal-governance or fraud, it is
important to have a transparent and clear policy in dealing with them. While
compliance with law is the minimum that is expected of any corporate citizen,
good governance practices should go beyond the minimum and set new standards.
In the context of dealing with RPTs, this can begin with investing time and
effort in crafting a clear, comprehensive and concise policy that will enrich
shareholder value creation for the company in addition to significantly
enhancing its sustainability.

Do Facebook Friendships Make Parties Co-Conspirators? – SEBI Passes Yet Another Order

SEBI has
passed yet another order* holding
that being ‘friends’ on Facebook is ground enough to allege that the two
parties are connected and thus guilty for insider trading violations. Based on
this, SEBI has passed an interim order requiring such ‘connected person’ to
deposit the allegedly ill-gotten gains and also initiated proceedings for
debarment. About two years back, by an order dated 4th February
2016, SEBI had made a similar ruling that was discussed in this column.
However, in that case, the social media connection was not the sole connection.
Such orders raise several concerns since people are increasingly connected in
social media to friends, relatives and even strangers.

 

Summary
of some relevant provisions of law relating to insider trading

Insider
trading is believed to be rampant not just in India but also in other
countries. Proving that there was insider trading the guilty is a difficult
task. In India, it is also perceived that lack of adequate powers with SEBI to
determine “connections” between parties makes Regulators’ job a little more
difficult. Primarily, SEBI has to show that a person is connected with the
company or persons close to it. Further, it has to also show that unpublished
price sensitive information existed that was used to deal in shares and make
profit. In many cases, close insiders like executives, directors, etc. get
access to valuable price sensitive information and fall to temptation of easy
profits. Such cases are easier to investigate, compile sufficient and direct
evidence and punish the wrong doer.

 

However,
capital markets also attract sophisticated operators who use advanced tools and
techniques to avoid detection. Information can be increasingly shared in a
manner difficult to even detect, much less prove, more so with fast developing
technology, encryption, etc.

 

The SEBI
(Prohibition of Insider Trading) Regulations, 2015 does use several deeming
provisions that help establish a basic case. Some of these presumptions can be
rebutted by showing facts to the contrary.

 

To determine
whether there was insider trading in such cases, certain facts/circumstances
would have to be established. Firstly, it would have to be shown that there was
price sensitive information relating to the company that was not yet made available
to the public. Then, it would have to be shown that the suspected person is
‘connected’ to the company or certain insiders. Several categories of persons
are deemed to be connected. Alternatively, if the suspect is an unconnected
person, then he should be shown to have received such information from the
company or a connected person or otherwise. Then it would have to be shown that
such person dealt in the securities of the company while such information was
not yet made public.

 

Proving
“connection”

As discussed
above, there are some categories of persons that are deemed to be connected.
Directors, employees, auditors, etc. are, for example, deemed to be
connected if their position enables them access to unpublished price sensitive
information (“UPSI”).

 

Then there
are persons who are in “frequent communication with its officers” which enables
them access to UPSI. And so on.

 

Proving
contractual connection of directors, auditors, etc. would be relatively
easy. Proving that their position enables them access to UPSI requires
compiling of relevant information such as their nature of duties, their
position in the company, the nature of information that was UPSI, etc.
This information can be compiled with the help of the company.

 

Difficulty
arises in proving connection of persons who are not so closely associated with
the company. It would have to be proved, for example, that he was in frequent
communication with the officers, etc. of the company. This may be
possible if SEBI is able to establish, for example, a pattern of communication
of such person with the officers, etc. Alternatively, it would have to
be shown that the person was in possession of such UPSI, which is often more
difficult, more considering that parties may use sophisticated
techniques/technology to communicate.

 

What
happened in the present case?

Before going
into the details of this case, it is emphasised that this is an interim order.
There are no final findings and the statements made therein are allegations,
though after a certain level of investigation and also inquiring and obtaining
information from the parties concerned.

 

SEBI found
that the Managing Director (“MD”) of the listed company in question had
acquired a significant quantity of shares of the company. These purchases were
made when certain price sensitive information existed but was not published. It
appears that SEBI also found that certain other persons had also dealt in the
shares of the company during this time and made significant profits.

 

The price
sensitive information concerned certain large contracts received by the
company. SEBI found that, during this period, the company had been awarded
large contracts of hiring of oil drilling rigs through a process of tender. The
process of tendering broadly involved certain stages. The first stage was
invitation of the bids and due submission of bids by the company. The second
stage was, in one case, revision of the bid to satisfy certain requirements. Thereafter,
the bids were opened and the top bidder (termed as L1) was declared. A formal
and final award of the order followed thereafter. SEBI held that declaration as
top bidder made it more or less certain that the contract would be awarded to
such person. Hence, SEBI decided that this was the time when price sensitive
information came into being. Till such information was formally published by
the company, the information remained UPSI and hence, insiders were barred from
dealing in the shares of the company.

 

It may be
added here that the contracts so awarded constituted a very significant portion
of the turnover of the company and hence, SEBI held that this information was
price sensitive. It also demonstrated that the price of the equity shares of
the company on stock exchanges increased when the information was made public.

 

The MD and
certain other persons were found to have purchased/dealt in the shares of the
company during this period.

 

Showing
that the MD was connected and dealt in the shares of the Company

SEBI held
that the MD was closely involved in the bidding process and indeed present at
the time when the bids were opened. The MD was thus held to be `an insider’.

 

It was then
shown that he had purchased shares of the company during this period and before
the information was made public. SEBI concluded that the MD had engaged in
insider trading.

 

Showing
that the other persons were connected and that they dealt in the shares of the
Company

SEBI found
that two other persons had dealt in the shares of the company during this same
period and made substantial profits. They had purchased shares of the company
before the UPSI was made public and sold the shares thereafter.

 

The
individual, Sujay Hamlai, was 50% owner of shares and director of a private
limited company, while his brother held the remaining 50% shares and was also
its director. Sujay and his company had dealt in the shares of the company.

 

When the MD
and these persons were asked whether they were connected to each other, their
reply, to paraphrase, was that they had no business connection but as
individuals they were socially acquainted.

 

SEBI checked
the Facebook profiles of such persons and found that the MD was ‘friends’ with
Sujay and his brother/spouse. Further, they had ‘liked’ each other’s photos
that were posted on this social media site. No other connection was found by
SEBI. However, SEBI held that this was sufficient for it to allege and hold for
the purposes of this order that they were connected and thus insiders.

 

Order
by SEBI

Having held
that the parties were insiders and that they had dealt in the shares of the
company while there was UPSI, it passed certain interim orders. It ordered them
to deposit in an escrow account the profits made with simple interest at 12%
per annum.

 

The interim
order also doubled up as a show cause notice, since, as mentioned earlier, the
findings of SEBI were meant to be allegations subject to reply/rebuttal by the
parties. Thus, the parties were asked to reply to these allegations and also
why adverse directions should not be passed against them. Such adverse
directions would be three. Firstly, the amount so deposited would be formally
disgorged/forfeited. Secondly, the parties may be debarred from accessing
capital market. Finally, the parties may be prohibited from dealing in
securities for a specified term.

 

Determination
of profits and total amount to be deposited

The
determination of profits is demonstrative of how working out of profits for
purposes of insider trading follows a particular method and hence worth a
review. SEBI first determined the purchase price of the shares by the parties.

 

In the MD’s
case, since he had not sold the shares. SEBI thus determined the closing price
of the equity shares immediately after the UPSI was made public. The
difference, the increase, was deemed to be the profit and the value of such
profit for the shares was held to be profits from insider trading.

 

Sujay and
his company had sold the shares some time after the UPSI was made public.
However, the method of determining profits from insider trading was the same as
for the MD. The difference between the closing price of the shares immediately
after the publishing of the UPSI and the purchase price was deemed to be the
profit from insider trading.

 

To such
profits, simple interest @ 12% per annum was added till the date of the Order.
Adjustment was also made for dividends received during this period.

The total
amount so arrived, being Rs. 175.58 lakhs for the MD, Rs. 18.20 lakhs for Sujay
and Rs. 47.86 lakhs for Sujay’s company, was ordered to be deposited in escrow
account pending final disposal of the proceedings. The parties were also
ordered not to alienate any of their assets till the amount was deposited.

 

Conclusion

It is seen
that in this case, the sole basis of alleging ‘connection’ between the MD and
Sujay/his company was their ‘connection’ on social media website Facebook.
There were of course other suspicious circumstances of timing of purchases by
Sujay, other factors listed in the order such as insignificant trades in other
shares, very recent opening of broker/demat account, etc. But the social
media connection seems to be the deciding factor.

 

Whatever may
be the final outcome in this particular case – whether in the final order of
SEBI after due reply by the parties and/or in appeal – some concerns come to
mind. SEBI uses social media activities and connections of parties to compile
information that it may be useful for its investigations in insider trading. It
is obvious that SEBI may do this also for other investigations where
connections are relevant such as price manipulations, frauds, takeovers, etc.
Even other authorities – regulators, police, etc. – would access social
media profiles of persons.

 

However, it is also common knowledge that more and
more people are on social media. There are also several other social media
websites apart from Facebook – viz., Twitter, Instagram, Linkedin, etc.
Connections are made not necessarily with persons whom one may know but even
with persons who are totally strangers. One may thus have thousands of
‘connections’. Making a connection is often a mere clicking on the ‘following’
button or ‘send’ or ‘confirm’ friend request and the like. The objective may be
to interact with such persons for online discussions or even to plainly
‘follow’ for knowing their views. It is possible that persons may end up facing
investigation purely on account of the activities of persons whom one may be
having such thin connections. While orders like these may be taken as a lesson
of caution for all of us as to whom we get ‘connected’ with, considering the
reality of social media, it is submitted that SEBI and other
regulators/authorities should come out with reasonable guidelines as to how
such ‘connections’ are treated and what presumptions are drawn.

*Order dated 16th April 2018,
in the case of Deep Industries Limited

New Construction in Mumbai

Introduction

Real estate development is big
business in a metropolis such as Mumbai. However, what happens if all new real
estate development is abruptly halted by the High Court? A large part of the
economy would come to a grinding halt. However, this is what happened in Mumbai
on account of an Order passed by the Bombay High Court. The Order was passed to
tackle the growing problem of solid waste management in the City and the
inefficiency of the Municipal Corporation of Greater Mumbai (MCGM) in tackling
it. Nevertheless, it caused a great deal of issues and strife for the real
estate community. Now, a Supreme Court Order has given some respite from this.

 

Bombay
High Court’s Order

A Public Interest Litigation (PIL)
was filed before the Bombay High Court against the inefficient disposal of
solid waste arising during construction of real estate properties in the City
of Mumbai. Based on this, the Bombay High Court passed its Order in the case of
Municipal Corporation of Greater Mumbai vs. Pandurang Patil, CA No.
221/2013 Order dated 29.02.2016.  

 

The Court observed that everyday
the MCGM was illegally dumping over 7,400 metric tonnes of solid waste at its
dumping sites in Mumbai. This figure was expected to significantly increase on
various counts, including the several buildings being constructed in the City.
This illegal dumping would cause increased pollution along with posing fire
hazards. On the other hand, there were a large number of constructions going on
in the city. In fact, the State Government had amended the Development Control
Regulations by providing for grant of more and more Floor Space Index (FSI).
Thus, the Court held that the State Government was encouraging unsustainable
growth.

 

Further, under earlier PILs, the
High Court had granted time to the MCGM to set up waste disposal and processing
facilities at the dumping grounds which time had also expired and nothing was
done by the MCGM. The Court held that something drastic needed to be done to
improve the situation, such as, to impose some restrictions on the unabated
development in the city. Moreover, it was the duty of the Court to ensure that
the provisions of the Environment Protection Act,1986 and the Municipal Solid
waste (Management and Handling) Rules, 2000 were implemented in as much as the
breach thereof would amount to depriving a large number of citizens of Mumbai a
fundamental right guaranteed under the Constitution of India, which was, the
right to live in a pollution free environment.

 

Accordingly, the High Court
extended the time granted to the MCGM for installing waste processing
facilities till 30th June 2017. It noted that neither the said
Municipal Corporation nor the State Government had any solution whatsoever for
ensuring that the quantity of solid waste generated in the city should not
increase. Further, it was of the view, that the State Government was more
worried about the impact of imposing any restraint on the new constructions in
the city on the real estate industry. It felt that on one hand there was no
real possibility of any Authority complying with the Management of Solid Waste
Rules and on the other hand, the development by construction of buildings in
the city continued on a very large scale. There were also proposals for grant
of additional FSI by amending the Regulations. It therefore, was of the view
that, in case of certain development proposals, restrictions had to be imposed.
More so, because neither the State Government nor the Municipal Corporation has
bothered to make a scientific assessment of the impact of large scale
constructions going on in the city on the generation of the solid waste in the
city.

 

The Court was conscious of the fact
that in the city of Mumbai there were a large number of re-development projects
which were going on and the occupants of the existing premises might have
vacated their respective premises. Therefore, for the time being, it did not
impose any restrictions on the grant approval for proposals/applications for
the re-development projects including the construction of sale component
buildings under schemes sanctioned by the Slum Rehabilitation Authority (SRA).
However, it held that restrictions would have to be imposed on consideration of
fresh proposals/applications submitted for new construction of the buildings
for residential or commercial purposes.

 

Finally, the Bombay High Court
placed the following curbs on new development/construction in Mumbai:

 

(a) Development
permissions shall not be granted either by the MCGM or the State Government on
the applications/proposals submitted from 1st March 2016 for
construction of new buildings for residential or commercial use including
malls, hotels and restaurants. Such applications would be processed, but the
commencement certificate shall not be issued. However, this condition would not
apply to all the redevelopment projects and to the buildings proposed to be
constructed for hospitals or educational institutions. It would also not apply
to proposals for repairs/reconstruction of the existing buildings which do not
involve use of any additional FSI in addition to the FSI already consumed.

 

(b) Even
if there was an amendment of the Regulations made hereafter providing for grant
of additional FSI in the city, the benefit of the same shall not be extended to
the building proposals/ Applications for development permissions including for
the re-development projects submitted on or after 1st March 2016.

 

Supreme
Court’s Order

Aggrieved by this total ban on new
construction, the Maharashtra Chamber of Housing Industry approached the
Supreme Court by filing a Special Leave Petition. The Supreme Court gave its verdict
in Maharashtra Chamber of Housing Industry vs. Municipal Corporation of
Greater Mumbai, SLP(Civil) No. D23708/2017, Order dated 15th March
2018.

 

We make it clear that this order is
not intended to set aside or modify the aforesaid impugned judgement. We have
considered the matter only in order to explore the possibility of safe method
of permitting certain constructions in the city of Mumbai for a limited period
to pave the way for further orders that may be passed. We are satisfied that a
total prohibition, though selective, has serious ramifications on housing
sector which is of great significance in a city like Mumbai. It also has a
serious impact on the financial loans which have been obtained by the
developers and builders. Such a ban makes serious inroads into the rights of
citizens under Article 19, 21 and 300A of the Constitution of India. It might
be equally true that the activities and the neglect in disposing of the debris
invades the rights of other citizens under Article 21 etc. That issue is
left open for a proper determination.

 

The Supreme Court passed an Order
presenting the following solution:

 

(a) It
directed that any construction that was permitted hereafter for the purpose of
this order would be only after adequate safeguards were employed by the
builders for preventing dispersal of particles through the air. This would be
incorporated in the building permissions.

 

(b) According
to the MCGM, 10 sites had been located for bringing debris onto such specified
locations which require to be filled with earth. In another words, these sites
require land filling which will be done by this debris.

 

(c) The
MCGM would permit a builder to carry on construction on its site by imposing
the conditions in the permission, that the construction debris generated from
the site, would be transported and deposited in specific site inspected and
approved by the MCGM.

 

(d) The
Municipal Corporation shall specify such a site meant for deposit of
construction debris in the building permission. Any breach would entail the
cancellation of the building permission and the work would be stopped
immediately.

 

(e) The
Municipal Corporation would not permit any construction unless it has first
located a landfill site and has obtained ‘No Objection Certification’ or consent
of the land owner that such debris may be deposited on that particular site.
The Municipal Corporation shall incorporate in the permission the condition
that the construction was being permitted only if such construction debris was
deposited.

 

(f)  For
Small generators of Construction and Demolition Waste, the Waste would be
disposed of in accordance with the ‘Debris On-Call Scheme’ of the MCGM. 

 

(g)
For Large generators of Construction and Demolition Waste, the waste would be
disposed of as per the Waste/Debris Management Plan submitted by the
owner/developer at the time of applying for permissions and as approved by the
BMC.

 

(h) Builders
applying for permissions would have to give a Bank Guarantee of amount ranging
from Rs.5 lakh to Rs.50 lakh depending upon the size of the project and mode of
development, which bank guarantee shall remain in force solely for the purpose
of ensuing compliance of the Waste Management Plan/Debris Management Plan
approved by the MCGM, till the grant/issuance of the Occupation Certificate.

 

(i)  The
MCGM was instructed to submit a detailed report to the Supreme Court after the
expiry of 6 months from the date of the Order (i.e., 15th September
2018) and till such time the Supreme Court’s Order would remain in force. It
also ordered that no construction debris would be carried for disposal to the
Deonar and Mulund dumping sites.

 

Conclusion

While
the High Court’s Order may appear harsh, sometimes desperate situations call
for desperate measures. At the same time, it is laudable that instead of
adopting a very technical or legal approach, the Supreme Court has come out
with a workable solution. One only wishes that the MCGM and the State
Government come out with a concrete action plan to tackle this menace of solid
waste management!

A Chartered Route to International Anti-Corruption Laws

Corruption has been seen as an immoral and unethical practice since biblical times. But, while the Bible condemned corrupt practices, ironically Chanakya in his teachings considered corruption as a sign of positive ambition.1 However, there can be no doubt that in modern business and commerce, corruption has a devastating and crippling effect. According to the Transparency International Corruption Perception Index, India is ranked 76 out of 167 nations. These statistics do not help India’s image as a destination for ease of doing business.

The growth of anti-corruption law can be traced through a number of milestone events that have led to the current state of the law, which has most recently been expanded by the entry into force in December 2005 of the sweeping United Nations International Convention against Corruption (UNAC). Spurred on by a growing number of high-profile enforcement actions, investigative reporting and broad media coverage, ongoing scrutiny by non-governmental organisations and the appearance of a new cottage industry of anti-corruption compliance programmes in multinational corporations, anti-corruption law and practice is rapidly coming of age.

While countries have for long had laws to punish their own corrupt officials and those who pay them bribes, national laws prohibiting a country’s own citizens and corporations from bribing public officials of other nations are a new phenomenon, less than a generation old.

The US Foreign Corrupt Practices Act (FCPA) was the first anti-corruption law that rigorously pursued cross border bribery. For more than 25 years, the United States was the only country in the world that through the extra territorial reach of its FCPA, rigorously investigated bribes paid outside of its own borders.

It was surpassed by The UK Bribery Act enacted by the UK government in 2010 and is arguably the most radical extra-territorial anti-graft law to date. This law was put into place by the UK Parliament after a demand from the Organization for Economic Cooperation and Development (OECD) in 2007 that the UK offer some explanation for its failure to abide by its OECD Anti-Bribery Convention obligations.

The United Kingdom has in 2010 enacted the robust United Kingdom Bribery Act (UKBA), that has created a new anti-corruption compliance regime which is even more powerful than the FCPA in many respects. Failure to adhere to anti-bribery compliance obligations based on these and other new anti-corruption laws can result in substantial and potentially debilitating fines being imposed against companies and their aids.

Both legislation and the business response to anti-corruption are now intensifying. On 11th May 2016, The Law Society of England and Wales; The Institute of Chartered Accountants in England and Wales, The Society of Trust and Estate Practitioners; The Law Society of Northern Ireland; The Law Society of Scotland; The International Federation of Accountants; The Association of Chartered Certified Accountants; The Chartered Institute of Public Finance and Accountancy; The Institute of Chartered Accountants of Scotland; Chartered Accountants Ireland, The Chartered Institute of Management Accountants; The Association of Taxation Technicians; The Association of International Accountants; The Chartered Institute of Taxation; The International Association of Book-Keepers; The Institute of Certified Bookkeepers; The Institute of Financial Accountants; UK200; The Association of Accounting Technicians issued the Anti-Corruption Statement by Professional Bodies – deploring corruption and the significant harm it causes. The statement acknowledges that criminals seek to abuse the services provided by Professional service providers such as Chartered Accountants to launder the proceeds of corruption and we are committed to ensuring the professionals are armed with the tools to thwart this abuse.2

Chartered accountants, either in business or in the profession, have to be well informed of the latest developments to ensure that they play a meaningful role in the prevention of corruption in the organisations which they serve.

THE PREVENTION OF CORRUPTION ACT 1988 (POCA)

In India, the law relating to corruption is broadly governed by the Indian Penal Code, 1860 (‘IPC’) and the Prevention of Corruption Act, 1988 (‘POCA’). Apart from the risk of criminal prosecution under POCA, there is also the risk of being blacklisted, debarred and subject to investigation for anti-competitive practices.

Sections 8, 9 and 10 of the POCA are applicable to arrest the supply side of corruption namely: Taking gratification, in order, by corrupt or illegal means, to influence public servant (Sec.8), Taking gratification for exercise of personal influence with public servant (Sec.9), Punishment for abetment by public servant of offences defined in Section 8 or 9 (Sec.10). Section 11 criminalises various acts of public servants and middlemen seeking to influence public servants.

In the case of H. Naginchand Kincha vs. Superintendent of Police Central Bureau of Investigation 3, the Karnataka High Court has clearly held that the words occurring at section 8 of the Act “Whoever accepts or obtains, or agrees to accept, or attempts to obtain, from any person, for himself or for any other person, any gratification…………”

covers the persons other than the public servants contemplated by definition clause (c) of section 2 of the Act and that does not require much elaboration.4

Unlike laws in some other jurisdictions, POCA makes no distinction between an illegal gratification and a facilitation payment. A payment is legal or illegal. This treatment applies to other laws and regulations in India as well.

PREVENTION OF CORRUPTION (AMENDMENT) BILL 2013–2011 TO 2016

After India ratified the United Nations Convention on Anti-Corruption, the Government of India initiated measures to amend POCA to bring it in line with international standards. Materially, these included –

a. Prosecuting private persons as well for offences, b. Providing time-limits for completing trials, c. Attachment of tainted property,

d. Prosecuting the act of offering a bribe.

In 2013, the Amendment Bill was introduced in Parliament, reviewed by the standing committee and Law commission of India.

One of the significant amendments proposed, to widen the scope of the Act beyond bribery of public servants, provides that irrespective of capacity in which the person performs services for or on behalf of the commercial organisation either as an agent, service provider, employee or subsidiary, the liability under POCA would follow. This places an organisation at considerable risk since illegal acts by employees even at the entry level can expose the organisation to prosecution.

The above proposed amendments are corroborated by the WhistleBlowers Protection Act, 2014 and section 177(9) of the Companies Act 2013 which provides for the establishment of a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

While the Companies Act, 2013 provides that companies should have a vigil mechanism, the Companies Act does not provide for consequences if a vigil mechanism is in place. In any event, companies may adopt measures provided in international documents like the UNCAC which provides for implementation of preventive anti-corruption policies and practices.

UNCAC provides for liability of legal persons. While commercial organisations and key officers should be prosecuted, there needs to be certainty and clarity in relation to the scope of such provisions. The UNAC further provides for the right of an aggrieved party to seek compensation/ damages for loss caused due to corrupt practices.

In light of the above, most commercial organisations may adopt measures provided in international documents and implement Anti-corruption compliance procedures which would not only be preventive in nature but would also assist in nailing the offender under law and fixing his liability. This would not only reduce the impact of the instance on the organisation by showing the bonafide of the organisation as a whole and bring to book corrupt individuals.

THE UNITEDSTATES FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA)

For many years, the FCPA has been the world champion of ethical corporate behaviour on the part of companies registered in, or associated with, the United States (US). The combined determination of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) requires big business to take rigorous measures to thwart corporate bribery, or face substantial penalties.

The FCPA, which is an US federal law, targets the payment of bribes by businesses linked to the US to foreign government officials. The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments, or foreign political parties, with the intent of obtaining or retaining business. It also requires businesses to keep proper books and records. It also prohibits the payment of bribes indirectly through a third person. For these payments, coverage arises where the payment is made while knowing, that all or a part of the payment will be passed on to a foreign official.

Record penalties for corporate corruption were imposed against Siemens AG when the multi-national company settled FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office (i.e. in its home country Germany) and the SEC. These included multiple guilty pleas and $1.6 billion in fines and penalties, including $800 million in disgorgement of bribe-tainted profits to the US authorities. This case demonstrates how regulators in different jurisdictions are cooperating with each other more than ever. According to the DOJ, this was the largest monetary sanction ever imposed in an FCPA case.5

As is demonstrated by the Siemens settlement, there is no double-jeopardy defence for offenders, and the same set of facts can give rise to a multitude of prosecutions since the violations generally took place in subsidiaries in remote regions. This is an important factor for local companies, as many Indian corporates are expanding their business operations globally at a rapid rate. They will have to implement stern measures to manage the corruption risk and ensure that management in their remote subsidiaries avoid the payment of bribes or face the wrath of the not just the DOJ and SEC but also local judiciary.The DOJ signalled to companies that it would continue to book corporates on FCPA violations around the globe.

For violating anti-bribery provision, FCPA provides that;

  •     corporations and other business entities are subject to a fine of up to $2 million;

  •     Individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to

  •     $250,000 and imprisonment for up to five years.

For violating accounting provision of the FCPA6

  •     corporations and other business entities are subject to a fine of up to $25 million

  •    Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.

Under the (US) Alternative Fines Act, courts may impose significantly higher fines than those provided by the FCPA—up to twice the benefit that the defendant obtained by making the corrupt payment, as long as the facts supporting the increased fines are included in the indictment and either proved to the jury beyond a reasonable doubt or admitted in a guilty plea proceeding.

The UK Bribery Act 2010

The Bribery Act 2010 expands its territorial applicability beyond the UK through section 6-Active bribery of a foreign official and section 7 Company failing to prevent bribery (corporate offense) (strict liability). Under section 11, the maximum penalties that can be imposed on an individual convicted of an offence u/s. 1, 2 or 6 is an unlimited fine and imprisonment for up to 10 years.

An organisation that can prove it has adequate procedures in place to prevent persons associated with it from bribing will have a defence to the Section 7 offence.

The guidance, provided u/s. 9 of the Act, will help commercial organisations of all sizes and sectors understand what sorts of procedures they can put in place to prevent bribery, as mentioned in section 7.

An organisation could also be liable where someone who performs services for it – like an employee, consultant or agent – pays a bribe specifically to get business, keep business, or gain a business advantage for the organisation. But the organisation will have a full defence for this particular offence, and can avoid prosecution, if the organisation can show it had adequate procedures in place to prevent bribery.

While under the Act there is no need for extensive written documentation or policies. organisations may have proportionate procedures through existing controls over company expenditure, accounting and commercial or agent/consultant contracts for example. In larger organisations, it will be important to ensure that management in charge of the day to day business is fully aware and committed to the objective of preventing bribery. In micro-businesses, it may be enough for simple oral reminders to keystaff about the organisation’s anti-bribery policies. In addition, although parties to a contract are of course free to agree whatever terms are appropriate, the Act does not require you to comply with the anti-bribery procedures of business partners in order to be able to rely on the defence.7

CONCLUSION

The principal problem in the modern corporation is mainly the separation of ownership and control in organisations, the managers have often different motives from the owners, the management often tries to find ways to conceal corrupt practices and/or any setbacks in the company’s performance. They postpone intimating the shareholders, or even to the board, waiting for things to improve. In these cases, transparency and full disclosure in financial reporting are often sacrificed.

Anti-corruption compliance is the new watch-phrase in global boardrooms, and chartered accountants have a responsibility to not only help organisations to develop meaningful and robust anti-corruption controls, but also to understand compliance obligations applicable to them and keep pace with any changes in the bribery risks and compliance mechanisms put in place by multi-national organisations. These mechanisms are intended to prevent the use of accounting practices to generate funds for bribery or to disguise bribery on a company’s books and records.

Violations of record-keeping requirements can provide a separate basis of liability for companies involved in foreign and domestic bribery. It is here that the Chartered Accountant would play an important role, of not just raising the red flag but refusing to sign the accounts until all questionable payments are explained to their satisfaction by the Company.

The role of Chartered Accountants (CAs) has been seen as promoting transparency and fairness. CAs are national-level watchdog. However, CAs are not specialised anti-corruption agencies: on the whole, they are not expressly charged with detecting or investigating corrupt activity, but they have expertise in auditing and reporting the facts. CAs have traditionally undertaken financial audits of organisations’ accounting procedures and financial statements, and compliance audits reviewing the legality of transactions made by the audited body, and it is this vigilance that is relied upon while bringing to task the bribe givers and takers.

Prevention of Corruption Act 1988, focuses on the legal definitions governing corruption, lacks the suggestive guidance of how best to implement in practice financial and other controls which would be effective to prevent corruption, and bring to light any questionable payments.It is through their detailed study of several financial systems adopted by their various clients that CA’s are equipped with the required information and can suggest best practices that may be incorporated by the Government in a Model anti-corruption vigilance mechanism which may serve as a guidance to various organisations, and a yard stick to assess the ethical quotient of any organisation.

1    Chanakya – His Teachings & Advice, Pundit Ashwani Sharma, Jaico Publishing House, 1998: In the forest, only those trees with curved trunks escape the woodcut-ter’s axe. The trees that stand straight and tall fall to the ground. This only illustrates that it is not too advisable to live in this world as an innocent, modest man.

2    ANTI-CORRUPTION STATEMENT BY PROFESSIONAL BODIES – ISSUED 11th MAY 2016; https://www.icaew.com/-/media/corporate/files/technical/legal-and-regulatory/business-crime-and-misconduct/anti-corruption-statement.ashx?la=en

3    http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/183651/1/CRL-RP1040-14-13-09-2017.pdf

4    http://bangaloremirror.indiatimes.com

5    U.S. v. Siemens Aktiengesellschaft, 2008 – Case No. 08-367.

6    Section 78(b) of the FCPA contains certain accounting provisions that are applicable only to issuers. These require issuers to make and keep accurate books and ac-counts as well as certain internal controls

7    https://www.justice.gov.uk/downloads/legislation/bribery-act-2010

PROPOSED AMENDMENTS TO INVESTOR ADVISERS’ REGULATIONS – WIDE RANGING IMPLICATIONS INCLUDING TO CHARTERED ACCOUNTANTS

SEBI has issued on 7th October 2016 a consultation paper
proposing some amendments to regulations relating to investment advisors and
investment advice generally. Some of the proposed changes affect Chartered
Accountants, Company Secretaries, lawyers and other professionals directly. The
changes generally would make the regulations relating to investment advisors
much stricter. They will also make the categorisations between various types of
advisers sharper, so much so that they may end up being mutually exclusive.

Curiously, this paper has
invited widespread criticism on the grounds that SEBI perhaps did not expect.
Clearly, there were certain valid concerns SEBI has had to address through the
proposals. However, partly due to over-reach and partly due to
ill-drafted/ill-conceived proposals, there has been a strong opposition.
However, considering that amendments are inevitable, it is necessary to
consider the background and also the proposals as they presently stand.

Background of the provisions

SEBI had in 2013 notified regulations
relating to investment advisers (the SEBI (Investment Advisers) Regulations
2013 or “the Regulations”). These Regulations created a fresh category of
persons who assist investors in making investments. The others include
portfolio managers, mutual fund distributors, stock brokers, etc. This
category was created for a specific objective and to resolve certain conflicts
of interest that arose when the adviser was also the seller/distributor of
products.

An investor who approaches an
intermediary faces a concern about the objectivity of the intermediary. On one
hand, the investor expects that the intermediary will give him impartial advice
on which product he should invest in, taking into account his needs and
circumstances. On the other hand, the intermediary usually is paid by the
organisation (i.e., mutual fund, etc.) whose product he distributes. In
any case, he has his further own self interest to serve which may motivate him
to push those products that give him the highest of commissions/remuneration.
The result can not only be costly for the investor in terms of his effectively
paying high cost for making investments, but he may also end up holding
investments that are not suited to him. Mis-selling of units is such a serious
issue that it has actually been made a category of fraudulent practice under
the PFUTP Regulations. Generally, code of conduct relating to intermediaries
too lay stress on their taking into account interests of their clients above self-interest.

However, obviously, this is not
enough. So long as there is conflict of interest, temptations will remain and
no regulations can resolve it merely by mandating against it or banning it. The
Investment Advisers Regulations created a neat solution. It created a category
of intermediaries – Investment Advisers – who would focus on giving advice and
not distributing products. Thus, they will render skilled advice to clients
taking into account their needs and circumstances and thus suggest a portfolio
or investment products that serve their needs. More importantly, their fees
will be directly paid by such clients. The Investment Advisers thus have
motivation as well as interest in focussing only the interests of clients. They
are generally not permitted to accept remuneration/commission from entities
whose products they may recommend.

The Regulations go further and
mandate a higher level of professionalism in such Investment Advisers. They are
required to carry out proper client analysis and document it. Acting as
Investment Advisers would require prior registration. A certain level of
qualifications and also certification is also mandated for such persons.

However, while Investment
Advisers generally were required to obtain registration, exemption from
registration was given to certain persons. For example, persons who give
investment advice as part as incidental to their other activities are not
required to register. A good example is of Chartered Accountants who may give
such advice as part of their practice of rendering tax and related advice to
their clients. Similarly, distributors of products may also give such advice. Such persons are not required to be registered.

This may now undergo a
significant change as per the proposals made in the Consultation Paper.

No exemption to Chartered
Accountants and others who render investment advice incidentally

Chartered Accountants, Company
Secretaries, lawyers, stock brokers, etc. who give investment advice
incidental to their primary activity of professional practice will now require
registration as Investment Advisers. The result will be that such persons will
now have to focus on their core activity and cannot, even if asked, render
investment advice to their clients.

It is not as if such persons
are not qualified or otherwise unregulated. Further, it is also not as if they
have conflict of interest. Yet, this requirement is proposed.

It is possible that some such
persons may obtain the required registration to enable them to continue giving
such advice to their clients. However, it is more likely that the
categorisation of persons will become more distinct and separate with each group
focussing on their own activities.

Mutual Fund distributors to be
debarred from giving investment advice

As explained earlier,
intermediaries such as mutual fund distributors face the very conflict of
interest that is the focus of the Investment Advisers Regulations. They are
paid by the mutual fund/AMC whose products they sell though the investor may
expect that they are given impartial advice suited to their circumstances. Such
distributors under the Regulations were not required to be registered as Investment
Advisers, if they gave advice that is incidental to the selling of such
products. The Consultation Paper now proposes to wholly prohibit them from
giving such advice even incidental to selling.

Categorisation between Research
Analysts and Investment Advisers

Research Analysts and
Investment Advisers provide similar functions in relation to giving of
investment advice. However, the nature of their functions and approach is
significantly different and thus requirements relating to their registration
and functioning are covered under separate Regulations. A proposal now makes
this categorisation even sharper.

The Consultation Paper observes
that investment advice is often given in electronic and broadcasting media. A
certain level of exemption is presently provided under the Investment Advisers
Regulations to such advice that is widely available to public. It is now
proposed to divide such advice being given. Simply stated, generic advice in
such media to public at large can be given by research analysts while client
specific advice can be given by Investment Advisers.

Another recommendation further
clarifies this divide. Research Analysts would be required to send their
recommendations to all classes of its clients at the same time. The reason is that
their recommendations are generic and product related and not client specific.
Thereafter or independently, the role of the Investment Adviser would arise
where the investor would take the help of such Adviser to decide whether such
recommendation is suitable for his needs and circumstances.

Investment tips via social
media and the like

This proposal has seen very
strong criticism. While the criticism is justified, the evil that is sought to
be addressed also needs to be considered.

It is too often found – as
evidenced by several orders of SEBI – that there are persons who use the
internet and social media for giving tips in dubious scrips whose price and
trading are manipulated to trap unsuspecting investors. Tips are given by SMS,
whatsapp, social media, etc. Often, these scrips are what are known as
“penny stocks” who rarely have any intrinsic value but are quoted at low
prices. The price of the shares are manipulated and huge volume is also seen in
stock exchange which tempts investors into investing. The investing public may
be influenced by the low price and hence, there is expectation that loss too
can be low. The shares, after some time, see their price and volumes both
crashing with investors then left holding the valueless shares. In some cases,
SEBI has identified persons who carry out such manipulative/fraudulent
activities and debar/punish them. At other times, it may be difficult even to
identify who they are.

The Consultation Paper now
seeks to wholly debar giving of such tips unless such persons who give tips are
themselves registered as Investment Advisers and thus subjected to the
regulatory requirements. Moreover, giving of such tips in violation of such
requirements will be treated as a fraudulent act inviting stringent punishment.

This proposal has invited very
strong criticism. The objection obviously is not against action against such
dubious/fraudulent tippers. It is the blanket and overreaching ban against all
type of tips on internet and social media irrespective of who is giving such
types, of what type and in what manner. To give a most basic example, a person
may recommend in passing to his friend a particular share in a conversation
over WhatsApp. This may not be well researched and even accurate. Yet, such a thing is so common. Such a tip may attract severe punishment.

It is common to find
whatsapp/facebook groups where investment advice is freely taken/given amongst
like minded persons. There are countless blogs that discuss investments and it
is likely that some sort of recommendation may be given on such blogs. Critics
have given example of comments of persons like Warren Buffet and the like who
discuss their investments publicly.

It is felt that SEBI has not
thought through this issue well and their recommendation may restrain free
discussion of stocks and investments generally. It is even stated that such
restriction amounts to severe and unjustified restraint on freedom of speech.

One will have to see how SEBI
deals with this criticism and what modified form of regulation it comes out
with.

Ban on schemes, competition,
games, etc. relating to stock market

SEBI has observed that many
persons organise competition, games, etc. relating to stock market which
may involve predicting the price of shares on stock markets. The paper makes it
clear that SEBI does not approve or endorse such schemes and thus the public
may engage in such schemes at their own risk. However, SEBI goes a step beyond
such hands-off/caveat emptor approach and notes that the public may end up
suffering losses. Hence, the paper recommends a total ban on such schemes, etc.

Client Agreement by Investment
Advisers

Client agreements have always
been a concern in respect of intermediaries in securities markets. There may be
non-uniformity or even sheer non-existence of such agreements. Or the terms may
be one-sided or opaque. Certain minimum level of protection of clients may not
be provided. Hence, SEBI often provides for certain standard form of such
agreements with certain minimum requirements that cannot be deviated from. For
Investment Advisers, the paper recommends a “Rights and Obligation” document.
The paper recommends a certain minimum provisions in such document including
various disclosures by the Investment Adviser. The result would be that, while
avoiding over-formalisation, a certain level of protection as well as
disclosure would be available to the client.

Other recommendations

The Paper generally seeks to
make several other amendments. The Regulations particularly relating to Investment
Advisers will thus see substantial amendments.

Conclusion

Intermediaries are considered
to be the gatekeepers to securities markets who deal with investors directly.
It is then inevitable that such intermediaries will face considerable
regulation and supervision. It is also expected that SEBI would ensure that,
through registration, it creates a requirement whereby only qualified persons
who comply with certain basic requirements as well as ethics are only permitted
to operate. Further, conflicts of interests are also avoided. This has resulted
in not only multiple categories of such intermediaries but increasingly complex
regulatory requirements. Whatever shape the final requirements may come in
following the consultation paper, they will only increase such requirements
which eventually will also increase costs of compliance. The multiple
categories will ensure that there is sharp specialisation and many
intermediaries and even professionals like Chartered Accountants will have to
give up certain activities they may otherwise be engaging in. The investors
will have advantage of such specialisation but will then have to go to multiple
intermediaries to fulfill their simple desires of investing in capital market
products. _

Staying In Parents’ House – A Matter of Right?

Introduction

In the usual American/Western way
of life, a son stays with his parents till the age of 16 year and thereafter,
he goes to college in another State after which he lives in his own house.
Living with one’s parents in their home is very rare and unusual. However, in
India the matter is entirely opposite. An Indian son continues to live with his
parents in their home even after becoming a major and in several cases even
after starting a family of his own. Strange as it appears to several
Westerners, this is the usual way of life in India.  However, what happens when the parents want
to evict their adult son from their home? Can they do so or does the son have a
vested right to reside in their house?

The Delhi High Court had an
occasion to consider such an interesting issue in the case of Sachin vs.
Jhabbu Lal, RSA 136/2016.

Facts of the Case

A senior citizen couple were
residing on the ground floor of their two-storied home in Delhi. They had
allowed their married elder son and his wife to live on the 2nd floor
and their married younger son and his wife on the 1st floor.  They did so on account of their natural love
and affection for their sons.

The parents claimed that the
entire house was self-acquired by them out of their own funds. The property
documents, i.e., the General Power of Attorney, the Agreement to Sell, the
Receipt and their Will all were in favour of the father. The sons did not have
any documentary evidence to prove that they were the rightful owners or that
the sons contributed to the purchase of the home.

The parents and their sons could
not get along due to constant quarrels. Matters came to such a headway that the
parents filed police complaints against their sons’ families. They also issued
a public notice disowning their sons and evicting them from their self acquired
property. The parents approached Court for a decree directing them to vacate
the two floors in their possession and also to restrain them from creating any
third party interest in the property.

The sons denied the parents’ claim
that the property was self acquired and also denied their claims of being the
exclusive owners. Their contention was that they have also contributed to the
purchase of the property and construction costs and hence, they should be
regarded as co-owners. Accordingly, the suit for eviction failed.

The Delhi High Court’s Judgment

The Court observed that the sons
were not able to substantiate any evidence to prove that the parents were not
exclusive owners of their property. Further, they have not denied that the
property stands in their father’s name and have not been able to claim any
ownership rights separate from their parents. They could not prove that they
have contributed to the purchase of the property.

The Court held that where the
house is a self acquired house of the parents, a son whether married or
unmarried, has no legal right to live in that house and he can live in that
house only at the mercy of his parents upto such time as his parents allow.
Merely because the parents have allowed him to live in the house so long as his
relations with the parents were cordial, does not mean that the parents have to
bear his burden throughout their life. Since there was no evidence to prove the
sons’ right in the property and on the contrary, there was evidence to prove
that the property was the sole property of the parents, it was clear that the
sons could be evicted by their parents.

This is an important and correct
verdict given by the Delhi High Court. There have been many instances of
children forcing their parents to allow them to reside in homes belonging to
their parents. This decision would come as a shot in the arm for such parents.
However, it must be noted that in case the property is ancestral or cost of
which is contributed by the sons then this decision would have no application.
Of course, what is ancestral is a question of fact and would depend upon the
circumstances of each case. Generally, ancestral property refers to property
belonging to at least 3 generations, i.e., one’s parents and grandparents.
However, it may be noted that in case the parents gift the house to the son
during their lifetime then he becomes the rightful owner and claim right of
ownership over the same.  

Dwelling House

Another ancillary factor to be
borne in mind is the amendment by the Hindu Succession (Amendment) Act, 2005 to
the Hindu Succession Act, 1956 in respect to dwelling houses. The erstwhile
section 23 of the Hindu Succession Act, 1956 
provided that when a Hindu dies without a will, i.e., intestate, and he
has left behind Class I male and female heirs and his property includes a
dwelling house, then the female heirs could not claim a partition of such
dwelling house till such time as the male heirs chose to divide their
respective shares then. However, she was entitled to a right of residence
therein. The erstwhile section carved out an exception that if such female heir
was a daughter, then she was entitled to a right to residence in the
dwelling-house only if she was unmarried or had been deserted / separated from
her husband, or was a widow.  Hence, the
females were dependent on the males  to
claim their right of partition. This provision was intended to ensure that sons
living in their parents’ home were not rendered homeless by a claim for
partition by their sisters. The Supreme Court in Narasimha Murti vs.
Susheelbai, AIR 1996 SC 1826 has defined the expression `dwelling
house’by stating that it is referable to the dwelling house in which the
intestate Hindu was living at the time of his/her death; he/she intended that
his/her children would continue to normally occupy and enjoy it; The intestate
Hindu regarded it as his permanent abode. It further held that section 23 (as
it stood before its deletion in 2005), limited 
the right of the Class-I female heirs of a Hindu who died intestate
while both male and female heirs were entitled to a share in the property left
by the Hindu owner including the dwelling house. It was an exception to the
general partition. So long as the male heir(s) chose not to partition the
dwelling house, the female class-I heir had been denied the right to claim its
partition subject to a further exception, namely, the right to residence
therein by the female class-I heir under specified circumstances. In other
words, the dwelling house remained indivisible. 
But the moment the male heir chose to let out the dwelling house to a
stranger/third party, as a tenant or a licensee, the dwelling house became
partible. Here, the conduct of the male heir was the cause and the entitlement
of the female Class-I heir was the effect and the latter’s claim for partition
got ripened into right as they were to sue for partition of the dwelling house,
whether or not the proviso came into play.

This section has been deleted
altogether with effect from 9th September 2005. Now, a female heir
can ask for a partition of the house property where the coparceners are
residing. Thus, this is another scenario where the sons could be rendered
homeless.

Conclusion

While it was apparent that a son can claim no
vested right in his parents’ self acquired property, this clear cut verdict
helps to clarify matters. Irrespective of his marital status, an adult son
cannot claim that he has a legal right to stay in his parents’ home.

Notification No. FEMA 5(R)/2016-RB dated September 8, 2016

CORRIGENDUM  – G.S.R. 389(E) –
dated September 8, 2016

Foreign  Exchange  management 
(deposit)  Regulations, 2016

By a Corrigendum dated September
8, 2016 published in the Gazette of india, extraordinary, Part-ii, Section 3,
Sub-section (i), the following changes have been made to Notification No. FEMA
5(R)/2016-RB relating to Foreign exchange management (deposit) regulations,
2016: ­

Paragraph 6(3) of Schedule i has
been substituted as under: ­

“loans  outside india – authorised dealers may allow
their branches/correspondents outside india to grant loans to or in favour of
non-resident depositor or to third parties at the request of depositor for bona
fide purpose against the security of funds held in the NRE accounts in india
and also agree for remittance of the funds from india, if necessary, for
liquidation of the outstanding.”

Previously, third party loans
could be given for bona fide purpose except for the purpose of relending or
carrying on agricultural / plantation activities or for investment in real
estate business. With this amendment restriction on user of funds has been
removed.

Exports – Write-Off, Netting off Etc

Background

The
Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued
thereunder came in force from 1st June 2000. Since then, over last
16 years, they have undergone several changes.

Beginning
December 2015, RBI is issuing Revised Notifications in substitution of the
original Notifications issued on May 3, 2000. Previously, annually on July 1
RBI was issuing Master Circulars with shelf life of one year. In another
change, from January 1, 2016, most of the Master Circulars have been
discontinued and substituted with Master Directions (except in case of –
Foreign Investment in India, Money Transfer Service Scheme and Risk Management
and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions
will be updated on an ongoing basis, as and when any new Circular/Notification
is issued.
However, in case of any conflict between the relevant Notification and the
Master Direction, the relevant Notification will prevail.

Concept
and Scope

The
objective of this column is to revisit certain topics on a quarterly, covering
aspects or amendments in Rules or Regulations of FEMA (excluding the procedural
aspects) which may have practical significance for professional brethren. The
issues relating to write-off of export proceeds and some other issues connected
therewith are being discussed to begin with.

Export
of Goods and Services

Vide Notification No. FEMA
23(R)/2015-RB dated January 12, 2016, RBI notified Foreign Exchange Management
(Export of Goods and Services) Regulations, 2015. This Notification repeals and
substitutes Notification No. FEMA 23/2000-RB dated 3rd May 2000 which had
notified Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000.

This
Article discusses the following aspects in the context of exports by domestic
tariff area units (i.e., units other than those located in SEZ).

1.  Reduction
in invoice value.

2.  Extension
of time.

3.  Write-off
of unrealised export bills.

4.  Set-off
of export receivables against import payables.

1.  Reduction in invoice value

a.  On
account of prepayment of usance bills

     Most
of the export transactions are on credit. Thus, the price negotiates also
includes certain credit period. However, sometimes the overseas importer may
desire to discharge purchase consideration before the due date if such
pre-payment is beneficial. The importer and the exporter negotiate the
consideration for such pre-payment. The consideration is generally linked to
the prevailing interest rates and the period and is by way of discount for
pre-payment by reduction in the invoice value.

     Presently,
in case of pre-payment, FEMA permits an Indian exporter to reduce the invoice
value by allowing cash discount equivalent to the interest on the unexpired
period of usance. This discount is to be calculated at the rate of interest
stipulated in the export contract. If such rate is not stipulated in the
contract, prime rate/LIBOR of the currency of invoice is to be applied.

b.  On
account of change of buyer / consignee

     Sometimes,
after the goods are shipped, it may so happen that the original buyer defaults
or does not pay for the goods. Having the goods shipped back to India will
result in substantial expenses.

     In
such case, the exporter may consider selling goods to another buyer. Therefore,
FEMA permits the exporter to transfer the goods to another buyer, whether in
the same country or any other country. Further, knowing the predicament of the
exporter, the new buyer will attempt to negotiate a lower price. Hence, for
change of buyer/consignee in such case, or selling the goods at a lower price,
the exporter is not required to obtain prior permission of RBI if the following
conditions are fulfilled.

i.  The
reduction in value of the invoice due to such change is not more than 25% of
the value of the original invoice.

ii.  The
export proceeds must be realised within 9 months from the date of export to the
original buyer/consignee.

     However,
prior permission of RBI is required if either of the above conditions are not
fulfilled. RBI may grant such permission provided:

i.   Exports
do not relate to export of commodities subject to floor price stipulations;

ii.  Exporter
is not on the exporters’ caution list of the Reserve Bank; and

iii.  Exporter
has surrendered proportionate export incentives availed of, if any.

c.  In
any other case 

This
category covers cases of exporters who are in the business of export for more
than three years and cases of other exporters.

In
case of exporters who are in the business of export for more than three years,
banks may permit reduction in invoice value without any limit if: –

i.  Export
outstanding (excluding outstanding of exports made to countries facing
externalisation problems in cases where the buyers have made payments in local
currency) do not exceed 5% of the average annual export realisation during the
preceding three financial years.

ii.  Exports
do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any. 

In
other cases, banks may permit reduction in invoice value if: –

i.   Reduction
does not exceed 25% of the value of invoice.

ii.  Exports
do not relate to export of commodities subject to floor price stipulations.

iii.  Exporter
is not on the exporters’ caution list of the Reserve Bank.

iv. Exporter
has surrendered proportionate export incentives availed of, if any. 

If
an exporters case is not covered in either of the above situations, prior
permission of RBI needs to be obtained before reducing the value of invoice.

2.  Extension of time

Every
exporter of goods / software / services is required to realise and repatriate
the full value of exports (export proceeds) within nine months from the date of
export. In case of exports made to the exporter’s own warehouse outside India
the export proceeds must be realised within fifteen months from the date of
shipment of goods.

However,
many times it may not be possible to realise and repatriate the export proceeds
within the stipulated time. In such cases, banks are authorised to grant
extension of six months for realisation of export proceeds subject the
following conditions.

i. Export
transactions covered by the invoices are not under investigation by Directorate
of Enforcement/Central Bureau of Investigation or other investigating agencies.

ii.  Banks
are satisfied that the exporter has not been able to realise export proceeds
for reasons beyond his control.

iii.  Exporter
submits a declaration that the export proceeds will be realised during the
extended period.

iv. The
total outstanding of the exporter should not exceed US $ one million or 10% of
the average export realisations during the preceding three financial years,
whichever is higher. However, if the exporter has filed suits abroad against the buyer, extension can be granted by the banks irrespective of the amount
involved / outstanding. 

If
an exporter’s case is not covered by any of the above situations, then
permission from concerned Regional
Office of RBI has to be obtained for extension of time for realization and
repatriation of export proceeds.

3.  Write-off of unrealised export bills

Some
stakeholders appear to be under an impression that pursuant to liberalisation,
permission of RBI is no longer required for writing off unrealised export
proceeds. In practice, this is not the case. Unrealised export proceeds only
within certain limit can be written off without obtaining prior permission from
RBI, while certain amounts can be written off only after obtaining prior
approval from RBI.

It
is pertinent to know that there are no specific provisions / formats with
respect to export of services that need to be complied with / submitted.
However, the general principles governing export of goods relating to export
realisation, etc. also apply to export of services.

Write-offs
may be full write-offs or partial write-offs. This may be necessary due to
several reasons such as, non-receipt of payment, early receipt of payment,
damage to goods in transit, export of goods of a different quality, etc.

a.  Write-off
due to non-receipt of payment

Sometimes,
it may not be possible for an exporter to realize the amounts due against the
export of goods / software / services. There may be varied reasons for this
non-realisation. In such cases the exporter is forced to write-off the
unrealised amount.

Depending
on the amount to be written off as well as certain other conditions, the
exporter can:

(a) write-off
the unrealised amount without obtaining permission from his bank or from RBI;
or

(b) approach
the bank which handled the relevant export documents and request permission to
write-off the unrealised amount; or

(c) approach
the concerned Regional Office of RBI through the bank which handled the
relevant export documents, for permission to write-off the unrealised amount.

To
qualify for write-off, either self write-off or otherwise: –

i.   The
unrealised amount must be outstanding for more than one year.

ii.  Exporter
must produce satisfactory documentary evidence to prove that he has made all
efforts to realise the unrealised amount.

iii.  Non-realisation
must be for one of the following reasons: –

a)  The overseas buyer is insolvent and a certificate
from the official liquidator indicating that there is no possibility of
recovery of export proceeds is obtained.

b)  The
overseas buyer is not traceable over a reasonably long period of time.

c)  The
goods exported have been auctioned or destroyed by the Port / Customs / Health
authorities in the importing country.

d)  The
unrealised amount represents the balance due in a case settled through the
intervention of the Indian Embassy, Foreign Chamber of Commerce or similar
Organization.

e)  The
unrealised amount represents the undrawn balance of an export bill (not
exceeding 10% of the invoice value) remaining outstanding and is unrealisable
despite all efforts made by the exporter.

f)   The
cost of resorting to legal action is disproportionate to the unrealised amount
of the export bill.

g)  The
exporter even after winning the Court case against the overseas buyer is not
able to execute the Court decree due to reasons beyond his control.

h)  Bills
were drawn for the difference between the letter of credit value and actual
export value or between the provisional and the actual freight charges but the
amounts have remained unrealised consequent on dishonor of the bills by the
overseas buyer and there are no prospects of realisation.

It
may be noted that adequate documentary evidence may be required to be provided
to substantiate the write-off.

Write-off
will not be permitted in the following cases: –

i.   Exports
have been made to countries with externalisation problem i.e. where the
overseas buyer has deposited the value of export in local currency but the
amount has not been allowed to be repatriated by the central banking
authorities of the country.

ii. Export
Declaration Form (EDF) is under investigation by agencies like, Enforcement
Directorate, Directorate of Revenue Intelligence, Central Bureau of
Investigation, etc.

iii.  Outstanding
bills which are subject matter of civil / criminal suit.

Limits for write-offs (by self or through bank permission)

 

 

“Write-off”
by

Permitted write-off as a

% of the total export proceeds

realised during the

previous calendar year

Self “write-off” by an exporter (Other

than Status Holder Exporter)

5%

Self “write-off” by Status Holder

Exporters

10%

“Write-off” by Bank which handled the

export documents

10%

The limits stated above are
related to total export proceeds realised during the previous calendar year and
are cumulatively available in a year.

Before write-off is possible, the
exporter has to surrender the export incentives, if any, availed in respect of
the amount to be written-off and submit documents evidencing the same to the
bank.

Also, in case of self write-off,
the exporter has to submit to the bank, a Chartered Accountant’s certificate,
containing the following information: –

i.   Amount of export realisation in
the preceding calendar year.

ii.  Amount of write-off already
availed of during the current year, if any.

iii.  Details of the relevant EDF to
be written off.

iv. Details of invoice no., invoice
value, commodity exported, country of export.

v.  Surrender of export benefits, if
any, availed in respect of the amount to be written-off. 

Further, banks are required to
report the write-off of unrealised export proceeds (self-write-off or
otherwise) through EDPMS to RBI.

All cases of a write-off which are
not covered by the above criteria are to be referred to the concerned Regional
Office of RBI for its approval.

b. Write
off in cases of payment of claims by ECGC and private insurance companies
regulated by Insurance Regulatory and Development Authority (IRDA)

If though the Indian exporter had
not realised the export proceeds from the overseas buyer, but received the
corresponding amount from either ECGC or from an Insurance company, the bank
which handled the export documents can write-off the unrealised amount (without
any limit) after receiving an application along with supporting documentary
evidence from the exporter.

The surrender of export incentives
will be as provided in the Foreign Trade Policy (FTP). However, the amount so
realised / recovered from ECGC / insurance company by the Indian exporter will
not be treated as export realisation in foreign exchange.

c.  Write-off
relaxation

In case of write-off other than
self-write-off, realisation of export proceeds will not be insisted upon under
any of the Export Promotion Schemes that are covered under FTP if: –

i.  RBI / bank has permitted the
write off on the basis of merits, as per extant guidelines.

ii.  The exporter produces a
certificate from the Foreign Mission of India concerned, about the fact of
non-recovery of export proceeds from the buyer.

In such case the Indian exporter
is not required to surrender the export incentives that have been availed by
him against such exports.

4.  Netting off of export receivables against
import payables

At the outset, ONLY units in SEZs
are permitted to net off export receivables against import payments.

It may be noted that imports and
exports from group entities cannot be internally netted. Netting off can only
be done in cases where import / export is from / to the same entities i.e. the
two parties must be debtors and creditors of each other and not of their other
group entities.

An exporter is permitted to
set-off his export receivable against his import payable subject to the
following: –

i.   Export / import transactions
are not with ACU countries.

ii.  Set-off of export receivables against
import payments are in respect of the same overseas buyer and supplier.

iii.  Consent for set-off has been
obtained from the overseas buyer and seller.

iv. Import is as per the Foreign
Trade Policy.

v.  Invoices / Bills of Lading /
Airway Bills and Exchange Control copies of Bills of Entry for home consumption
have been submitted by the importer to the bank.

vi. Payment for the import is still
outstanding in the books of the importer.

   vii. All the relevant documents have been submitted to the bank which will have to comply with all the regulatory requirements relating to the transactions.

Power of Attorney holder – Authorised for signing various documents – Suit filed by Power of Attorney holder – Power of Attorney holder deposing in court on his personal knowledge of each and every detail of transaction – Evidence of Power of Attorney holder of Plaintiff readiness and willingness admissible [Code of Civil Procedure, 1908, Order VI Rule 14, Order XLI Rule 27].

Santosh
Vaidya vs. Namdeo Budde and Ors AIR 2016 (NOC) 584 (BOM.)

Respondents-plaintiffs,
through their power of attorney holder by name Dhairyasheel, instituted Special
Civil Suit for specific performance of contract against the Appellant defendant
no. 1 and defendant no. 2.

The
case was that defendant  no.  1 was the owner of field HR at Mouza
Hudkeshwar and he entered into an agreement in favour of the Plaintiff and
defendant  no. 2 for the sale thereof. It
was also agreed that defendant no. 1 will execute the sale-deed within 1 1/2
years from the date of the agreement and remaining consideration would be paid
accordingly. It was further agreed that in case there was any legal impediment
in getting the sale- deed registered, further time of 1 1/2 years would be
extended. The defendant no. 1 having not complied with the obtaining of
permissions and no objections from the authorities, was not entitled to cancel
the agreement nor could he do so since the agreement itself provided for
extension by another 1 1/2 year. Plaintiffs and defendant no. 2 again informed
defendant no. 1 that they were ready and willing to get the sale-deed
registered and then defendant no. 1 also realised his mistake of not obtaining
the necessary documents of no objections etc. and agreed to make compliance.
however, defendant no. 1 still did not produce no objections from the competent
authority and therefore, Plaintiff had no alternative but to file suit for
specific performance of contract thereafter.

It
was held by the high Court that rule 14 of the Code of Civil Procedure
categorically shows that a person authorised is entitled to file and prosecute
the suit till its disposal. In the light of the above provision, it is not
possible to accept the submissions about the incompetence of the power of attorney
holder to file the suit.

The
counsel for the appellant then argued that the power of attorney holder had no
personal knowledge about the execution of agreement and, therefore, his
evidence is worthless and should not have been relied upon by the appellate
judge.

On perusal of the evidence of two witnesses of
the defen­ dant namely; appellant nos. 1 and 2, does not even show a semblance
of evidence that there was no readiness and willingness on the part of the
Plaintiff and defendant no. 2. It was clear from the entire record that the
power of attorney holder had full personal knowledge about the entire
transaction and that Plaintiff and defendant no. 2 were ready and willing to
perform their part of contract. In the wake of the above factual position in
this case, the power of attorney holder could validly depose about the
readiness and willingness. Accordingly, the appeal was dismissed.

Protected Tenant’s right to property – Landholder cannot sell the land without first offering the same to the ‘Protected Tenant’ – Land can be sold only if the ‘Protected Tenant’ does not exercise his right to purchase the said land. [Hyderabad Tenancy and Agricultural Lands Act (21 of 1950), Sections 40, 32; Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act, 1950 – Section 40]

B.
Bal Reddy vs. Teegala Narayana Reddy and Ors.. AIR 2016 SUPREME COURT 3810

One
teegala Shivaiah was a Protected tenant in respect of agricultural lands. The
respondents were the heirs and successors of said teegala Shivaiah who died
sometime in the year 1964. The land holders who were recorded as owners of the
said land sold the said land to various buyers who in turn further effected
sales.

Respondents,  after 
obtaining  succession  certificates from Dy. Collector and Mandal
Revenue Officer, filed an application u/s. 32 of the act for restoration of possession
of the said land. The deputy Collector mandal revenue Officer directed
restoration of the physical possession the Respondents. The succession
certificate as well as the order of restoration was set aside by the joint  Collector. The high Court reversed the order
of the joint  Collector on the point of
restoration of possession.

The
Supreme Court held that section 38-d of the act prescribes the procedure to be
followed when the land holder intends to sell the land held by a Protected
tenant. Accordingly, the land must first be offered by issuing a notice in
writing to the Protected tenant and it is only when the Protected tenant does
not exercise the right of purchase in accordance with the procedure, that the
land holder can sell such land to any other person. The court further held, it
is well settled that the interest of a Protected tenant continues to be
operative and subsisting so long as ‘protected tenancy’ is not validly
terminated. Even if such Protected tenant 
has lost possession of the land in question, that by itself does not
terminate the ‘protected tenancy’.

Hence,
the appeals were dismissed.

Insurance claim– Cannot be denied on the ground that no premium had been paid – Notice to insured before the policy lapses, must be issued. [Insurance Act (4 of 1938)]

Jammu
and Kashmir Bank Ltd., Jammu vs. Tania Jamwal and Others. AIR 2016 JAMMU AND
KASHMIR 114

The
Claimants-respondents  had an insurance
policy named, “jeevan  Saral Policy”. As
per the arrangement/ authorisation of the deceased policy holder, the premium
amount was to be debited by the insurance company from the account of the
deceased policy holder through electronic clearing system, provided there were
sufficient funds in the bank account, which was being maintained by j & K
Bank ltd.  This was an inter-se
arrangement between the Policy holder’s bank and the insurance company.

The
deceased policy holder passed away and the claimants claimed the amount of
insurance policy. the insurance company 
rejected the claim on the ground that the policy had already lapsed due
to non-payment of premium.

The
high Court held that if for any reason the amount in question could not be
debited in time, it was the sole duty of the insurance company to appraise the
deceased policy holder. But in the present case, the insurance company did not
bring it to the notice of the deceased policy holder, moreover, the bank, while
rejecting the requisition of the insurance 
company  mentioned  “miscellaneous”  in  its
reasons memo as a result of which the insurance company suffered a confusion.
if there was any procedural lapse/ wrong, the same was between the insurance
company and  the  bank 
for  which  the 
policy  holder  cannot 
be held responsible.

Wide Scope of Insider Trading Regulations & Severity of Punishment for Violation – Recent Orders of SEBI and SAT

Background

A recent series of interesting SEBI orders has highlighted
two aspects of insider trading. One is, how broad the law can be and the types
of transactions and acts/omissions that are covered. The other is, how
stringent the punishment can be. These orders of SEBI have now also been
confirmed by the Securities Appellate Tribunal (“SAT”), with some changes.

Nature of Insider Trading as commonly perceived and the recent
Orders

Insider Trading is commonly seen to be of a particular
nature. There is an insider – who could be a director, officer or even auditor,
etc. who has close relations with the Company. He usually occupies a
position of trust and has access to inside information. Such information, if
made public, would result in the price of the shares going up or down. He can
thus profit from such information. This is deemed to be abuse of such trust and
the regulations that prohibit and prescribe punishment for insider trading.
However, as will be seen from the SEBI orders discussed herein, what may constitute
inside information and thus Insider Trading can be something not envisaged from
this common understanding.

Further, these SEBI orders also show that the punishment for
Insider Trading can be more severe than one may commonly expect. As will be
seen here, though the profits would have been in thousands, the penalty imposed
is in tens of lakhs of rupees and even in crores.

Whether information regarding open offer is inside information

The SEBI (Prohibition of Insider Trading) Regulations 2015
(which replaced the earlier 1992 Regulations) consider certain information to
be inside information. If such information is price sensitive and not made
public, then the Regulations require that insiders should not deal on basis of
such information (termed in the Regulations as Unpublished Price Sensitive
Information or “UPSI”). An example of this is receipt of large and profitable
orders by the Company. The head of sales, the Chief Financial Officer, the
Managing Director, etc. who become aware of this development would also
know that once this information is made public, the price of the shares may
rise. The Regulations thus rightly bar them from dealing in the shares of the
Company till such information remains is not shared with public. There can be
more examples of such information – a large dividend payment or bonus issue of
shares is decided on, an acquisition or divestiture of a business is being
considered, etc. However, in each of these cases, the matter concerns
something directly relating to the activities of the Company. When an insider
is entrusted with such confidential and material information, he is duty bound not to make use of it for his profit.

The question that arises is whether even information that
does not directly relate to activities of companies can also be inside
information. If, for example, the Promoters of a Company have entered into an
agreement to sell their shareholding to an acquirer, whether such information
would also be inside information under the Regulations? The peculiar nature of
such information can be seen. The information does not really relate to the
operations of the Company. It is also a proposed transaction by the Promoters
of a company independently of the Company. If the Company is wholly
professionally managed, it is possible that the Company and its officers may
not even come to know, till the last moment, of such agreement. Are the
Promoters duty bound not to trade on basis of such information?

The implications are not far to see. Such an acquisition
would have to result in an open offer from the public by the acquirer under the
SEBI Takeover Regulations. If the open offer price is higher than the current
ruling market price, the public shareholders would profit. However, if the
Promoters, being aware of such deal with the acquirer, acquire the shares from
the market at the ruling price, they may profit from such purchase. The
question is whether such dealing would be Insider Trading under the
Regulations.

SEBI Orders

The Orders dealt with in this article tackle this question
though partly. The Promoters of a listed company had entered into negotiations
with an acquirer whereby they would sell their shares and control over the
Company. The resultant open offer price seems to be, from limited facts given
in the SEBI orders, far higher than the ruling market price. The directors of
the Company were, as per findings of SEBI, aware of such transaction. Yet, they
and certain persons to whom such information was shared by such Directors, made
purchases of the shares from the market at the lower ruling price. Furthermore
they did not inform the stock exchanges promptly at end of board meeting where
such agreement for sale of shares/control was taken up. The resultant public
announcement of open offer was also delayed by a day. SEBI considered these as
violations of the Regulations and levied severe penalties. The Company, its
directors, its Company Secretary, the persons to whom such information was
shared, etc. were all proceeded against. These matters also went in
appeal before SAT. The orders of SEBI for each of these persons and the
decision of the SAT in appeal are discussed below. The decisions of SEBI are
all dated 7th March 2014 and the decision of the Securities
Appellate Tribunal (“SAT”) is dated 30th November 2016. The name of
the Company is Shelter Infra Projects Limited (“the Company”).

When did the UPSI arise?

An important relevant question was, when did the Unpublished
Price Sensitive Information (“UPSI”) arise? It is really from this time that
the insiders are prohibited from dealing in the shares of the Company. Often
developments may be in process. However, there would be a particular stage
after which the development has turned into such definite information that if
made known to the public would materially affect the price of the shares of the
Company. This is also relevant for determining the trading window closure date
too since before UPSI arises, the window should already be closed.

In the present case, the SAT eventually noted that there was
a meeting on 19th June 2009 at which a decision was taken to go
ahead with the agreement of sale of shares/transfer of control. At this
meeting, a decision was also taken to finalise the transaction within a week.
SAT considered this date to be the date when UPSI arose.

Action against the Company Secretary and directors for not
closing trading window

The Regulations, read with Code of Conduct prescribed
thereunder which companies are also required to adopt, provide for closure of
trading window when price sensitive information is expected to be generated.
Thus, for example, during the time when the financial results of the Company
are being compiled, there may be persons in the Company who may have access to
such information. If they deal in the shares of the Company, then it is likely
they would take into account such information and thus enter into trades
favourable to them. The Regulations thus require that the Company should
prohibit trading during such period by specified insiders and such prohibition
is called closure of trading window. The Company Secretary of the Company is
required to notify such closure of trading window.

SEBI initiated action against the Company Secretary and
directors of the Company as the trading window was not closed during the time when
the sale of controlling interest was being decided upon. However, by this time,
the Company Secretary of the Company had passed away. SEBI noted that the
obligation for initiating closure of the trading window under the
Regulations/Code of Conduct was on the Company Secretary. On his death, the
proceedings against him abated. The other directors were also absolved.

On the other hand, a similar action was initiated against the
Company for not closing the trading window and a penalty of Rs. 50 lakh was levied
on it for such default. This penalty was upheld by the SAT on appeal.

Action against directors for dealing in shares of the Company
with (Unpublished Sensitive Information ) UPSI

The SEBI Orders
demonstrated how directors purchased shares while the price sensitive
information regarding proposed takeover was not published. In two cases,
directors were also held to have shared the information with their relatives
who dealt in the shares. The directors were penalised separately for sharing
information and for dealing. Such relatives too were penalised for the dealing.

The Chairman of the
Company and his wife were proceeded against. SEBI made a finding that the
Chairman had not only dealt in the shares himself by purchasing 10,200 shares
but also communicated the UPSI to his wife. The wife in turn also dealt in the
shares by purchasing 5,000 shares. The Chairman, however, died while the
proceedings were in progress and hence the action against him abated. SEBI,
however, levied a penalty of Rs. 1 crore on his wife for her dealing in the
shares. On appeal, SAT, considering the age of the wife and other relevant factors,
reduced the penalty to Rs. 30 lakh.

Another director was held to have shared the information with
a group he was associated with, which group in turn dealt in the shares of the
Company. For sharing such information, SEBI levied a penalty of Rs. 1 crore on
such director. For the persons to whom such UPSI was shared and who dealt in
such shares, a penalty of Rs. 2 crore was levied for such persons put together,
to be payable jointly and severally. Both of such penalties were confirmed by
SAT.

Similarly, a whole time director of the Company was held to
have dealt in the shares of the Company while in possession of UPSI and for
having communicating the UPSI to his son, who, in turn, dealt in the shares of
the Company. The Whole Time Director bought 1,246 shares for Rs. 41310 and sold
the same for Rs. 42151. This also involved violation of the rule of not
entering into opposite transaction within six months of the first transaction.
He was penalised Rs. 30 lakh for communicating UPSI and for dealing in the
shares. His son bought 2000 shares for Rs. 80,824. He was penalised Rs. 20
lakh.

Some such persons argued that they had only purchased shares
but did not sell them and hence did not realise any profits. This argument was
rejected and rightly so. Insider Trading arises when dealing takes place and
that may be merely one side of the transaction – purchase or sale.

Intimating stock exchanges regarding decision of   takeover and making  the public announcement as required by the
Takeover Regulations

It was found by SEBI that while the Company decided at a
meeting to go ahead with the takeover agreement, it did not promptly inform the
stock exchange as required by the Listing Agreement. Indeed, as SEBI pointed
out, the Company did not send the information to stock exchanges at all.

Further, a public announcement was required to be made under
the Takeover Regulations within four working days of having entered into the agreement for sale of shares/control. The
public announcement was made, however, after 5 working days, which incidentally
came to 7 week days.

A penalty of Rs. 50 lakh was levied by SEBI for not
intimating the stock exchange under the Listing Agreement and a further Rs. 50
lakh for not releasing the public announcement in the prescribed time. The
Company argued that the information was provided through the public
announcement in seven days and even otherwise the penalty for delayed information
is Rs. 1 lakh per day. The SAT, however, took a practical view and accepted the
contention that the public announcement also effectively released the required
information. Hence, the delay was limited to seven days. The SAT also applied
the penalty of Rs. 1 lakh per day u/s. 23(a) of the Securities Contracts
(Regulation) Act, 1956, and limited the penalty to Rs. 7 lakh.

Quantum of penalty

The penalties levied, as is seen, are fairly high. The
amounts involved of purchases are barely in thousands or tens of thousands
while the penalty is in tens of lakhs. It needs to be considered whether it is
disproportionate or whether such high penalties are necessary for punishing the
guilty for and also act as deterrent for others in the future. The Adjudicating
Officer of SEBI has not given any detailed working of how the penalty has been
arrived at. However, as can be seen, except where reduced by the SAT on facts,
the penalties have been confirmed.

Conclusion

The decision ought to make companies and
insiders of the sheer breadth of the Insider Trading Regulations. If one
reviews the definition of “insider” under the Regulations, the actual
implications are even broader. An insider includes any person who has received
any unpublished price sensitive information, irrespective of the source. Thus,
while in the decisions discussed in this article, insiders were close to the
Company and thus had access to inside information. Even the other persons
considered here had relations with such insiders. However, even if that were
not so, the Regulations may apply if even a third party had merely received
such information. For example, an outsider/third party who has inside
information that is price-sensitive would be deemed to be an insider and thus
face a bar on dealing on basis of such information.

SEBI Decision in Reliance’s Case – Allegations Of Serious Violations Including Fraud & Price Manipulation

Background

SEBI
has passed an order holding Reliance Industries Limited (“Reliance”) and 12
other entities to have violated certain provisions of Securities Laws including
those relating to fraud and price manipulation. This finding has been recorded
in its order dated 24th March 2017 (“the Order”), in respect of its
dealings in the shares/futures of Reliance Petroleum Limited (“RPL”). SEBI has
ordered that the profit of Rs. 447.27 crore from such transactions be disgorged
along with interest @ 12% per annum from 29th November 2007 till the
date of payment. The events as laid down in the Order are complex and certain
interesting issues and concerns have been raised therein. Concepts like hedging
have been discussed and applied. The decision has relevance also to any case
where a large quantity of shares are purchased or sold.

This
article narrates the findings and assertions made in the SEBI order. Needless
to add, considering the reportedly proposed appeal against the Order, it is
possible that there may be developments in the near future.

The
facts as narrated in the said SEBI Order including its reasoning as also
certain further comments are given in the following paragraphs.

Context of the proposed dealings in shares of RPL

Reliance
was the holder of 75% of the equity share capital of RPL. Reliance needed to
raise monies for its large new projects. To part meet such needs, it had
decided at its Board Meeting held in March 2007 to sell about 5% shares (about
22.50 crore shares) in RPL. It is the manner in which the sales were carried
out that raised concerns and eventually, after being seized of the matter for
nearly 10 years, SEBI has passed this Order.

Method adopted for sale of the equity shares in RPL

It
can be expected that when a relatively large quantity of shares are to be sold
in the market, the price of the shares may fall in the interim. This may result
in the seller getting a lower price. According to Reliance, to help make up for
such potential loss in the cash market, it decided to hedge in the futures
market. Accordingly, it argued, it sold futures in the shares of RPL. However,
as will be seen later, this contention that trades in futures were for hedging
was rejected by SEBI. SEBI also held that the whole purpose of and manner of
carrying out the futures trades through certain agents was to profit through
price manipulation and fraud.

Client wise limits in futures

Relevant
provisions under circulars of SEBI/National Stock Exchange and other relevant
bye-laws/regulations prescribe limits of quantum of futures trade that a single
client could enter into. Such limits are intended for purposes of market
integrity, ensuring wider market, etc. It was found, however, as will be
seen later, that Reliance, with the help of agents/front entities, carried out
future trades far in excess of the prescribed limits.

Future trades with the help of 12 ‘front entities’

Reliance
entered into agreements with 12 entities (“the front entities”) who would enter
into futures trades for the benefit of Reliance. This meant that the
profits/losses on account of such trades would accrue to Reliance while the
front entities would earn commission. Each of the entities, except one, entered
into future trades that were slightly lower than the permissible limit per
client. In one case, where this limit was exceeded, the said entity was
penalised by the stock exchange.

The
futures trades that the front entities entered into were to expire on 29th
November 2007. Accordingly, a party who had entered into such trades
could square off such trades on or before closing on 29th November
2007. Alternatively, it could keep the trades as outstanding in which case they
would be compulsorily squared off at the weighted average price during the last
10 minutes of the closing day in the cash market.

The
front entities entered into future sale trades in the aggregate of 9.92 crore
shares. During this period, 1.95 crores of such trades were squared off leaving
a net of 7.97 crore of trades.

Sale in cash market

SEBI
recorded a finding that Reliance sold from 6th November to 23rd
November 2007 18.04 crore equity shares in the cash market. From 24th
November 2007 to just before the last 10 minutes of trading of last day of
trading, it did not sell any shares. However, in the last 10 minutes of such
last trading day, it offered for sale 2.43 crore shares of RPL and actually was
able to sell 1.95 crore. SEBI alleged that this was done with an intent to
manipulate the price since heavy sales in the last 10 minutes would result in
reduction in price. This, as explained earlier, would affect the settlement
price for futures resulting in higher profit for Reliance.

Violation of client wise limits

The
first finding regarding violation of law was relating to effectively exceeding
of client limits. As seen earlier, the futures trades were carried out through
12 front entities. Each of such entities had entered into an agreement with
Reliance whereby the profits/losses of the futures would accrue to Reliance
while such front entities will earn commission. The quantity of trades of each
such entity, except one, was just below the client-wise limits as prescribed
under relevant circulars of the stock exchanges/SEBI and other regulations,
bye-laws, etc. SEBI held that this arrangement with such entities was
done to circumvent the prescribed limits.

Reliance
argued that the relevant provisions provided that each entity should be
considered separately for the purposes of calculating this limit and hence it
was not in violation of the circulars. SEBI however rejected this argument. It
held that it was Reliance who, through such agreements, was the entity that was
carrying out such trades and hence there was effectively only one party. It
also observed that all the front entities were represented by one single
individual who also happened to be an employee of a wholly owned subsidiary of
Reliance. Such person also placed orders in the cash market for the sales made
by Reliance. The trades were thus in violation of the limits. More importantly,
SEBI held that considering the large volumes of futures trades that had a high
percentage of market share, they were entered into “with the intention to
corner the F&O segment and were therefore fraudulent and manipulative in
nature”.

Finding by SEBI

SEBI
alleged that Reliance and the front entities had carried out manipulation and
fraud and thus was in violation of the relevant provisions of the SEBI Act and
Regulations. It also held that Reliance had violated the limits of client wise
trades and thus was in violation of the relevant circulars of the stock exchanges
thereby violating the provisions of the Securities Contracts (Regulation) Act,
1956.

Directions by SEBI

In
view of such finding of violation of laws, SEBI issued two directions which are
contained in its order.

Firstly,
it debarred Reliance and the 12 front entities from dealing in equity
derivatives directly or indirectly for a period of one year in the ‘Futures and
Options’ segment of stock exchanges. It, however, permitted them to square off
existing positions on the date of the Order.

Secondly,
it directed Reliance to disgorge the excess profits made out of the futures
trades in violation of law. For this purpose, the proportionate profits of the
futures trades over and above the permitted limit for one client were
calculated. Further, interest @ 12% per annum was required to be paid from the
date of earning of such profits till the date of payment. The profits thus
worked out to be Rs. 447.27 crore. To this, interest @ 12% per annum with
effect from 29th November 2007 till the date of payment was to be
added.

Comments and conclusion

As
this article is being written, it has been reported that this Order will be
appealed against and Reliance has rejected such findings. Considering the
findings of fraud/manipulation are of a serious nature and considering also the
large amount, it is possible that the matter may even go for final decision to
the Supreme Court. The standards of proof required for serious allegations of
fraud/manipulation are high in law and it will be interesting to consider what
the appellate authorities have to say on the facts of this case and reasoning
applied by SEBI. This would add to the jurisprudence in Securities Laws through
the observations of the appellate authorities on the law.

The
decision is also interesting considering how SEBI has used data such as
quantity of futures/shares sold, the price at which trades took place
particularly relative to last traded price, the futures trades squared off and
generally how it made periodic comparison between the quantity of shares sold
in the cash market vs. the futures trades.

The
observations relating to hedging by SEBI are relevant too and considering that
it is an important defence offered, it is likely that there may be finding on
this issue by the appellate authorities. In passing, it may be observed that
such client-wise limits effectively defeat one of the objectives futures and
that being hedging.

The
present case was of a proposed sale of a large quantity of shares which
could have lowered the market price and hence the desire of hedging. A similar
situation can arise in case of proposed purchase of a large quantity
shares that may result in increase, at least in the short term, of the price of
the shares as quoted on stock exchanges. Such situations are dealt with in different
ways such as hedging or even warehousing where other parties are asked to
purchase shares that would eventually be transferred to the buyer. The present
order and its outcome would be of interest to such and other similar
transactions. Needless to say, it would be the facts of each case that would be
decisive. However, an element of wariness and proper planning would become
imperative by parties so as to avoid such action by SEBI.

In
the opinion of the author, there are some areas of concern in the Order. SEBI
has held that the fact that 12 front entities were used is a pointer of an
intent to manipulate/defraud. Whether this finding can be held to be
independently correct or has the benefit of hindsight of last 10 minutes of
heavy sales is, I submit, an area requiring more examination. Then there is the
fall in price in the last 10 minutes on account of the large sales in the cash
market. Even if it can be held that such fall was intended/manipulative,
whether the profits on account of only such fall can be treated as ill-gotten
profits? Or whether, as SEBI held, the whole of the profits on account of the
open futures trades should be held to be ill-gotten profits?

All in all, it would be
interesting to follow the case as it 
develops further.

WhatsApp as Evidence….. What’s that?

Introduction

We are inundated by electronic
data and increasingly even by social media! Social media and Apps, such as,
WhatsApp, Facebook, LinkedIn are fast replacing other traditional forms of
communication and human interaction. However, one frontier which has yet not
been fully breached by the social media is the Indian courts. Can chats on
WhatsApp be admitted as evidence in a Court case? This was an issue which the
Bombay High Court recently had an occasion to consider in the case of Kross
Television India Pvt. Ltd vs. Vikhyat Chitra Production, Notice of Motion (L)
No. 572/2017. Certain other High Court judgments have also had an
occasion to rely on WhatsApp Chats as evidence. Let us examine some of these
interesting cases.

Background

Evidence in courts in India is
admissible provided it confirms to the contours of the Indian Evidence
Act, 1872. This Act applies to all judicial proceedings in or before
any court in India. It defines evidence as meaning and including all statements
which the court permits or requires to be made before it by witnesses in
respect of matters of fact which are under inquiry. Such evidence is known as
oral evidence. The Act also deals with documentary evidence. The definition of documentary
evidence in the Indian Evidence Act was modified by the Information
Technology Act, 2000 to provide that all documents including electronic
records produced for the inspection of the court would be known as documentary
evidence. Hence, electronic records have been given the status of evidence.
Section 2(1)(t) of the Information Technology Act defines an electronic record
to mean any data, record or data generated, image or sound stored, received or
sent in an electronic form or micro film or computer generated microfiche.

Section 65B of the Indian Evidence
Act deals with admissibility of electronic records as evidence. Any information
contained in an electronic record which is stored, recorded or copied in
optical / magnetic media (known as computer output) produced by a ‘computer’ is
also deemed to be a document provided 4 conditions are satisfied. Further, such
a document shall be admissible as evidence. The 4 conditions which must be
satisfied are (a) the computer output must be produced by the computer during
the period when the computer was used to store or process information by
persons having lawful control over it; (b) information of the kind contained in
the output was regularly fed into the computer; (c) the computer was operating
properly throughout the period; and (d) the information contained in the
electronic record reproduces information fed into the computer in the ordinary
course of activities.  

The term ‘computer’ is not
defined in the Indian Evidence Act but the Information Technology Act defines
it to mean any electronic, magnetic, optical or other high-speed data
processing device or system which performs logical, arithmetic, and memory
functions by manipulations of electronic, magnetic or optical impulses. Thus,
this definition is wide enough to include a smartphone also!

The Delhi High Court in a criminal
case of State vs. Mohd. Afzal, 107(2003) DLT 385 has held that
computer generated electronic records are evidence and are admissible at a
trial if proved in the manner specified by section 65B of the Indian Evidence
Act. It has given a very vivid explanation of the law relating to electronic
records being admissible as evidence. It held that the normal rule of leading
documentary evidence is the production and proof of the original document
itself. Secondary evidence of the contents of a document can also be led under
the Evidence Act. Secondary evidence of the contents of a document can be led
when the original is of such a nature as not to be easily movable. Computerised
operating systems and support systems in industry cannot be moved to the court.
The information is stored in these computers on magnetic tapes (hard disc).
Electronic record produced there from has to be taken in the form of a print
out. Section 65B makes admissible without further proof, in evidence, print out
of a electronic record contained on a magnetic media a subject to the
satisfaction of the conditions mentioned in the section. Four conditions are
mentioned. Thus, compliance with the conditions of section 65B is enough to
make admissible and prove electronic records. It even makes admissible an
electronic record when certified that the contents of a computer printout are
generated by a computer satisfying the four conditions, the certificate being
signed by a person occupying a responsible official position in relation to the
operation of the device or the management of the relevant activities. Thus,
section 65B(4) provides for an alternative method to prove electronic record
and not the only method to prove electronic record. It further held that the
last few years of the 20th century saw rapid strides in the field of
information and technology. The expanding horizon of science and technology
threw new challenges for the ones who had to deal with proof of facts in
disputes where advanced techniques in technology were used and brought in aid.
Storage, processing and transmission of date on magnetic and silicon medium
became cost effective and easy to handle. Conventional means of records and
data processing became outdated. Law had to respond and gallop with the
technical advancement.  Hence, the Delhi
High Court concluded that electronic records are admissible as evidence in
Court cases.

In M/s. Sil Import, USA vs.
M/s. Exim Aides Silk Exporters, 1999 (4) SCC 567, the Supreme Court
held that a notice in writing for a bounced cheque must be given under the
Negotiable Instruments Act to the drawer of the bounced cheque. It held that
the legislature must be presumed to have been aware of the modern devices and
equipment already in vogue and also in store for future. If the court were to
interpret the words giving notice in writing in the section as restricted to
the customary mode of sending notice through postal service or even by personal
delivery, the interpretative process would fail to cope up with the change of
time. Accordingly, it allowed a notice to be served by fax.

WhatsApp relied on

There have been a few cases where
WhatsApp chats have been relied upon by the Courts while deciding cases. In a
bail application before the Bombay High Court in the case of Kaluram
Chaudhary vs. Union of India, Cr. WP No. 282/2016 the accused produced
a call record of WhatsApp communications between himself and his wife, which
showed that at the relevant time he was in communication of his wife on
WhatsApp, whereas the panchanama drawn showed that he was subjected to search
and seizure and his phone, bearing the same number on which his wife was
chatting with him as above, was shown as having being recovered from him. Thus,
he claimed that the arrest was perverse and the entire case was false. Although
the High Court rejected the bail application it held that the electronic
records of WhatsApp chats were matters of evidence, which would have to be
strictly proved in accordance with law at the trial stage.

Similarly, based on threats issued
to a person on WhatsApp, the Madras High Court directed the police to conduct
an enquiry in the case of H.B. Saravana Kumar vs. State, Crl. O.P. No.
10320/2015. The Court relied on a CD containing the WhatsApp chats as
evidence of the threats. 

Recent case of Kross Television

The recent case of Kross
Television before the Bombay High Court was one pertaining to a case of plagiarism
and copyright violation. Kross Television had pleaded that Vikhyat Chitra
Production had made a Kannada movie, Pushpaka Vimana which in effect was
a copy of a Korean movie. Kross Television had purchased the official rights of
this Korean film but before they could make the movie, Vikhyat Chitra
had already plagiarised the original Korean film by making Pushpaka Vimana.
Accordingly, Kross moved the High Court seeking an injunction against  Vikhyat Chitra. However, for this to
take place, first they needed to serve a Notice on Vikhyat Chitra so that it
would know that it has a case pending against it. They tried obtaining the
address of Vikhyat Chitra from various sources and sent couriers but the
defendant kept changing its address to avoid service of the Notice. They even
served the Notice on 2 email addresses belonging to the defendant. Ultimately,
they managed to call a mobile number of AR Vikhyat, the head of Vikhyat
Chitra and spoke with him. WhatsApp Chats with him showed that he stated
that he did not understand anything and would check with his legal team and
revert. However, there was still no response from Vikhyat Chitra.

Accordingly, Kross Television
moved the High Court for ex-parte injunction. In a scathing order, the
High Court has held that it did not see what more could be done for the
purposes of this Motion. It cannot be that rules and procedure are either so
ancient or so rigid (or both) that without some antiquated formal service mode
through a bailiff or even by beat of drum or pattaki, a party cannot be said to
have been ‘properly’ served. The purpose of service is put the other party to
notice and to give him a copy of the papers. The mode is surely irrelevant.
Courts have not formally approved of email and other modes as acceptable simply
because there are inherent limitations to proving service. Where an alternative
mode is used, however, and service is shown to be effected, and is
acknowledged, then surely it cannot be suggested that the Defendants had ‘no
notice’. To say that is untrue; they may not have had service by registered
post or through the bailiff, but they most certainly had notice. They had
copies of the papers. They were told of the next date. A copy of the previous
order was sent to them. Defendants who avoid and evade service by regular modes
cannot be permitted to take advantage of that evasion.

The High Court relied on the
WhatsApp chats with AR Vikhyat, the head of Vikhyat Chitra Production, as
evidence that he has received the Notice. It also relied on the fact that the
WhatsApp status of this head showed a picture of Pushpaka Vimana.
Further, (and probably for the first time), the High Court relied on TrueCaller
App which showed that the mobile number indeed belonged to AR Vikhyat.

Considering all these electronic
evidences, the High Court held that if Vikhyat Chitra believed they
could resort to these tactics to avoid service, they were wrong. They may
succeed in avoiding a bailiff; they may be able to avoid a courier or a postman
but they have reckoned without the invasiveness of information technology. Vikhyat
Chitra in particular did not seem to have cottoned on to the fact that when
somebody calls him and he responds, details can be obtained from in-phone apps
and services, and these are very hard to either obscure or disguise. There are
email exchanges. There are message exchanges. The Court held that none of these
established that the defendants were not adequately served. Accordingly, it
held that the defendants should bear the consequences of their actions.
Ultimately, the High Court granted an interim injunction against Vikhyat Chitra
Production from the showing the movie in all forms, cinema, TV, DVDs, etc.,
and also granted a host of other restrictions against it pending final disposal
of the suit.

Thus, in this case, the Bombay
High Court relied not just on WhatsApp chats but also on the TrueCaller App of
the defendant. This surely is one of the most revolutionary verdicts delivered
by the Courts.

In a similar development,
according to certain reports, the court of the Haryana Financial Commissioner
in the case of Satbir Singh vs. Krishan Kumar has served a
summons on a non-resident through WhatsApp since his physical address in India
was untraceable. The court ordered that the summons should be sent on the
defendant’s WhatsApp from the mobile of a counsel, who would produce proof of
electronic delivery via WhatsApp by taking a printout and duly authenticating
it by affixing his own signature.

Conclusion

The Delhi High Court has held that
the law did not sleep when the dawn of information technology broke on the
horizon. The world over statutes were enacted and rules relating to
admissibility of electronic evidence and its proof were enacted. It is
heartening to note that the Bombay High Court and the Madras High Court have
relied on WhatsApp chats and TrueCaller as evidence.

However, at the same time one would also like to
sound a note of caution since often the veracity and authenticity of social
media and Apps could be in doubt. Cyber security could often be compromised and
if the Court relies on hacked data then there could be serious consequences.
Nevertheless, a step in the right direction has been taken by the Courts! So
check your WhatsApp carefully next time, you might just have received a Court
summons!

Prohibition of Benami Property Transactions Act, 1988 (As Amended) – Some Important Issues [Part – II]

In the Part I of the Article published in April 2017 issue of
BCAJ, we have given an overview of the amended Benami law. In this part, we are
dealing with certain important issues which are likely to arise in the mind of
a reader. It is important to note that there are many issues relating to Benami
Act. We have dealt with some issues which could be useful for a large number of
readers.

1.  What is Benami Property Law? What is its role
in fighting black money & corruption? How does it fit in the overall scheme
of things?

a.  Prohibition of Benami Property Transactions
Act, 1988 [the Act/Benami Act] contains the law relating to benami properties.
In addition, section 89 of the Companies Act, and rule 9 of the Companies
(Management and Administration) Rules, 2014 contain provisions relating to
declaration in respect of beneficial interest in any share.

b.  The objective of the Act is to prohibit benami
transactions so that the beneficial owner i.e. true or real owner who provided
consideration, would be compelled to keep the property in his own name only and
various legal issues and complexities arising due to apparent owner not being
the real owner, could be avoided and taken care of.

c.  The objective of the Benami Transactions
(Prohibition) Amendment Bill, 2015 and its role in fighting black money, was
explained by the Finance Minister during parliamentary debate as follows:

     “the principal object behind this Bill is
that a lot of people who have unaccounted money invest and buy immovable
property in the name of some other person or a non-existent person or a
fictitious person or a benami person. So these transactions are to be
discouraged. As far as assets held illegally abroad are concerned, from the
very beginning the effort of the Government has been, they should be squeezed,
the use of cash beyond a certain limit should be discouraged, unaccounted money
must make way and, so, the colour of transaction of money itself must change.
Therefore, this is an important step in that direction. It is predominantly
an anti-black money measure that any transaction which is benami is illegal and
the property is liable to be confiscated. It will vest in the State and the
entrant of the benami transaction is liable to be prosecuted.” 

2.  Are the provisions of Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 [Black Money Act],
Prevention of Money Laundering Act, 2002 [PMLA], Prevention of Corruption Act,
1988, Income-tax Act, 1961 and FEMA overlapping with provisions of Benami Act?

a.  The Black Money Act contains provisions to
deal with the problem of black money that is undisclosed foreign income and
assets, the procedure for dealing with such income and assets and provides for
imposition of tax on any undisclosed foreign income and asset held outside
India and for matters connected therewith or incidental thereto.

b.  PMLA essentially deals with money laundering
which involves disguising financial assets so that they can be used without
detection of the illegal activity that produced them. Thus, PMLA is restricted
only to proceeds of crime i.e. property obtained as a result of criminal
activity relating to scheduled offences.

     Please refer to our article on the subject
published in September 2016 issue of BCAJ.

c.  The Prevention of Corruption Act, 1988 is
enacted to combat corruption in government agencies and public sector
businesses in India.

d.  As regards conflicts, if any with the
provisions of the Income-tax Act, 1961, while replying to the debate on the
Amendment Bill in Lok Sabha on 27.7.2016, the Finance Minister clarified as
follows:

     “Is this law in conflict with the Income
Tax Act in any way? The answer is ‘no’. This law is not in conflict with
the Income Tax Act in any way. The Income-tax deals with various
provisions of taxation, the powers to levy the procedures, etc. This particular
law deals with any benami property which is acquired by a person in somebody
else’s name to be vested in the Central Government. So the two Acts are
supplementary to each other as far as this Act is concerned.”

e.  Foreign Exchange Management Act, 199 [FEMA]
contains law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and
maintenance of the foreign exchange market in India. 

f.   As mentioned above, since the purpose and
objective of each of the abovementioned Act is different, there is no
overlapping with the provisions of Benami Act.

g.  Benami Act vs PMLA: The Benami Act applies
equally to both a property acquired through proceeds of crime or through
legitimate means and hence its scope is wider than PMLA. Its objective is to
prohibit benami transactions so that the beneficial owner would be compelled to
keep the property in his own name only.

3.  What is benami property and a benami
transaction? Who has the onus of proof? Is it limited to only Real Estate?

a.  The term ‘benami property’ has been defined in
section 2(8) of the Benami Act to mean any property which is the subject matter
of a benami transaction and also includes the proceeds from such property.
Similarly, the term benami transaction has been elaborately defined in section
2(9) of the Benami Act.

b.  Onus or burden of proof:

     The burden of proof regarding benami is
upon the one who alleges benami. The burden to prove passing of consideration
or the motive is on the person who alleges benami. This aspect of the matter
was considered by the Supreme Court in Valliammal (D) By Lrs vs.
Subramaniam & Ors (2004) 7 SCC 233, where it was held:

     “This
Court in a number of judgments has held that it is well-established that
burden of proving that a particular sale is benami lies on the person who
alleges the transaction to be a benami. The essence of a benami transaction
is the intention of the party or parties concerned and often, such intention
is shrouded in a thick veil which cannot be easily pierced through. But
such difficulties do not relieve the person asserting the transaction to be
benami of any part of the serious onus that rests on him, nor justify the
acceptance of mere conjectures or surmises, as a substitute for proof. Referred
to Jaydayal Poddar vs. Bibi Hazra, 1974 (1) SCC 3; Krishnanand vs. State of
Madhya Pradesh, 1977 (1) SCC 816; Thakur Bhim Singh vs. Thakur Kan Singh, 1980
(3) SCC 72; His Highness Maharaja Pratap Singh vs. Her Highness Maharani
Sarojini Devi & Ors., 1994 (Supp. (1) SCC 734; and Heirs of Vrajlal J.
Ganatra vs. Heirs of Parshottam S. Shah, 1996 (4) SCC 490. It has been held that
in the judgments referred to above that the question whether a particular
sale is a benami or not, is largely one of fact, and for determining the
question no absolute formulas or acid test, uniformly applicable in all
situations can be laid. After saying so, this Court spelt out following six
circumstances which can be taken as a guide to determine the nature of the
transaction:

1. the
source from which the purchase money came;

2. the
nature and possession of the property, after the purchase;

3. motive, if any, for giving the transaction a
benami colour;

4. the
position of the parties and the relationship, if any, between the claimant and
the alleged benamidar;

5. the
custody of the title deeds after the sale; and

6. the
conduct of the parties concerned in dealing with the property after the
sale.”

     The above indicia are not exhaustive
and their efficacy varies according to the facts of each case. Nevertheless,
the source from where the purchase money came and the motive why the property
was purchased benami are by far the most important tests for
determining whether the sale standing in the name of one person, is in reality
for the benefit of another. We would examine the present transaction on the
touchstone of the above two indicia.”

c.  Is it limited to only Real Estate? 

     No. the Benami Act covers all kinds of
assets including cash, bank balances, shares etc. Section 2(26) of the Benami
Act defines “property” to mean assets of any kind, whether movable or
immovable, tangible or intangible, corporeal or incorporeal and includes
any right or interest or legal documents or instruments evidencing title to
or interest in the property and where the property is capable of conversion
into some other form, then the property in the converted form and also includes
the proceeds from the property. 

4.  What are the consequences if a benami
transaction / property is proved?

     If a benami transaction is proved, the
following consequences follow:

a.  Punishable Offence – imprisonment and fine

b.  Prohibition of the right to recover property
held benami

c.  Benami property liable to confiscation

d.  Prohibition on re-transfer of benami property
by benamidar to beneficial owner

     For details of the above, please refer to
para 3 of Part I of this article published in BCAJ April 2017.

5.  Can multiple actions be taken under different
laws in respect of the same benami property against different or same person?
In other words, will a person face simultaneous action under PMLA,
Anti-corruption law, FEMA, Income-tax Act etc. in respect of the same
transaction / property?

     There is no exclusion clause in any of the
abovementioned Acts. Accordingly, if an action lies under the provisions of any
particular Act in respect of same benami property, then a person may face
simultaneous action under various Acts in respect of same transaction /
property.

6.  If a benami property has already been sold,
transferred or passed on to another for lawful & adequate consideration,
what are the consequences for such a buyer / acquirer?

a.  Section 24(1) of the Act provides that
where the Initiating Officer, on the basis of material in his possession, has
reason to believe that any person is a benamidar in respect of a
property, he may, after recording reasons in writing, issue a notice to the
person to show cause within such time as may be specified in the notice why
the property should not be treated as benami property. 

b.  Section
26(3) of the Act provides that the Adjudicating Authority shall,
after (a) considering the reply, if any, to the notice issued under sub-section
(1); (b) making or causing to be made such inquiries and calling for such
reports or evidence as it deems fit; and (c) taking into account all relevant
materials, provide an opportunity of being heard to the person specified as a benamidar
therein, the Initiating Officer, and any other person who claims to be the
owner of the property, and, thereafter, pass an order (i) holding the
property not to be a benami property and revoking the attachment order; or
(ii) holding the property to be a benami property and confirming the
attachment order, in all
other cases.

c.  Section 27 of the Act deals with confiscation
and vesting of the benami property. Section 27(1) of the Act provides
that where an order is passed in respect of any property under sub-section
(3) of section 26 holding such property to be a benami property, the
Adjudicating Authority shall, after giving an opportunity of being heard to the
person concerned, make an order confiscating the property held to be a
benami property. It is also provided that where an appeal has been filed
against the order of the Adjudicating Authority, the confiscation of property
shall be made subject to the order passed by the Appellate Tribunal u/s. 4. It
is further provided further that the confiscation of the property shall be made
in accordance with such procedure as may be prescribed.

d.  Section 27(2) provides that nothing in
sub-section (1) shall apply to a property held or acquired by a
person from the benamidar for adequate consideration, prior to
the issue of notice under sub-section (1) of section 24 without
his having knowledge of the benami transaction.

e.  Section 57 deal with certain transfers
to be null and void and provides that notwithstanding anything contained in the
Transfer of the Property Act, 1882 or any other law for the time being in
force, where, after the issue of a notice u/s. 24, any property referred to
in the said notice is transferred by any mode whatsoever, the transfer shall,
for the purposes of the proceedings under this Act, be ignored and if the
property is subsequently confiscated by the Central Government u/s. 27, then,
the transfer of the property shall be deemed to be null and void.

     Therefore, the transfer of property prior
to the issue of a notice u/s. 24(1) by the Initiating Officer, by any mode
whatsoever, shall be deemed to be null and void.

f.   Accordingly, there will be no consequence for
a buyer/acquirer who has acquired the property from the benamidar
for adequate consideration, without his having knowledge of
the benami transaction, prior to the issue of notice u/s 24(1).

7.  If demonetised high value notes are deposited
in say Jan Dhan a/c of an account holder and the account holder is not aware of
or denies knowledge of the same, then what are the consequences for such an
account holder?

     As per section 2(8) of the Act, benami
property means any property which is the subject matter of a benami
transaction and also includes the proceeds from such property.

     If the monies have been deposited in a Jan
Dhan a/c without the consent of the account holder who is totally unaware or
denies knowledge, in that case though the transaction is a ‘benami transaction’
the account holder cannot be prosecuted u/s. 53, inter alia, on the ground that
he has not ‘entered into’ any such transaction.

8.  Does the law have retrospective application or
it applies prospectively?

a.  One view – Law is retrospective

     Section 1(3) enacted as part of the Original
(pre-amended) Act provides that the provisions of sections 3 (Prohibition of
benami transactions), 5 (property held benami liable to acquisition) and 8
(Power to make rules) shall come into force at once i.e. 5-9-88 being the date
on which original Act was notified and the remaining provisions of the Act
shall be deemed to have come into force on the 19th May, 1988.

     It is to be noted that said section 1(3) of
the Benami Act has not been amended by the Benami Transactions
(Prohibition) Amendment Act, 2016, which came into effect from 1-11-2016.

     Based on the provisions of section 1(3), it
is argued that the provisions of the Benami Transactions (Prohibition)
Amendment Act, 2016 are retrospective in nature.

b.  The Other view:

     The renumbered section 3(2) of the Act
provides that whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or with fine or
both.

     Section 3(3) of the Act, inserted by the
Benami Transactions (Prohibition) Amendment Act, 2016 w.e.f. 1-11-2016 provides
that whoever enters into any benami transaction on and after the date of
commencement of the Benami Transactions (Prohibition) Amendment Act,
2016, shall, notwithstanding anything contained in sub-section (2), be
punishable in accordance with the provisions contained in Chapter VII.

     Section 2(9) defines ‘benami transaction’
and was substituted by the Benami Transactions (Prohibition) Amendment Act,
2016 w.e.f. 1-11-2016, with enlarged scope as compared to the earlier
definition of ‘benami transaction’ provided in section 2(a).

     Benami Act is a penal law. During the
parliamentary debate, it has been clarified and explained that as per Article
20 of the Constitution of India, penal laws cannot be made retrospective and in
this regard the finance minister stated as follows:

     “The 1988 Act also has a provision for
prosecution. The provision for prosecution, prohibition and acquisition
remained in that Act. So, the prosecution provision u/s. 3(3) says that whoever
enters into any benami transaction shall be punishable with imprisonment for a
term which may extend to three years or with fine or both. So, whoever
subsequent to 1988 entered into a transaction which was a benami transaction,
either of the two parties would be liable for prosecution.

     So,
if we had accepted the recommendation of the Standing Committee – repealed the
1988 Act and recreated a new law in 2016 – that would have been granting
immunity to all people who acquired properties benami between 1988 and 2016.
Obviously, the acquisition now cannot take place, but the penal provisions of
the 1988 Act also would have stood repealed. When a new Act with a similar
provision would have come, it could only apply for a penal provision to
properties which are benami and entered into after 2016.         

    Anybody will know that a law can be
made retrospective, but under Article 20 of the Constitution of India, penal
laws cannot be made retrospective. The simple answer to the question why we did
not bring a new law is that a new law would have meant giving immunity to
everybody from the penal provisions during the period 1988 to 2016 and giving a
28-year immunity would not have been in larger public interest, particularly if
large amounts of unaccounted and black money have been used to transact those
transactions. That was the principal object. Therefore, prima facie
the argument looks attractive that ‘there is a 9-section law and you are
inserting 71 sections into it. So, you bring a new law.’, but a new law would
have had consequences which would have been detrimental to public interest.”

     In view of the widening of the scope of the
definition of the term ‘benami transaction’ it is contended that since there
was no provision in law to cover various transactions of the nature mentioned
in the substituted definition of benami transaction in section 2(9), which came
into effect from 1-11-2016, the law cannot have retrospective application in
this regard.

c.  Judicial precedents regarding retrospective
application of section 4(1) and 4(2) dealing with prohibition of the right to
recover property held benami (which have remained the same in the amended Act
also)

i.   In Mithilesh Kumari & another vs.
Prem Behari Khare [(1989) 1 SCR 621], the Supreme Court observed that
though section 3 is prospective and though section 4(1) is also not expressly
made retrospective by the legislature, by necessary implication, it appears to
be retrospective and would apply to all pending proceedings wherein right to
property allegedly held benami is in dispute between the parties and that
section 4(1) will apply at whatever stage the litigation might be pending in
the hierarchy of the proceedings, for the reasons mentioned therein.

ii.  The Supreme Court in a later decision in the
case of R. Rajagopal Reddy vs. Padmini Chandrasekharan [(1995) 2 SCC 630],
agreed with the view that “on the express language of Section 4(1) any right
inhering in the real owner in respect of any property held benami would get
effaced once Section 4(1) operated, even if such transaction had been entered
into prior to the coming into operation of section 4(1), and hence-after
section 4(1) is applied, no suit can lie in respect to such a past benami
transaction. To that extent, the section may be retrospective. 

     However, the court did not agree with the
view that “Section 4 (1) would apply even to such pending suits which were
already filed and entertained prior to the date when the section came into
force and which has the effect of destroying the then existing right of
plaintiff in connection with the suit property cannot be sustained in the face
of the clear language of section 4(1).”

9.  Does the Benami Act apply to a ‘sham
transaction’?

     For a transaction to be ‘benami
transaction’, there has to exist an actual transaction which has taken place.
In a sham, bogus or fictitious transaction, no transaction has actually taken
place and the transaction is merely shown to have taken place on paper.

     In the context of original Act, before the
Kerala High Court in the case of Ouseph Chacko vs. Raman Nair [1990] 49
Taxman 410 (Ker.) the following questions arose for determination –

(i)  Is a sham transaction `benami’?

(ii) Does section 4 of the Benami Transactions
(Prohibition) Act, 1988 apply to sham transactions?

     The Court after exhaustively considering
various decisions of the Privy Council, the Apex Court and also the provisions
of the Indian Trusts Act, the provisions of the Benami Transactions
(Prohibition) Act, 1988, observed that in view of the decision of the Apex
Court in Shree Meenakshi Mills case and in Bhim Singh’s case the question
for consideration is whether the Act applied to both these cases, or whether it
is limited only to the benami transactions falling in the first category and
does not extend to those falling in the second category.

     The Kerala High Court, in this case held
that-

     “The Act has provided a definition for
‘benami transaction’. It means any transaction in which property is transferred
to one person for a consideration paid or provided by another. It contemplates
cases where (a) there is a transfer of property, and (b) the consideration is
paid or provided not by the transferee, but by another. Where there was no
transfer of property as in a sham document, there is no consideration for the
transaction which does not satisfy the definition of ‘benami transaction’ under
the Act. The definition of ‘benami transaction’ in the Act, thus, excludes from
its purview a sham transaction. Further, section 81 of the Indian Trusts Act,
1882, applies to a transaction under which no transfer was intended and no
consideration passed, i.e., to a sham transaction. But section 82 provides for
another class of transactions which are also statutorily treated as obligations
in the nature of a trust and they relate to transfer to one for consideration
paid by another. It is significant that section 82 has practically been bodily
lifted and incorporated in the definition of ‘benami transaction’ in the
present Act. This definition has nothing to do with the concept contained in
section 81. If the Act intended to embrace transactions covered by section 81
also, there was no reason for restricting the definition of ‘benami
transaction’ to the phraseology employed in section 82. This also gives an
indication that sham transactions, loosely called benami transactions, which
are in fact not benami transactions in the real sense of the term, are not
subject to the rigour of the Act. It is true that section 3 uses the
words ‘benami transaction’ and section 4 uses only the word ‘benami’. But that
makes no qualitative difference in the application of the Act.”

10. Whether power of attorney transactions in
immovable properties are ‘benami transaction’?

     It appears that by virtue of Explanation to
section 2(9) power of attorney transactions will not be regarded as benami
transactions provided the conditions mentioned therein are satisfied.

     In his reply to the debate on the Amendment
Bill in Rajya Sabha on 3.8.2016, the Finance Minister has clarified as under:

     “As far as power of attorneys are
concerned, I have already said, properties which are transferred in part
performance of a contract and possession is given then that possession is
protected conventionally under section 53A of the Transfer of Property Act.
That is how all the power of attorney transactions in Delhi are protected, even
though title is not perfect and legitimate. Now, those properties have also
been kept out as per the recommendation made by the Standing Committee.”

11. Is every transaction where consideration is
provided by a person other than a transferee a `benami transaction?

     In its submissions before the Parliamentary
Standing Committee on Finance, the Ministry of Finance explained the amendment
to the definition of `benami transaction’ as under–

     “The circumstances in which another
person pays or provides the consideration to the transferee for being passed on
to the transferor may be manifold. A person may provide consideration money to
the transferee out of charity or under some jural relationship such as creditor
and debtor or the like. The final relationship between such other person and
the transferee has nothing to do or may have nothing to do with the jural
relationship between the transferor and the transferee. The intention of the
other person paying or providing the consideration is in substance the main
factor to be considered and is of great importance. If that other person really
intends that he should be the real owner of the property, then only the
transferee may be characterized as a benamidar, whether the transferee is a
fictitious person or a real person having no intention to acquire any title by
means of the transfer. It was perhaps for this very reason that intention of
the persons actually paying or providing consideration to the transferee was
incorporated as an essential element in the provisions of section 82 of the
Indian Trusts Act. It would appear to be unreasonable to rest the provisions
relating to benami transactions on the payment or provision of consideration
alone by a person other than transferee. To have such a provision in a sweeping
language may make the Act unworkable in actual implementation. The actual
payment or provision of consideration has been made the dominant factor, but by
itself it may have no real substance unless the person providing the
consideration does so with the intention of actually benefiting himself. 

     In view of the above, it is proposed that
the payment alone by the other person should not be the only consideration for
deciding a benami transaction rather intention of the other person paying or
providing the consideration should be considered for deciding a benami
transaction. Therefore, to hold a transaction or an arrangement as benami, it
is proposed to provide an additional test that the benamidar should be holding
the property for the benefit of the person providing the consideration.” 

     [Para 2.10 of the 58th Report of
the Parliamentary Standing Committee on Finance].

12. Does `foreign property’ also come within scope
of benami property?

     While
there is no requirement in either section 28 dealing with the management of the
properties confiscated or in section 2(26) defining the term ‘property’ that
the property or benami property should be located in India. However, in his
reply to the debate on the Amendment Bill in Rajya Sabha on 2.8.2016, the
Finance Minister clarified as follows:

     “What happens if the asset is outside
the country? If an asset is outside the country, it would not be covered under
this Act. It would be covered under the Black Money Law, because you are owning
a property or an asset outside the country….”

13. What is meant by “known sources”? Does it mean
“Known sources of income” of the individual? If an individual takes a loan and
purchases property in spouse’s name, will it be benami transaction?

     The term ‘known sources’ is not defined in
the Act. “Known sources” of the individual should not be construed as “known
sources of income”.

     The words “of income” were originally there
in the Amendment Bill but were omitted at the time of passing of the Bill. In
his reply to the debate on the Amendment Bill, the Finance Minister clarified
in this regard in the Rajya Sabha as under:

     “ …. This is exactly what the Standing
Committee went into. The earlier phrase was that you have purchased this
property so you must show money out of your known sources of income. So, the
income had to be personal. Members of the Standing Committee felt that the
family can contribute to it, you can take a loan from somebody or you can take
loan from bank which is not your income. Therefore, the word “income” has been
deleted and now the word is only “known sources”. So, if a brother or sister or
a son contributed to this, this itself would not make it benami, because we know that is how the structure of the family itself is….” 

14. What would happen if the property is in the
name of a Director, but the money has come from the company? Would the
transaction be regarded as a benami transaction?

     In this regard, the Finance Minister
clarified as follows while replying to the debate on the Amendment Bill in
Rajya Sabha:

     “What would happen if the property is in
the name of a Director, but the money has come from the company? Already in
this Act there is an exception that if you hold it as a fiduciary of the
company as a Director, then, it is not an offence. If you hold it as a trustee
of a trust, it is not an offence. So fiduciary holding is allowed as an
exception to benami”.

The
provisions of the Black Money Act, PMLA, Prevention of Corruption Act,
Income-tax Act and FEMA together form a heady concoction of law dealing to deal
with black money and undisclosed income and property, in whatever form such
that any violator would find it difficult to escape from the clutches of the
law. In fact, the provisions of these laws are wide enough to also rope in the
advisors and various intermediaries who aid and abet such transactions.

The Payment of Bonus Act, 1965

Editor’s
note: According to the Payment of Bonus
Act, eligible employees are to be paid bonus within a period of 8 months from
the close of the financial year i.e. on or before 30th November. The purpose of
this article is to make readers aware of the basic provisions of this welfare
legislation.

Introduction

The
Payment of Bonus act, 1965 gives to the employees a statutory right to a share
in the profits of his employer. Prior to the enactment of the act some
employees used to get bonus, but that was so if their employers were pleased to
pay the same. The payment was voluntary, with no vested right in the employee.
With the passing of the act, employees covered by the act had a right to Bonus.

Object

The
object of the act is to maintain peace and harmony between labour and capital
(i.e. employees & employers), by allowing the employees to share the
prosperity of the establishment reflected by the profits earned by the
contributions made by capital, management and labour.

Applicability

The
act applies to

a)  Every factory

b)  Every other establishment employing 20
(twenty) or more persons.

A
state government can, however, apply the act to any establishment employing
less than 20 but not less than 10 persons.

c)  The Government of Maharashtra by notification
dt:- 11th  April 1984 has expanded the
scope by making the same applicable, where 10 or more persons are employed in
any establishment or factory.

Once
the act applies, it shall continuously remain in force, irrespective of number
of employees falling in number i.e. once covered always covered.

 Applicability to Public Sector

A
Public sector establishment which sells any goods produced or manufactured by
it or renders any services in competition with the private sector and earns
income from such sale or services shall be covered by the act.

Eligibility

Every
employee who is drawing a salary or wages up to Rs.21,000/- per month and has
worked for a minimum period of 30 days in a particular year is entitled to get
Bonus. as per the above ceiling, all employees drawing wages  up 
to  Rs.21,000/- per  month 
shall  be  eligible for Bonus irrespective of their
grade/designation i.e. manager/part-time/casual/seasonal employee etc.(w.e.f.
01/04/2014 by Gazette Notification Dated : 1st jan, 2016)

Sum with Reference to Which Bonus is Payable

For
the purpose of calculation of Bonus Salary or Wages includes Basic Salary,
dearness allowance / Special allowance only, but does not include other
allowances such as overtime, house rent allowance, Conveyance, travelling
allowance, monthly Bonus, Contribution to Provident fund,  retrenchment compensation, Gratuity or
commission.

Amount of Bonus

An
employee who is drawing salary or wages not exceeding Rs.7,000/- per month, is
entitled to get bonus on entire salary/wages or minimum Wages, whichever is
higher.

An
employee who is drawing salary or wages between Rs.7,000/- per month and
Rs.21,000/- per month, the Bonus payable to him is to be calculated as, if his
salary or wages were Rs.7,000/- per month. An employee drawing a salary or wage
exceeding Rs.21, 000/- per month is not entitled to get Bonus as per payment of
Bonus act.

Minimum & Maximum Bonus (Limits)

The
quantum of bonus depends on allocable surplus, which is explained in the
following paragraph. An employer is bound to pay his employees every year a
minimum Bonus of @ 8.33% of the yearly salary or wage or Rs.100/- whichever is
higher, whether he has allocable surplus or not. if in any year the allocable
surplus exceeds the amount of minimum Bonus payable to the employees, the
maximum Bonus payable by the employer to his employee in that particular year
is @ 20% of the yearly salary or wages. Hence, 
Bonus  is  payable 
to  the  employee 
between 8.33% & 20% as per availability of allocable surplus. An
employer is not required to pay bonus in excess of 20% even if bonus is linked
with production or productivity.

Available
surplus & allocable surplus

The
Bonus payable under the Act is linked with profits of the company. The employer
has to calculate “Gross Profit” of his establishment in the manner specified in
section 4. Then from Gross Profit so calculated, he has to deduct the sums
referred to in section 6 as prior charges. The balance amount is the “available
surplus”. A percentage of available surplus calculated in accordance with the
provisions of sub-section (4) of section 2 is described as “allocable surplus”.

Where
allocable surplus exceeds the amount of minimum Bonus  payable 
to  the  employee, 
the  employer  must pay to every employee in respect of that
year Bonus in proportion to the salary or wages earned by the employee during
the year subject to a maximum of 20% of such salary or wage.

What is set on & Set Off Of Allocable Surplus

Set on :-

Where
for any year the allocable surplus exceeds the amount of maximum Bonus payable
to the employees, then the excess shall (subject to limit of 20% Bonus of total
salary/wages) be carried forward for being set on in the succeeding year and so
on to be utilised for the purpose of payment of Bonus.

Set off:-

Where
for any year there is no surplus or the surplus in respect of that year falls
short of the amount of minimum Bonus payable i.e. 8.33% to employees and there
is no amount or sufficient amount carried forward and Set On which can be
utilised for the purpose of minimum Bonus, then 
such  minimum  amount 
or  the  deficiency 
as  the case may be shall be
carried forward for being Set off in succeeding year and so on.

Deductions from bonus:-

Where
in any year the employer has paid any amount to an employee as customary/pooja
bonus, then he can deduct such amount from Bonus payable to the employee for
that year.

If
any employee is found guilty of misconduct causing financial loss to the
employer, the employer can deduct the amount of loss from the amount of Bonus
payable to the employee for the year in which he was found guilty of misconduct.

Time limit for payment of bonus:-

Bonus
must be paid within a period of 8 months from the close of accounting year as
per income-tax act i.e. April to March.

If
any dispute about the payment of Bonus is pending before any authority, then
Bonus must be paid within one month from the date of award by any such
authority.

Remedy for recovery of bonus:-

If
any employer fails to pay Bonus to the employee, he can make an application for
recovery of Bonus to the competent Authority. The authority may issue a
certificate to the collector to recover the same as arrears of land revenue
i.e. by way of attachment of Property and assets. However,  the time limit for application to the
authority is one year from the date on which Bonus amount became due.

Productivity bonus :-

Bonus
paid on production or productivity or under a formula different from that under
the act can be allowed, but subject to the Provisions of the act in respect of
the payment of minimum or maximum Bonus. However, attendance bonus or any other
allowances are outside the purview of payment of Bonus act.

If an entity has a number of departments, under takings or
branches, should they be treated as separate establishments or as one composite
establishment?

If
an establishment consists of different departments or undertakings or has
branches, whether situated in the same place or in different places, unless a
separate balance-sheet and profit and loss account are prepared and   maintained  
by   such or  branches, 
they  should  be same 
establishment  for  the departments/undertakings treated  as 
parts  of  the purpose 
of  computation formula  different 
from  that  under 
the  act,  i.e. 
bonus linked with production or productivity; but subject to the
provisions of the act in respect of payment of minimum of  bonus, 
and  once  they 
are treated  as  part 
of  the and maximum bonus. Same
establishment, they should continue to be treated as such.

Is bonus payable to contractors employees

Section
32 provides that the act shall not apply to certain classes of employees.
Clause (vi) of the said section refers to “employees employed through
contractors on building operation”. This clause has been deleted by the Payment
of Bonus amendment ordinance, 2007 with retrospective effect from 1st April 2006.
The said class of employees is therefore, entitled to get april 2006. bonus
with effect from 1st April 2006.

Excluded
categories :-


Following
establishments / entities are excluded from application of the Bonus Act:


L.I.C. of India

Reserve Bank of India

Unit Trust of India

Universities & other Educational
Institutions

Any other establishments permitted by
Government for a specified period and subject to specified conditions.


Newly
set-up establishment :-

A newly set-up establishment is
exempted from paying Bonus to its employees in the first 5 (Five) years, if it
does not make any profit. If however, employer derives profit in any of the
first five years, it loses the exemption under the Act and he has to pay Bonus
for that year. The provisions of Set-On & Set-Off are not applicable in
such cases.


Employee
disqualified from receiving Bonus :-

Employee is disqualified from receiving
Bonus if he is dismissed from the service for       (A) Fraud (B) Riotous or Violent
behavior while on the premises of the establishment     (C) Theft, misappropriation or sabotage of
any property of Establishment.


Agreement
or Settlement of Bonus:-

Employees can enter into an agreement
or a settlement with their employer for granting them bonus under a formula
different from that under the Act, i.e. bonus linked with production or
productivity; but subject to the provisions of the Act in respect of payment of
minimum and maximum bonus.


Attendance
Bonus:-

As attendance bonus which was being
paid by the establishment was outside the purview of the Payment of Bonus Act,
1965. Workmen / employees of the establishment can claim the bonus payable
under the act over and above the attendance bonus


Is
a Seasonal Worker entitled to get Bonus?

Section 8, relates to the eligibility
for Bonus. The only requirement of that section is that the employee should
have worked in an establishment for not less than thirty working days in an
accounting year. Therefore, if a seasonal worker has worked in an establishment
for more than thirty working days, he shall be entitled to get bonus.


Manner of payment of
Bonus in State of Maharashtra.

If
Bonus amount is more than Rs.3,000/- then it has to be paid by Account Payee
Cheque or by Bank transfer.


Records
to be Maintained:-

A register in “Form No. A” showing
Computation of Allocable Surplus.

A register in “Form No. B” showing
Set-On & Set-Off of the allocable surplus.

A register in “Form
No. C” showing details of the Bonus due to each of the    employee & deductions under Section 17
& 18 and the amount actually disbursed.


Submission of annual Return:-

 

Purpose

When to Submit

Form/ Return

By Whom

To Whom

Relevant Section / Rule

1

2

3

4

5

6

Submission of
Annual Return

Within 30 days
after the expiry of time limit specified under the act

Form – D

Every employer

Labour Officer of
the concerned area

Section 26 read
with rules 5.


Offences
/ Punishments:-

If any persons contravenes the
provision of the Act or any rule made there under or fails to comply with any
directions given to him he would be punished with imprisonment up to six (6)
months or with fine up to Rs.1,000/- or both.

 THE PAYMENT OF BONUS (AMENDMENT)
ACT, 2015 w.e.f  1st APRIL, 2014

(Gazette Notification Dated 1st Jan., 2016)

Theamendment
in The Payment of Bonus Act received the assent of the President on the 31st
December, 2015, and isdeemed to have come into force on 1st April 2014.

Key provisions of Amendment Act
– Eligibility of employees:

The Act
provides for enhancing Bonus calculation ceiling from the existing Rs 3,500 to
Rs7,000 per month or the Minimum wages for the Scheduled Employment whichever
is higher .

It also
enhances the eligibility limit for payment of bonus from Rs 10,000 per month to
Rs 21,000 per month.

Calculation of bonus: In regard to employees drawing
salary more than Rs. 3,500/-p.m. as per Section 12 of the Act, the bonus was
computed on a maximum salary of Rs. 3,500/=p.m.
only. Now the Amendment Act  has raised
this calculation ceiling of bonus to Rs.
7,000 per month from present from 
Rs  3,500/-  per 
month  ceiling.  Accordingly, 
the  Maximum  Bonus 
payable  to  an employee 
under  the  Payment 
of  Bonus  Act  (20% 
of  Rs.  3,500X12) 
worked  out  to  Rs.8,400/=pa. Because of the salary
ceiling being raise to Rs 7,000/= p.m. the Bonus of 20%would now become Rs. 16,800/= for the year or more if
minimum wages are more than Rs.7000/- pm.

The Act has been amended
retrospectively from 1st April 2014. In respect of the Financial Year, April 1, 2014
to 31st March 2015 Bonus was due to be paid with the close of 8 months of the
Accounting Year i.e. November 30, 2015.


Retrospective applicability
stayed

Courts in at least 8 States have already stayed the retrospective
applicability of the Amendment act referred to above.


Conclusion

The aim of this article is to make readers aware of The Payment of Bonus
Act, a welfare legislation. The same should be followed in letter and
spirit.

New Requirements for Profit Sharing Arrangements by Promoters, Directors & Others

Introduction

SEBI has finally issued amendments requiring that profit
sharing/compensation agreements by certain persons shall require board as well
as public shareholders approval of the listed company. These provisions
effectively have retrospective effect
of three years. The agreements covered are those that are entered into by
specified persons such as promoters, directors, key managerial personnel with
shareholders or even third parties. Such agreements would provide for
compensation/profit sharing in relation to dealings in securities. Vide
amendments made by notification dated 4th January 2017, such
agreements would require prior approval of Board and shareholders. Agreements
entered into in preceding three years, whether subsisting or expired, would
also require approvals and/or disclosures.

Background

Readers may recall that SEBI had, on 4th October
2016, issued a consultation paper on such agreements and invited public
comments. This was discussed in an earlier column of this Journal.

SEBI had expressed concerns about certain agreements in as
much as though the listed company itself may not be a party to or directly
affected by such agreements, they resulted in certain concerns about good
corporate governance. SEBI gave an example of the Promoters of a listed company
having entered into an agreement with a private equity investor. This agreement
provided for sharing of profits on appreciation earned by such investor in the
shares of the company. SEBI observed:-

“It has come to the notice of
SEBI that certain Private Equity (PE) firms have entered into side agreements
with top personnel and key managerial personnel (KMPs) of a listed entity by
which such PE firms (who were allotted shares on a preferential basis) would
share a certain portion of the gains above a certain threshold limit made by
them at the time of selling the shares and also subject to the conditions that
the company achieves certain performance criteria and the employee continues
with the company for a certain period.” ?

It was felt that such practice may be quite common. The
beneficiary of such agreement could be a promoter, director, key managerial
personnel etc of the company. The private equity investor would have invested
in the shares of the company. The agreement would provide that if the investor
earns profit on sale of the shares beyond a specified amount/rate of return, a
part of such excess would be shared with such persons. Such persons would thus
benefit by way of gains beyond what they would otherwise earn as shareholders,
key managerial personnel, directors, etc.

It was obvious that the company concerned was not directly
affected by such agreement. The company does not bear any of such costs. It is
the investor who, for  motivating such
persons, bears the cost out of his gains. Hence, such agreements would not come
before the board or shareholders of the company for approval. Indeed, it is
possible that the company and the public shareholders may not be even aware of
such agreements.

However, the concerns over such agreements are easy to see.
The directors or key managerial personnel may have at least a perceived
conflict of interest in view of such agreements. Such persons also have
restrictions over their remuneration under the Companies Act, 2013 but yet they
may get further remuneration under such agreements. The tying of the Promoters
with such investors is also an area of concern.

Hence, SEBI, after due consultation, has provided for certain
requirements by introducing certain provisions in the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015.

To summarise, these provisions require that any new
agreement should receive prior approval from the Board of the
listed entity and from its public shareholders by way of a
resolution. In case of agreements entered into in the preceding three
years and still subsisting, approval of the board and the public shareholders
needs to be obtained at their respective forthcoming meetings. Further,
such agreements and also agreements that have expired should be disclosed to
stock exchange for public knowledge.

The following agreements analyse the new requirements in more
detail.

Regulations amended

The SEBI LODR Regulations 2015 have been amended by inserting
sub-regulation (6) in Regulation 26. These amendments have been made vide
notification dated 4th January 2017 and will also apply to
agreements entered into the preceding three years from the date when the
amendments came into effect.

To whom do they apply

The provisions apply to agreements between two sets of
parties.

On one side are employees including key managerial personnel,
directors or promoters of a listed entity. They may be acting on their own
behalf or on behalf of any other person.

On the other side are shareholders or even any other third
party.

The scope thus has been made quite wide, and it is wider even
than the proposed amendments as per the consultation paper. The party on one
side can be any employee and not merely a key managerial personnel. An apparent
ambiguity/loophole in wording the consultative paper was corrected and hence
the party can be any director and not merely directors who are employees.
Further, the promoter may be a director or employee or otherwise and can even
be a limited company.

On the other side would be any shareholders or even
non-shareholders. 

The nature of the agreement

The agreement should be “with regard to compensation or
profit sharing in connection with dealings in the securities of such listed
entity”.

Prior approvals required of Board/public shareholders

Such agreements require prior approval of the
Board of Directors of the listed company.

Further, prior approval is also required of the public
shareholders of the listed company by way of an ordinary resolution. The
term “public shareholders” has been defined in Regulation 2(1)(y) of the
Regulations as ”public shareholding” means public shareholding as
defined under clause (e) of rule 2 of the Securities Contracts (Regulation)
Rules, 1957. Effectively, subject to certain further adjustments where
required, it means shareholders who are other than the promoters or promoter
group of the company or the subsidiaries/associates of the Company. However,
non-public shareholders by this definition could include directors, employees,
etc. who are not part of promoters, etc. To ensure that the voting
remains unbiased, apart from the promoters, etc. even “interested parties” are
not allowed to vote, as explained later herein.

Interested parties not to vote

It is seen earlier that the agreement would require the
approval of the public shareholders and thus promoter shareholders would not be
eligible to vote. However, there are certain other persons who also are
debarred from voting. These are “interested persons involved in the
transaction”. This term has been defined as “any person holding voting rights
in the listed entity and who is in any manner, whether directly or indirectly,
interested in an agreement or proposed agreement”.

Thus, it is not merely the parties to the agreement but
persons even otherwise interested in such agreement would be debarred from
voting.

Agreements entered into preceding three years

The new provisions also cover agreements entered into
preceding three years. For this purpose, such agreements are categorized into
those that are subsisting and those that have expired.

If such an agreement has expired, then it shall be disclosed
to the stock exchanges for public dissemination.

If such an agreement is subsisting then the following needs
to be done:-

(i)  It shall be disclosed to the stock exchanges
for public dissemination.

(ii) It
shall be placed before the forthcoming Board meeting for approval.

(iii) If the
Board approves, it shall be placed before the forthcoming general meeting for
approval by the public shareholders. 

Consequences of non-compliance

SEBI has wide powers to take action in case there is
non-compliance. There can be penalties, debarment, disgorgement, prosecution,
etc.

A critique

The concerns as regards such agreements are obvious – the
conflict of interest that it creates that may place self-interest over company
interest and even a special relation with certain shareholders over relation
with all shareholders generally. On other hand, considering that the profit
that is shared arises from sale of shares and not from the company or paid by
it or even the shareholders, it seems harsh that such agreements are so restricted.
Arguably, a disclosure ought to be enough. Of course, if such agreements are
entered into by Independent Directors, then the concerns may be justified.

Comparison with approval for related party transactions

The SEBI LODR Regulations also require approval under certain
circumstances of related party transactions by the shareholders. For such
approval too, there is restriction on voting by persons who have interest or
concern in the transactions. It is worth contrasting the requirements of shareholder
approval in case of related party transactions with such profit sharing
agreements.

As seen above, in case of such agreements, (i) resolution is
placed before public shareholders only (ii) approval is by way of an ordinary
resolution and (iii) persons interested in such agreements are also debarred
from voting.

In case of specified related party transactions, (i)
resolution is placed before all shareholders and not just public shareholders
(ii) approval is by way of special resolution (iii) all related parties are
debarred from voting.

Conclusion

The requirements will introduce a level of
transparency in dealings by Promoters and other persons connected with the
Company. The public shareholders and even the Board of Directors generally will
have a say in such matters and can veto it. Considering the retrospective
applicability, there are likely to be many such arrangements that would not
only require public disclosure but in case of subsisting agreements would
require the two level approval.

Deficient Stamp Duty – Cause for Imprisonment?

Introduction

Stamp Duty is the 2nd largest
source of revenue for the Maharashtra Government. The fact that the Government
is becoming very vigilant to check stamp duty evasion is a good move so as to
ensure that there is no revenue leakage. However, having said that, does every
case of deficient stamp duty justify an imprisonment on the ground that there
was a fraudulent act or a forgery or a case of corruption between the assessee
and the Sub-Registrar? Shooting from the hip and arresting people at a drop of
the hat is something which should be avoided by the authorities at all costs!
There exist enough safeguards in all revenue statutes to tackle cases of tax
evasion. Let us consider one such case which travelled all the way up to the
Supreme Court – State of Maharashtra vs. Ravindra Babulal Jain, SLP (Cr.)
No. 1881/2016.

Facts of the case

Ravindra Jain and others,
respondents in the case, purchased a piece of land admeasuring 8 acres 4
gunthas situated at Aurangabad by way of a public auction and by following a
tender process. The consideration paid by them of Rs. 3.60 crore was the
highest of several bidders. Since the property fell within the green zone, the
price paid by them was optimum. They got a sale deed registered in respect of
the land by showing a market value of the said property as Rs.3,500/- per
square meter at a time when the market value of the said property was
Rs.4,100/- per square meter. Based on this fact, the Anti Corruption Bureau,
acting on a private complaint, lodged a case against them as well as the
concerned Sub-Registrar alleging that all of them in connivance caused a
revenue loss to the tune of Rs.12,76,000/- to the State Government. It was also
alleged that they completed the aforesaid transaction by preparing false
documents, false records and fraudulently and dishonestly used the said records
as genuine ones. The cases were registered under the Indian Penal Code read
with section13(2) of the Prevention of Corruption Act as well as sections 59
and 62 of the Maharashtra Stamps Act, 1958. Accordingly, all the accused in
this case as well as the Sub-registrar and his assistant were arrested and
later released on bail. Subsequently, the accused moved the Bombay High Court
for quashing the FIR lodged against them by filing Cri. Appln. No.
4614/2012. 

Allegations against the Accused

The Prosecution argued before the
Bombay High Court that the accused purchased the land for a consideration of
Rs. 3.60 crore. While presenting the sale deed for its registration in December
2008, they did not disclose the true market value of the aforesaid land which,
according to the prosecution, was Rs.4100/- per square meter as per the Ready
Reckoner rates declared by the Government in the year 2008. It was alleged that
the applicants showed the market value of the said property as Rs.3,500/- per
square meter which was the Ready Reckoner rate of the earlier year, i.e., of
2007.

According to the Prosecution, as
per Ready Reckoner rates of the year 2008, the market value of the subject
property was Rs.7.05 crore and the stamp duty payable on the same was Rs.35.26
lakh. The accused, declared the market value of the subject property as Rs.4.50
crore based on the Ready Reckoner rates of 2007 and accordingly paid stamp duty
of Rs.22.50 lakh only. Hence, it was alleged that the purchasers of the said
land paid less stamp duty to the extent of Rs.12.76 lakh and caused a revenue
loss to the Government to that extent.It was also alleged that while
registering the subject instrument, the accused used false and forged documents
as genuine one and conniving with the then in charge Assistant Sub Registrar,
cheated the Government by causing loss of Rs.12.76 lakh. It was further alleged
that not mentioning the zone number within which the property fell clearly
indicated the malafide intention of cheating the Revenue. Consequently, the
Prosecution invoked various provisions of the Indian Penal Code, 1860,
viz, section 119 (Public Servant concealing design to commit offence which
it is duty to prevent), section167 (Public Servant framing an incorrect
document with an intent to cause injury), section 418 (Cheating with
knowledge that wrongful loss may ensue to person whose interest offender is
bound to protect), section  468
(Forgery for purposes of Cheating), section 471 (Using as genuine a
forged document); section 13(2) of the Prevention of Corruption Act,
1988 (criminal misconduct by public servant) as well as section 59 (Penalty
for executing instrument not duly stamped) and section 62 (Penalty for
failure to set forth facts affecting duty in the instrument) of the Maharashtra
Stamp Act, 1958.

High Court’s Verdict

The Bombay High Court considered
the facts of the case. At the outset it noted that section 119 and section 167
of the Indian Penal Code (IPC), as well as section 13(2) of the
Prevention of Corruption Act can only be attracted against public servants. The
accused in the present case were private individuals (separate proceedings were
launched against the sub-registrar) and hence, these sections automatically
failed. Thus, the Court was only concerned whether a fit case against the
accused under sections 418, 471 and 468 of the Indian Penal Code survived?

It held that section 418 of the
IPC dealt with Cheating with knowledge that wrongful loss may ensue to person
whose interest offender is bound to protectand no such case was apparent from
the material on record. Hence, even that section did not survive.

It next considered the offences of
section 468 (Forgery for purposes of Cheating) and section 471 (Using as
genuine a forged document). In this respect, it observed that the Prosecution
had made the following specific accusations:

(i)   The applicants submitted the
in-put form which was not correctly filled.

(ii)  The applicants intentionally
did not mention the zone number within which the subject property was situated.

(iii) The ready reckoner rate and
zone number were not mentioned at the top of the document of sale deed.

(iv) The market value of the
subject property was deliberately shown less.

(v) The market value of the
property was fraudulently assessed as per the ready reckonerrates prevailing in
2007 when the same ought to have been assessed at the ready reckoner rates of the
year 2008. This was done with a view to confer pecuniary advantage to the
accused which resulted in wrongful loss to the Government.

(vi) The accused and the other two
accused officials had a common intention to cheat the Government.

The High Court observed that no
offence could be made under the IPC in the present case. Even if the in-put
form was incorrectly filed or the zone number was not mentioned or the market
value was incorrect it was not a case of using a false document or one of
forgery! Merely making a false claim in a document does not make the
document a false one. Further, making a false statement cannot amount to
forgery. It gave a precise definition of a forged document as meaning only one
which purports to be signed or sealed by a person who in fact never did so.
Thus, it quashed the allegations u/ss. 468 and 471 of the IPC also.

Lastly, the High Court analysed
the correctness and the legality of the allegation that the accused
deliberately, showed the market value of the property less with a view to make
a wrongful gain for them and cause wrongful loss to the Government. It stated
that there was a specific allegation against the accused that, they with a
fraudulent and dishonest intention did not disclose the true market value of the
subject property while presenting the deed of sale of the said property for its
registration before the Sub Registrar and thereby cheated the Government by
causing revenue loss. It considered the definition of market value u/s.2(na) of
the Stamp Act Market Value to mean in relation to any properly which is the
subject matter of any instrument means the price which such property would have
fetched if sold in open market on the date of execution of such instrument or
the consideration stated in the instrument whichever is higher.

Accordingly, the High Court held
that the whole approach adopted as by the Prosecution in determining the market
value of the subject property appeared erroneous. It relied on Jawajee
Nagnatham vs. Revenue Divisional Officer, Adilabad, A.P. (1994) 4 S.C.C. 595,
which held that the Ready Reckoner prepared and maintained for the purpose of
collecting stamp duty had no statutory base or force and it could not form a
foundation to determine the market value mentioned thereunder in instrument
brought for registration.

It further considered R.
SaiBharathi vs. J. Jayalalitha, 2003 AIR S.C.W. 6349 where the Supreme
Court held that, “… the guideline value will only afford a
prima-facie base to ascertain the true or correct market value. Guideline value
is not sacrosanct, but only a factor to be taken note of if at all available in
respect of an area in which the property transferred lies. In any event, for
the purpose of Stamp Act guideline value alone is not a factor to determine the
value of the property and the authorities cannot regard the guideline valuation
as the last word on the subject of market value.”

Similar Supreme Court decisions
not considered by the Bombay High Court but which are on the same lines
include, Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991
P&H 26.

Hence, the High Court concluded
that the very foundation of the charges that the market value was deliberately
shown less got uprooted. It went on to state that even if the market value was
shown less, the Sub-registrar could have referred the instrument for
adjudication to the Collector u/s. 32A(2) of the Stamp Act. Since this was not
done, it was implied that the Sub-registrar accepted the value. Considering
that the said property was bought under a public auction and tender process and
by paying the highest price, the Sub-registrar may have considered all these
facts in accepting the stated value.

The Court held that prima facie
it found no fault with the Sub-registrar’s approach. It noted that in any event
the Collector had suo moto powers of revision u/s. 32A(5) of the Stamp Act.
Further, this section empowered the Collector to levy a penalty of 2% per
month. This power was already exercised by the Collector in the present case.
The Court wondered that when this action was already availed, where was the
propriety in launching criminal proceedings under the IPC and more so when
there did not seem any cogent, concrete and sufficient material against the
accused. A similar case of alleged cheating was considered by the Bombay High
Court in Sanjay Shivaji Dhapse vs. State of Maharashtra (2014 All M.R.
(Cri.) 3617). There the Division Bench of the Court held that not
affixing stamp of adequate amount would amount to irregularity and it is always
subject to verification / check by the concerned Government Officer. However,
it held that a criminal complaint could not lie against such an irregularity.

Hence, on a holistic view, the
Court in Ravindra’s case concluded that there was no offence under any section
of the IPC. The only guilt if at all which could be attributed would be that of
applying the reckoner rates of 2007 instead of 2008. However, the correct
sections to penalise that offence would be sections 59 and 62 of the Stamp Act
and not the IPC. Section 59 provides a fine and an imprisonment for any person
who with the intention to evade duty executes any instrument. Further, section
62 levies a fine for not setting forth all facts and circumstances in the
instrument which affect the chargeability of stamp duty. It was pleaded by the
accused that even those offences might not be attracted in the instant case in
light of section 59A of the Stamp Act which provided that no person could be
prosecuted u/s. 59 for an instrument which was admitted in Court. In Ravindra’s
case, the instrument was admitted before the Civil Judge. However, the Bombay
High Court did not go into merits of the case and instead only focused on the
fact that there was no offence under the IPC.

Hence, the High Court dropped all
criminal complaints in the instant case.

SLP to Supreme Court

Aggrieved by the above order, the
State preferred an SLP before the Supreme Court. The Supreme Court dismissed
the SLP by stating that it did not find any legal and valid ground for
interference with the Bombay High Court’s Order.

Conclusion

The Stamp Duty Reckoner is fast
becoming a single point linkage for several revenue statutes. The 1% VAT
composition Scheme, the Fungible FSI Premium, the deemed sales consideration
u/s. 50C and section 43CA of the Income-tax Act, the buyer’s Income from Other
Sources u/s. 56(2)  of the Income-tax
Act, etc., are all connected with the stamp duty ready reckoner
valuation. At a time like this, treating every irregularity in computing stamp
duty as a criminal offence would have drastic consequences.

India is not a Banana Republic where people can
be arrested on a mere difference in the stamp duty reckoner rate and the actual
value on which duty is paid. There could be several explanations for the
difference and even if there are none, arrest should be the last frontier which
should be resorted to. There are enough anti-abuse provisions, penalties which
the authorities can avail of under the Stamp Act. One hopes that after this
rationale decision, tax and other authorities would adopt a more genteel
approach towards taxpayers!

Whither Informal Guidance Scheme? – Whether An Obituary Is Due !

Background

When the scheme for informal
guidance was released by SEBI in 2003, it was expected that this will become a
form of advance ruling. More importantly, it would add to the interpretation of
Securities Laws. It would also serve as guidance for future transactions as
parties would know SEBI’s view on a particular issue. To be clear, Informal
Guidance was not at all meant to be the final view of SEBI. However, I submit
the expectations that this will help clarify the law, have been belied. A
recent decision of the Securities Appellate Tribunal (Arbutus Consultancy
LLP vs. SEBI, dated 5th April 2017) has raised questions on the
reliance one could place on the informal guidance.

What is the Scheme for Informal
Guidance?

Often parties undertake
transactions that have implications under the Securities Laws. The consequences
of violation of Securities Laws are severe and could result in SEBI taking
adverse action – for example – penalty, prosecution and debarring those
involved from approaching or dealing in the financial market. Ignorance of law,
as the proverb goes, is no excuse. However, needless to say, a clear
interpretation from the regulator itself should bring clarity and resolve
doubts.

Hence, when SEBI introduced the
Informal Guidance Scheme in 2003, it was seen as a market friendly initiative.
It allowed several categories of persons associated with the securities markets
to approach SEBI to get interpretation on almost any aspect of Securities Laws.

This was expected to avoid
litigation and enhance compliance. The queries and their replies were
specifically intended to be published for public knowledge with the intent of
having universal applicability where facts and issues
were same.

Informal Guidance is of two types.
One is a no-action letter. When a party proposes to undertake a
particular transaction in a particular manner, it may want to know how would
SEBI treat it under a specific provision of Securities Laws. A good example of
this is the subject matter of the SAT decision. The issue is : whether
exemption to inter promoter transfers from requirement of open offer under the
Takeover Regulations would be available on a particular set of facts. The
applicant is required to submit to SEBI the facts and also state the specific
provision on which it requires clarification. SEBI may then, take a view that
such exemption would be available and it would not take any action if the
applicant carries out the transaction exactly as per the proposal placed before
SEBI.

The other is an interpretative
letter. In this case, SEBI is asked to give an interpretation on
a particular provision in the context of a certain set of facts and
transaction.

SEBI gives limited protection to
the person who has received such guidance. It is provided that, in case of
no-action letters, the concerned department of SEBI would (or would not)
recommend any action under the Securities Laws if the transaction is carried
out in the manner put forth. However, in the letter it is clarified that such
guidance “constitutes the view of the Department but will not be binding on the
Board, though the Board may generally act in accordance with the view”.

Interestingly, SEBI will not
respond to a request for Informal Guidance “where a no-action or interpretive
letter has already been issued by any other Department on a substantially
similar question involving substantially similar facts as that to which the
request relates”. This, in my submissions, creates an impression that SEBI may
follow such interpretation in similar cases and hence a fresh informal guidance
is not needed.

Facts of the matter before SAT

In the case before SAT, there was
a complex restructuring transaction that involved inter-se transfers amongst
the promoters of a listed company. In ordinary course, any acquisition of
shares in a listed company would have implications under the SEBI Takeover
Regulations 2011 – for example – if the acquisition is beyond the specified
percentage, it may attract an open offer. However, exemption from open offer is
given for restructuring where the transfer is within the promoters. However,
such exemption is given provided certain conditions are met. One of such
conditions is that the transferor and transferee promoters should have been
disclosed as promoters in the filings with the stock exchange for the preceding
three years. In the present case, to simplify as the listed company was
recently listed, there was a peculiar situation. The transferor and transferee
both were promoters for more than 3 years. However, since the listing had taken
place less than two years back, the condition of three years were not complied
with. Hence, the inter se transfer apparently did not qualify for exemption
from open offer. The acquirer did make an open offer because of certain latter
transactions but at a lesser price based on latter transactions. However, since
the earlier transactions were treated as not exempt, the open offer price
computed by SEBI was higher than offered by the acquirer, hence, SEBI ordered
the acquirer to pay such higher price plus interest.

Before SAT, the acquirer pursued
the argument on merits that the three years post-listing disclosure was not a
strict condition and in reality the promoters were promoters for more than
three years. However, this was an interesting issue as in an earlier `Informal
Guidance’, the view propagated by the acquirer was approved. The informal
guidance had held that if the parties were promoters for more than three years
including in the period before listing, the requirement that there should still
be such three years of disclosure as promoters post listing need not be
complied with.

However, unfortunately, this was
not all. It appeared that in a subsequent Informal Guidance on similar facts,
an opposing view was said to have been expressed. It was even argued/conceded
by SEBI itself that the earlier Informal Guidance was actually incorrect! The
question was whether the earlier Informal Guidance would be helpful to the
acquirer.

Decision of SAT

To begin with, on the
interpretation of the provision itself, SAT was not in agreement with the
acquirer. According to SAT, the requirement of the law was clear. There has to
be at least three years of post listing filing of the parties as promoters with
the stock exchanges. Only if this condition is strictly complied with that the
benefit of exemption to inter se transfers between them would be available.

Then SAT dealt with several issues
relating to Informal Guidance – for example – what is the binding nature of
informal guidance? Does it help persons who were not the original applicant,
even if the facts were similar? Does it bind SEBI? What will be the situation
if there is another contradictory guidance on similar facts? Can a party claim
that the one beneficial to it should be applied?

The acquirer also argued that the
guidance was in the nature of a circular and thus binding on SEBI.

SAT discussed the Informal
Guidance scheme. It noted that the requirement of the provision was clear and
against the view advocated by the acquirer. SAT observed that, “…a wrong
interpretation given by an official cannot be used as a shelter in interpreting
provisions of law.” In my opinion, this by itself would reduce the value of the
original guidance relied on by the acquirer. SAT in any case pointed out that
there was already a subsequent guidance holding a different view.

It reiterated that “…an interpretation
provided under the Scheme by an official of department of SEBI cannot be used
against the correct interpretation of law (in the instant matter SAST/Takeover
Regulations, 2011)”. It also relied on its earlier decision in the case of Deepak
Mehra vs. SEBI ((2010) 98 SCL 216 (SAT). The following observations of the
SAT in Deepak Mehra’s case are relevant and illuminating:-

“The
impugned communication is only an interpretative letter providing under the
scheme an interpretation of the provisions of the Takeover Code as was sought
by Bharti pending finalization of the proposal which may or may not come
through. Clause 12 of the scheme makes it clear that an interpretative letter
issued by a department of the Board constitutes the view of the department but
will not be binding on the Board, though the Board may generally act in
accordance with such a letter. Clause 13 thereof also makes it clear that a
letter giving an informal guidance by way of interpretation of any provision of
law or fact should not be construed as a conclusive decision or determination
of those questions and that such an interpretation cannot be construed as an
order of the Board under section 15T of the Act. While giving its informal
guidance to Bharti, the general manager of the Corporation Finance Department
of the Board had also made it clear that the view expressed therein is not a
decision of the Board on the questions referred to by Bharti. It is, thus,
clear that the views expressed in the impugned communication are the views of
the corporate finance division of the first respondent and they shall not bind
the said respondent. It is further clear that the first respondent has not
taken any final decision in the matter and has passed no order which could said
to be adversely affecting the rights of the appellant or any other shareholder
of Bharti. The informal guidance given by the general manager is not an
“order” which could entitle anyone to file an appeal. The word
“order” is defined in Black’s Law Dictionary (Eighth Edition) as
“1. A command, direction, or instruction. 2. A written direction or
command delivered by a Court or Judge. The word generally embraces final
decrees as well as interlocutory directions or commands.” In the case
before us, the first respondent has not issued any command or direction. An
occasion to issue a direction or pass an order may arise, if and when, the
proposal that is being discussed between the two companies is finalized. If and
when, such a direction is issued or any order passed, it shall be open to any
person who feels aggrieved by that order or direction to come in appeal before
the Tribunal.” 

Conclusion

The decision of SAT, while
confirming to some extent how the Informal Guidance Scheme is viewed, I submit,
reduces the usefulness of the Scheme.

In any case, parties ought not
rely on the `informal guidance’ even for identical transactions. Hence, parties
involved will have to seek specific guidance. It is curious that the Scheme
itself provides that SEBI may refuse giving guidance if a guidance has already
been given on a similar issue!

There can be another interesting
situation. A party may approach SEBI for an informal guidance on a set of
facts. SEBI may give an interpretation that is not acceptable to the party and
it is legally advised that SEBI’s view is not correct in law. What would happen
if the party still goes ahead with the transaction? The Informal Guidance is
surely not binding on the party but there would still be an adverse view of
SEBI on record.

In conclusion, while the Informal Guidance
Scheme may continue to be used, even if sparingly and it should be treated with
a degree of wariness by others. I believe that SEBI should come out with a
clarification on the effectiveness of the `informal guidance’ to clear the confusion
that investors, implementators and advisors are likely to experience. In my
view, the guidance should take the character of a circular issued by the CBDT
under the Income Tax Act. This would reduce litigation and grant certainty. In
the alternative the informal guidance should be treated on par with the
decision of AAR.

Maintenance of Parents

Introduction

Ageing is a natural phenomenon!
But what if in one’s twilight years one’s own children don’t take care of a
person or even worse subject him / her to mental and physical abuse and agony?
There have been cases where the children have not provided even for basic
maintenance and daily needs of their parents. In such a scenario, the
Government of India thought it fit to introduce a legislation to provide
simple, inexpensive and speedy provisions which would enable the suffering
parents to claim maintenance from their children. Accordingly, “The
Maintenance and Welfare of Parents and Senior Citizens Act, 2007” was
enacted on 31st December, 2007 as a Central Act to provide for more
effective provisions for the maintenance and welfare of parents and senior
citizens guaranteed and recognised under the Constitution of India. Let us
consider some of the provisions of this social welfare statute.

Maintenance of Parents and Senior
Citizens

The Act provides for the setting
up of a Maintenance Tribunal in every State which shall adjudicate all matters
for maintenance, including provision for food, clothing, residence and medical
attendance and treatment. The following persons can make an application to the
Tribunal for maintenance of such needs so that he can lead a normal life:

(a) A parent (whether biological,
adoptive or step) or a grandparent can make an application against one or more
of his major children. Interestingly, the parents need not be senior citizens,
i.e., they can be less than 60 years of age.

(b) A childless senior citizen (an
Indian citizen who is at least 60 years of age) can make an application against
his major relative who is legal heir and who is in possession of the senior’s
property or who would inherit his property after the senior’s death. Any person
who is a relative of the senior and who has sufficient means shall maintain him
provided he is in possession of the property of the senior or would inherit his
property. If more than one such relatives are entitled to inherit his property,
then the maintenance would be proportionate to their inheritance.  

     While the senior must be an
Indian and at least 60 years of age, there is no such condition in respect of a
parent. In fact, the Act provides that it applies to citizens of India residing
abroad. How the Act would enforce its jurisdiction in a foreign land is a moot
point.

The application to the Tribunal
can be made by the senior citizen / parent himself, any other person or NGO
authorised by him. The Tribunal can even take suomoto cognisance of the
issue.

After inquiry, the Tribunal would
pass an order for maintenance and failure to comply with its order can lead to
penal action and imprisonment. The maximum maintenance allowance which may be
ordered by the Tribunal shall be such as may be prescribed by the respective
State Governments but not exceeding Rs. 10,000 per month. A claim for
maintenance can alternatively be made by the applicant under Chapter IX of the
Code of Criminal Procedure, 1973 but he cannot make it under both.

The Act also provides for the
constitution of an Appellate Tribunal before whom an appeal against orders of
the Maintenance Tribunal can be filed. Interestingly, the Act only gives the
right of appeal to a senior citizen or a parent aggrieved by the order of the
Maintenance Tribunal. It contains no provision for an appeal by the relative
aggrieved by the order of the Maintenance Tribunal! This is rather strange.
Another interesting facet is that the Act provides that a lawyer cannot
represent either party before the Maintenance Tribunal or the Appellate
Tribunal. However, if a parent so desires, then he can ask the State
Government’s District Social Welfare Officer to represent him. Why should an
Act deprive an old person from availing of legal representation? What if the
senior is a person who is unable to attend proceedings owing to ill-health,
incapacitation? He would then be forced to find some person / NGO who would
appear for him. Is it that easy to find someone? 

Abandoning Seniors

If any person who has been given
the care or protection of senior citizens, leaves them in any place with the
intention of wholly abandoning them, then he shall be punishable with
imprisonment for a term of up 3 month and / or fine of Rs. 5,000. Intention of
wholly abandoning would be demonstrated only through circumstantial evidence
and actual conduct and the onus would be on the person who alleges abandonment.
Such a case would be tried before a Magistrate Court and not by the Maintenance
Tribunal.

Protection of Life and Property

Section 22(2) of the Act mandates
that the State Government shall prescribe a comprehensive action plan for
providing protection of the life and property of senior citizens. To enable
this, section 32 empowers it to frame Rules under the Act. Accordingly, the
Maharashtra Government has notified the Maharashtra Maintenance and
Welfare of Parents and Senior Citizens Rules, 2010. Rule 20 which has
been framed in this regard, provides that the Police Commissioner of a city
shall take all necessary steps for the protection of the life and property of
senior citizens. Some of the important steps laid down under the Action Plan
under Rule 20 are as follows:

(a) Every police station must
maintain an up-to-date list of seniors living within its jurisdiction, especially
those living by themselves. One wonders whether this is being done in practice?

(b) A police officer with a social
worker should visit all seniors at least once a month and as soon as possible
on requests of assistance.

(c) Volunteers’ committees must be
formed for interaction between the police station and seniors.

(d) Every station must maintain a
register of all offences committed against seniors.

(e) Antecedents of servants working
for seniors must be promptly verified by the police on request from seniors.

(f)  A monthly report must be
submitted to the District Magistrate / Director General of Police about crimes
against seniors and the status of complaints and preventive steps taken.

(g) Every Police Commissioner must
start a toll-free help line for seniors. Mumbai police has set up an Elder Line
at 1090. 

Void Transfers

Section 23 of the Act introduces
an interesting provision. If any senior citizen who, after the commencement of
this Act, has transferred by way of gift or otherwise, his property, on the
condition that the transferee shall provide the basic amenities and basic
physical needs to the transferor and such transferee refuses or fails to
provide such amenities and physical needs, then the transfer of property shall
be deemed to have been made by fraud or coercion or under undue influence and
shall at the option of the transferor be declared void by the Tribunal. This
negates every conditional transfer if the conditions subsequent are not
fulfilled by the transferee. Property has been defined under the Act to include
any right or interest in any property, whether movable/immovable/ancestral/self
acquired/tangible/intangible.

In Promil Tomar vs. State of
Haryana, (2014) 175 (1) PLR 94, the Punjab and Haryana High Court has
held that the words ‘gift or otherwise’ in the section would include the
transfer of possession of a property or part thereof. It would cover a transfer
by way of lease, mortgage, gift or sale deed. Even a transfer of possession to
a licencee by a senior citizen would be covered. In Sunny Paul vs. State
NCT of Delhi, WP(C) 10463/2015 (Del), the Delhi High Court has held
that interest of the senior citizen as tenants/licencees of the property is
also covered under the section even though they are not owners of the property.
It further held that a claim for maintenance under the Act and an application
for setting aside a void transfer u/s. 23 of the Act are separate and different
remedies and one is not a pre-condition for the other

In Rajkanwar vs. Sita Devi,
AIR 2015 Raj 61, the Rajasthan High Court has held that a Will would
not be covered under the above provision since it is not a transfer inter vivos
and does not involve any transfer. A Will is only a legal expression of the
wishes of the testator. 

Eviction from House

One of the most contentious and
interesting facets of the Act has been whether the senior citizen / parent can
make an application to the Tribunal seeking eviction from his house of the
relative who is harassing him? Can the senior citizen / parent get his son /
relative evicted on the grounds that one has not been allowing him to live
peacefully? Different High Courts have taken contrary views in this respect.
The Kerala High Court in CK Vasu vs.The Circle Inspector of Police, WP(C)
20850/2011 has taken a view that the Tribunal can only pass a
maintenance order and the Act does not empower the Tribunal to grant eviction
reliefs. A Single Judge of the Delhi High Court in Sanjay Walia vs. Sneha
Walia, 204(2013) DLT 618 has held that for an eviction application, the
appropriate forum would be a Court and not the Maintenance Tribunal.

However, another Single Judge of
the Delhi High Court in Nasir vs. Govt. of NCT of Delhi & Ors., 2015
(153) DRJ 259 has held that while interpreting the provisions, the
object of the Act had to be kept in mind, which was to provide simple,
inexpensive and speedy remedy to the parents and senior citizens who were in
distress, by a summary procedure. The provisions had to be liberally construed
as the primary object was to give social justice to parents and senior
citizens. Accordingly, it upheld the eviction order by the Tribunal. A similar
view was taken in Jayantram Vallabhdas Meswania vs. Vallabhdas Govindram
Meswania, AIR 2013 Guj 160 where the Court held that setting aside of
void transfers u/s. 23 would even include cases where only possession of
property has been given instead of an actual legal transfer. It thus upheld the
vacation of the premises as directed by the Tribunal. A very interesting
judgment was delivered by the Division Bench of the Punjab & Haryana High
Court in J. Shanti Sarup Dewan, vs. Union Territory, Chandigarh, LPA
No.1007/2013 where it held that there had to be an enforcement
mechanism set in place especially qua the protection of property as
envisaged under the said Act.It held that the son was thus required to move out
of the premises of his parents to permit them to live in peace and civil
proceedings could be only qua a claim thereafter if the son so chose to make
but that too without any interim injunction. It was not the other way round
that the son and his family kept staying in the house and asked his parents to
go to the Civil Court to establish their rights knowing fully well that the time
consuming civil proceedings may not be finished during their life time.

The Court held that it did not
have the slightest of hesitation in coming to a conclusion that all necessary
directions could thus be made under the said Act to ensure that the parents
lived peacefully in their own house without being forced to accommodate their
son.

Recently, a Single Judge of the
Delhi High Court had an occasion to consider all the aforesaid judgments on the
power of eviction of the Tribunal. It held that the requirement that the
children or relatives must be in line to inherit the property was mandated only
for issuing direction with regard to maintenance. To invoke jurisdiction for
protection of life of the senior citizen or setting aside void transfers no such
pre-condition had to be satisfied. Further, directions to remove the children
from the property was necessary in certain cases to ensure a normal life of the
senior citizens. After considering all decisions on the issue, the Court held
that it was in agreement with the view expressed in the case of Nasir (supra)
that the provisions of Act, 2007 have to be liberally construed as one of the
primary objects of the Act is to protect the life and property of senior
citizens. Consequently, it held that u/s. 23 of the Act, the Maintenance
Tribunal could issue an eviction order to ensure that senior citizens live
peacefully in their house without being forced to accommodate a son who
physically assaults and mentally harasses them or threatens to dispossess them.

Since the Act conferred on the
Maintenance Tribunal the express power to declare a transfer of property void
at the option of the transferor u/s. 23, it had to be presumed that the intent
of the Legislature is to empower the Maintenance Tribunal to pass effective and
meaningful orders including all consequential directions to give effect to the
said order. The direction of eviction was a necessary consequential relief or a
corollary to which a senior citizen would be entitled upon a transfer being
declared void. It accordingly directed the Police Station to evict the son.

Conclusion

This is an interesting
social welfare statute designed to provide speedy redressal to parents and
seniors. While there continue to be judicial debates on whether eviction is possible,
one tends to think that the decisions upholding eviction would ultimately
prevail. The Delhi High Court, in a somewhat similar case of Sachin vs.
Jhabbu Lal, RSA 136/2016(analysed in detail in this Feature in the
BCAJ of January 2017) has held that in respect of a self acquired
house of the parents, a son had no legal right to live in that house and he
could live in that house only at the mercy of his parents up to such time as
his parents allow. That decision was not rendered under the context of this Act
but yet the ratio was the same. To conclude one only wonders, do we need a law
or a Court to tell us to take care of our parents? The times, truly have
changed!

LIFTING THE CORPORATE VEIL

Introduction

A company is a separate legal entity with a perpetual succession and an identity distinct from its members. Members may come and go but a company continues to exist independent of its members. This is a principle of law which has been laid down since the time the very first statute dealing with companies came into existence. However, there are times when the Courts decide to look behind the company, i.e., lift or pierce the corporate veil and ascertain who are the real beneficiaries behind the entity. Such scenarios are very few and far between but they do exist and are resorted to by the Courts in the rarest or rare cases.

Recently, the Supreme Court in the case of Estate Officer UT Chandigarh vs. M/s. Esys Information Technologies P Ltd, CA No 3765/2016 (“Esys’s case”) had an occasion to deal with the circumstances when the corporate veil may be lifted.

Corporate Identity

Section 9 of the Companies Act, 2013 provides that from the date of incorporation of a company, all its members shall be a body corporate by the name under which it is formed and the company shall be capable of owning property and shall have a perpetual succession. Thus, this section lays down the corporate identity of a company which is distinct and separate from its members.

Factual Matrix of Esys’s Case

Esys,a subsidiary of a Singapore company, was allotted a site at an Information Technology Park at Chandigarh under the Allotment of Small Campus Site in Chandigarh Information Services Park Rules, 2002. Esys was supposed to carry out construction of a campus site but before doing so, 98% of its shareholding was transferred by its Singapore-based holding company to a Dubai-based group company. The Dubai-based group company, in turn, transferred its controlling stake to another company, known as Teledata Informatics Ltd. In neither case was permission obtained for the transfer of shares. The Estate Officer concluded that since the shareholding changed hands after land allotment and that too without the prior permission of the Estate Officer, there was a violation of the terms of the allotment letter. The particular clause of the allotment letter being referred to by the Officer stated that the transfer of the site would not be allowed for 10 years from the date of allotment without the prior permission. It may be allowed in the event of merger or split of the allottee and that too after obtaining prior permission. Further, all cases of transfer were subject to payment of prescribed transfer charges.

As a result of the transfers, not only did the Dubai-based company became the owner of the land but it was further transferred to Teledata. This fact of transfer to Teledata was suppressed on oath by the Director of Esys but was discovered by the Estate Officer from an affidavit filed by the Director before the High Court of Singapore in another matter. In that affidavit the Director had very clearly conceded that Teledata was the new owner of Esys. The Estate Officer concluded that the manner in which the transfer was made was not permissible as per the Rules and terms of the allotment letter. The holding company and its subsidiaries were two distinct legal entities and hence, the corporate veil should be lifted so as to unearth the mala fide, dishonest and fraudulent design of the allottee. Accordingly, the Officer contended that this amounted to an illegal transfer of the land and also ordered that the allotted site be resumed. The Appellate Authority upheld this Order of the Estate Officer.

High Court’s verdict

The Punjab and Haryana High Court overruled the verdict of the Appellate Authority. It refused to lift the corporate veil in the case under discussion. It stated that there was neither a transfer of the allotted site nor a merger of the allottee. The allottee was a juristic entity and continued to remain as such. It relied upon an old decision of Saloman vs. Saloman, 1897 AC 22(1) which held that a company is separate and distinct legal entity. It also relied on the Supreme Court’s decision in the case of Bacha F. Guzdar vs. CIT, 27 ITR 1(SC) where the Court held that that a shareholderhas got no right in the property of the company. His only rights are the right to vote and right to dividend, if declared, but that does not, either individuallyor collectively, amount to more than a right to participate in the profits of the company. The company was a juristic person and was distinct from the shareholders. It was the company which owned the property and not the shareholders. It also discussed the judgment in the case of Andhra Pradesh State Road Transport Corporation vs. ITO, AIR 1964 SC 1486 which held that a shareholder does not own the property of the corporation or carries on the business with which the corporation is concerned. The High Court further held that the argument that the principle of lifting of the corporate veil should be applied, did not arise in the impugned case since the shareholders were distinct from the company and there was no change in the name of the allottee. The allotment continued in the name of the company. Change in shareholding could not be construed to be violative of the allotment letter as the company was a distinct and separate entity and composition of share holding did not change the nature of the company. It accordingly set aside the Officer’s site resumption order.

Based on this the Estate Officer appealed to the Supreme Court where a pointed question was raised by the Supreme Court to the director as to whether the shares of Esys have been transferred to Teledata? The director stated on oath that they have not been which was in fact, contrary to the truth.

When can the Veil be Lifted?

The Supreme Court held that in Juggilal Kamlapat vs. CIT 73 ITR 702 (SC), it has been laid down that it is true that from juristic point of view a company is a legal personality entirely distinct from its members and it is capable of enjoying rights and being subjected to rights and duties which are not the same as those enjoyed or borne by its members but in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. It further discussed the decisions of Jai Narain Parasrampuria vs. Pushpa Devi Saraf, 2006 (7) SCC 756;State of U.P vs. Renusagar Power Co., AIR 1988 SC 1737 wherein the Supreme Court held that it was well settled that the corporate veil could in certain situations can be pierced or lifted. In the expanding horizon of modern jurisprudence, lifting of corporate veil was permissible. Its frontiers were unlimited. It must, however, depend primarily on the realities of the situation. The aim of legislation was to do justice to all the parties. The principle behind the doctrine was a changing concept and it was expanding its horizon Whenever a corporate entity was abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable therefor. The Apex Court observed that the corporate veil even though not lifted was becoming more and more transparent in modern company jurisprudence. It held that the case of Saloman vs. Saloman, 1897 AC 22(1) was still popular but the veil has been pierced in many cases. The lifting of the veil has been held to be permissible in Life Insurance Corporation of India vs. Escorts Ltd. AIR 1986 SC 1370 which held that it may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern.

Though not considered in this decision but the Supreme Court in Vodafone International Holdings BV vs. UOI, 341 ITR 1 (SC) had also dealt with this issue by stating that lifting of the corporate veil is readily applied in the cases coming within the Company Law, Law of Contract, and Law of Taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction. The Court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal facade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. This principle is also applied in cases of a holding company – subsidiary relationship- where in spite of being separate legal personalities, if the facts reveal that they have indulged in dubious methods for tax evasion. This decision examined the concept of whether a transaction should be “looked at” or “looked through”. The amendments made by the Finance Act, 2012 to section 9 and section 2(47) of the Income-tax Act, 1961, which introduced the concept of taxation of Indirect Transfers, are nothing but an extension of the doctrine of lifting of the corporate veil.

Apex Court’s Decision

After considering various factors, the Supreme Court overruled the decision of the High Court in Esys’s case. It also held that prima facie from the affidavit of the director filed in Singapore, there was a transfer in favour of Teledata. Inspite of a direction to disclose the facts, there was a concealment of material facts. Esys was guilty of concealing the truth and thus, it held that the provisions of the allotment letter have been clearly violated and the Estate Officer was within his rights to resume possession of the land.

Fallout of this Decision

This decision raises several unanswered questions. Was this view taken by the Supreme Court merely because the director lied on on oath or would the doctrine of lifting the veil be applied in all cases where shares of a company are transferred? It appears that the Court was driven towards this view because of the concealment by the director. However, if there was no concealment, would the decision of the Supreme Court been different? It is relevant to note that the allotment letter contained no restriction on the transfer of shares of the allottee! All that it prohibited was a transfer of the site.

This question is relevant in several other situations. In case of transfer of shares of a company owning a valuable piece of land at Mumbai would stamp duty be levied @ 0.25% as on a transfer of shares or 5% as on conveyance of property? The Mumbai ITAT in the case of Irfan Abdul Kader Fazlani, ITA No. 8831/Mum/11 has held that section 50C cannot be applied to the sale of shares of a property owning company. The veil cannot be pierced in such a case to contend that what is being sold is actually land and building.

Similar questions also arise in flats where collector’s charges are to be paid. These charges are currently being avoided because what is being sold are shares of the company and not the property per se.

Further, if shares of such a company are long-term capital assets but the land held by the company is short-term capital asset, then would the gain on sale of shares be treated as short-term capital gain? A similar question was placed before the Karnataka High Court in Bhoruka Engineering Industries Ltd vs. DCIT, 356 ITR 25 (Kar). In that case, shares of a listed company were sold through the exchange and capital gains exemption was claimed u/s. 10(38). The only asset of the company was land. The AO contended that the veil should be lifted since what had been sold was virtually land and hence, the exemption should be denied.

The High Court denied this plea of the Department and held that the transaction was real, valuable consideration was paid, all legal formalities were complied with and what was transferred was the shares and not the immovable property. The finding of the assessing authority that it was a transfer of immovable property was contrary to the law and contrary to the material on record. It held that they committed a serious error in proceeding on the assumption that the effect of transfer of share was transfer of immovable property and therefore, if the veil of the company was lifted what appeared to them was transfer of immovable property. According to the High Court, such a finding was impermissible in law.

Conclusion

One can only hope that the lifting of the veil is resorted to in select cases, such as, those where there are instances of fraud or deceit. A wrong use of this decision could open up a Pandora’s box and it could be like Vodafone’s case being revisited all over again – one only hopes this purdah is not lifted easily!! _

Overseas Direct Investments – Write-Off of Investment

BACKGROUND
The Foreign Exchange Management Act, 1999 (“FEMA”) and Rules and Regulations issued thereunder came into force from 1st June, 2000. Since then, over last 16 years, they have undergone several changes.

Beginning December 2015, RBI is issuing Revised Notifications in substitution of the original Notifications issued on May 3, 2000. Previously, annually on July 1,  RBI was issuing Master Circulars with shelf life of one year. In another change, from January 1, 2016, most of the Master Circulars have been discontinued and substituted with Master Directions (except in case of – Foreign Investment in India and Risk Management and Inter-Bank Dealings). Unlike the Master Circulars, the Master Directions will be updated on an ongoing basis, as and when any new Circular / Notification is issued. However, in case of any conflict between the relevant Notification and the Master Direction, the relevant Notification will prevail.

CONCEPT AND SCOPE
The issues relating to write-off of investments in overseas subsidiary / joint venture entity and some other issues connected therewith are being discussed in this article.

OVERSEAS DIRECT INVESTMENT
Vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, RBI notified the revised Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. This Notification repealed and substituted Notification No FEMA 19/2000-RB dated 3rd May 2000 which had notified Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000.

The purpose of this Notification is to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment (or financial commitment) by Indian entities in overseas joint ventures and / or wholly owned subsidiaries. This Notification also regulates investment by a person resident in India in shares and securities issued outside India. Updated provisions in this regard are contained in FED Master Direction No. 15/2015-16.

This article discusses the following aspects in the context of overseas investment made by an Indian party in the shares of an overseas entity.

1.    Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables.
2.    Sale of shares in a WOS / JV involving write off of the investment (or financial commitment).

1.    Restructuring of the balance sheet of the overseas entity involving write off of capital and receivables

Almost all businesses suffer teething troubles and have a gestation period during which it will generally incur losses. However, over time, the business comes on track and also recoups the initial losses. Indeed, in some cases it may happen that despite the best efforts of the Indian party, the business continues to suffer losses and may require restructuring. Such instances are increasingly noticed in the post-2008 period which is marked by global economic turmoil.

If appropriate corrective action is not taken at the appropriate time, it may not only affect the viability and continuity of the business but the overseas entity may become sick and be in an irrecoverable situation although the business may have good potential. In such cases, the possible solution could be to restructure the balance sheet of the overseas entity by setting-off the past losses against the paid-up capital and reserves. However, this would also require the shareholders to write down their investment in the overseas entity.

In this background, in 2011 RBI amended Notification No. FEMA 120/RB-2004 and inserted Regulation 16A which permits the Indian Party (investors / promoters) to undertake restructuring of the overseas entity. Regulation 16A permits write-off of investment as well as receivables subject to compliance with certain conditions.

Such write off is permitted in case of both Wholly Owned Subsidiary (WOS) of the Indian Party or a Joint Venture (JV) of the Indian Party along with overseas investor(s). However, in case of a JV, the write-off is permitted only if the Indian Party holds at least 51% stake in the JV.

What can be written-off
The Indian Party can write-off the following investments / dues from the foreign entity: –
1.    Equity share capital.
2.    Preference share capital.
3.    Loans given.
4.    Royalty
5.    Technical knowhow fees.
6.    Management fees.

Available Routes for restructuring and write-off
This restructuring and write-off can be done either under the Automatic Route or under the Approval Route. The maximum amount that can be written-off under the Automatic Route as well as the Approval Route is 25% of the equity investment made by the Indian Party in the overseas WOS / JV.

AUTOMATIC ROUTE
A company listed on a recognised stock exchange in India can avail of the Automatic Route. The Indian Party is required to report the write-off / restructuring to RBI, through the designated AD Category-I Bank within 30 days of the write-off/restructuring.

APPROVAL ROUTE
An unlisted Indian Party can write-off / restructure its investment / receivables in overseas WOS / JV only after obtaining prior approval of RBI. It will need to apply to RBI, through the designated AD Category-I Bank.

Documents to be submitted
Both under the Automatic Route as well as the Approval Route, the Indian Party is required to submit the following documents together with its application.

a)    A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party.
b)    Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.

2.    Sale of shares in a WOS/JV involving write off of the investment (or financial commitment)

Depending upon the business exigencies, an Indian Party may consider selling its shares in the overseas WOS / JV. Regulation 16(1) grants general permission to an Indian Party to disinvest the shares subject to certain conditions if the sale does not result in any loss.

However, it is not necessary that the sale will always result in profit. Hence, RBI has granted general permission for disinvestment of shares by an Indian Party where such disinvestment results in a loss. It may be noted that the computation of ‘loss’ in case of Notification No. FEMA 120/RB-2004 is distinct from that the computation of ‘loss’ in terms of the Income-tax Act, 1961. For FEMA purpose, the ‘loss’ is to be understood as realisation of disinvestment proceeds of shares which are less than the investment made. Thus, there would be a ‘loss’ when the disinvestment proceeds on the sale of shares are lower than the amount paid at the time of purchase of shares.

Again, disinvestment by an Indian Party in its overseas WOS / JV, resulting in a loss or write-off on investment, can be either under the Automatic Route or the Approval Route.

AUTOMATIC ROUTE
The Indian Party can avail the Automatic Route if it complies with any of the following four criteria.

1.    The overseas JV / WOS is listed on a stock exchange outside India.
2.    The Indian Party is listed on a stock exchange in India and it has net worth of not less than Rs. 100 crores.
3.    The Indian Party is listed on a stock exchange in India, it has net worth of less than Rs. 100 crores but investment in the overseas JV / WOS does not exceed US $ 10 million.
4.    The Indian Party is unlisted and the investment in the overseas entity does not exceed US $ 10 million.

Once the Indian Party qualifies under any of the aforementioned criteria, it will need to comply with the following conditions.

a.    If the shares of the overseas JV / WOS are listed, the sale should be effected through the stock exchange.

b.    If the shares of the overseas JV / WOS are not listed and they are disinvested by a private arrangement, the share price should not be less than the value certified by a Chartered Accountant / Certified Public Accountant as the fair value of the shares based on the latest audited financial statements of the JV / WOS.

c.    The Indian Party should not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS.

d.    The overseas concern should have been in operation for at least one full year and the Annual Performance Report together with the audited accounts for that year must have been submitted to RBI.

e.    The Indian Party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.

f.    The Indian Party should submit details of such disinvestment through its Bank in Part III of Form ODI within 30 days from the date of disinvestment.

g.    Sale proceeds should be repatriated to India within 90 days from the date of sale of the shares / securities.

APPROVAL ROUTE
If an Indian Party does not satisfy the criteria / conditions mentioned above, it should obtain prior approval from RBI for undertaking divestment in its overseas WOS / JV.

SPECIFIC WINDOW IN CASE OF A LISTED COMPANY HAVING EXPORTS

In addition, Regulation 171 provides another window for write-off in case of a listed company. Thus, if the proceeds realised by an Indian Party listed on any stock exchange in India from sale of shares or security referred to in Regulation 16 (1)2  are less than the amount invested in the shares or security transferred, the Indian Party may write off the differential amount if such differential amount does not exceed the percentage approved by the RBI, from time to time, of the Indian Party’s actual export realization of the previous year.

If, however, the differential amount is more than the percentage approved by RBI from time to time, of the Indian Party’s actual export realisation of the previous year, prior permission of RBI would be required for write-off.

SIGNING OFF
As pointed out above, transfer by way of sale of shares of a JV / WOS outside India as well as restructuring of the balance sheet of JV/WOS involving write-off of capital and receivables, requires fulfillment of various conditions and also involves various compliances. It would be prudent to examine the facts carefully and in appropriate cases, wherever applicable, apply to the RBI for permission which may be granted subject to such conditions as the RBI may consider appropriate.

1    It may be noted that while Notification No. FEMA 120/RB-2004 includes Regulation 17, Master Direction No. 15/2015-16 on investment in JV/WOS does not make any mention thereof.
2    While Regulation 17 mentions Regulation 16(1), it also mentions “for a price less than the amount invested in the shares or security transferred”. A case where sale proceeds are less than investment is within the ambit of Regulation 16(1A) and not within the ambit of Regulation 16(1). Hence, Regulation 16(1) should be read as Regulation 16(1A).

SEBI Again Initiates Action against Statutory Auditors for Fraud, Negligence, Etc.

SEBI has initiated action yet another time against auditors of a listed company that was alleged to have carried out massive frauds, made false/fake/duplicate books of accounts, etc. In an earlier case, SEBI had actually debarred an auditor/Chartered Accountant from issuing any certificates under various Securities Laws. This case was discussed earlier in this column in the April, 2016 issue of this Journal. Further, as will also be discussed later herein, the Bombay High Court had held that SEBI did have power to take action against auditors and that such powers were not the exclusive prerogative of the Institute of Chartered Accountants of India. This results in not only SEBI being able to debar auditors but also  initiate other actions such as penalties, prosecution, etc. Action under other laws such as the Companies Act, 2013, can also not be ruled out.

This particular case (Order of SEBI dated 16th February 2017 in the matter of Arvind Remedies Limited) has an interesting and perhaps worrisome feature. SEBI has taken a view that the concerned auditors had been negligent in their duties as auditors and failed to maintain requisite professional standards in their work. Based on this, the auditors have been accused  of fraud, manipulation, deceit, etc. These allegations are not only more serious but can result in far stricter punishment.

FACTS OF THE CASE
A forensic audit was carried out of the listed company, Arvind Remedies Limited, by a consortium of bankers. Several findings were made by these forensic auditors and also by SEBI’s own subsequent investigation. Some of alleged frauds/manipulation, etc. were as follows:-

1.    Maintenance of multiple sets of books of accounts.
2.    Recording of bogus sales.
3.    Allegedly making fake sales/entries with several companies.
4.    Destruction of large amount of inventories which SEBI suspects to be originally non-existent.
5.    Reduction of a large amount of tangible assets in a suspicious manner.
    And so on.

The turnover of the company had reduced very substantially. The share price on stock exchange too had reduced to a small fraction of the price in preceding period. It was alleged that during the relevant period the Promoters sold a very substantial number of shares and reduced  their shareholding from 46.84% to 3.58%. The Promoter Director also had drawn a large amount as commission on sales which SEBI has alleged to be fake.

Around this time, the erstwhile auditors (“the Auditors”) of the Company resigned and a new firm was appointed. The findings by the new firm were similar to findings of SEBI/the forensic auditor.

ACTION BY SEBI AGAINST THE COMPANY AND PROMOTER DIRECTOR
SEBI alleged that the Company and its promoter director were guilty of violation of several provisions of the SEBI Act/SEBI (PFUTP) Regulations relating to manipulations, frauds, etc. It also alleged that the promoter director had drawn a large amount of commission on the basis of bogus sales. Accordingly, it issued the following interim directions:-

1.    Debarred the Company and the promoter director from accessing the securities markets, buying/selling shares, etc.

2.    Directed the promoter director to impound the commission that he had drawn on basis of allegedly bogus sales.

SEBI also directed the promoter director not to alienate any of his assets till the amount of commission was duly impounded in the manner specified by SEBI.

ACTION AGAINST THE AUDITORS
SEBI had sought a statement from the Auditors on various issues to which replies were given by them. Pursuant to such replies and investigation, SEBI made several observations against the role of the Auditors. SEBI stated: “For negligence in certification of accounts of listed company, failure to maintain professional standards in Audit, the Statutory Auditor and its proprietor were prima facie alleged to have violated – i. Section 12A(a), (b) and (c) of the SEBI Act and Regulation 3(b), (c) and (d) and Regulation 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations.” (emphasis supplied).

Again, SEBI pointed out several alleged lapses of the Auditors such as not reporting on certain discrepancies in the accounts. Based on this, SEBI observed, “The irregularities perpetrated by ARL, its Director and Statutory Auditor, discussed hereinabove are prima facie in violation of Sections 12A(a), (b) and (c) of the SEBI Act; Regulations 3(b), (c) and (d) read with Regulations 4(1) and 4(2)(a), (e), (f), (k) and (r) of the PFUTP Regulations. “

Thus, SEBI has alleged that the Auditors have prima facie violated the provisions relating to fraud, manipulation, deceit, etc. as contained in the SEBI Act and the PFUTP Regulations.

These provisions provide for certain fairly serious violations. Section 12A(a) concerns with use of “any manipulative or deceptive device or contrivance” in connection with certain issue/purchase/sale of securities. Section 12A(b) deals with employment of “any device, scheme or artifice to defraud” in connection with issue or dealing of securities. Regulation 4(2)(r) of the PFUTP Regulations deal with “planting false or misleading news which may induce sale or purchase of securities.”

Thus, and to repeat, these are serious violations alleged.

The interim order also operates as a show cause notice to the Auditors asking them to show cause as to why they should to be debarred from giving various certificates for having allegedly committed violations of the provisions relating to fraud, manipulation, deceit, etc.

Whether negligence/lower professional standards in audit can be treated as fraud, deceit, etc.

In the earlier order in the case of Shashi Bhushan discussed in an earlier article in this column, the auditor concerned was specifically alleged to have committed the violations relating to fraud, etc. In other words, the allegation was that he was party to such things.

In the present case, the order, though not wholly clear/consistent, seems to be on a different footing. The Auditors are not specifically alleged to be party to such fraud, etc. The allegation against them is that they have been negligent in their audit and/or they have applied lower professional standards in their audit. However, whether such negligent work can amount to fraud, manipulation, etc.? The latter are allegations that can result in severe consequences of debarment, penalty, prosecution and perhaps more.

The Order/Show Cause notice further states that “The Statutory Auditor therefore, enabled ARL and its Director to perpetrate manipulation/fraud on genuine investors in the securities market.” Thus, it appears that the allegation is that the alleged actions/defaults of the Company/director were a consequence of such alleged negligence, etc.

It will be interesting to read the final order of SEBI on the matter and how it bridges what I see as a gap between alleging negligence/low professional standards in audit and an active fraud/manipulation/deceit. Negligence/low professional standards in audit is surely a default that ought to be acted upon but allegation of fraud, manipulation, etc. are different and serious defaults. Negligence, it is submitted, does not amount to committing fraud which requires mens rea and a conscious and active participation to commit such an act.

WHETHER SEBI HAS POWERS TO ACT AGAINST AUDITORS
To consider whether SEBI has powers to act against auditors of a listed company, the decision of the Bombay High Court in Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96) is relevant. The Court had observed therein:-

“25. ….The powers available to the SEBI under the Act are to be exercised in the interest of investors and interest of securities market. In order to safeguard the interest of investors or interest of securities market, SEBI is entitled to take all ancillary steps and measures to see that the interest of the investors is protected. Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants.
….
With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market.”

The Court thus has held that where a Chartered Accountant is “instrumental in preparing false and fabricated accounts”, SEBI does have jurisdiction to act in interests of investors/markets. The Court further observed:-

“If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.”

It is clear thus that SEBI does have power/jurisdiction to take action against a Chartered Accountant who connives/colludes with the management of the company to concoct false accounts.

However, the questions that this particular case presents are two. Whether negligence/applying lower professional standards in auditing by itself amount to fraud. Secondly, whether such negligence, etc. itself are actionable
by SEBI. 

IMPLICATIONS ON OTHER PROFESSIONALS AND GENERALLY THROUGH OTHER LAWS
Action by SEBI against the Chartered Accountant does not rule out action by the Institute of Chartered Accountants of India for defaults of professional negligence, misconduct, etc. Further, action is also conceivable under other laws such as the Companies Act, 2013, etc.

Adverse action is also possible in appropriate cases against other professionals such as Company Secretaries, lawyers, etc.

It will be of interest whether and to what extent the defence of double jeopardy (under Article 20(2) of the Constitution of India) of double punishment for the same offence would be available.

CONCLUSION
The liability of auditors of entities to which Securities Laws apply have only increased over the years. Apart from increasingly complex laws and wider requirements/scope of audit and other work, there are multiple regulators who end up regulating the same work. The auditors would have thus to be prepared to defend their work against action by different regulators/forums and also be subject to multiple forms of adverse action for the same work.

Joint Holder or Nominee is the Question

INTRODUCTION
Succession planning is catching up with modern India. Earlier, people in India would think of wills, trusts and other modes of estate planning only when they were of a ripe old age. However, today even younger people are considering what is the best mode of planning for one’s assets so that there is a smooth transmission to the family. And rightly so, since life is uncertain and hence, planning for one’s affairs would only mean that an already mourning family has one less problem to face!

When it comes to estate planning, the most basic form of planning is a joint ownership of assets and a nomination. However, there is a fair deal of confusion as to the difference between these two and which is superior of the two. Let us examine the meaning of these two very important tools and when to use which.

JOINT HOLDING
A joint holder as the name suggests is joint in ownership along with the 1st holder or the main holder. Joint ownership could be in respect of bank accounts, demat accounts, share certificates, flat ownership certificates, etc. A joint holding is the opposite of a single / sole ownership. Depending upon the mode of joint holding, in certain assets, the joint holder can operate the assets along with or after the lifetime of the primary holder. To illustrate in the case of bank accounts, the following modes are possible:

(a)    Either or Survivor – under this mode, either of the joint holders can operate the account. Moreover after the death of the primary member, the joint holder would automatically become the sole holder of the account.

(b)    Former or Survivor – under this mode, the joint holders can operate the account only after the death of the primary member. Once the primary member dies, the joint holder would automatically become the sole holder of the account. However, during the lifetime of the primary member, the joint holder cannot operate the account.

Table F of Schedule I to the Companies Act, 2013 lays down the model Articles of Association of a limited company. Clause 23 of this Table F provides that on death of a joint holder of shares, the survivor member would alone be recognised by the company as having any title to his interest in the shares.

NOMINATION
Nomination is something which is extremely popular nowadays and is increasingly being used in co-operative housing societies, depository/demat accounts, mutual funds, Government bonds/securities, shares, bank accounts, etc. Nomination is something which is advisable in all cases even when the asset is held in joint names. Simply put, a nomination means that the owner of the asset has designated another person in his place after his death.

The legal position in this respect is crystal clear. Once a person dies, his interest stands transferred to the person nominated by him. Thus, a nomination is a facility to provide the society, company, depository, etc., with a face which whom it can deal with on the death of a person. On the death of the person and up to the execution of the estate, a legal vacuum is created. Nomination aims to plug this legal vacuum. A nomination is only a legal relationship created between the society, company, depository, bank, etc. and the nominee.

The nomination seeks to avoid any confusion in cases where the will has not been executed or where there are disputes between the heirs. It is only an interregnum between the death and the full administration of the estate of the deceased.   

A nomination continues only up to and until such time as the will is implemented. No sooner the will is implemented, it takes precedence over the nomination. Nomination does not confer any permanent right upon the nominee nor does it create any beneficial right in his favour. Nomination transfers no beneficial interest to the nominee. A nominee is for all purposes a trustee of the property. He cannot claim precedence over the legatees mentioned in the will and take the bequests which the legatees are entitled to under the will.

The Supreme Court in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases 214 (SC), in the context of a nomination under a life insurance policy held that a mere nomination made does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. Once again in the case of Vishin Khanchandani vs. Vidya Khanchandani, 246 ITR 306 (SC), the Supreme Court examined the National Savings Certificate Act and various other provisions and held that, the nominee is only an administrative holder. Any amount paid to a nominee is part of the estate of the deceased which devolves upon all persons as per the succession law and the nominee must return the payment to those in whose favour the law creates a beneficial interest. Again, in Shipra Sengupta v Mridul Sengupta, (2009) 10 SCC 680, the Supreme Court upheld the superiority of a legal heir as opposed to a nominee in the context of a nomination made under a Public Provident Fund.

The Supreme Court reinforced its view on a nominee being a mere agent to receive proceeds under a life insurance policy in Challamma vs. Tilaga (2009) 9 SCC 299. In Ramesh Chander Talwar vs. Devender Kumar Talwar, (2010) 10 SCC 671, the Supreme Court upheld the right of the legal heirs to receive the amount lying in the deceased’s bank deposit to the exclusion of the nominee. A similar view has been taken by the Bombay High Court in Nozer Gustad Commissariat vs. Central Bank of India, 1993(2) Bom.C.R.8 and Antonio Jaoa Fernandes vs. Asst. Provident Fund Commissioner, 2010(3) All MR 599 in respect of balance standing in the employee provident fund of the deceased.

The position of a nominee in a flat in a co-operative housing society was analysed by the Supreme Court in Indrani Wahi vs. Registrar of Co-operative Societies, CA NO. 4646of 2006(SC). The Supreme Court held that there can be no doubt that the holding of a valid nomination does not ipso facto result in the transfer of title in the flat in favour of the nominee. However, consequent upon a valid nominationhaving been made, the nominee would be entitled to possession of the flat. Further, the issue of title had to be left open to be adjudicated upon between the contesting parties. It further held that there can be no doubt, that where a member of a cooperative society nominates a person, the cooperative society is mandated to transfer all the share or interest of such member in the name of the nominee.The Supreme Court concluded, that it was open to the other members of thefamily of the deceased, to pursue their case of succession or inheritance in respect of the flat, in consonance with the law.

The position was a bit murky when it came to a nomination in respect of shares in a company or a depositary account. The Companies Act, 2013 in the form of section 72 read with Rule 19 of the Companies (Share Capital and Debentures) Rules, 2014 (in respect of nomination for physical shares) and Bye Law 9.11 made under the Depositories Act, 1996 (which deals with nomination for securities held in a dematerialised format) provide that any nomination made in respect of shares or debentures of a company, if made in the prescribed manner, shall, on the death of the shareholder/debenture holder, prevail over any law or any testamentary disposition, i.e., a will. A Single Judge of the Bombay High Court explained this proposition in the case of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd, 112 (5) Bom. L.R. 2014 that upon the death of a shareholder, the shares would “vest” in the nominee. A nominee became entitled to all the rights attached to the shares to the exclusion of all others regardless of anything stated in any other disposition, testamentary or otherwise. The Court concluded that the Legislature’s intent under the Companies Act and the Depositories Act, 1996 was very clear, i.e., to vest the property in the shares in the nominee alone in supersession of the testamentary/intestate succession. Another Single Judge of the Bombay High Court, had an occasion to consider the above provisions of the Companies Act and the earlier decision of the Bombay High Court in Jayanand Jayant Salgaonkar vs. Jayashree Jayant Salgaonkar and others, Notice of Motion No. 822/2014 in Suit No. 503/2014. It held that the earlier decision of Harsha Nitin Kokate vs. The Saraswat Co-op. Bank Ltd was rendered per incuriam, i.e., without reference to several binding Supreme Court and Bombay High Court decisions.

A nomination, if held supreme, wholly defenestrates the Indian Succession Act. According to the judgment in Harsha Nitin Kokate, a nomination becomes a “Super-Will” one that has none of the defining traits of a proper Will. Thus, a nomination, even under the Companies Act only provides the company or the depository a quittance. A nominee only continues to hold the securities in trust and as a fiduciary for the legal heirs under Succession Law.

A division bench of the Bombay High Court in Shaktia Yezdani vs. Jayanand Jayant Salgaonkar, Appeal No. 313/2015 Order dated 01.12.2016 considered both the earlier Single Judge decisions. It also analysed all the Supreme Court and High Court decisions on the superiority of a will over a nomination. It held that the provisions of the Companies Act are not materially different from the provisions of other Acts which provide for nomination. A nomination does not become a testamentary disposition under the Indian Succession Act.  As has been consistently held, a nominee does not get an absolute title to the property. Nomination never overrides testamentary or intestate succession. The legislative intent by virtue of the Companies Act is not to make nomination a third mode of succession after testamentary or intestate succession.  It concluded that the provisions of the Companies Act have nothing to do with the law of succession. Hence, the view of the Single Judge in Harsha Nitin Kokate’s case (supra) was incorrect and that of the Single Judge in Jayanand Jayant Salgaonkar was correct. Thus, the Division Bench has, for the time being, placed nomination even under the Companies Act / Depositories Act, at par with nomination for other assets, i.e., subservient to a will/ intestate succession.

WHICH IS SUPERIOR – JOINT HOLDING OR NOMINATION?
The big question which most people are asking is that what should be done – a joint ownership or a nomination of both? A joint holder is definitely on a higher pedestal as compared to a nominee since he is already entered as an owner. All that the bank/depositary participant /society needs to do is to strike out the name of the deceased primary member and take the joint holder on record as the primary member. So the descending order of hierarchy when it comes to succession planning would be Will – Joint Holding – Nomination. Of course, one can even place a trust right at the top of the pyramid. Thus, in cases where one is certain that after him the asset should go to a particular person then a joint holding is definitely advisable, e.g., in the case of a husband and a wife. In addition, a nomination may be created as an alternative beneficiary, e.g., in favour of the child of the couple. If there are joint holders, the nomination must be signed by all the joint holders and the nominee’s right would arise only when all the joint holders die.

One overarching fact to be borne in mind is that neither a joint holder nor a nomination creates a legal ownership over the asset in question. That is determined solely on the basis of the will (in cases of testamentary succession) or by the intestate law (e.g., the Hindu Succession Act, 1956 in case of Hindus dying intestate or Indian Succession Act for Parsis dying intestate).

It is advisable that the fact of joint holding/nomination is also reproduced in the will of the person. Moreover, the beneficiaries under the will should be co-terminus with the joint holders/nominees wherever possible to avoid any variance and disputes. Further, always have a habit of reviewing all joint holdings and nominations. There have been several instances of people making nominations or adding joint holders long back and then forgetting about it. In many cases, these past actions come back to haunt the family of the deceased by causing succession hurdles.

CONCLUSION
Considering the confusion and myths surrounding succession planning, joint ownership, nomination, is it not time to entirely redo the Indian Succession Act, 1925? Is it right to interpret succession issues in the light of a 92-year old Act? There should be a comprehensive law dealing with all forms and modes of estate planning across various asset classes. That would go a long way in reducing the pending litigation before our judiciary since a large number of cases pertain to succession disputes!

Prohibition of Benami Property Transactions Act, 1988 (As Amended) – An Overview [Part – I]

In the last couple of years, there has been an immense hue and cry about curbing benami transactions and black money. The number of benami transactions in the real estate and other sectors have increased astronomically. In the absence of an effective regulation, the black or ill-gotten money is easily parked in the opaque real estate industry. Since the year 2014, this issue also assumed significant importance in view of the election manifesto of Bharatiya Janata Party and subsequent focus and determination of the present government, reflected in the substantial amendments to the applicable law and prompt actions initiated for its effective implementation.

The Benami Transactions (Prohibition) Act, 1988 has been completely revamped in the year 2016 by the Benami Transactions (Prohibition) Amendment Act, 2016 and the government is vigorously invoking the amended law in achieving its objective of combating the menace of black money and corruption. The purpose of this article is to provide a brief history of the law on benami transactions, and give an overview of the law dealing with such transactions and the journey of the vital changes in law.

1.    Background & Brief History

A.    Background
a)    The earliest noteworthy mention of benami transactions was in the 18th century when the British had colonised the territory of India. In the case of Gopeekrist Gosain vs. Gungapersuad (1854) 6 MLA 53, it was held that such benami transactions were a part of India’s custom and therefore must be recognised unless otherwise provided by law.

    Thereafter, sections 81 and 82 of the Indian Trusts Act, 1882 extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other.

b)    In the last few decades, many such transactions were entered between parties to deploy ill-gotten wealth and to defraud and frustrate various law enforcement authorities under various laws. In order to remedy this situation the Parliament introduced section 281A in the Income-tax Act, 1961 [the ITA] to prohibit the institution of suits with regards to benami properties. The widespread menace of illegal benami transactions was not effectively curtailed and therefore sections 81 and 82 of the Indian Trust Act, 1882 and section 281A of the ITA were repealed by the Benami Transactions (Prohibition) Act, 1988 w.e.f. 19-5-1988. Thereafter following the recommendations of the 57th Law Commission Report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 was promulgated by the President on 19th May, 1988.

c)    The said Ordinance was subjected to criticism in the media and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly, 130th Law Commission Report submitted certain recommendations as enumerated below:-

–    All kinds of property must be covered by benami transactions.
–    The new law must declare that entering into benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife.
–    Omission of section 94 of the Transfer of Property Act, 1882.
–    Acquisition of such properties under the same procedure as provided in Chapter XXA dealing with acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, of the ITA.
d)    Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Bill was passed by both the Houses of Parliament and on 5th September 1988, it became the Benami Transactions (Prohibition) Act, 1988.

B.    Benami Transactions (Prohibition) Act, 1988 now renamed as Prohibition of Benami Property Transactions Act, 1988

The Benami Transactions (Prohibition) Act, 1988 now renamed by the Benami Transactions (Prohibition) Amendment Act, 2016 as Prohibition of Benami Property Transactions Act, 1988 [the Benami Act] was enacted in order to prohibit all benami transactions and confiscating of property which has been held as benami. The pre-amended Act consisted of only 9 sections out of which Sections 3, 4 and 5 were significant.

–    Section 3 prohibited entering into a benami transaction. The exceptions to the same were as follows:

    “the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife of the unmarried daughter.”

–    Section 4 provided that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same were:

“(a)     where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

–    Section 5 provided that the benami properties shall be acquired by authority without any compensation or payment in return.

C.    Delay in implementation of the Act

The menace of benami transactions has flourished not due to lack of appropriate legal framework but mainly due to non-implementation/lack of proper implementation of the enacted laws and lack of adequate administrative infrastructure. In other words, although 28 years ago the Benami Act was passed by the Parliament, it was not implemented despite the request by the Central Vigilance Commission [CVC] to the government to empower the CVC under the Benami Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the law. Hence, recently the present government brought in a new bill to completely revamp the Benami law in tune with the current circumstances and requirements and to deal with growing challenges.

D.    Benami Transactions (Prohibition) Amendment Act, 2016

The original Benami Transactions (Prohibition) Act, 1988 i.e. the ‘Principal Act’ was woefully inadequate to address the rampant menace of benami transactions in a country with widespread poverty and illiteracy.

    In the recent past, there have been various instances in which people used their unaccounted money to purchase property in name of a fictitious or non-existent person. Therefore, the need for a strong mechanism to combat such activities has become inevitable. The object and purpose of the Benami Transactions (Prohibition) Amendment Act, 2016 is not only to efficaciously prohibit benami transactions but also to prevent evasion of law by illegal practices. The most significant aspect of the Amendment Act is that all the benami properties shall be confiscated after following due procedure of law.

    However, the law extended immunity under the Income Declaration Scheme, 2016 to those who made a declaration in respect of their benami properties.

E.    Development of the law on prohibition of benami transactions
–    On 13th May, 2015, the Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Benami Act i.e. amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions.
–    The Amendment Bill, 2015 was then referred for examination to the Standing Committee on Finance. On 28th April, 2016, the Standing Committee’s report was submitted.
–    On 22nd July, 2016, the government proposed amendments to the Amendment Bill, 2015. On 27th July, 2016 the Amendment Bill was passed by the Lok Sabha and on 2nd August, 2016 the Rajya Sabha approved the same.
–    The Amendment Bill received the President’s assent on 10th August, 2016 and the Benami Transactions (Prohibition) Amendment Act, 2016 [the Amendment Act, 2016] was brought into force.

F.    Reason for enlargement of the Act from 9 sections to 72 sections instead of enacting a new Benami Act

    A question arises as to why the government has chosen to make such a large number of amendments i.e. from 9 sections to 72 sections, instead of enacting a new law altogether.

    This was explained by the Finance Minister during the parliamentary debate, as follows:

    “Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28 year immunity would not have been in larger public interest, particularly if large amounts of unaccounted and black money have been used to transact those transactions. That was the principal object.”

2.    Meaning of Benami Transaction

What is Benami?
The term “Benami” has its origin in the Persian language which implies “without a name”. The term “benami” implies made, held, done, or transacted in the name of (another person). It is used in Hindu law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the principal or beneficial owner.

The benami transaction is any transaction in which property is transferred to one person for a consideration paid by another person. In this kind of transaction the person who pays for the property does not buy it under his/her own name. The person on whose name the property has been purchased is called the benamidar and the property so purchased is called the benami property. The person who finances the deal is the real owner. The property is held for the benefit, direct or indirect, of the person paying the amount.

In simple terminology, benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person; therefore, the former will be the nominal owner and the latter will the real owner of the property. The Privy Council in the case Pether Perumal vs. Muniandy (1908) ILR 35 Cal. 551 held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who has beneficial ownership of the property.

The Amendment Act, 2016 has substituted the definition of ‘benami transaction’ and the substituted definition, considerably expanding the scope of the term, reads as follows.

     “(9) “benami transaction” means, –

    (A) a transaction or an arrangement –

(a)    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
(b)    the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by –

(i)    a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

(ii)    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 participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;

(iii)    any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;

(iv)    any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(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 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.

    Explanation – For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force, –

(i)    consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;

(ii)    stamp duty on such transaction or arrangement has been paid; and

(iii)    the contract has been registered;”

Prior to its substitution, the definition of ‘benami transaction’ read as follows:

“2(a)”benami transaction” means any transaction in which property is transferred to one person for a consideration paid or provided by another person.”

    In the context of pre-amended provisions of the Act, the Supreme Court in the case of G. Mahalingappa vs. G. M. Savitha [2005] 147 Taxman 583 (SC) held that the following findings of fact were arrived at by the appellate court and the trial court, and would conclusively prove that the transaction in question was benami in nature:

(1)    the appellant had paid the purchase money.
(2)    the original title deed was with the appellant.
(3)    the appellant had mortgaged the suit property for raising loan to improve the same.
(4)    he paid taxes for the suit property.
(5)    he had let out the suit property to defendant Nos. 2 and 5 and collecting rents from them.
(6)    the motive for purchasing the suit property in the name of plaintiff was that the plaintiff was born on an auspicious nakshatra and the appellant believed that if the property was purchased in the name of plaintiff/respondent, the appellant would prosper.
(7)    the circumstances surrounding the transaction, relationship of the parties and subsequent conduct of the appellant tend to show that the transaction was benami in nature.
    Similarly, in the context of cases under the ITA, various courts and tribunals have laid down various tests for deciding the issue regarding benami nature of transactions. However, it is important to keep in mind the enlarged scope of the definition of the ‘benami transaction’ substituted by the Amendment Act, 2016.

Meaning of some other important terms

    The Amendment Act, 2016 has substituted or inserted various other important definitions in the Act, some of which are given below for ready reference.

“(8)    “benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;”

“(10)    “benamidar” means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name;”

“(12)    “beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar;”

“(16)    “fair market value”, in relation to a property, means –

(i)    the price that the property would ordinarily fetch on sale in the open market on the date of the transaction; and

(ii)    where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with such manner as may be prescribed;”

“(24)    “person” shall include (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) every artificial juridical person, not falling under sub-clauses (i) to (v);”

“(26)    “property” means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property;”

“(29)    “transfer” includes sale, purchase or any other form of transfer of right, title, possession or lien;”

3.    Prohibition and consequences of  Benami Transactions

A.    Benami Transactions – A punishable Offence

a)    Section 3(1) provides that no person shall enter into any benami transactions.

b)    Section 3(3) provides that whosoever enters into any transaction on or after the date of commencement of Amendment Act, 2016 i.e. 1-11-2016, shall be punishable in accordance with the new Chapter VII i.e. new section 53 of the Act.

c)    Section 53(1) provides that where 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 benami transaction.

d)    Section 53(2) provides that whoever is found guilty of the offence of benami transaction referred to in sub-section (1) mentioned above, 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 twenty-five per cent of the fair market value [FMV] of the property.

e)    The FMV of the property shall be determined in accordance with section 2(16) read with Rule 3 of the Prohibition of Benami Property Transaction Rules, 2016 [the Rules]. Presently, Rule 3 prescribes the methodology of valuation of unquoted equity shares i.e. higher of its cost of acquisition, FMV as per Discounted Cash Flow method and value determined in prescribed manner as per prescribed formula.

B.    Prohibition of the right to recover property held benami

a)    Section 4(1) provides that no suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property.

b)    Section 4(2) provides that no defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property.

C.    Property held benami liable to confiscation.

    Section 5 provides that any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central Government.

D.    Prohibition on re-transfer of property by benamidar.

    Section 6 provides that no person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. Any such re-transfer shall be deemed to be null and void. However, this prohibition shall not apply to a re-transfer made in accordance with the provisions of section 190 of the Finance Act, 2016 i.e. under the Income Declaration Scheme, 2016.

4.    Authorities

    Chapter III and sections 7 to 23 of the Act deal with various authorities under the Act and their powers.

    Section 18 of the Act provides that the following shall be the authorities for the purposes of the Act, namely:

a)    The Initiating Officer;
b)    The Approving Authority;
c)    The Administrator; and
d)    The Adjudicating Authority.
    An Adjudicating Authority shall consist of a Chairperson and at least two other members.

    The Central government has vide notification no. 3288(E), dated 25-10-2016, notified that the Adjudicating Authority appointed u/s. 6(1) of the Prevention of Money-laundering Act, 2002 [PMLA] and the Appellate Tribunal established u/s. 25 of PMLA shall discharge the functions of Adjudicating Authority and Appellate Tribunal under the Benami Act until the appointment of Adjudicating Authority and establishment of Appellate Tribunal under this Act.

    Section 19 deals with the powers of discovery and inspection, enforcing attendance, compelling production of books of accounts and other documents, issuing commissions, receiving evidence on affidavits etc.

    Section 21 provides for the power to call for information while power to impound documents is given in section 22. In addition, section 23 provides for the power of authority to conduct inquiry etc.

5.    Attachment, Adjudication and Confiscation

    Chapter IV and sections 24 to 29 of the Act deal with the attachment, adjudication and confiscation of the benami property.

A.    Notice and attachment of property involved in benami transaction

    Section 24 and Rule 5 provide for issue of notice by the Initiating officer to any person believed to a benamidar and to beneficial owner, provisional attachment of the property for a period not exceeding 90 days, passing of appropriate order for continuing provisional attachment or revocation of the provisional attachment order (after making such inquires and calling for such reports or evidence as he deems fit and taking into account all relevant materials) and in case of order for continuation of provisional attachment or order for provisional attachment, draw up a statement of the case and refer it to the Adjudicating Authority within 15 days of the attachment.

B.    Manner of service of notice
    Section 25 provides for manner of service of the notice on the person named therein either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908 and to be addressed to specified addressees in various cases.

C.    Adjudication of benami property

    Section 26 contains provisions relating to the process to be followed by the Adjudicating Authority in respect of adjudication of benami property. On receipt of a reference from an Initiating Officer, the adjudicating authority shall issue notice within 30 days to (a) the person specified as a benamidar therein; (b) any person referred to as the beneficial owner therein or identified as such; (c) any interested party, including a banking company; (d) any person who has made a claim in respect of the property and provide not less than 30 days to furnish the information sought.

    The Adjudicating Authority shall, after (a) considering the reply, if any, to the notice issued under s/s. (1); (b) making or causing to be made such inquiries and calling for such reports or evidence as it deems fit; and (c) taking into account all relevant materials, provide an opportunity of being heard to the person specified as a benamidar therein, the Initiating Officer, and any other person who claims to be the owner of the property, and, thereafter, pass an order (before the expiry of one year from the end of the month in which the reference under sub-section (5) of section 24 was received) (i) holding the property not to be a benami property and revoking the attachment order; or (ii) holding the property to be a benami property and confirming the attachment order, in all other cases.

D.    Confiscation and vesting of benami property

    Section 27 provides that where an order is passed in respect of any property under sub-section (3) of section 26 holding such property to be a benami property, the Adjudicating Authority shall, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property. In case an appeal has been filed against the order of the Adjudicating Authority, the confiscation of property shall be made subject to the order passed by the Appellate Tribunal u/s. 46.

    The procedure for confiscation of the property is prescribed in Rule 6, which provides that the adjudicating officer shall send a copy of the order of confiscation to the Authorised Officer. The rule contains separate procedure for confiscation in respect of immovable property and moveable property.

    It is further provided that nothing in sub-section (1) shall apply to a property held or acquired by a person from the benamidar for adequate consideration, prior to the issue of notice under sub-section (1) of section 24 without his having knowledge of the benami transaction.

    Where an order of confiscation has been made, all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation. Any right of any third person created in such property with a view to defeat the purposes of this Act shall be null and void.

E.    Management of properties confiscated

    Section 28 provides that the Administrator shall have the power to receive and manage the property, in relation to which an order of confiscation has been made. Rules 7, 8 and 9 contain relevant rules in respect of receipt of the confiscated property, management of confiscated property and disposal of the same.

    The Central government has vide notification no. 3290 (E), dated 25-10-2016, directed that the Income-tax Authorities specified u/s. 116 of the Income-tax Act, 1961, as mentioned in the notification, to exercise the powers and to perform the functions of the ‘Authority’ i.e. Approving Authority, Initiating Officer and Administrator, under the Act.

F.    Possession of the property.

    Section 29 provides that where an order of confiscation in respect of a property has been made, the Administrator shall proceed to take the possession of the property. The Administrator shall (a) by notice in writing, order within seven days of the date of the service of notice to any person, who may be in possession of the benami property, to surrender or deliver possession thereof to the Administrator or any other person duly authorised in writing by him in this behalf; (b) in the event of non-compliance of the order referred to in clause (a), or if in his opinion, taking over of immediate possession is warranted, for the purpose of forcibly taking over possession, requisition the service of any police officer to assist him and it shall be the duty of the officer to comply with the requisition.

6.    Appeals

    Chapter V and sections 30 to 49 of the Act and Rule 10 together with Form 3, contain relevant provisions relating to appeal to Appellate Tribunal against the order of the Adjudicating Authority and Appeal to high Court against the order of the Appellate Tribunal.

7.    Offences and Prosecution

    In addition to confiscation of the benami property and penalty for benami transactions mentioned earlier in the context of section 3, section 54 provides that any person who is required to furnish information under the Benami Act knowingly gives false information to any authority or furnishes any false document in any proceeding under the Benami Act, shall be punishable with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine which may extend to 10% of the FMV of the benami property.

    No prosecution can be instituted against any person in respect of any offence u/s. 3, 53 or 54 without the prior sanction of the CBDT.

8.    Other Important provisions

a)    Certain transfers to be null and void
    
     Section 57 provides that notwithstanding anything contained in the Transfer of the Property Act, 1882 or any other law for the time being in force, where, after the issue of a notice u/s. 24, any property referred to in the said notice is transferred by any mode whatsoever, the transfer shall, for the purposes of the proceedings under this Act, be ignored and if the property is subsequently confiscated by the Central Government u/s. 27, then, the transfer of the property shall be deemed to be null and void.

b)    Proceedings etc. against legal representatives

    Section 66 provides where a person dies during the course of any proceeding under the Benami Act, any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased.

    Any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative and all the provisions of this Act, except section 3(2) relating to entering into benami transaction prior to 1-11-2016 and the provisions of Chapter VII relating to offences and prosecution, shall apply accordingly.

    Where any property of a person has been held benami u/s. 26(3), then, it shall be lawful for the legal representative of the person to prefer an appeal to the Appellate Tribunal, in place of the person and the provisions of section 46 relating to appeals to Appellate Tribunal shall, so far as may be, apply, or continue to apply, to the appeal.

c)    Provisions of the Act to override other laws

    Section 60 clarifies that the provisions of the Benami Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force.

    Section 67 provides that the provisions of the Benami Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

In this connection, the Finance Minister, during the parliamentary debate, clarified as follows:

“Is this law in conflict with the Income-tax Act in any way? The answer is ‘no’. The Income-tax deals with various provisions of taxation, the powers to levy the tax and prescribes procedures etc. This particular law deals with any benami property which is acquired by a person in somebody else’s name to be vested in the Central Government. So the two Acts are supplementary to each other as far as this Act is concerned.”

The above gives an overview of the amended Benami law. In the next part of the Article, we shall deal with certain important questions which are likely to arise in the mind of a reader.

Imprisonment And Penalty Under Rera Realty Firm’s Directors, Partners And Officers, Beware!

BACKGROUND OF REAL ESTATE LAW

Real estate business, perceived to be non-transparent, is now
required to fall in line with stringent requirements of the Real Estate (Regulation
and Development) Act, 2016 (“RERA”).

Under RERA, real estate companies are required to furnish
exhaustive particulars to the regulator. Some of these are:

–  Promoters to do prior registration of
projects with the regulator before advertising, booking or selling apartments;

–   Each phase of a project must be registered
separately as a standalone;

–   Every application for completion certificate
should have minute details, including past project details, delivery status and
legal cases pending against the promoter;

–   Developer must be ready with approval and
commencement certificate, sanctioned plan and project details at all times.

Offences under RERA will attract serious consequences
including imprisonment in some cases. This is intended to deter promoters,
directors, partners and officers of the real estate concerns from indulging in
financial malpractices and cheating.

Recently, promoters of a well-known realty company were
arrested by the Economic Offences Wing (EOW) of the Delhi Police for alleged
fraud in their real estate project in which Rs. 363 crore were collected from
customers. It is alleged that the promoters siphoned Rs. 200 crore off their
project and stashed the same abroad. They have also been accused of duping
buyers who booked flats in their residential project.  

Nearing 1 May 2017, the implementation date of RERA,
the government notified the remaining sections of RERA on 19 April 2017. This
has put an end to the speculation about extension of implementation deadline.
Thus, RERA is viewed as a positive step and shows the government’s firm resolve
to protect home buyers’ interest.

RERA – A NEW LAW

RERA is a new legislation. Most of its provisions came into
force on 1 May 20161. Remaining provisions came into force on 1 May
20172. Thus, now all provisions are notified and the entire Act has
come into force by 1 May 2017. The following are the provisions that were
notified on 19 April to come into force on 1 May 2017. [The others were earlier
notified and came into force a year earlier on 1 May 2016].

(i)   Sections 3 to 10: Registration of real estate
projects and registrationof real estate agents.

(ii)  Sections 11 to 18: Functions and duties of
promoter.

(iii)  Section 19: Rights and duties of allottees

(iv) Section 40: Recovery of interest or penalty or
compensation and enforcement of order

(v)  Sections 59 to 70: Offences, penalties and
adjudication

(vi) Section 79: Bar of jurisdiction

(vii) Section 80: Cognisance of offences.

Section 69 of RERA which [has come into force on 1 May 2017]
deals with the liability of promoters, directors, partners and officers of the
realty companies, firms and other non-individual entities, came into force on 1
May, 2017.

Since RERA is new, its provisions including section 69 would
need to be interpreted on the basis of similarly worded provisions of other
legislations. For example, section 42 of the Foreign Exchange Management
Act, 1969 (FEMA) shows that the same is identically worded and corresponds
to section 69 of RERA. Accordingly, provisions of section 69 may be interpreted
by relying on the propositions concluded in the decisions rendered u/s. 42 of
FEMA or similarly worded sections in other laws.

 

1   See Notification
No. SO 1544 (E) [F No. O-17034/18/2009-11] dated
26 April, 2016

2   See
Notification No. 1216(E) [F No. O-17034/275/2017-H] dated
19 April, 2017

Offences under RERA are punishable under Chapter VIII thereof
(sections 59-68). The gist of the penal provisions is given below.

Sr

Description of offence

Penal consequence

1

Violation of section
3 requiring prior registration of the real estate project

Penalty upto 10% of
the estimated project cost

2

Continuing violation
of section 3

Imprisonment upto 3 years and/or
fine upto further 10% of the estimated project cost

3

Providing false
information or failure to apply for registration alongwith documents
specified under section 4

Penalty upto 5% of
the estimated project cost

4

Failure to comply
with other provisions (i.E. Other than section 3 and 4)

Penalty upto 5% of
the estimated project cost

5

Real estate agent’s
failure to do prior registration or comply with the functions specified in
section 10(2)

Penalty @10,000/-
per day of default with the ceiling of 5% of cost of apartment / land /
building

6

Promoter’s failure
to comply with orders of Authority

Penalty upto 5% of
the estimated project cost

7

Promoter’s failure
to comply with Tribunal’s Order

Imprisonment upto 3 years and/or
fine upto 10% of the estimated project cost

8

Real estate agent’s
failure to
comply with orders of the Authority

Penalty upto 5% of
the estimated cost of plot/apartment/building

9

Real estate agent’s
failure to comply with Tribunal’s order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of plot/apartment/building

10

Allottee’s failure
to comply with orders of Authority

Penalty upto 5% of
estimated cost of the plot/apartment/building

11

Allottee’s failure
to comply with Tribunal’s Order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of the plot/apartment/building

The persons liable to punishment would often involve
companies, partnership firms and association of individuals. As will be seen
from the abovementioned gist, the punishment is by way of stiff fine and in
four cases, also by way of imprisonment.

A partnership firm is merely a compendious description of its
partners. However, a company is a juristic entity distinct from its
shareholders1. In case of a partnership, it may also be difficult to
link any partner directly with the offence committed by the firm. For this
reason, in the provisions of a statute dealing with offences, partnership firms
are treated as companies. In section 69, this is evident from the Explanation
which is extracted here:

________________________________________

1   Bacha F. Guzdar vs.
CIT (1955) 27 ITR 1 (SC)

“Explanation
— For the purpose of this section—

(i)  “Company” means any body corporate and
includes a firm or association of individuals; and

(ii) “Director”, in relation to a firm, means a
partner in the firm.”

In terms of the Explanation to section 69, a company
means a body corporate and includes a firm or association of individuals; and a
director in relation to a firm, means a partner in the firm. A firm is not a
distinct legal entity and, prima facie, proceedings cannot be initiated
against a firm. Under the Explanation, however, a firm is regarded as a
company for the purposes of this section and therefore, proceedings against a
firm would be valid.

It may be noted that the definition of “company” is inclusive
in nature and could be interpreted in wider manner so as to include even other
entities and persons.

GIST OF SECTION 69 OF RERA

Before section 69 is analysed in detail, it would be better
to review the gist of its provisions.

Section 69 deals with the offences committed by firms,
companies and association of individuals. A company has been defined to include
a firm or association of individuals for the purposes of this section. In terms
of section 69(1) and 69(2), therefore, the persons who are liable to be charged
with the offence committed by the company, firm, association, etc. would
include the following persons:

–  A person in charge of the business of the
company, firm, association, etc.;

–   A person who is responsible to the company,
firm, association, etc. for the conduct of its business;  

–   Director of the company;

–   Partner of the firm;

–   Secretary of the company;

–   Manager of the company, firm, association, etc.;

–   Any other officer of the company, firm,
association, etc.

If an offence under RERA is committed by a company, firm,
association, etc., both, the person in charge of the company firm,
association, etc. and the company, firm, association, etc. are
deemed to be guilty of such offence. The person charged with the offence,
however, will not be liable to punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent commission of such offence. Where the offence has been committed by a
company with the consent or connivance of, or is attributed to any neglect of
secretary, director, manager or any other person in charge of the business of
the company, such person will also be deemed to be guilty of the offence and
liable to be proceeded against and punished accordingly.

RATIONALE UNDERLYING SECTION 69

Since a company is not a physical person, the pain of
punishment cannot be inflicted on it. Unlike an individual, the company does
not have mind that can be guilty of criminal intent. Hence, for a company,
punishment under RERA is not practical. It is, therefore, necessary to punish
the functionaries of the company, association, etc. whose duties,
responsibilities and conduct represent the policy of the company.

The Joint Committee of Parliament had also discussed the
spirit and content of the various clauses in the Bill (which was eventually
enacted into the repealed FERA) pertaining to vicarious liability of the
functionaries of company, etc. The following observations made by the
Joint Committee are enlightening:

“…..in corporations also, extent
of vicarious liability cannot be extended beyond the acts which are punishable
with fines. First, a clear distinction should
be made between vicarious liability of the master for acts of the servant, and
imputation of the actions of a person in the employment, or acting on behalf of
the Corporation which are properly imputable to the latter. Imputed liability is not vicarious but original
liability. The principles of vicarious responsibility has been developed in
the law of tort, because it has seemed socially and economically necessary to
hold the master – and that it is in many cases a corporation liable vis-à-vis
third parties for acts committed within his sphere of operations. The master is held liable to recover against his
servant. The law of tort is, however, concerned with the economic
adjustment of burdens and risks, and the principle of vicarious liability is
applicable to the criminal law only in so far as the criminal law is
approximated to the objectives of the law of tort i.e. where the law is
essentially concerned with the enforcement of certain objective standards of
conduct, through the imposition of fines, rather than with the individual guilt
of a person. This point to the area of strict responsibility which is largely,
though not entirely, co-extensive with the area of so-called public welfare
offences”. [Emphasis supplied]

PERSONS LIABLE TO IMPRISONMENT AND/OR FINE

A reference to the Explanation to section 69 of RERA
shows that the provisions of section 69 are applicable to the persons in charge
of the business of or responsible to the companies, partnership firms, body
corporates and any other associations of individuals. The word “includes”
in the definition of the “company” given in the Explanation seems to
expand the sweep of section 69 so as to also cover the other non-individual
entities, such as, trust, society, etc. Directors, partners, managers,
secretaries and other officers of the company, body corporate, associations of
individuals, trusts, societies, etc. would be covered by section 69 provided
any such person was regarded as “in charge of” or “responsible to”
the company for the conduct of its business. While the company would be primarily
liable for the consequences of the offence committed by it under RERA, the
director, partner, manager, secretary, other officer and functionaries of the
company, partnership, associations of persons, trust, society, etc.
would be vicariously liable for the offences committed under RERA by the
primary offender. Indeed, the charge of vicarious liability u/s. 69 can be
fastened on such functionary only after establishing that he was in charge of
or responsible to the company for the conduct of its business at the time
when the offence was committed by the company. A review of various
provisions of RERA shows that the business in real estate sector conducted in
the form of non-individual entities, such as, a company, a partnership firm,
AOP, trust, society, etc. would attract the vicarious liability provided
u/s. 69. Thus, the following persons connected with the real estate business
would be covered under the wide sweep of the vicarious liability provided u/s.
69 of RERA and would be punishable with fine and/or imprisonment, as the case
may be.

–   Promoters, directors, partners and officers
of realty companies, firms, etc., and builders, developers, etc.
engaged in the real estate business

–   Companies, firms and association, etc.
in the business of Real estate agents

–   Allottees of the plots, apartment, and
buildings

–   Architects

–   Engineers

–   Various entities defined as “person”
in section 2 [zg]

All the abovementioned persons concerned with or engaged in
the real estate business in the form of company, partnership firm, AOP,
society, trust and other non-individual entities and the functionaries of such
entities are covered under the wide sweep of section 69 of RERA and would be
punishable with fine and/or imprisonment, as the case may be.

Accordingly, show cause notices for the offence under RERA
may be issued to such functionaries in addition to the show cause notice issued
to the non-individual entities, i.e., company, partnership firm, AOP, trust,
society, etc.

LIABILITY OF THE PERSON-IN-CHARGEOF THE COMPANY, FIRM, ETC.

Section 69(1) deals with the directors, senior executives and
employees of the company and partners and key officers of partnership firms,
associations of individuals, etc. who are in charge of or responsible to
the company, firm, etc. for the conduct of its business. Where an
offence has been committed by a company under RERA, apart from the company
being liable for such offence, the person who was in charge of or was responsible
to the company for the conduct of its business at the time of such offence
is also liable to the penal consequences of the offence. The offence may be of
any provision of RERA. Indeed, the deeming provision that the offence has been
committed by such person is a matter of presumption. Such presumption can be
rebutted by establishing that the offence was committed without the knowledge
of the person or that he had exercised all due diligence to prevent the
commission of such offence. It is settled law1 that a person, who
has failed to carry out a statutory obligation, cannot be punished unless he
either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest or that he acted in conscious disregard of his
obligations.

In Girdharilal Gupta vs. D. N. Mehta2, a
leading case on vicarious liability, it has been held by the Supreme Court that
such provision [Corresponding to section 69(1)] is a highly penal provision
since it makes the person in charge of or responsible to the company for the
conduct of its business, vicariously liable for the offence committed by the
company. Therefore, this section must be construed strictly. In other words, to
charge a person with vicarious liability for the impugned offence committed by a
company, it is necessary for the Department to establish the following:

__________________________________________________________

1   Hindustan Steel Ltd
v. State of Orissa (1972) 83 ITR 26 (SC).

2    AIR
1971 SC 28

–   at the time the offence was committed by the
company, the person was in charge of or was responsible to the company for the
conduct of the business of the company; or

–   the offence was committed with the consent or
connivance of the person; or

–  the offence was attributable to the neglect
of the person.

“PERSON-IN-CHARGE” –
CONNOTATION OF

The material expression in section 69(1) is the “person
in-charge of”. Connotation of this expression was examined by the Supreme Court in Girdharilal Gupta vs.
D. N. Mehta3. This expression has been explained by the
Supreme Court in following words.

“A person ‘in-charge’ must mean the person in overall control of the
day-to-day business of the company. This inference follows from the
wordings of s/s. (2). It mentions director, who may be a party to the policy
being followed by the company and yet not be
in-charge of the business of the company. Further, it mentions manager, who
usually is in charge of the business but not in overall charge. Similarly, the
other officers may be in charge of only some part of business”. (Emphasis
supplied)

In this connection, one may also note the decision of the
Delhi High Court in Umesh Modi vs. Dy Director4 in which
distinction has been drawn between the directors in charge of day to day
affairs of the company’s business and other directors who are not.

A person cannot be convicted of the offence merely because
he, as a partner, has a right to participate in the firm’s business under the
terms of the Partnership Deed5. When a person in charge of business
goes abroad, it would not mean that he ceases to be in charge, unless it is
established that he gave up the charge in favour of another person.

Similarly, it is only that partner/director who is in charge
of or responsible to the firm/company who could be made liable u/s. 69 and,
therefore, those partners who had not signed the relevant documents, say,
regarding exports, could not be visited with penalty concerning the offence
pertaining to export transactions6.

__________________________________________________

3   AIR 1971 SC 2162

4   [2015] 130 SCL 621
(Del)

5   State of Karnataka
vs. Pratap Chand (1981) 128 ITR 573 (SC).

6   Sofi
Carpets vs. Directorate of Enforcement (1990) 50 Taxman 439 (FERAB).

In the undernoted case1, a company was found
guilty of contravention of FERA. Adjudication proceedings were initiated
against the company and also against the appellant in his capacity as a
director. On investigation, it was found that the bank certificate furnished
during the investigation showed that another director was exclusively in charge
of the company’s accounts. This certificate was, however, not brought on
record. The matter was remanded for identifying the director who was in charge
of and was responsible to the company for the conduct of its business. The
expression “person in charge of and was responsible to the company”, was
interpreted threadbare in the undernoted case2 in which it was held
that the expressions “in charge of” and “responsible to” are
synonymous. A person in charge of the business was, thus, always responsible
therefor3.

DISTINCTIVE FEATURE OF SECTION 69

However, the said proposition is not applicable to section 69
of RERA because of the word “or” between the two expressions “was in charge
of” and “was responsible to” in section 69(1). To this extent, section
69 is different from the corresponding provisions in other laws, such as,
section 42 of FEMA, section 62 of Prohibition of Benami Property
Transactions Act, 1988. In those Acts, the word between the said two
expressions is “and” whereas in section 69 of RERA, it is “or” between the said
two expressions.

JOINT AND SEVERAL LIABILITY OF THE COMPANY AND THE PERSON-IN-CHARGE

The words “as well as” in section 69(1) clearly suggest that
the liability for the offence committed by the company is joint and several as
between the company and its director, partner or functionary who, at the time
the offence was committed, was in charge of and responsible to the company,
firm, etc. for the conduct of its business.

Accordingly, it would not be proper for the person charged
with the offence u/s. 69(1) to argue that the company should be charged first
and that his being charged for the same offence was conditional upon the
company being first so charged. This argument does not appear tenable because
the section does not lay down any condition that the person-in-charge of the
company cannot be separately charged for the offence committed by the company
when the company itself was not prosecuted. From the words “as well as”, it is
clear that each such person or any one of them may be charged separately or
alongwith the company, the only requirement for the same being that there
should be a finding that the offence was committed by the company4.

______________________________________________________

1   Biren N. Shah v. DE
(1999) 104 Taxman 496 (FERAB).

2   N. Sasikala v.
Enforcement Officer (1998) 93 CC 355 (Mad).

3   ANZ
Grindlays Bank, Bombay v. Directorate of Enforcement (1999) Cr LJ 2970 (Bom).

In the undernoted case5, the appellant was
mother–general of a registered society running a convent. She was charged with
contravention of certain FERA provision. On appeal, it was held that the
appellant could not be proceeded against for transactions made on behalf of a
registered society unless the society was found guilty of the contravention.
Similarly6, if the charge against the company itself was not
established, none of the directors of the company could be held liable.Thus, it
would be irrational to charge a person mentioned in that section with vicarious
liability independent of the proceedings to first charge the company for the
offence.

In Raman Narula vs. Director7, the Delhi
High Court has held that where no factual basis was laid by the Directorate for
alleging that the noticee was in-charge of and responsible to the company for
conduct of its business, he could not be held vicariously liable for the
alleged contravention by the company.

BURDEN OF PROOF – ON THE DEPARTMENT

A reading of section 69(1), the Proviso to section
69(1) and section 69(2) offers an interesting review of “burden of proof”.

Section 69(1) shows that the burden of proof is on the
Department to establish the following:

–  The company, firm, etc. has committed
offence of any provisions of RERA.

–  At the time the offence was committed, the
person charged with the offence was in charge of the company, firm, etc.
or

–   At the time the offence was committed, the
person was responsible to the company, firm, etc. for the conduct of its
business.

__________________________________________________________________________________________________

4   Sheoratan Agarwal
v. State of M P AIR 1984 SC 1824 (rendered in the context of the analogous
provisions of section 10 of the Essential Commodities Act, 1955). Per contra:
Union of India v. Annamalai (1987) 11 ECC 240 (Mad).

5   Nambibai Mary v.
Directorate of Enforcement (1990) 50 Taxman 534 (FERAB).11          N Sasikala v. Enforcement Officer
(1998) 93 CC 355 (Mad).

6   Shirin Sabbir
Rangwala (Mrs) v. Directorate of Enforcement (1991) 55 Taxman 39 (FERAB);
Nowrosjee Wadia Sons (P) Ltd v. Directorate of Enforcement (1999) 106 Taxman
551 (FERAB); Rakesh Jain v UoI [2015] 53 Taxmann.com 133 (Del).

7     [2014] 216 SCL
120 (Del)

Unless the Department discharges the burden of proving the above
facts, the Department’s action u/s. 69(1) would be ab initio void1.

As regards the nature of
the burden of proof under the Proviso to section 69(1) and u/s. 69(2), a
reference may be made to the relevant synopsis headings (infra).

In the undernoted case2,
Special Director called the petitioner for personal hearing. Petitioner filed
writ petition contending that he had no role with regard to remittances and
receipts of foreign exchange in the conduct of IPL in 2009 in South Africa and
that a separate committee was set up to administer IPL with a separate bank
account to be operated by the Treasurer. On these facts, it was held that as
far as opening and operating bank account of IPL and obtaining permission of
Reserve Bank for making remittances or receipts of foreign exchange was
concerned, the petitioner was not in charge of and responsible for such
operational matters. Accordingly, it was considered necessary for adjudicating
authority to form the opinion whether the petitioner was at all covered by the
substantive part of section 42(1) of FEMA [section 69(1)].

Likewise, in the undernoted case3, the appellant
contended that he was not aware of the transaction in question as he was not
looking after day to day affairs of the company. The Department failed to prove
that the appellant was in charge of affairs of the company and he was also
looking after day to day affairs of the company including the transaction in
question. It was also noted that similar penalty on other directors was set
aside by the High Court. Accordingly, the penalty imposed on the appellant was
also set aside.

PRIVATE AGREEMENT – CANNOT OVERRIDE THE STATUTORY PROVISION

In the undernoted case4, there was a change in
ownership and management of a company pursuant to an agreement. The agreement
provided that all personal liabilities attached to the office of the managing
director or director will continue to be the personal liabilities of the
directors under whose charge the offence was committed and the incoming
directors were not responsible for the offence committed prior to the takeover.
On appeal by the incoming directors who contested the charge, it was held that
such term in the agreement cannot absolve the company and the present
management merely because the offence was committed before the present
management took over. It was held that the terms of the agreement could not
override statutory provisions as there is no estoppel against statute.

_____________________________________________________________________________________________________________________________

1   See Sayed Wahid vs.
Director of Enforcement (1988) 37 Taxman 16 (FERAB); See Also: Kavita Dogra vs.
Director (2014) 126 SCL 182 (Del).

2   Shashank Vyanktesh
Manohar vs. Union of India (2013) 122 SCL 317 (Bom)

3   Sanjay Dalmia vs.
Special Director (2014) 123 SCl 311 (ATFFE).

4   Iyer & Sons Pvt
Ltd vs. Directorate of Enforcement (1990) 53 Taxman 160 (FERAB).

EXERCISE OF DUE DILIGENCE – PROVISO GIVES BENEFIT OF DOUBT

In the undernoted case5, the Chairman of the appellant
company had given power-of-attorney to conduct the company’s business at the
time when contravention of a FERA provision took place. It was held that though
the Chairman would come within the meaning of “a person in charge of and
responsible to the company” for the conduct of its business at the time of
the contravention, he was entitled to the benefit of the Proviso to
section 68(1) [corresponding to the Proviso to section 69(1)] since he
had exercised all due diligence to prevent the contravention.

LIABILITY UNDER SECTION 69 IS NOT ABSOLUTE

In the undernoted case6 , the Supreme Court has
once again observed that while deciding the matter, it is open for the Court to
consider that the liability of the person is vicarious or that the offence was
committed without his knowledge or neglect.

Thus, even if the documents relied upon indicate that the
offence was committed, it would not be a ground for denying a person inspection
of all such documents7 .

ILLUSTRATIVE CASES

Having regard to the principles discussed above, some
illustrative cases may be reviewed in which the person-in-charge argued on
various grounds that he cannot be charged for the offence committed by the
company.

DIRECTOR

Director of a company may
be held liable by virtue of section 69(2) if the offence was committed with his
connivance and he had actively acquiesced in the commission of the offence1.
Likewise, where the Director was duty-bound to supervise the sale of foreign
currency which was physically handled by his subordinate, the director can be
held liable for the offence arising from such sale2.

_____________________________________________________________________

5   Pheroze Kudianavala
Pvt Ltd vs. Directorate of Enforcement (1991) 54
Taxman 164 (FERAB)

6   AIR 1971 SC 2162;
see also: Lalit Kumar Modi vs. Special Director (2014) 125 SCL 330 (Bom).

7   Lalit
Kumar Modi vs. Special Director  (2014)
125 SCL 330 (Bom); Shashank Vyanktesh Manohar vs. Union of India (2013) 122 SCL
317 (Bom)

The nature of liability of a director is merely vicarious.
Accordingly, a director cannot be held guilty3 without first, the
company being held guilty and that, too, after adducing reasons for invoking
his vicarious liability.

Section 69(1) extends the liability, by a deeming fiction,
only to such directors who, at the relevant time, were in charge of or were
responsible to the company for the conduct of its business. In the undernoted
case4, petitioners had ceased to be directors by the company on 14
November, 1997. This was disclosed in Form No. 32 filed with the Registrar of
Companies. The export proceeds were to be realised by the company for the year
ended 31 March 2008. It was held by the Delhi High Court that the contravention
in respect of such export receivable could take place only after 31 March 2008
by which time the petitioners ceased to be directors of the company. On this
ground, the submission of the petitioners (that the proceeding against them was
not sustainable in law), was accepted by the Delhi High Court by relying on the
decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd vs. Neeta Bhalla5.

However, in ANZ Grindlays Bank Ltd vs. Director6,
the Supreme Court has held that even if the company cannot be punished, it does
not mean that the persons referred to u/s. 68(1), (2) of FERA [section 69(1),
(2)] cannot also be punished. Indeed, a Director who had ceased to be a
director as evidenced by form No. 32, cannot be said to be in charge of the
affairs of the company or responsible for the conduct of its business in
respect of the transactions after he ceased to be a director7.

_____________________________________________________________________________

1   Directorate of
Enforcement v. South India Viscose Ltd (1990) 50 Taxman 501 (FERAB).

2   Travels &
Rental (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

3   C R Das Gupta v.
Special Director (2000) 112 Taxman 608 (FERAB); Eupharma Laboratories Ltd v.
Enforcement Directorate (2000) 110 Taxman 469 (FERAB); Nowrosjee Wadia &
Sons P Ltd v. Director of Enforcement (1999) 106 Taxman 55‘; S P Singh v.
Director of Enforcement (1990) 104 Taxman 503 (FERAB).

4   Bhupendra V. Shah v.
Union of India – WP(C) 19881 of 2004, WP(C) 26 and WP(C) 1038 of 2005 decided
by Delhi High Court on 26 March 2010; M M Shah v. Dy Director (2010 104 SCL 79
(Bom)

5   (2005) 8 SCC 89.

6   (2005) 58 SCL 350
(SC).

7   Bhupendra
V. Shah v. Union of India (WP/C 19881/04 decided on 26-3-2010 by Delhi High
Court); M. M. Shah v. Dy Director (2010) 104 SCL 79 (Bom)

It is possible in some cases that a director is merely
concerned with laying down the policy for the company’s business and is not
concerned with the day to day or operational matters of the company. This
aspect was examined by the Allahabad High court in R. K. Khandelwal vs.
State8. In this decision, Allahabad High Court has observed that
there can be directors who merely lay down the policy and are not concerned
with the day to day working of the company.

Accordingly, the mere fact that a person is a director of the
company does not automatically make him liable for the offence committed by the
company particularly when the other ingredients of section 69(1) are not
established so as to make him vicariously liable. In this respect, a reference
may also be made to the Supreme Court decision in S M S Pharmaceuticals Ltd
vs. Neeta Bhalla9. In this case, the Supreme Court has
categorically held that the vicarious liability is cast on persons who may have
something to do with the transaction complained of and not on the basis of
merely holding a designation or office. It would depend on the role he plays
and not on his designation or status. The said decision was rendered in respect
of section 141 of the Negotiable Instruments Act but was held by the Bombay
High Court as applicable to section 42 of FEMA [section 69] as the wordings of
both the provisions are in pari uthoriz [see: Shashank Vyanktesh
Manohar vs. Union10 ].

MANAGING DIRECTOR

Normally, managing director is appointed by an agreement with
the company or by a resolution of the company or by the company’s Memorandum and
Articles of Association. These are the sources from which the managing director
derives the powers of management entrusted to him. Thus, if the managing
director is to be charged for the offence committed by the company, it would
not be sufficient for the Department to merely make an allegation to that
effect without anything more. For charging the managing director with the
vicarious liability u/s. 69(1), first of all, the burden of proof must be
discharged by the Department by adducing appropriate evidence. If, however, the
Department fails to bring sufficient evidence to discharge such burden, the
managing director cannot be charged for the offence committed by the company11.
Where, however, the Managing Director was dutybound to supervise the sale of foreign
currency which was physically handled by his subordinate, the Managing Director
can be held liable for the offence concerning such sale1 .

_______________________________________________________

8   [1964] 62 A L J 625

9   [2005] 63 SCL 93
(SC)

10  [2013] 37
taxmann.com 151 (Bom), para 35]

11   E
Merck (I) Ltd v. Director of Enforcement (1988) 39 Taxman 47 (FERAB).

However, a reference may be made to another decision2 in
which managing directors of two companies which were charged with contravention
of FERA were deemed guilty of such contravention in terms of section 68(1)
[section 69(1)].

EX-DIRECTOR

In the undernoted case3, the company and its
ex-director were charged for failure to repatriate export proceeds. On appeal
by the ex-director, it was held that penalty on ex-director was justified since
he did not take reasonable steps to repatriate export proceeds. It was
particularly observed that he had not sought intervention of Indian and Russian
diplomatic authorities in time in respect of export proceeds receivable from
Russia.

In a similar situation, it was held by the Delhi High Court4
that the ex-director was not vicariously liable where there was no evidence to
show in what manner she was responsible to the company for the conduct of its
business. Where the show cause notice on the ex-director was served at the
address of the company at the time when he had ceased to be a director, it was
held that such service was not proper service and the Order based on such
improper service was unsustainable in law5.

NON-EXECUTIVE DIRECTOR

Can a director of the company who is not in full time
employment and who is not involved in the day-to-day management of the company
be charged with contravention by invoking section 69(2)? Having regard to the
aforesaid discussion on the principles of the burden of proof u/s. 69(2), the
answer is ‘no’. This answer has greater relevance to the professional
directors, independent directors and the nominees of the financial
institutions. The proposition that such director, simpliciter cannot be charged
with the offence committed by the company is fortified by the undernoted
decision of the Calcutta High Court6.

PROFESSIONAL/NOMINEE DIRECTOR

In the undernoted case7, the Bombay High Court
held that nominee/professional director cannot be vicariously held liable for
acts of commission or omission of subordinates.

1   Travels &
Rentals (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

2   Telco
Ltd v. Special Directorate of Enforcement (1991) 55 Taxman 85 (FERAB).

3   Dheklapara Tea
Company Ltd v. DE (1998) 100 Taxman 470 (FERAB).

4   Kavita Dogra v DoE
[2014] 126 SCL 182 (Del)

5   Shailendra Swarup v
Special Director [2015] 54 taxmann.com 79 (Del)

6   Bhagwati Prasad Khaitan v.
Special Director of Enforcement (1977) CrLJ 1821 (Cal).

PROPRIETOR

Business concerns are often floated in the names which may
not contain proprietor’s name. Ostensibly, therefore, the show cause notice may
be issued in the name of the concern as also in the name of the proprietor. The
moot point, however, is whether it was in order to invoke section 68(1) of FERA
[corresponding to 69(1)] at all? This question has been examined in the
undernoted case8 in which it was held that a proprietary concern and
its proprietor both are same. Hence, section 68(1) [section 69(1)] cannot be
invoked in case of a proprietary concern.

PARTNER

Can a partner be charged for the offence committed by the
firm? The answer appears to be ‘yes’. In principle and by analogy, vicarious
liability could be extended to contravention by partnership firms2.
However, having regard to the Explanation defining the “company” and
“director”, coupled with the Proviso to section 69(1), a partner cannot
be charged unless the following two conditions are fulfilled.

Firstly, the Department has discharged the following
triple-burden of proof.

–  The partnership had committed offence of any
provision of RERA;

–   At the time when the offence was committed,
the partner was in charge of the business of partnership; or

–   At the time the offence was committed, the
partner was responsible to the partnership firm for the conduct of its
business.

Secondly, the partner was unable to prove that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent commission of the offence. Thus, where the non-resident
partners were fully aware of the affairs of the appellant firm as also the
affairs of the foreign buyers who were related to them, such non-resident
partners can be held vicariously liable for the offence10. On the
other hand, where the non-resident partner was employed abroad and had not
taken part in the day to day affairs of the firm, he could not be held liable
for the offence committed by the firm1

_____________________________________________________________________________________________

7   M M Shah v. Dy
Director (2010) 104 SCL 79 (Bom)

8   Apex Exports &
Baljeet Singh v. DE (1997) 92 Taxman 452 (FERAB).

9   Brij Trading Co. v
Enforcement Directorate (2014) 126 SCL 118 (Del)

10  Simertex v.
Director (2006) 69 SCL 177 (ATFE).

.

Assuming that the Department succeeds in discharging such
triple-burden of proof, still if the partner is able to rebut the charge in
terms of the Proviso, he cannot be punished2. Thus, penalty cannot
always be imposed on managing partner3.

However, where the firm is penalised for the offence, the
partners of the firm cannot be penalised again for the same offence since
partnership firm is just a compendious description for the partners
constituting the firm and the firm does not exist independently of the partners
particularly for the purposes for imputing the penal liability4.

In the undernoted case5, a partnership firm was
charged with failure to repatriate export proceeds. On investigation, it was
found that the partner in charge had taken “reasonable steps” to repatriate
export proceeds. On appeal, it was confirmed that reasonable steps were taken
to repatriate the export proceeds. It was held that reasonable steps taken by the
partner should be regarded as reasonable steps taken by the firm. It was also
held that, once the finding was reached that one partner had taken reasonable
steps to repatriate export proceeds, the charge cannot be sustained either
against the firm or against any other partner. The fact that the firm was
already penalised is also a factor to be weighed while deciding the liability
of partners under this section6.

In the last-mentioned case, the Court examined the
phraseology of section 140 of the Customs Act which was in pari uthoriz
with the relevant FERA provision (corresponding to section 69).

_____________________________________________________________________________

1   United Enterprises
v. Special Director (2002) 35 SCL 273 (ATFE)

2   Agarwal Trading Co
v. Asst Collector of Customs AIR 1972 SC 648; Girdhari Lal Gupta v. D N Mehta
AIR 1971 SC 28.

3   SRC Exports (P) Ltd
v. Director of Enforcement (2000) 112 Taxman 142
(FERAB); See also: Chhabra Handicrafts v. Deputy Director (2000) 111 Taxman 138
(FERAB).

4   K B.S.H. Export
House v. Director of Enforcement (1988) 41 Taxman 138 (FERAB). Tarak Nath Sen
v. Union of India AIR 1975 CAL 337; Mohan, Prop. Kandan Mohan Exports v.
Director (2009) 95 SCL 58 (ATFE);

     Jagmohan Tandon v.
Director (2003) 46 SCL 273 (ATFE); Garments India Exporters v. Director (2005)
62 SCL 276 (ATFE); Hathibhai Bulakhidas v. Director (2002) 36 SCL 764 (FERAB).

5   Lakshmi Garments v.
DE (1996) 86 Taxman 259 (FERAB).

6   Tarak Nath Sen v.
Union AIR 1975 Cal 337.

It may be noted that the nature of liability of a partner is
merely vicarious. Accordingly, a partner cannot be held guilty without the firm
being held guilty and that, too, after adducing proper reasons for invoking the
vicarious liability7.

SLEEPING PARTNER

Sleeping partners cannot be held liable for the offence
committed by the firm and penalties cannot be imposed on them8.

POWER-OF-ATTORNEY HOLDER

In case of proprietary concerns, it is usual for the
proprietor to delegate certain functions of business to others who are not his
employees but who act as his agents and act on his behalf in terms of the
power-of-attorney executed by the proprietor in their favour.

All acts of the holder of the power-of-attorney are done by
him in his capacity as mere agent of the proprietor. The responsibility for all
acts done by the agent rests on the proprietor. Accordingly, the concept of
joint and several liability cannot be invoked in such cases to fasten vicarious
liability u/s. 69(1) on the power-of-attorney holder9. However,
where the power-of-attorney holder is in full control of business of a
non-resident, he would be vicariously liable for the offence10.

EXPORT MANAGER – NOT A PERSON IN-CHARGE OF THE COMPANY

Generally, the show cause notice alleging non-repatriation of
export proceeds is issued to the export manager on the premise that he was the
person in charge of the export business. Is it possible for the export manager
to argue that he was not the person in charge of the business? This question
was considered in the undernoted case11. In that case, a company
applied for permission to export certain machinery for participating in an
exhibition in USA. The permission was given on the condition that the machinery
will be re-imported. The company failed to re-import the machinery pursuant to
which the show cause notice was issued charging the company, its director and
the export-manager for the alleged contravention. Penalty was imposed on all
the three. While the company and its director paid the penalty, the
export-manager contended that he was not the person in charge of the company’s
affairs and accordingly, he could not be considered guilty even for abetment.

It was observed that in view of the provisions of section
68(2) of RERA [section 69(2)] the export manager could be held guilty only
if it was proved that the offence was committed with his consent or
connivance or was attributable to neglect on his part. It was also observed
that when the company had a managing director in charge of the company’s affairs,
the other functionaries could not be considered to be in-charge of the
company’s affairs. Accordingly, the penalty levied on the export manager was
set aside.

________________________________________________________________

7   Sumangal Enterprises
v. DE (1999) 104 Taxman 489 (FERAB).

8   Chhabra Handicrafts
v. Dy Director (2000) 111 Taxman 138 (FERAB).

9   Rajathi Agencies v.
Director of Enforcement (1988) 39 Taxman 56 (FERAB).

10  Simertex v. Director
(2006) 69 SCL 177 (ATFE)

11  R K Caprihan v.
Director of Enforcement (1988) 38 Taxman 23 (FERAB).

LEGAL REPRESENTATIVE

The liability u/s. 69(1) is on the person who, at the time
the offence was committed, was in charge of or was responsible to the company
for the conduct of its business. It is extremely arguable whether the legal
representatives of such person can be held liable by imputing such vicarious
liability. The tenor of section 69 also does not appear to suggest that if
there is any offence of any provisions of the Act by father, his legal
representatives would be vicariously liable for the same. This issue was
examined by the Madras High Court1 where a sole proprietor was
charged for some offence. The proprietor’s sons had no interest in the
proprietary business of their father and had never taken part in its management
or control during the lifetime of their father. Accordingly, they argued that
they cannot be regarded as “the person in charge of and responsible for the
conduct of the business of” the proprietary concern. The lower authorities held
the sons liable for the offence which was alleged to have been committed by
their father. While deleting the penalty, the Court made the following
observations:

“There
is no provision in the Foreign Exchange Regulation Act that, if there is any
contravention of the provisions of the Act by the father, his legal
representatives would be vicariously liable and responsible for the same. The application of the doctrine of vicarious
liability in the criminal law may be described as actuated by necessity rather
than desirability. Criminal responsibility is generally regarded as being
essentially personal in character and it is with considerable diffidence that
the principle is accepted whereby a man may be found guilty and punished for an
offence which is actually committed by another.

One
member of a family is not vicariously liable for acts of another member merely
because of the family relationship. Thus one spouse is not liable for the
torts of the other, nor the parent for the
torts of the child if nothing more than relationship appears in the case.

 

___________________________________________________________________________________________________

1   P N P Thulkarunai
& Co v. Director, Enforcement Directorate (1969) 39 CC 101 (Mad).

 

Thus, the doctrine of vicarious
liability is not of general application in the field of statutory crimes.

They are no doubt heirs of their
father. But when they succeeded to the estate of their father, they formed
themselves into a partnership business. They never partook of any interest in
the sole proprietorship concern of their father. [Emphasis supplied]

WHEN DOES THE BURDEN OF PROOF SHIFT FROM THE DEPARTMENT?

The Proviso to section 69(1) deals with this issue.
Its language signifies two things.

Firstly, for invoking the Proviso, the
Department must discharge the initial burden of proof in terms of section
69(1). Thus, where there was no evidence to show in what manner the director
was responsible to the company for the conduct of its business and the facts
relevant to the director were not discussed in the Order, it was held that the
Department had failed to make out a case for vicarious liability2. Secondly,
only after the Department discharges the burden of proof, the same would shift
to the person charged. The burden of proof so shifted is, however, rebuttable
and hence it is open to the person charged to prove the existence of any of the following two facts:

–  The offence was committed without his
knowledge; or

–  He had exercised due diligence to prevent the
commission of the offence.

It has been held3 that a mere averment that the
company had exercised due diligence or that the offence was committed without
the knowledge of the company or the officers responsible for the conduct of the
business would not suffice to establish a defence under the Proviso to
section 42(1) of FEMA [corresponding to Proviso to section 69(1)]. In
the absence of proper disclosure of the internal arrangements made by the
company to ensure proper conduct of the business according to the guidelines
framed, it was held that there indeed was failure to discharge the burden under
the Proviso to section 42(1) of FEMA [corresponding to Proviso to
section 69(1)].

__________________________________________________________

2   Kavita Dogra v. DoE
[2014] 126 SCL 182(Del)

3    V.
S. Ubhaykar v. Special Director (2012) 112 SCL 114 (Bom)

CONSIDERATIONS RELEVANT FOR SHIFTING THE BURDEN

What considerations should weigh the authorities for
ascertaining whether the person has discharged the burden which shifted to him
in terms of the Proviso? This question was considered by the Supreme
Court1.

The Supreme Court held, among others, that in case of a
partnership firm, acting partner would be liable for the offence committed by
the firm and unless the acting partner proves that he was not aware of the
offence or that he had exercised due diligence to prevent it and the fact that
when the offence was committed, he was out of India would be of no avail.

MITIGATING FACTORS-MAY RESCUE PROMOTER, DIRECTOR, PARTNER,
ETC.

In the undernoted case2, the appellant guest-house
had accepted rupees from foreigners in contravention of FERA. The partner and
manager of the guest-house were penalised u/s. 68(1), (2) of FERA [section
69(1), (2)]. The appellant pleaded that there was no mala fide
intention. The penalty against the partner was set aside in terms of the Proviso
to section 68(1) of FERA [Proviso to section 69(1)] on the ground
that he was not aware that the contravention was committed. Penalty on the
manager, too, was set aside on the basis of the following mitigating factors.

–  Contravention occurred unwittingly and
without awareness of the contravention.

–  The Department did not dispute that the
appellant fully co-operated with the Department.

–  There was no past history of contravention,
this being the first and the only one.

–   Appellant had not benefitted from the
contravention.

–  Appellant’s averment – that had he known the
correct legal requirement, he would have certainly complied with the same – was
not disputed by the Department.

It was observed that if all offenders are treated alike
without giving due weightage to the honest conduct of some of them, it may make
even honest persons dishonest.

______________________________________________________________________

1   Giridharilal Gupta
vs. D N Mehta AIR 1971 SC 28.

2   Sangam Guest House
vs. Dy Director [2002] 35 SCL 20 (ATFE)

Delhi High Court3 has held that mere fact that in
the opportunity notice given to the appellant, it was stated that the appellant
was in charge of and responsible for the day to day functioning is not enough
to discharge the initial burden cast on the Department to prove so. In that
case, neither in the order of Special Director nor of the Appellate Tribunal,
there was any finding that the appellant was in charge of and was responsible
for the day to day working of the company.

OFFENCE COMMITTED WITH CONNIVANCE OF PROMOTER, DIRECTOR,
PARTNER OR OFFICER

While section 69(1) deals with the persons who, at the time
of contravention, are in charge of or responsible to the company for the
conduct of its business, section 69(2) imposes liability on a functionary who
is a director, partner, manager, secretary or other officer. However, the
Department is required to prove not only the fact that the functionary
proceeded against was a director, partner etc. but also the fact that the
offence was committed either with the consent or connivance of such functionary
or is attributable to any neglect on his part. Unless both these facts are
established, the functionary would not be liable for punishment. Thus, in the
undernoted case4, a company was found guilty of receiving payment in
rupees from non-resident. The investigation showed that the payment was
received by the appellant. The adjudicating officer charged the appellant u/s.
68(2) of FERA [section 69(2)] on the ground that contravention took place with
his consent. On appeal, the finding of the adjudicating officer was confirmed
that the contravention took place with his consent so as to attract section
68(2). [section 69(2)].

NATURE OF BURDEN OF PROOF ON THE DEPARTMENT

The language of section 69(2) suggests that the burden of
proving the consent, connivance or neglect of the functionary lies on the
Department.

HOW WILL THE DEPARTMENT DISCHARGE SUCH BURDEN?

As regards “connivance”, it would be necessary for the
Department to establish that the offence was committed in the circumstances
showing that but for the reticence of the functionary, it was possible for him
to prevent the commission of such offence.

____________________________________________________________________________________

3   Parag Dalmia vs.
Special Director (2012) 115 SCL 57 (Del)

4   Bhupinder Singh vs.
DE [1997] 95 Taxman 315 (FERAB)

As regards “neglect”, the Department must first
ascertain as to what is the spectrum of the duties of director, partner,
officer, etc. This can be done by examining the letter of his appointment,
agreement, the resolution, etc. from which he derived the powers
exercised by him in discharge of his duties. Thereafter, the Department will
have to adduce evidence that it was possible for the functionary to do an act
in discharge of the duties assigned to him which in fact he did not.

SUMMATION : TWO ISSUES

While summing up the discussion on the liability of
promoters, directors, partners and officers of the realty companies, firms,
association, etc. following two issues deserve some further thought.

First, what is the distinction between the provisions
of section 69(1) and section 69(2)?

Second, is there any possibility of the peculiarly
structured real estate transactions triggering the provisions of Prohibition of
Benami Property Transactions Act, 1988 that came into force
retrospectively from 19 May 1988 ?

As regards the first issue, the principal distinction is that
u/s. 69(1), the burden of proof lies on the Department. Once the Department
discharges it, the Proviso shifts the burden to the person vicariously
charged with the offence.

On the other hand, section 69(2) casts the burden of proof on
the Department without the opportunity of shifting the same to the functionary
of the company vicariously charged thereunder.

As regards the
applicability of Prohibition of Benami Property Transactions Act, 1988,
one may note the following.

Real estate developers across India are currently in a
quandary over how to deal with properties they have aggregated over the years through
proxies.

Because of restrictive land ceiling laws, it was common for
real estate developers to amass land holdings through proxies—normally through
firms not directly controlled
or owned but funded by way of loan or subscription to share capital.

Despite the Benami Transactions (Prohibition) Act being
in force from 1988, not much attention was paid to the parcels of land acquired
by developers through proxies because the law had no implementing agency until
now and hence was rarely applied.

With the income-tax department now starting to crack the whip
on the transactions in which the actual beneficiary is different from the
registered owner, many real estate developers across India who have structured
the transactions through land aggregators are in a quandary.

In the run-up to 2016 November amendment to the benami law,
many real estate developers hurriedly “reversed” benami transactions by
transferring properties back to themselves from their proxies who previously
held them. But under the amended law, such ‘re-transfers’ are banned with
retrospective effect.

Of the 72 sections of the amended Benami Act, only
three came into force last year; the rest were made effective from 19 May 1988
through the 2016 November amendment.

Real estate developers claim that their acquisitions through
proxies should not be treated in the same manner as any other transaction aimed
at tax evasion or concealment of wealth. According to them, proxies were used
only to get past restrictive land ceiling laws.

Under the amended Benami law, people involved in benami
transactions face up to seven years in jail and confiscation of properties
without compensation.

The aim of the Benami Act is to curb black money. Real
estate developers will be in difficulty if it is used to take on land
aggregation through proxies.

If it can be established that the motive for
creating multiple ownership in land aggregation was not to avoid tax, hopefully
the government may not bracket such transactions with benami transactions.

SEBI’s Guidance Note On Board Evaluation – Much Needed Road Map

Background

The Securities and Exchange Board of India (SEBI) has issued
a Guidance Note on Board Evaluation on 5th January 2017. While not
intended to act as interpretation of the law, it serves as a great and much
needed road map for implementation of several provisions in the Companies Act,
2013, and SEBI Regulations on corporate governance. Auditors have guidance from
the Institute of Chartered Accountants in respect of several areas of their
work and increasingly Company Secretaries have from their alma mater.
However, the Board of Directors and individual directors generally find their
role, obligations and even liabilities having increased manifold but yet do not
have detailed formal guidance as to how they are to carry on their work. This
knowledge gap is felt even more, since most directors may not be well
conversant with the law.

The Guidance Note, to reiterate, does not have a binding
effect. However, I submit that diligent compliance in letter and spirit can be
a good defence in case of action against independent directors by regulators.
Such action can be expected to be manifold considering that corporate governance
is now a law with severe consequences for violations. Indeed, it is possible, I
submit, as also elaborated later, that gross non-compliance of this Guidance
Note could lead to a presumption of violation.

Overview

Requirements of corporate governance earlier were mainly in
the erstwhile Clause 49 of the Listing Agreement. However, now, they are part
of the statutes and indeed they are not only elaborate and detailed but
overlapping too. They are now contained in the Companies Act, 2013 (“the Act”),
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
(“the Regulations”).

On the subject matter of the Guidance Note, there are
requirements on how the Board, its Committees and its members would be
evaluated, selected, recommended for removal, etc. The requirements of
corporate governance in this sense are intended to be self-regulating. The law
lays down that such evaluation should take place, who should carry out such
evaluation and what should be disclosed in respect of such evaluation. However,
the manner in which the evaluation should be carried out has not been specified
leaving a gap which companies may fill in different ways, some more elaborately
and in detail and some summarily or even perfunctorily. The Guidance Note is
intended to fill this gap to help companies and their boards to carry out this
function.

Requirements of law relating to board evaluation

The law prescribes categories of companies to which the
requirements apply. Some important provisions in such law in relation to Board
evaluation, functions of Board, Committees are as follows:-

1. There has
to be a Nomination and Remuneration Committee. It is this Committee that
carries out functions relating to setting up criteria for selection &
evaluation of Board/Directors and related matters.

2.
Independent Directors are also expected to carry out certain evaluation of the
Board, of non-independent directors, the Chairperson, etc. The
Independent Directors, in turn, are evaluated by the Board as a whole, excluding
the director being evaluated.

3.
Generally, detailed functions of Board are laid down including the manner in
which it will function.

However, as is seen above, the law lays down the basic
structure of who shall perform and what functions shall they perform. How they
should perform is left largely unsaid. The Guidance Note provides these
details.

Aspects covered by the Guidance Note

The Guidance Note covers the following aspects

Subject of Evaluation i.e. who is to be evaluated. This
includes the Board as a collective unit, various Committees, independent
directors, executive/non-executive directors, the Chairman and senior
management.

Process of Evaluation including laying down of objectives
and criteria to be adopted for evaluation of different persons. Depending
on who is to be evaluated, the criteria differs. Thus, the Chairman may be
judged, inter alia, on his leadership qualities. The Board be may judged on how
it performs its strategic functions, how diverse it is in terms of
experience/seniority, cross functional expertise, gender, etc., whether
it allows all members to freely participate, etc. The Independent
Directors would also be evaluated in terms of their distinguishing functions.

Feedback to the persons being evaluated; While the
evaluation may give some clear finding about suitability for continuation or
unsuitability (and hence removal), more often the evaluation may highlight
areas for improvement. Feedback to such persons is helpful.

Action Plan based on the results of the evaluation
process; Post evaluation, a plan would have to be suggested to fill in the
deficiencies observed by training, etc.

Disclosure to stakeholders on various aspects;
This can be critical as evaluation would not only have to be done but seen to
have been done. The law requires that the policy relating to some of the
evaluation parameters should be disclosed in the Board’s Report. However, it
would be up to the Company whether or not the actual results of the evaluation
are disclosed, the action taken on the evaluation, etc. and the Guidance
Note keeps this discretionary.

Frequency of Board Evaluation; The law requires that
the board evaluation has to be done once in a year. The Guidance Note suggests
that this should be a continuous process in terms of regular feedback.

Responsibility of Board Evaluation: As stated earlier,
depending on who is to be evaluated, the person who carries out this evaluation
changes. Obviously, there cannot be self-evaluation as a rule. Indeed, the
person being evaluated is required to be absent when he or she is being
evaluated. There also ought not also be conflict of interest generally. The
Guidance Note places higher emphasis on the Chairman in terms of steering the
process of Board evaluation generally.

Review of the entire evaluation process periodically.
The evaluation process itself needs to be evaluated from time to time! The
manner in which the evaluation is carried out thus requires a periodic review
and improvement.

Internal vs. External evaluation:- Evaluation can be
internal with each group evaluating the other. Internal evaluation has
advantage of familiarity and close observation over extended periods of time.
However, there may be concerns here whether this can result in mutual back-scratching
or even otherwise whether the evaluation is sufficiently
well-informed/professional. External evaluators may not only bring objectivity
but also professionalism as well as experiences from other evaluations.

Evaluation of Committees

The Committees are required to be evaluated in terms of their
constitution, the functions assigned to it, its actual functioning, its
effectiveness in terms of its objectives, etc.

Detailed guide to board functioning

The Guidance Note talks in great detail about the evaluation
of the Board. While this is meant to be a guide to evaluate it, it by itself
serves also as good guidance on how a Board should function. The Guidance Note
throws detailed light on several aspects such as agenda to be circulated
including how early and how detailed, the manner in which discussions take
place and how they are recorded, the role the Board should really play such as
formulating strategy, relation with the CEO and senior management, what role it
should play in risk management, etc. Thus, while serving as a benchmark for
evaluation, it also actually serves as a road map of actual functioning of the
Board.

Consequences of
non-evaluation/non-following of the Guidance Note

The Guidance Note and the covering circular to it of SEBI
clearly specifies that it is intended to provide guidance and is not to be
interpreted as a law. However, consider some consequences of
non-compliance relating to these matters. For example, section 178
(which deals with constitution and role of Nomination and Remuneration
Committee and other matters) has a sub-section (8) that states that in case of
non-compliance, the company is punishable with fine. Further, officers in
default may be punishable with imprisonment upto a year or fine or both. This
may sound fairly serious for a provision relating to corporate governance.
Non-compliance with the SEBI Regulations too has consequences in terms of
penalty and prosecution. SEBI also has powers, and indeed has in the past
applied these powers, to debar persons and has other wide powers too.

It may also happen that wrongdoing in various forms may be
found in a Company. In such an event, the role of every board member would be
examined minutely. If provisions relating to board, directors, etc.
evaluation are not observed, adverse consequences may follow on those who have
defaulted. In such a situation, question will arise whether these provisions
were duly complied with in terms of law.

It is obvious then that the Guidance Note should be taken
seriously. Even if not meant to be a law, it may be a good preliminary
defence of non-compliance if the provisions of the Guidance Note are observed.
Gross non-compliance could be prima facie evidence of violation of the
provisions.

For example, section 178(2) of the Act provides that “the
Nomination and Remuneration Committee…shall carry out evaluation of every
director’s performance”. In context of the Guidance Note, it may not be
sufficient to show that some evaluation was carried out. The evaluation
itself may be questioned if the provisions of the Guidance Note were not
followed and otherwise it was not found to be sufficiently detailed.
Following the Guidance Note may help meet the preliminary onus.

Conclusion

There is criticism, which is valid to an extent, that many
western practices of corporate governance may not have direct application in
India where there is dominant position of Promoters both in terms of large
shareholding and board control. However, even in this context, it is recognised
that corporate governance serves a very valuable purpose. Hence, it is now
implemented not as a voluntary code but as mandatory and comprehensive law. The
liability of the Board, directors generally and, in particular, Independent
Directors, key managerial personnel, is ever increasing. Guidance is thus
needed not just on how they should perform but also, in case of any wrong doing
found, how will their actions – which are often subjective and circumstances
based – be judged.

The Guidance Note serves a good purpose in this.
It will not be surprising if more Guidance Notes will be released in the future
for functioning of other pillars of corporate governance. For example, the role
of the Audit Committee is very important, almost next to the Board itself. A
Guidance Note on how SEBI expects it to function would be helpful as an active
guidance as also a benchmark for defence when things go wrong.

Gratuitous Possession of Property

Introduction

Consider a case of a person who
was in need of a house to stay and some close relative of his helped him by
allowing him to stay gratuitously in his spare house. This person continues
staying in this house for a significantly long period of time due to the
goodwill gesture extended to him by his relative. Since possession is often
considered to be nine-tenths of the law, can he now claim that by virtue of
such a long period of possession, he has acquired a legal right in the property
and hence, he also has a title to the property? Strange as this proposition may
sound, this is a reality which several people are experiencing.

The Delhi High Court had an
occasion to consider a somewhat analogous issue 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 had no legal right to
live in that house and he could live in that house only at the mercy of his
parents up to such time as his parents allow. Merely because the parents have
allowed him to live in the house so long as his relations with the parents were
cordial, does not mean that the parents have to bear his burden throughout
their life.

However, would the position be on
a different footing if a close relative was allowed to stay in a house for a
fairly long period of time out of sympathy, natural love and affection? This
was the issue deliberated by the Supreme Court in the case of Behram Tejani
vs. Azeem Jagani, CA 150/2017 (SC).

Facts of the Case

A person named Mohammed Ali Tejani
(“the deceased”) died, leaving behind a will. Prior to his death, he had a
fractional ownership in various immovable properties, flats in Mumbai. One such
property was a residential flat. The deceased resided in this flat with his
wife and his family members. After his death, his wife and his daughter’s son
(‘grandson’) continued to reside in this flat.

Under his will, the deceased
bequeathed his fractional ownership in all his immovable properties, including
the abovementioned residential flat, to his 4 brothers in equal proportion. He
did not provide for any life interest benefit or carve out any interest in this
flat for his wife or his grandson. The will was sought to be probated.

The grandson prayed before the
Bombay City Civil Court for a temporary injunction restraining the
beneficiaries under the will from dispossessing him and his grandmother from
the aforesaid flat since they were in use and possession of the same.

In reply to this, his 4 grand
uncles, i.e., the deceased’s brothers (also the beneficiaries named by the
deceased under his will) stated that the wife of the deceased was merely
allowed to use and occupy the suit premises by the defendants out of love and
sympathy without any fees or compensation; that the suit premises belonged to
them as co-owners since the testator had bequeathed his right, title and
interest in the building to them. They further stated that nonetheless, out of
sympathy, close blood relationship and out of love and affection, the
deceased’s wife had been allowed to use the suit premises. Further, since she
has no right, title or interest in the suit premises she could have no right to
permit any other person much less her grandson to interfere with the ownership
right of the co-owners. Accordingly, they opposed the grant of any interim
relief to the grandson.

The Bombay City Civil Court
dismissed the injunction prayer of the grandson. It held that the deceased’s
wife herself had no right in this premises. Only on a sympathetic ground she
was allowed to occupy the premises. In such facts, when the grandson came
before the Court claiming equitable relief like injunction, he had to prima
facie show some rights to claim the relief. If protection was asked for,
one must clearly seek ascertaining his legal rights. He merely claimed that he
was residing with his grandmother and if she herself did not have a right in
the property, then an injunction type of a protection could not be granted in
favour of the grandson.

On appeal, the Bombay High Court
overruled the verdict of the City Civil Court and upheld the grant of a
temporary injunction. It held that legal right of possession alone cannot be
the basis unless it is adjudicated, for overlooking the “settled possession”.
While deciding the possession right the City Civil Court had actually given a
finding against the maternal grandmother and decided that even she had no right
to occupy the premises and therefore, there was no question of permitting her
grandson to reside therein. The concept of “settled possession” could not be
equated with in all matters-“legal possession”. It depended upon the facts and
circumstances of a case.

It further held that the lower
Court proceeded on a wrong footing of law that the possession can be granted
only to the person who has a legal right to occupy the premises and no one
else. It felt that the law must take its due course with a foundation to
dispossess the person in possession of the premises only after a due trial. In
view of the same, it was inclined to observe that the order passed by the City
Civil Judge was against the settled principle of law with regard to the
possession of the property. It was however, made clear that the High Court was
only dealing with the protection of the possession of the premises and not the
ownership and/or title of the maternal grandmother of the plaintiff.

Accordingly, the beneficiaries
under the will of the deceased appealed to the Supreme Court.

Supreme Court’s Verdict

The Apex Court analysed the will
and observed that the will bequeathed the entire interest of the deceased in
the immovable properties in favour of his brothers. Neither the deceased’s wife
nor the grandson had any interest in these properties. She did not have any
right qua the premises in question but was permitted to occupy merely
out of love and affection. The status of the grandmother was thus of a
gratuitous licensee and that of her grandson was purely of a relative staying
with such a gratuitous licensee.

The Court referred to its earlier
decision in the case of Rame Gowda (Dead) by LRS. vs. M. Varadappa
Naidu(Dead), 2004(1) SCC 769. In that decision, the Supreme Court dealt
with the issue of settled possession by a person. It referred to Salmond on
Jurisprudence which held “that few relationships are as vital to man as that
of possession, and we may expect any system of law, however primitive, to
provide rules for its protection. . . . . . . Law must provide for the
safeguarding of possession….. Legal remedies thus appointed for the protection
of possession even against ownership are called possessory, while those
available for the protection of ownership itself may be distinguished as
proprietary.”

It also analysed its decision in Lallu
Yeshwant Singh (dead) vs. Rao Jagdish Singh, (1968) 2 SCR 203 where it
was held that the Law respects possession even if there is no title to support
it. It will not permit any person to take the law in his own hands and to
dispossess a person in actual possession without having recourse to a court. No
person can be allowed to become a judge in his own cause. Next, in Nair
Service Society Ltd. vs. K.C. Alexander, (1968) 3 SCR 163, the Apex
Court held that a person in possession of land assumed character of an owner
and exercising peaceably the ordinary rights of ownership has a perfectly good
title against all the world but the rightful owner. When the facts disclosed no
title in either party, possession alone decided. The court quoted Loft’s maxim ‘Possessio
contra omnes valet praeter eur cui ius sit possessionis (He that hath
possession hath right against all but him that hath the very right)‘ and
said, “A defendant in such a case must show in himself or his predecessor
a valid legal title, or probably a possession prior to the plaintiff’s and thus
be able to raise a presumption prior in time”.    

The Court thus held that it was
clear that so far as the Indian law was concerned, the person in peaceful
possession was entitled to retain his possession and in order to protect such
possession, he may even use reasonable force to keep out a trespasser. A
rightful owner who had been wrongfully dispossessed of land may retake
possession if he could do so peacefully and without the use of unreasonable
force. If the trespasser was in settled possession of the property belonging to
the rightful owner, the rightful owner shall have to take recourse to law; he
cannot take the law in his own hands and evict the trespasser or interfere with
his possession. The law will come to the aid of a person in peaceful and
settled possession by injuncting even a rightful owner from using force or
taking law in his own hands, and also by restoring him in possession even from
the rightful owner (of course subject to the law of limitation), if the latter
has dispossessed the prior possessor by use of force. It is the settled
possession or effective possession of a person without title which would
entitle him to protect his possession even as against the true owner. The
concept of settled possession and the right of the possessor to protect his
possession against the owner had come to be settled by a catena of
decisions, such as, Munshi Ram and Ors. vs. Delhi Administration,(1968) 2
SCR 455;Puran Singh and Ors. vs. The State of Punjab (1975) 4 SCC 518 and Ram
Rattan and Ors. vs. State of Uttar Pradesh (1977) 1 SCC 188. The Court
further observed that it was difficult to lay down any hard and fast rule as to
when the possession of a trespasser can mature into settled possession. The ‘settled
possession’ must be (i) effective, (ii) undisturbed, and (iii) to the knowledge
of the owner or without any attempt at concealment by the trespasser. The
phrase ‘settled possession’ did not carry any special charm or magic in it; nor
was it a ritualistic formula which could be confined in a strait-jacket. An
occupation of the property by a person as an agent or a servant acting at the
instance of the owner would not amount to actual physical possession.

It laid down the following tests
which could be adopted as a working rule for determining the attributes of
‘settled possession’ :

(i)   that the trespasser must be in
actual physical possession of the property over a sufficiently long period;

(ii) that the possession must be to
the knowledge (either express or implied) of the owner or without any attempt
at concealment by the trespasser and which contains an element of animus
possidendi. The nature of possession of the trespasser would, however, be a
matter to be decided on the facts and circumstances of each case;

(iii) the process of dispossession
of the true owner by the trespasser must be complete and final and must be
acquiesced to by the true owner; and

(iv) that one of the usual tests to
determine the quality of settled possession, in the case of culturable land,
would be whether or not the trespasser, after having taken possession, had
grown any crop. If the crop had been grown by the trespasser, then even the
true owner has no right to destroy the crop grown by the trespasser and take
forcible possession.

Next, the Supreme Court analysed
the ratio of another of its earlier decisions, Maria Margarida Sequeira
Fernandes and others vs. Erasmo Jack De Sequeira (Dead) through LRS, 2012 (5)
SCC 370. In this case, the appellant was married to a Naval Officer who
was transferred from time to time outside Goa and hence, on the request of her
brother she gave possession of the premises to him as a caretaker. The
caretaker held her property only on her behalf. The brother filed a suit for injunction
against his sister, the legal owner.

The Supreme Court observed that in
civil cases, pleadings were extremely important for ascertaining the title and
possession of the property in question. Possession was an incidence of
ownership and could be transferred by the owner of an immovable property to
another such as in a mortgage or lease. A licensee held possession on behalf of
the owner. Possession was important when there were no title documents and
other relevant records before the Court, but, once they come before the Court,
it is the title which has to be looked at first and due weightage be given to
it. Possession cannot be considered in vacuum. There was a presumption that
possession of a person, other than the owner, if at all it was to be called
possession, was permissive on behalf of the title-holder. Further, possession
of the past was one thing, and the right to remain or continue in future was
another thing. It was the latter which was usually more in controversy than the
former, and it was the latter which had seen much abuse and misuse before the
Courts. A title suit for possession had two parts – first, adjudication of
title, and second, adjudication of possession. If the title dispute was removed
and the title was established, then, in effect, it became a suit for ejectment
where the defendant must plead and prove why he must not be ejected.

In an action for recovery of
possession of immovable property, upon the legal title to the property being
established, the possession of the property by a person other than the holder
of the legal title was presumed to have been under and in subordination to the
legal title. It is for the person resisting a claim for recovery of possession
or claiming a right to continue in possession, to establish that he has such a
right. To put it differently, wherever pleadings and documents established
title to a particular property and possession was in question, it will be for
the person in possession to give sufficiently detailed pleadings, particulars
and documents to support his claim in order to continue in possession.

In Maria Sequeira’s case, the
brother did not claim any title to the suit property. Undoubtedly, the sister
had a valid title to the property which was clearly proved.The lower Courts had
failed to appreciate that the premises in question was given by the sister to
her brother herein as a caretaker.The brother’s suit for injunction against his
sister was not maintainable, particularly when it was established beyond doubt
that he was only a caretaker and he ought to have given possession of the
premises to the sister who was the true owner of the suit property on demand.
Admittedly, he did not claim any title over the suit property and he had not
filed any proceedings disputing the title of the appellant. The Supreme Court
held that an occupation of the property by a person as an agent or a servant at
the instance of the owner will not amount to actual physical possession.

It further held that the
possession of a servant or agent was that of his master or principal as the
case may be for all purposes and the former cannot maintain a suit against the
latter on the basis of such possession. Merely because the plaintiff was
employed as a servant to look after the property, it cannot be said that he had
entered into such possession of the property as would entitle him to exclude
even the master from enjoying or claiming possession of the property or as
would entitle him to compel the master from staying away from his own property.

In Maria Sequeira’s case, the
Court held that Principles of law which emerged were as under:-

(i)   No one acquired a title to the
property if he or she was allowed to stay in the premises gratuitously. Even by
long possession of years or decades, such person would not acquire any right or
interest in the said property.

(ii)  A caretaker, watchman or
servant can never acquire interest in the property irrespective of his long
possession. The caretaker or servant had to give possession forthwith on
demand.

(iii)  The Courts were not justified
in protecting the possession of a caretaker, servant or any person who was
allowed to live in the premises for some time either as a friend, relative,
caretaker or as a servant.

(iv) The protection of the Court
could only be granted or extended to the person who had a valid, subsisting
rent agreement, lease agreement or license agreement in his favour.

(v)  The caretaker or agent held a
property of the principal only on behalf of the principal. He acquired no right
or interest whatsoever for himself in such property irrespective of his long
stay or possession.

Hence, in Maria Sequeira’s case,
the judgment of the lower Courts were set aside and the Supreme Court directed
that the possession of the suit premises be handed over to the sister, who was
admittedly the owner of the suit property.

Accordingly,
after analysing and following the ratio of the above decisions, the Supreme
Court in Tejani’s case, concluded that a person holding the premises
gratuitously or in the capacity as a caretaker or a servant would not acquire
any right or interest in the property and even long possession in that capacity
would be of no legal consequences. In the circumstances, the City Civil Court
was right and justified in rejecting the prayer for interim injunction and that
decision was correct. However, it clarified that the matter having come up
before the Supreme Court from an interim order and since the main suit itself
was pending, observations made by it were not to be taken as concluding the
controversy and the merits of the matter will be gone into by the Court at the
appropriate stage.

Conclusion

It is apparent that a gratuitous possessor can
claim no vested right in the legal owner’s property. This clear cut verdict
helps to clarify matters. This decision read with the Delhi High Court’s
decision that an adult son cannot claim that he has a legal right to stay in
his parents’ home would go a long way in resolving several possession disputes.

A. P. (DIR Series) Circular No. 5 dated October 6, 2016

Import   data    Processing  
and   monitoring System (IDPMS)

This
circular states that IDPMS will go live from October 10, 2016 and all Banks
must use IDPMS  for reporting and
monitoring of the import transactions. Operational directions / guidelines with
respect to IDPMS  are mentioned in this
circular and are also available in the help menu on EDPMS Portal under “import
process” tag.

A. P. (DIR Series) Circular No. 4 dated September30, 2016

Investment by 
Foreign  Portfolio  investors (FPI) in government Securities

This
circular has increased the limit for investments in Government Securities by
FPI in two tranches each of Rs. 100 billion from October 3, 2016 and January 2,
2017 as under, in the table below:

INR Billion

 

Central Government Securities

State Development Loans

Aggregate

 

For All FPIs

Additional for Long Term FPIs

Total

For all FPIs (including Long Term FPIs)

 

Existing Limits

1440

560

2000

140

2140

Revised limits with effect from
October 3, 2016

1480

620

2100

175

2275

Revised limits with effect from
January 2, 2017

1520

680

2200

210

2410

The operational guidelines relating to allocation
and monitoring of limits will be issued by the Securities and exchange Board of
india (SEBI).

A. P. (DIR Series) Circular No. 3 dated September 29, 2016

Exim Bank’s GoI supported line  of Credit of USD 87.00 million to the
government of the Republic of zimbabwe

Exim
Bank has made available, subject to certain terms and conditions, to the
Government of the republic of Zim­ babwe, a Line of Credit of US $ 87 million
for financing renovation / up-gradation of Bulawayo thermal  Power Plant in republic of Zimbabwe. Eligible
goods and servic­ es including consultancy services of the value of at least
75% of the contract price must be supplied by the sellers from india, while the
remaining 25% of the goods and ser­ vices can be procured by the sellers from
outside india.

The
last date for opening letters of credit and disbursement is 60 months from the
scheduled completion date of the project.

Notification No. FEMA 375/2016-RB dated September 9, 2016

Foreign Exchange management (Transfer or issue of Security
by a Person Resident out- side india) (Thirteenth amendment) Regulations, 2016

This
Notification states that Schedule 1, in Annex B, Para­ graph F.8 Notification
No. FEMA. 20/2000-RB dated 3rd may 2000 will be substituted as under: ­

F.8

Other Financial Services

 

 

 

Financial Services activities
regulated by financial sector regulators, viz., RBI, SEBI, IRDA, PFRDA, NHB
or any other financial sector regulator as may be notified by the Government
of India.

100%

Automatic

F.8.1

Other Conditions

 

 

 

i.        Foreign investment in ‘Other
Financial Services’ activities shall be subject to conditionalities,
including minimum capitalization norms, as specified by the concerned
Regulator/Government Agency.

ii.      ‘Other Financial Services’ activities need to be
regulated by one of the Financial Sector Regulators. In all such financial
services activity which are not regulated by any Financial Sector Regulator
or where only part of the financial services activity is regulated or where
there is doubt regarding the regulatory oversight, foreign investment up to
100% will be allowed under Government approval route subject to conditions
including minimum capitalization requirement, as may be decided by the
Government.

iii.    Any activity which is specifically regulated by an
Act, the foreign investment limits will be restricted to those
levels/limit that may be specified in that Act, if so mentioned.

iv.    Downstream investments by any of these entities engaged in “Other
Financial Services” will be subject to the extant sectoral regulations
and provisions of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident outside India) Regulations, 2000, as amended
from time to time.”

Side Incentives to Promoters and Management by PE Investors – SEBI Seeks to Address Conundrum

Background

Perhaps
a never-ending conflict in listed companies is the one between interests of
Promoters/management on one hand and the public shareholders on the other.
Promoters and members of the public are both shareholders and hence,
effectively have equal rights and benefits. However, Promoters are in charge of
company and would need oversight  to  ensure 
that  they  do 
not  take  any 
undue benefit of such control. The key top executives who run the
company are also particularly relevant in professionally managed companies. The
conflict of interest here is that they may keep their interests above that of
shareholders. Thus, for example, they should not pay themselves excessive
remuneration. these  are two of the
important of challenges in listed companies that are partly sought to be
addressed by good corporate governance measures. The Companies act, 2013, does
contain certain statutory provisions in this regard. A parallel set of
provisions with some differences are provided by SEBI in the SEBI (listing  obligations and disclosure requirements)
regulations, 2015. Generally, it is expected that, in comparison with
parliament, SEBI would act as a more dynamic watchdog for protection in
particular of public shareholders. Hence, it is not surprising that SEBI has
sought to address a peculiar arrangement that is being adopted in connection
with investment in several companies by Private equity investors (“PE
investors”).

Nature of Concern Sought to be Addressed

PE
investors have a special role in listed companies. They usually are not such
substantial shareholders so as to be able to control the listed company.
However, their holding is  sufficiently
big  whereby  they often have agreements with the
management/Promoters (“the management”) such that certain special rights are
given to them. What has now become an issue of concern is a side arrangement
many of such PE investors have entered into with the Promoters/ management of
listed companies. Essentially, what is provided in such arrangement is that the
PE investor will pay a share of profits made by it on its investment in the
listed company to the management. Usually, this share is from the excess
profits made by the PE Investor over and above a certain benchmark return.
Thus,  for example, the PE investor may
agree to pay to the management 20% of the excess of profits over an internal
rate of return of 36% per annum. To take an example in figures, say, the PE
Investor had invested at a cost of Rs. 100 per share and sells the shares at
Rs. 500 after four years. The cost of Rs. 100 would require a sale price of Rs.
342 to give it an internal rate of return of 36% per annum. Thus,  it would have an excess of Rs. 158. The
management would thus be given about Rs. 31.60 per share as 20% share of such
excess.

The
concern that has been raised is whether such arrangements are fair and whether
they require any regulation in terms of ensuring transparency, obtaining
approvals, etc.

SEBI  has issued a consultation paper dated
4th  October 2016 seeking views. While
one will have to wait for the outcome of this consultation and in what form the
regulatory requirements will be issued, the consultation paper is specific
enough to merit a study. The paper gives the specific clauses that SEBI
proposes to insert in the regulations. As will be seen later herein, the Scope
of the requirements are wider than the arrangements between management and the
PE Investor for sharing of excess profits.

Nature of Issues/Problems

There
can be several issues raised in respect of such agreements, some of which have
been highlighted in the consultation paper. One of course is, lack of
transparency – the public shareholders would not even be aware of such side
arrangements. There is a potential conflict of interest between  the 
management  and  the 
public  shareholders on account of
such arrangements. It is possible that the PE 
investor  may  get 
special  treatment over the public
shareholders, though it may not be in violation of the law.

 Another concern is that the management may
become focussed on short term goals which lead to price appreciation of the
shares, since this would help them get a share of the profits under such
arrangements.

In
a sense, the management would be able to get more compensation than otherwise
permissible to them under law. for example, Promoters are not entitled to
employees stock options. Further,  there
are limits to remuneration that can be paid to managerial personnel under the
Companies act, 2013. Of course, the share is not paid out of the funds of the
company. Yet, the concern may be whether the spirit of such provisions is
defeated.

Analysis of the Proposed Amendments

In
regulation 26 of the SEBI (listing obligations and disclosure requirements)
regulations, 2015 (“the regulations”), a new sub-clause 6 is proposed to be
inserted as follows (emphasis provided):­

“No
employee, including key managerial personnel, director or promoter of a
listed entity shall enter into any agreement with any individual shareholder(s)
or any other third party with regard to compensation or profit sharing unless
prior approval has been obtained from the 
Board as well as  shareholders by
way of an ordinary resolution”.

“Provided
that all such  existing agreements
entered into prior to the date of notification and which may continue beyond
such date  shall  be 
informed  to the stock exchanges
for public dissemination and approval 
obtained  from  shareholders 
by  way  of an ordinary resolution in the forthcoming
general meeting. Provided further that in case approval from shareholders
is not received, all such agreements shall be discontinued “.

Thus,   the proposed clause  divides the requirements in two parts – one
for new agreements providing for such arrangements and the other for existing
agreements. It requires that such agreements shall require prior approval of
Board of directors and the shareholders by way of ordinary resolution. In case
of existing agreements that would continue in the future, the requirements will
be slightly different. The approval of Board of directors is not required.
However, disclosure to stock exchanges would have to be made. Further,  approval of the shareholders by way of
ordinary resolution would have to be obtained in the forthcoming general
meeting of the company. If such approval is not received, then the agreement
for such arrangement would have to be discontinued.

The
requirement applies to such agreements as are described therein. Such agreement
would have to be with “employee, including key managerial personnel, director
or promoter of a listed entity” with “any individual shareholder or any other
third party”. The agreement should relate to “compensation or profit sharing”.
The term “key managerial personnel” would be as per the definition under the
Companies act, 2013.

Thus,  on one hand, the type of agreement as well
the persons between whom the agreement may be made have been widely defined. On
the other hand, the definition is specific and hence would apply only to such
matters and between such persons as specified therein.

Non-Transparent Arrangements till now

As
stated above, there is presently no statutory requirement to disclose such
agreements to the public. hence, such arrangements may not be known even to the
Board of directors,  much less to the
shareholders generally or the stock exchanges/public.

Requirements of Approval

The
requirements of approval are dual. One is from the Board of directors the  second is from the shareholders by way of an
ordinary resolution. For agreements that are to come into force in the future,
such approvals would have to be prior to entering into such agreements and not
after they are entered into.

Covers Agreements for Compensation As Well As Share of
Profits

The
payment to the management may be in the form of compensation or share of
profits. These terms have not been defined and hence may have wide meaning.
This also widens the scope of the requirements from what appears to be the
intent.

Covers Agreements with Share- Holders As Well As Third
Parties

The
agreements may be with individual shareholders of the company or even with
third parties. This may once again result in a scope that is wider than may be
otherwise expected from a requirement that appears to be intended for
agreements with PE investors. For example, would any compensation by a
group/holding/associate company to any person in management be also covered?

Retrospective effect

Of
particular concern is  the  fact 
that  the  requirements will effectively have a
retrospective effect. All existing agreements would be required to be disclosed
to the stock exchanges and also approved by shareholders. Failure to receive
such approval would result in a requirement to discontinue such agreement.

Comments

There
are valid objections raised for and against the requirements.

A
preliminary objection is as to whether such matters should be at all regulated.
Even if regulated, whether disclosures would be adequate to achieve the
objective. Even more, whether the approval of the shareholders serves any real
purpose and whether a group that should not have any say in such matters is
being given a right to veto such arrangements. The compensation/profits do not
go out of the pocket of the company or the shareholders. Indeed, the public
shareholders would also be benefitting in typical cases where the profit is out
of appreciation in the price of the shares.

On
the other hand, there may be a view that even such restrictions are not
sufficient. For one, there is no absolute bar on such agreements. There may be
a view that the conflict of interest that can result is substantial. Moreover,
such arrangements can be a subterfuge for payments for other consideration.

Further,  it is often likely that the
Board/shareholders may be dominated by the Promoters. Unlike related party
transactions, where there are certain restrictions on voting on certain
shareholders, there are no such restrictions here.

Finally,  of course, the new requirements may hit
existing arrangements hard. It is possible that existing agreements may have to
be shelved halfway if they do not receive approval and thus parties may be deprived
of the benefit particularly in respect of benefits that would have already
accrued to an extent.

All
in all, however, initiation of the debate is a step in the right direction and
at the very least, such arrangements would come to the knowledge of parties
concerned. One will have to see how the final draft of the requirements is
issued and then examine their impact.

Nomination in a Flat

Introduction

Nomination is increasingly used
in co-operative housing societies, depository/demat accounts, mutual funds,
Government bonds/securities, shares, bank accounts, etc. a nomination means
that the owner of the asset has designated another person in his place after
his death.

Once a person dies, his interest
stands transmitted to the person nominated by him. Thus,  a nomination is a facility to provide the
society, company, depository, etc., with a face with whom it can deal with on
the death of a person. On the death of the person and up to the execution of
the estate, a legal vacuum is created. Nomination aims to plug this legal
vacuum. A nomination is only a legal relationship created between the society,
company, depository, bank, etc. and the nominee.

A nomination seeks to avoid any
confusion in cases where the will has not been executed or where there are
disputes between the heirs. It is only an interregnum between the death and the
full administration of the estate of the deceased.

While there have been several
Supreme Court decisions on the question of the role of a nomination, recently,
the Supreme Court had an occasion to consider the issue in the context of a
flat in a co-operative society.

Which is superior?

A nomination continues only up to
and until such time as the will is executed. No sooner the will is executed, it
takes precedence over the nomination. A nomination does not confer any
permanent right upon the nominee nor does it create any legal right in his
favour. Nomination transfers no beneficial interest to the nominee. A nominee
is for all purposes a trustee of the property. He cannot claim precedence over
the legatees mentioned in the will and take the bequests which the legatees are
entitled to under the will.

The  Supreme Court’s in the case of Sarbati Devi vs. Usha Devi, 55 Comp. Cases
214 (SC), in the context of a nomination under a life insurance policy
under the insurance act, 1938 has held that it does not have an effect of
conferring on the nominee any beneficial interest in the amount payable under
the life insurance policy on the death of the assured. It only indicates the
hand which is authorised to receive the amount on the death of the insured.

Again in Vishin Khanchandani vs. Vidya Khanchandani, 246  ITR 
306  (SC),the  Supreme 
Court  examined  the effect of a nomination in respect of a
national  Savings Certificates and held
that nominee is only an administrative holder. any amount paid to the nominee
is part of the estate of the deceased which devolves upon all persons as per
the succession law and the nominee must return the payment to those in whose
favour the law creates a beneficial interest.

Flat In A Co-Operative Housing Society

Let us now consider the position
in the context of a flat in a co-operative society. Section 30 of the
maharashtra Co-operative Societies act, 
1960 (‘the act”)  provides as
follows:

“Section 30 – Transfer of interest on death of member

(1) On the death of  a 
member  of  a 
society,  the society shall
transfer the share or interest of the deceased member to a person or persons
nominated in accordance with the rules, or, if no person has been so nominated
to such person as may appear to the committee to be the heir or legal
representative of the deceased member.

Provided that, such nominee, heir
or legal representative, as the case may be, is duly admitted as a member of
the society:

Provided further that, nothing in
this sub-section or in section 22 shall prevent a minor or a person of unsound
mind from acquiring by inheritance or otherwise, any share or interest of a
deceased member in a society.

(2) Notwithstanding anything
contained in sub-section (1), any such nominee, heir or legal representative,
as the case may be, may require the society to pay to him the value of the
share or interest of the deceased members, ascertained in accordance with the
rules.

(3)  A society may pay all other moneys due to the
deceased member from the society to such nominee, heir or legal representative,
as the case may be.

(4)   All transfers and payments duly made by a
society in accordance with the provisions of this section shall be valid and
effectual against any demand made upon the society by any other person.”

Thus, in the event of the death
of a member of a Society, the Society is required to transfer the member’s
interest to such person as may appear to the Committee to be the heir or legal
representative of the deceased member. The Act does not define the term “heir”.
The Supreme Court in the case of N. Krishnammal vs. R. Ekambaram, 1979 AIR SC
1298, has defined the term as follows:

“…The word “heirs”, as
pointed out by this Court in Angurbala Mullick v. Debabrata Mullick (1) cannot
normally be limited to “issues” only. It must mean all persons who
are entitled to the property of another under the law of inheritance.”

The Act also does not define who
is a “Legal representative”. Hence, one may refer to the Civil Procedure Code.
Section 2(11) of the Code of Civil Procedure, 1908defines a “Legal
Representative” as follows:

“(11) ” legal representative
” means a person who in law represents the estate of a deceased person,
and includes any person who intermeddles with the estate of the deceased and
where a party sues or is sued in a representative character the person on whom
the estate devolves on the death of the party so suing or sued;”

High Court Rulings

The Bombay high Court in another case of Om Siddharaj Co-operative
Housing Society Limited vs. The State of Maharashtra & Others, 1998 (4)
Bombay Cases, 506, has observed as follows in the context of a nomination
made in respect of a flat in a co-operative housing society:

“…….If a person is nominated in
accordance with rules, the Society is obliged to transfer ‘the share and
interest of the deceased member to such nominee. It is no part of the business
of the Society in that case to find out the relation of the nominee with the
deceased member or to ascertain and find out the heir or legal representatives
of the deceased member. It is only if there is no nomination in favour of any
person, that the share and interest of the deceased member has to be transferred
to such person as may appear to the committee or the Society to be the heir or
legal representative of the deceased member….”

Again in  the Gopal
Vishnu Ghatnekar vs. Madhukar Vishnu Ghatnekar, 1981 BCR, 1010 case, the
Bombay high Court has observed, in the context of a nomination made in respect
of a flat in a co-operative housing society, as follows:

“………It  is 
very  clear  on 
the  plain  reading 
of the Section that the intention of the Section is to provide for who
has to deal with the Society on the death of a member and not to create a new
rule of succession. the  purpose of the
nomination is to make certain the person with whom the Society has to deal and
not to create interest in the nominee to the exclusion of those who in law will
be entitled to the estate. The purpose is to avoid confusion in case there are
disputes between the heirs and legal representatives and to obviate the
necessity of obtaining legal representation and to avoid uncertainties as to
with whom the Society should deal to get proper discharge. though,  in law, the Society has no power to determine
as to who are the heirs or legal representatives, with a view to obviate
similar difficulty and confusion, the Section confers on the Society the right
to determine who is the heir or legal representative of a deceased member and
provides for transfer of the shares and interest of the deceased member’s
property to such heir or legal representative. Nevertheless, the persons
entitled to the estate of the deceased do not lose their right to the same. …….
once a person is nominated and the Society transfers the share or interest of
the deceased to him, he becomes the owner. If that is to be accepted it will
follow that if a Society accepts a person as the heir or legal representative
and transfers the share or interest to him, that person will become the owner. That
obviously, cannot he the intention of the legislature. Society has no power,
except provisionally and for a limited purpose to determine the disputes about
who is the heir or legal representative, therefore, follows that the provision
for transferring a share and interest to a nominee or to the heir or legal
representative as will be decided by the Society is only meant to provide for
interregnum between the death and the full administration of the estate and not
for the purpose of conferring any permanent right on such a person to a
property forming part of the estate of the deceased. The idea of having this
section is to provide for a proper discharge to the Society without involving
the Society into unnecessary litigation which may take place as a result of
dispute between the heirs’ uncertainty as to who are the heirs or legal
representatives. ….. it is only as between the Society and the nominee or heir
or legal representative that the relationship of the Society and its member are
created and this relationship continues and subsists only till the estate is
administered either by the person entitled to administer the same or by the
Court or the rights of the heirs or persons entitled to the estate are decided
in the Court of law. Thereafter the Society will be bound to follow such
decision.

……………. To repeat, a Society has a
right to admit a nominee of a deceased member or an heir or legal
representative of a deceased member as chosen by the Society as the member.”

A Single judge in Ramdas Shivram Sattur vs. Rameshchandra
Popatlal Shah 2009(4)Mh LJ 551 has held that a nominee has no right of
disposition of property since he is not an absolute owner. It held that section
30 does not provide for a special rule of Succession altering the rule of
Succession laid down under the personal law.

Supreme Court’s Decision

The position of a nominee in a
flat in a co-operative housing society was recently analysed by the Supreme
Court in Indrani Wahi vs. Registrar of
Co-operative Societies, CA NO. 4646 of 2006(SC). This decision was rendered
under the context of the West Bengal Co­ operative Societies act, 1983. In the
impugned case, a father died leaving a nomination in favour of his married
daughter. His widow and son challenged the same on various grounds. The matter
traveled from the deputy registrar of Cooperative Societies up to the high
Court and ultimately to the Supreme Court.

The Supreme Court held that there
can be no doubt that the holding of a valid nomination does not ipso facto
result in the transfer of title in the flat in favour of the nominee. However,
consequent upon a valid nomination having been made, the nominee would be
entitled to possession of the flat. Further, the issue of title had to be left
open to be adjudicated upon between the contesting parties.it further held that
there can be no doubt, that where a member of a cooperative society nominates a
person, the cooperative society is mandated to transfer all the share or
interest of such member in the name of the nominee. It is also essential to
notice, that the rights of others on account of an inheritance or succession is
a subservient right. Only if a member had not exercised the right of
nomination, then and then alone, the existing share or interest of the member
would devolve by way of  succession  or 
inheritance.  It  clarified 
that  transfer of share or interest,
based on a nomination in favour of the nominee, was with reference to the
concerned cooperative society, and was binding on the said society. The
cooperative society had no option whatsoever, except to transfer the membership
in the name of the nominee but that, would have no relevance to the issue of
title between the inheritors or successors to the property of the deceased. The
Court finally concluded, that it was open to the other members of the family of
the deceased, to pursue their case of succession or inheritance, in consonance
with the law.

Conclusion

Thus, the legal position in this respect is very
clear. A nomination is only a legal relationship and not a permanent transfer
of interest in favour of the nominee. If the nominee claims ownership of an
asset, the beneficiary under the will can bring a suit against him and reclaim
his rightful ownership. However,  the
possession of the flat must be handed over by the society immediately to the
nominee till such time as the succession issue is legally settled.

Knowledge Updation

Arjun (A) — Govind Bolo Hari Gopala
Bolo Radharaman Hari Gopala Bolo Shrikrishna ! Shrikrishna !

Shrikrishna (S) — Arey arjun, today
you are chanting my bhajan! What is the matter?

A — I am in a good mood today; for a
change !

S — Oh, i see. But what makes you so
happy?

A — This   time, 30th  
September date was  extended
without our asking for it. All of us were anticipating no such extra time. So
it was a bonus!

S — How complacent you people are!
You become happy even by such small things. In a way, it is a good quality.

A — Bhagwan,  we 
are  otherwise  slogging 
day  and night – literally reeling
under the pressure. So even small reliefs mean a big thing for us.

S — 
So   this   time,  
you   could   complete  
it   quite comfortably, you mean.

A — Not exactly. But yes. The
nightmare was a little less frightful!

S — and then you enjoyed Diwali!

A —    Well, to some extent yes. Still, the
pressure of time-barring assessments continued. But by and large, there was
relaxation.

S — That  means, now you will wake up directly in next
September !

A — ha  ! ha 
!! ha  !!! not  really. now 
i will have to manage my CPE hours.

S — ‘Manage’? What do you mean? Why
always at the last moment?

A — That is the real fun. We need to
simply enrol for some seminar, relax there; and get CPE credit.

S — But how will you manage the new
things that are coming?

A — what are they?

S —    GST; and that ICDS which was postponed last
year. And many other regulations that are continuously coming.

A —    See, it will keep on happening. There are
experts available. They will study and guide us. Why break our head?

S —That’s  the pity, Arjun. Most of you have almost
given  up 
self-study.  Even CPE  hours 
you  are ‘managing’. not taking it
seriously.

A —So far, lack of self-study has
not been declared as a misconduct!

S —Great thought, Arjun ! are  you the same Arjun who was so inquisitive
about knowledge even on the battlefield? are you the same Arjun who had a quest
for knowledge?

A —Bhagwan,   in  
those   days,   knowledge  
was respected. It had value. Now, no one cares for it. everything can be
managed.

S — Alas! What a downfall !

Not studying in itself may not be a
misconduct; but all misconducts arise out of ignorance and lethargy, why don’t
you understand this? not following the institute’s guidelines also is a
misconduct.

A — What you say is right. That
reminds me, i have just uploaded the returns. But many hard copies of financial
statements are yet to be signed ! and they are also to be uploaded to ROC.

S — you mean, balance sheets are
still to be signed?

A —Yes.   that’s   
usual.   We   sign  
it   backdated. Sometimes, even
the checking continues after the returns are filed.

S —Oh! you may be aware, there were
instances of audit being signed; and email queries continuing even after the
signing date !

A — Yes. My friend was held guilty
of that. But i am very careful about it.

S — Anyway  ! you people 
won’t  improve. But right since
ancient time, you are my favourite Shishya.

I cannot see you not pursuing
knowledge.

A — Lord,  i am your true follower. Whatever i said just
now was the general attitude of CAs. i do my study quite religiously.

S — 
In  fact,  this 
is  the  right 
time  for  knowledge updation. For GST, you must get
geared up. Not only yourself; but see that your staff, articles, clients and
also their accountants get educated. It will be a team-effort. You should
encourage clients to attend the seminars.

A — I agree. One will get the
benefit of early start, i will tell my other CA 
friends also to be a little more serious about studies. Without updated
knowledge, we can’t survive.

S — You said it ! you need to be
constantly awake. Your motto is ‘Ya esha Supteshu Jagarti !’

A —But Bhagwan, too much of
knowledge often leads to a dilemma – one becomes indecisive. Same dilemma i
faced in Mahabharat war.

S —True. But then the knowledge
alone cleared your dilemma. moreover, mere error of professional judgment is
not a misconduct?

A —Then    what 
is  misconduct?  We  may  commit mistakes even when we know all
interpretations.

S — The  misconduct lies in lack of application of
mind.

By your working papers, you should
be able to show that you studied the issue, applied your mind and adopted a
plausible interpretation. it may not be 100% correct.

Others may perceive it differently.

A — I followed. Good that you
mentioned about working papers. i will get them also properly organised. After
one year, we can’t remember anything; and can’t locate anything.

S — Shabbash ! that’s  like a
good Ca. that  is why you are always
blessed, my dear !

A — Please continue to enlighten me
and motivate me.

Bhagwan, Aapko hamara pranam !

Om Shanti.

Note:

This   dialogue 
seeks  to  highlight 
the  importance  of continuous updating of knowledge.

(Ethical dilemma)

Arjun (A) — Oh, I am surrounded by the ocean around!  But not a single drop of water to drink! Hey Shree Ram!
Shrikrishna (S) — What reminds you of that great poetry?  And why you called Shree Ram when I am always around you?
A —    Shrikrishna, sorry. You are not only around me, but always in my heart too. I am just thinking of the present situation. I wanted both Shree Ram and Shrikrishna to help me.
S —    What situation? Which ocean you are thinking of?
A —    Ocean of old notes! High Denomination Notes. HDN! These are in plenty everywhere. But of no use at all !
S —    And you don’t have small value notes to spend. Right?
A —    Absolutely! I did not have money to pay for the cab. Nowadays, you have stopped driving my chariot! So I came here on foot.
S —    Good for health.
A —    Cannot buy provisions and vegetables – and day-to-day things. Literally starving.
S —    That is also good for health. Of late, you all had taken to over-eating!
A —    Jokes apart; but this cancellation of HDNs has spoilt our sleep.
S —    Why? You had so much of it?
A —    No. If I had that kind of money, I would not have continued this ‘magajmari’ in the practice.
S —    Then why are you bothered so much if you don’t have HDNs?
A —    Wherever I go, people keep on asking me about ‘conversion’ round the clock !
S —    Why can’t you tell that Government’s pronouncements are very clear. You can exchange notes at many places.
A —    Oh Lord! Why are you pretending to be ignorant though you are omniscient?
S —    Ha! Ha! Ha! People seek your advice on converting huge black money into white. Is that correct?
A —    Yes. They ask questions about what will happen in income tax? Will they charge tax as well as penalty?
S —    So you give answers. What is there? That’s your usual work.
A —    No Lord! It is not that simple. It is more complicated than even your Bhagwad Geeta!
S —    Really? But what is your dilemma?
A —    See, basically, there are too many questions and no definite answers. There is guess-work and speculation.
S —    Then say, you don’t know the answer. Why are you afraid?
A —    Actually, they ask me whether I can convert their notes into ‘white’ money.
S —    That’s money-laundering.
A —    But many of our CA friends have taken it as an opportunity to earn money! My dilemma is, what should I do? Whether to jump into that game or remain away.
S —    Similar dilemma you were faced with in Mahabharata.
A —    And you had advised me to jump in; and not run away from it. What is your advice now?
S —    Arjun, my advice is the same. ‘jump in’ in the same way.
A —    Oh! So you are advising me to enter into the field of conversion? Simply fall in line with my friends doing this change of colour of money? Bhagwan, you too?
S —    No my dear! I had advised you to jump in the war that time.  Same way, here also jump in the war with the weapons of honesty and straight forwardness. Say ‘No’ to such temptations.
A —    So you mean, honesty is the best policy.  They say, it is true that by honest business practices, one can become a millionaire; but for that, one first needs to be a billionaire!! Ha! Ha!
S —    See, Arjun, whether this withdrawal of HDN was good or bad in economic sense, time alone will decide.  But it was an honest decision; taken with good intentions.
A —    No doubt about it.  It requires lot of courage.  Failure in execution on the part of Administration does not mean the decision was bad.  I agree.  These hoarders of black money had literally spoilt our country.
S —    You said it! No value for truth.  All-pervasive corruption.  All unscrupulous elements.  Bribery, on money, no value for merit.  This had threatened even the national security.
A —    It was necessary to teach a lesson to such economic offenders and enemies of the nation.
S —    If that is your view, and still if you indulge in abetting the money-laundering, it will be the greatest treachery.
A —    But as a part of my profession, I must help my clients.  I should steer them out of the difficulties in financial and tax matters. That is our sacred duty!  Should I give it up? That is my dilemma.
S —    When two such values seem to be conflicting, always remember, there cannot be compromise with honesty. That is one of the noblest virtues.  Moreover, national interests, interests of the society are supreme! They are above all other considerations.  If you help the wrong-doers today, there will be further deterioration, downfall – of the society.  Your posterity is going to live in that kind of the world.  Is it acceptable to you?
A —    You are right.  But our next generation has already migrated!
S —    Why they were required to leave the country?  It was because of the inaction, indifference of the intellectual class.  You used your brilliant brains in protecting and helping; if not encouraging the wrong elements.
A —    Bhagwan, you have opened my eyes.  I must tell this to my CA friends.
S —    Moreover, there could be criminal liability on you people – prosecution under tax laws, prevention of Anti-money laundering Act, FEMA, Benami Transactions Act, and what not! This is abetment.
A —    Yes.  My Lord!  I will caution all my friends.  They should avoid all the jugglery – not just out of fear; but with a positive thought that we should be supporting only good things. Bless me Lord !
S —    Tathaastu.
Om Shanti.
Note:
This dialogue is based on the present situation arising out of cancellation of the HDNs. CAs are expected to give preference to the ‘values’ in life and  national duty. _

FRAUD INVESTIGATION TECHNIQUES AND OTHER ASPECTS – PART II

Use of the juxtaposition test in audit to detect fraud

Conventional audit tests look for reasonable evidence to
support the financial statements being audited. Vouching, tracing, casting and
scrutiny of accounts, whether in manual or soft data form, usually include
examination of records or documents, but they are seldom penetrative enough to
detect  duplication, falsification,
manipulation and forgery. In this regard, the additional use of a juxtaposition
test may be very useful in many audit situations to directly ferret out fraud.
What exactly is this juxtaposition test? It is a simple common sense test of
comparison, by placing side by side, two or more pieces of evidence. In simple
words, to juxtapose means to put adjacent to, or to place side by side to
facilitate comparison. It can be used either to detect similarities where none
are expected or differences where there should be none.

Usually in the course of day-to-day business, senior
management executives have to review, sign, or approve various documents,
invoices, even agreements and contracts with external parties such as vendors,
customers, etc. Even within an organisation, there are documents
constantly floating around for approval, such as vouchers, letters, minutes of
meetings. In almost every such situation, the relevant document (say for example
a vendor’s bill), will be seen or examined only one at a time. Two or
more documents (or any other evidence such as CCTV, Audio recordings, pictures
etc) from a particular party will seldom be examined together for comparison.
Usually only very important details, computations, amounts, or specific clauses
are examined and scrutinised more carefully. Consequently a fraud like a
duplicated letterhead bill from a vendor can easily escape detection because
one may not remember what exactly the original letterhead looked like. This
kind of fraud and many other frauds in evidence relied upon can perhaps be
detected by applying this simple juxtaposition test.

This juxtaposition test can be used in myriad number of ways,
in different situations, on different objects. Let us consider the various
places where such a juxtaposition test can be used:

1.  Comparison of external letters / documents for
inexplicable similarities indicating that the source is the same. Eg, multiple
quotations may not be from different parties but actually the same. Similarly
reference letters from two different employers may have some unique
similarities where there should be none. For example the following instances of
two such reference letters from totally different organisations indicate
exactly the same grammatical mistakes, spelling mistakes and english sentences.
These can be easily spotted only by juxtaposition and are outlined below.

 (Above names,
addresses, are purely for academic and demonstrative purposes. Any resemblance
to any entity is purely co-incidental. Nowhere is any fraud suggested or
implied)

2.  Approval signatures. Just as a bank manager
compares a signed cheque or an RTGS form with the specimen signature, it is
imperative for an auditor to see hard copy documents such as vouchers,
agreements, bills, minutes etc., with the specimen signature of those
who have signed. In one case, an auditor specifically asked for a list of
specimen signatures of the approving authorities on agreements, important
documents, records and vouchers. The company initially resisted but relented
and provided him such signatures. There were some sarcastic remarks about him
conducting an investigation instead of an audit. However the auditor was
unruffled and took this step as a routine control testing procedure and his
effort paid rich dividends. He meticulously conducted a sample check comparison
of approval signatures on payment vouchers with specimen signatures provided by
the company to him. He found some signatures which did not match with any
signature on the list given to him. He then went to the CFO of the company to
inquire about these unidentified signatures. The CFO was also surprised because
he too could not identify any of those signatures. After making detailed
inquiries with all departments, it was eventually established that they belonged
to no one and were mere scribbles. There were no such authorised
signatories and approvals for such vouchers were fictitious and invalid
authorisations. No one bothered to inquire who had authorized them and the
cashier presumed that these were genuine authorisations. In a year almost Rs 80
lacs were so paid through multiple small value vouchers. All that was required
was someone to see whether such signatures were known and valid before permitting
such expenditure. It is important to note that one need not be a signature
verification technical expert. A simple comparison with given signatures is
enough to detect fraud.

Example of an unidentifiable signature

3.  Juxtaposition check can be even within a
document. In the above case, the cashier did not have readily all the specimen
signatures. The juxtaposition test is sometimes missed out even when it is
possible on one single document. A huge purchase order of over Rs. 60 lakh was
executed without anyone realising that all the three signatures of the buyer,
checker and approver were the same. The human mind becomes so cluttered with
other information on any given document that focus is given only on critical
information such as value, rate, date, vendor, description of the material and
the existence of approval signatures. The human mind gets switched off beyond
that to examine deeply by applying any test for deception or wrongdoing. In
this case since the three signature were side by side (juxtaposed) on the
voucher. Just by looking at the three signatures, one could easily see that
they were by the same person.

(above is just an imaginary voucher with assumed names,
product and signatures for demonstration purposes; any resemblance is
co-incidental and unintentional and nowhere is any such person or entity
connected with fraud).

In the same manner, the juxtaposition test can be used to
compare:

(a) Vendors’ bills. Usually printing and stationery
bills, transport bills, courier charges, and similar regular expenditure
related bills are the ones most likely to be duplicated or replicated. By
juxtaposing these expenses, we will be in a position to identify anomalies and
perhaps spot a fictitious bill.

(b) Agreements and contracts lying between two or
more departments such as legal department, commercial department, purchase
department etc. It is expected that these are identical copies, but
wrongdoers even make alterations in copies of different departments for ulterior
motives of facilitating fraud.

(c) Documents with different ages. A two year old
document when compared with a recent document will have a difference in the
physical condition. Over a period of time, paper yellows out, creases, smudges
with handling and even tears a little. 
However, new documents have a crisp, whiter look and usually do not have
many smudges. In one case an auditor compared bills from a  suspected supplier for a two year period and
applied a juxtaposition test. Though he did not find anything anomalous in the
content matter,  he noticed that one of
the oldest bills was absolutely white and crisp. This stood out in complete
contrast with all the bills of that year. On a detailed investigation, it was
revealed that the bill was inserted recently because the original one had been
removed for a wrongful purpose of alteration. 

There are many such examples of the juxtaposition test on
documents; but  one may well ask whether
this test is going to be useful in the paperless environment with soft data,
spreadsheets, data on audio recordings, videos, CCTVs etc. The answer is
yes, very much. In some of the future articles in BCAS journal,  further examples and illustrations of usage
of juxtaposition test will be given. _

Family Court Proceedings – Admissibility of Electronic Records – Privileged Communication – Video clippings recorded through pin hole camera with hard disk memory is primary evidence – Section 65B compliance not required. [Indian Evidence Act, 1872 – Sections 122, 14, 62,65B; Family Courts Act, 1984 – Section 13, 14]

Preeti Jain vs. Kunal Jain and
Ors. AIR 2016 RAJASTHAN 153

A husband filed for dissolution
of the marriage u/s. 13 of the family 
Courts act, 1984 against his wife on the grounds of cruelty and
adultery. It was alleged that the applicant had in his possession a video
clipping recorded through a pin hole camera establishing his wife’s extra­
marital relationship.

Counsel for the wife submitted
that the electronic record placed before the family court did not satisfy the
mandate of section 65B (4) of the indian evidence act, 1872, which requires a
certificate (signed by a person occupying a responsible official position in
relation to the operation of the relevant device or the management of the
relevant activities,  whichever  was 
appropriate,  through  which the material was electronically
recorded) stating that the contents of the electronic recordings were true to
the best of his knowledge and belief. The prayer of the wife was dismissed.

It was held by the high Court
that it is the discretion of the family court to receive or not to receive the
evidence, report, statement, documents, information etc. placed before it on
the test, whether it does or does not facilitate an effective adjudication of the
disputes before it. Section 65B of the act of 1872 only deals with the
secondary evidence qua electronic records. It does not at all deal with the
original electronic records, as in the instant case, where the pinhole camera,
with a hard disk memory on which the recording was done has been submitted
before the family Court. Reliance was placed in the case of Anvar P.V. vs. P.K.
Basheer (2014)10 SCC 473:

“If an electronic record is
produced as a primary evidence u/s. 62 of the evidence act, the same is
admissible in evidence without compliance with the conditions of Section 65B of
the act of 1872.”

Hence, petition was dismissed.

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)

Part C | RBI/FEMA

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Given below are the highlights of certain RBI Circulars

34] A. P. (DIR Series) Circular No. 22 dated 21st
October, 2015

Notification No. FEMA. 351/2015-RB dated
September 30, 2015
Annual Return on Foreign Liabilities and Assets
(FLA Return) – Reporting by Limited Liability
Partnerships

This circular states that Limited Liability Partnerships (LLP) in India that have received FDI and / or made overseas investment in the previous year(s) as well as in the current year, have to submit the FLA return to RBI by 15th July every year, in the prescribed format.

As LLP do not have 21 Digit CIN (Corporate Identity Number), they should enter ‘A99999AA9999LLP999999’ against CIN in the FLA Return.

35] A. P. (DIR Series) Circular No. 23 dated 29th October, 2015

No fresh permission/renewal of permission to
LOs of foreign law firms- Supreme Court’s directions

This circular states that, till the final disposal of the matter by the Honorable Supreme Court of India: –

1. Foreign law firms that have been granted permission prior to the date of interim order for opening Liaison Office (LO) in India are permitted to continue till the date such permission is still in force.

2. No fresh permission / renewal of permission will be granted by RBI / banks.


36] A. P. (DIR Series) Circular No. 24 dated 29th October, 2015

Notification No. FEMA. 353 /2015-RB dated October 6, 2015 Subscription to National Pension System by Non-Resident Indians (NRIs)

This circular permits NRI to subscribe to
National Pension System governed and administered by Pension Fund
Regulatory and Development Authority (PFRDA), provided
the subscriptions are made through normal banking channels or out of
funds held in their NRE / FCNR / NRO account and the person is eligible
to invest as per the
provisions of the PFRDA Act.

 There are no restrictions on repatriation of the annuity / accumulated
savings and hence, the annuity / accumulated saving will be repatriable.

37] A. P. (DIR Series) Circular No. 26 dated 5th November, 2015

Notification No FEMA.347/2015-RB dated July 24, 2015 Switching from Barter Trade to Normal Trade at the Indo-Myanmar Border

This circular provides that with effect from 1st December, 2015 all trade at the Indo-Myanmar border will be as per normal trade route i.e. payments can be settled in any permitted currency in addition to the Asian Clearing Union mechanism. As a result, no trade on the barter system basis will be permitted from 1st December, 2015.

38] A. P. (DIR Series) Circular No. 27 dated 5th November, 2015

Software Export – Filing of bulk SOFTEX-further liberalisation

Presently, software exporters with an annual turnover of at least Rs.1,000 crore or who file at least 600 SOFTEX forms annually on an all India basis, are eligible to declare all the off-site software exports in bulk in the form of a statement in excel format, to the competent authority for certification on monthly basis.

This circular has extended that facility to all software exporters. Hence, all software exporters can now file single as well as bulk SOFTEX form in excel format with the competent authority for certification in the SOFTEX form Annexed to this circular.

Software exporters are required to submit the SOFTEX form induplicate as per the revised procedure. STPI / SEZ will retain one copy and handover the duplicate copy to the exporters after due certification. Software exporters can generate SOFTEX form number (single as well as bulk) for use in off-site software exports from the website of RBI viz., www.rbi.org.in. In order to generate the SOFTEX number/s, an online application form Annexed to this circular has to be filled in.

39] A. P. (DIR Series) Circular No. 28 dated 5th November, 2015

Risk Management & Inter-Bank Dealings: Relaxation of facilities for residents for hedging of foreign currency borrowings

Presently, residents having a long term foreign currency liability are permitted to hedge, with a bank in India, their exchange rate and/or interest rate risk exposure by undertaking a foreign currency-INR swap to move from a foreign currency liability to a rupee liability.

This circular now permits residents to enter in to FCY-INR swaps with Multilateral or International Financial Institutions (MFI / IFI) in which the Government of India is a shareholding member subject to the following terms and conditions: –

(i) Such swap transactions must be undertaken by the MFI / IFI concerned on a back-to-back basis with a bank in India.

(ii) Banks can face, for the purpose of the swap, only those Multilateral Financial Institutions (MFIs) and International Financial Institutions (IFIs) in which Government of India is a shareholding member.

(iii) The FCY-INR swaps must have a minimum tenor of 3 years.

(iv) All other operational guidelines, terms and conditions relating to FCY-INR swaps as laid down in A.P. (DIR Series) Circular No. 32 dated 28th December, 2010, as amended from time to time, shall apply, mutatis mutandis.

(v) In case of default by the resident borrower on its swap obligations, the MFI / IFI concerned must bring in foreign currency funds to meet its corresponding liabilities to the counterparty bank in India.

(vi) Banks have to report the FCY-INR swaps transactions entered into with the MFI / IFI on a back-to-back basis on CCIL reporting platform.

Property held by a Hindu Female is her Absolute Property – N’est-ce pas?

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Introduction
The above Title, ‘Isn’t a Hindu Female’s Property, her Absolute Property?’, may appear as a rhetoric question to readers! However, having said that it would be interesting to note that the question is not as cut and dried as it appears and this issue has travelled all the way to the Supreme Court on numerous occasions. Thus, while it is quite easy to understand in theory that right to property is a vested right of a Hindu female under the Hindu Succession Act, it becomes quite difficult to understand its implications given the facts and circumstances of a particular case. The issue is thrown into sharper focus by the seeming dichotomy under sub-sections (1) and (2) of section 14 of the Hindu Succession Act, 1956 (“the Act”), which deals with property of a Hindu female. A recent Supreme Court decision in the case of Jupudy Pardha Sarathy vs. Pentapati Rama Krishna, Civil Appeal No. 375/2007 (Jupudy’s case) has analysed the position laid down by various judgments on this subject.

Section 14 of the Act
The Act governs the position of a Hindu intestate, i.e., one dying without making a valid Will. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to such property and the order of preference among them. Section14 which is the crux of the issue needs to be studied closely.

Section14(1) states that any property possessed by a female Hindu, whenever it may be acquired by her, shall be held by her as full owner thereof and not as a limited owner. Thus, the Act lays down in very clear terms that in respect of all property possessed by a Hindu female, she is the full and absolute owner and she does not have a limited/restricted right in the same. The explanation to this sub-section defined the term, “property” to include both movable and immovable property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by gift (from any person, whether a relative or not, before, at or after her marriage), or by her own skill or exertion, or by purchase or by prescription, or in any other manner whatsoever. Thus, an extremely wide definition of property has been given under the Act. Property includes all types of property owned by a female Hindu although she may not be in actual, physical or constructive possession of that property – Mangal Singh & Ors vs. Shrimati Rattno, 1967 SCR (3) 454. The critical words used here are “possessed” and “acquired”. The word “possessed” has been used in its widest connotation and it may either be actual or constructive or in any form recognised by law. In the context in which it has been used in section 14(1) it means the state of owning or having in one’s hand or power – Gummalapura Taggina Matada Kotturuswami vs. Setra Veerayya and Ors. (1959) Supp. 1 S.C.R. 968. The use of the words ‘female Hindu’ is very wide in scope and is not restricted only to a ‘wife’ – Vidya (Smt) vs. Nand Ram Alias Asoop Ram, (2001) 1 MLJ 120 SC.

In Deen Dayal & Anr. vs. Rajaram, (1971) 1 SCR 298, it was held that, before any property can be said to be “possessed” by a Hindu woman as provided in section 14(1), two things are necessary: (a) she must have a right to the possession of that property and (b) she must have been in possession of that property either actually or constructively. However, this section cannot make legal what is illegal. Hence, if a female Hindu is in illegal possession of any property, then she cannot validate the same by taking shelter under this section.

Section 14(2) carves out an exception to section14(1) of the Act. It states that nothing contained in sub-section (1) of section 14 shall apply to any property acquired by way of gift or under a will or any other instrument or under a decree or order of a civil court or under an award where the terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate in such property. Thus, if a female Hindu acquires any property under any instrument and the terms of acquisition, as laid down by such instrument, itself provided for a restricted or a limited estate in the property then she would be treated as a limited owner only. In such an event, she cannot have recourse to section 14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of section 14 apply to a particular case depends upon the facts of the case – Seth Badri Pershad vs. Smt. Kanso Devi, (1969) 2 SCC 586. In this decision it was further held that sub-section (2) of section 14 is more in the nature of a proviso or an exception to sub-section (1). It can come into operation only if acquisition in any of the methods indicated therein is made for the first time without there being any pre-existing right in the female Hindu who is in possession of the property. It further approved of the observations of the Madras High Court Rangaswami Naicker vs. Chinnammal, AIR 1964 Mad 387 that section14(2) made it clear that the object of section 14 was only to remove the disability on women imposed by law and not to interfere with contracts, grants or decrees etc. by virtue of which a women’s right was restricted.

Factual Matrix of Jupudy’s case
A person had 3 wives and his 1st wife had predeceased him. His 3rd wife had no child and so, under his Will, he left her a house to be enjoyed for her life and after her life it was to go to his son from his 2nd wife. He also left her certain washroom facilities and right to fetch water from the well during her lifetime. All of these were also to devolve on his son after her death. The focussed issue before the Apex Court was whether the right to these properties so bequeathed on the 2nd wife was her absolute property by virtue of section 14(1) or whether it was a limited estate u/s. 14(2) since she was made an owner only for her lifetime?

Decisions on Section14
Several decisions of the Supreme Court have analysed section14(1) and section14(2) in depth. Some of the important ones are discussed below.

R.B.S.S. Munnalal and Others vs. S.S. Rajkumar, AIR 1962 SC 1493

The Supreme Court held that by section14(1) the legislature converted the interest of a Hindu female, which under the customary Hindu law would have been regarded as a limited interest, into an absolute interest and by the Explanation thereto gave to the expression “property” the widest connotation. The Court held that the Act conferred upon Hindu females full rights of inheritance, and swept away the traditional limitations on her powers of dispositions which were regarded under the Hindu law as inherent in her estate. She was under the Act regarded as a fresh stock of descent in respect of property possessed by her at the time of her death.

Nirmal Chand vs. Vidya Wanti, (1969) 3 SCC 628

If a lady is entitled to a share in her husband’s properties then the suit properties must be held to have been allotted to her in accordance with section14(1), i.e., as an absolute owner inspite of the fact that the deed in question mentioned that she would have only a life interest in the properties allotted to her share.

Eramma vs. Verrupanna, 1966 (2) SCR 626

The Supreme Court held that mere possession of property by a female does not automatically attract section 14(1) of the Act.

MST. Karmi vs. Amru, AIR 1971 SC 745

A person died leaving behind his wife. His son pre-deceased him. He gave a life-interest through his Will to his Wife. It was held that the life estate given to a widow under the Will of her husband cannot become an absolute estate under the provisions of the Act. Section14(2) would apply to such a situation and it would not become an absolute estate. The female having succeeded to the properties on the basis of her husband’s Will she cannot claim any rights over and above what the Will conferred upon her. This is one of the important decisions which have gone against the tide of conferring absolute ownership on the Hindu female.

V. Tulasamma vs. Sesha Reddi, (1977) 3 CC 99

In this landmark case, the Supreme Court clarified the difference between sub-section (1) and (2) of section 14, thereby restricting the right of a testator to grant a limited life interest in a property to his wife. case involved a compromise decree arising out of decree for maintenance obtained by the widow against her husband’s brother in a case of intestate succession. The compromise allotted properties to her as a limited owner. The Supreme Court held that this was a case where properties were allotted in lieu of maintenance and hence, section14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting s/s. (2) was that this subsection should be applicable only to cases where the acquisition of property is made by a Hindu female for the first time without any pre-existing right. Where, however, property is acquired by a Hindu female at a partition or in lieu of her pre-existing right to maintenance, such acquisition would be pursuant to her pre-existing right not be within the scope and ambit of section 14(2) even if the instrument allotting the property prescribes a restricted estate in the property. S/s. (2) must, therefore, be read in the context of s/s. (1) so as to leave as large a scope for operation as possible to s/s. (1) and so read, it must be confined to cases where property is acquired by a female Hindu for the first time as a grant without any preexisting right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted estate in the property. It further held that a Hindu woman’s right to maintenance is a personal obligation so far as the husband is’ concerned, and it is his duty to maintain her even if he has no property. If the husband has property then the right of the widow to maintenance becomes an equitable charge on his property and any person who succeeds to the property carries with it the legal obligation to maintain the widow. Though the widow’s right to maintenance is not a right to property, it is undoubtedly a pre-existing right in the property, i.e. it is a jus ad rem, not jus in rem and it can be enforced by the widow who can get a charge created for her maintenance on the property either by an agreement or by obtaining a decree from the civil court.

Smt. Culwant Kaur vs. Mohinder Singh, AIR 1987 SC 2251 / Gurdip Singh vs. Amar Singh 1991 SCC (2) 8

The provisions of section 14(1) of the Act were applied because it was a case where the Hindu female was put in possession of the property expressly in pursuance to and in recognition of the maintenance in her/where the wife acquired property by way of gift from her husband explicitly in lieu of maintenance.

Thota Sesharathamma vs. Thota Manikyamma, (1991) 4 SCC 312

The Apex Court dealt with a life estate granted to a Hindu woman by a Will as a limited owner and the grant was in recognition of pre-existing right. Tulasamma’s decision was followed and section 14(1) was held to apply. The Supreme Court also held that the contrary decision in the case of Mst. Karmi cannot be considered an authority since it was a rather short judgment without adverting to any provisions of section 14(1) or 14(2) of the Act. The judgment neither made any mention of any argument raised in this regard nor there was any mention of the earlier decisions on this issue.

Nazar Singh vs. Jagjit Kaur, (1996) 1 SCC 35 / Santosh vs. Saraswathibai, (2008) 1 SCC 465 / Subhan Rao vs. Parvathi Bai, (2010) 10 SCC 235

Applying Tulasamma’s decision it was held that lands, which were given to a lady by her husband in lieu of her maintenance, were held by her as a full owner thereof and not as a limited owner notwithstanding the several restrictive covenants accompanying the grant. According to the Court, this proposition followed from the words in sub-section (1) of section14, which insofar as is relevant read: “Any property possessed by a female Hindu … shall be held by her as full owner and not as a limited owner.”

Shakuntala Devi vs. Kamla and Others, (2005) 5 SCC 390

A Hindu wife was bequeathed a life interest for maintenance by her husband’s Will with a condition that she would not have power to alienate the same in any manner. As per the Will, after death of the wife, the property was to revert back to his daughter as an absolute owner. It was held that u/s.14(1) a limited right given to the wife under the Will got enlarged to an absolute right in the suit property.

Sadhu Singh vs. Gurdwara Sahib Narike, (2006) 8 SCC 75 / Sharad Subramanyan vs. Soumi Mazumdar (2006) 8 SCC 91

The Supreme Court in these well-considered decisions held that the antecedents of the property, the possession of the property as on the date of the Act and the existence of a right in the female over it, however limited it may be, are the essential ingredients in determining whether subsection (1) of section 14 of the Act would come into play. Any acquisition of possession of property by a female Hindu could not automatically attract section14(1). That depended upon the nature of the right acquired by her. If she took it as an heir under the Act, she took it absolutely. If while getting possession of the property after the Act, under a devise, gift or other transaction, any restriction was placed on her right, the restriction will have play in view of section14(2) of the Act. Therefore, there was nothing in the Act which affected the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act did not stand in the way of his separate properties being dealt with by him as he deemed fit. His Will could not be challenged as being hit by section 14(1) of the Act. When he validly disposed of his property by providing for a limited estate to his wife, the widow had to take it as the estate fell. This restriction on her right so provided, was really respected by section 14(2) of the Act. Thus, in this case where the widow had no pre-existing right, the limited estate granted to her under her husband’s Will was upheld u/s. 14(2).

Nazar G. Rama Rao vs. T. G. Seshagiri Rao (2008) 12 SCC 392

The Court held that if no issue was framed and also no evidence was led to substantiate the plea that the female was occupying the premises in lieu of maintenance, section 14(1) cannot automatically apply to every case.

Final Verdict in Jupudy’s case
After analysing a host of decisions and the legal principles, the Supreme Court in Jupudy’s case held that the bequest under the Will to the 3rd Wife was in the nature of maintenance even though the express words maintenance were not mentioned in the Will. She was issueless and the husband was duty bound to maintain her. Hence, he gave her the house and access to incidental facilities. Accordingly, section14(1) applied and the limited right stood enlarged into an absolute estate by virtue of a pre-existing right of maintenance. The Court observed that no one disputed the genuineness of the Will and the fact that the 3rd Wife continued to enjoy the said property in lieu of her maintenance and hence, the decision of G. Rama’s case cannot apply here.

Conclusion
Section14(1) is a very important piece of legislation when it comes to ensuring protection of a Hindu female’s rights over property. It ensures that a lady is an absolute owner in respect of her property. However, it is also essential that this is provision is used as a shield and not a sword. Section14(2) ensures that what was originally acquired as a limited owner does not automatically enlarge into absolute ownership. One important principle which emerges from the numerous Court cases is that, applicability of these two sub-sections has to be tested on the facts of each case and there cannot be one straight-jacketed approach to all cases. Due care should be taken in drafting a Will under which a Hindu lady is getting a limited estate to demonstrate that it is in effect a restricted interest and not something in lieu of maintenance.

Will – Transfer of property – Will becomes effective only after death of testator – Limitation Act, does not strictly apply for granting probate.

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The State of Meghalaya & Anr vs. Bimol Deb & Anr. ; AIR 2015 Meghalaya 48 (HC).

Writ petition was filed challenging the order of additional Dy. Commissioner (Revenue), Shillong on granting the probate. It was submitted that, as per the Meghalaya Transfer of Land (Regulation) Amendment Act, 2010, no one can make a Will to transfer the property from one living person to another living person and that the Will in question was not a Will at all, but it was made for the purpose of transfer of land by the testator of the Will.

The Hon’ble Court observed that The Meghalaya Land Transfer Act, 1971 is a law passed by the State legislature. There is no definition that, “transfer of property” shall also include within its meaning “WILL” under the Transfer of Property Act, 1882. Section 5 of the Transfer of Property Act, 1882 defines “transfer of property” as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, and one or more other living persons; and ‘to transfer property’ is to perform such act”.

The definition of “WILL” can be found only in the Indian Succession Act, 1925 in Section 2(h) “WILL” means the legal declaration of the intention of a testator with respect to his property which he desires to be carried into effect after his death.”

Now, the word “convey” in section 5 has been further defined in the Indian Stamp Act, 1899 in section 2(10). “Conveyance” includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos (between living persons) and which is not specifically provided for by Schedule I”.

The upshot of the above legal position is that, ‘transfer of property’ will include only between living person and the same is the meaning of conveyance also which will include only between living persons. However, Will is a testament by a legal declaration bequeathing the right of property to a living person in future. A Will becomes effective only after the death of the testator. A Will is a last wish of a dead person.

Analysing various provisions of The Meghalaya Transfer of Land (Regulation) Amendment Act, 2010, the Court held that, if we read the definition of “Transfer of property” and “Conveyance” quoted and discussed above, it becomes very apparent that, by including “WILL” within the meaning of “Conveyance”, the State legislature has rewritten the definition of “conveyance” which is an illegal exercise of power; but the State legislature in the first place has no power to alter the definition of conveyance legislated by the Parliament. The inclusion of “WILL” has to be struck down as illegal since the State legislature cannot overstep in the field of Union list while legislating law. The issue of succession is solely in the field of the Union list and not in the Concurrent list. Safe legal inference can be drawn that the insertion of WILL in clause 2(d) of the Meghalaya Land Transfer Amendment Act, 2012 quoted above is a blatant case of illegal legislation and is liable to be struck out. The subsequent amendment in section 3A restricting the devolution of property only to immediate family members will have to meet the same fate and to be struck down. The Court also observed that as per the limitation is concerned Article 17 of the Limitation Act, 1963 does not strictly apply for granting probate.

Tribunal – Early hearing – Application must be considered :

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Payadhi Foods P. Ltd. vs. UOI 2015 (325) ELT 705 (Cal.) (HC)

The Petitioner filed an application for early hearing of a pending appeal before the CESTAT which was dismissed on the ground that the appeal would be considered in due course.

The Hon’ble court observed that the appeal which was filed in the year 2010 had not reached to its logical conclusion as yet. The Court observed that though it was not oblivious of the reality where the docket of the Tribunal is burdened with enormous litigation filed before it, but equally this Court cannot lose sight of the responsibilities of the statutory authority to render justice effectively and expeditiously. When an application is taken out seeking for an early hearing of the said appeal, the Tribunal ought to have fixed the date but should not have thrown the said application at the threshold that it will be taken up in due course. The court observed that the justice would be sub-serve if the CESTAT is directed to fix up a date and hear out the said appeal within the time frame.

Gift Deed – Cancellation – Suspicious Circumstances – It is settled principles of law that negative cannot be proved

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Smt. Sita Sundar Devi vs. Savitri Devi & Ors. AIR 2015 Patna 217 (HC)

Plaintiff filed the suit for declaration that the gift deed dated 09.05.1967 purportedly executed by him in favour of defendant Nos. 2 to 4 is fraudulent, illegal and void. The plaintiff also prayed for cancellation of the gift deed.

The lower court recorded the finding that the plaintiff had no cause of action and, therefore, was not entitled to any relief. The court below also found that the plaintiff failed to prove that the gift deed was obtained from him by fraud and as such, the gift deed is not a fraudulent, fabricated and illegal document. Accordingly, the plaintiff’s suit was dismissed.

The Hon’ble High Court observed that it is settled principles of law that a registered document is presumed to be genuine unless the contrary is proved. However, this presumption is rebutable. Once the plaintiff denied its execution with his knowledge and alleged fraud describing how the fraud was played on him, it was for the defendant to have explained the facts, which have been denied by the plaintiff.

The plaintiff has shown the circumstances and the reason as to why he would have gifted his entire property to the the defendants, who are not close relatives without making any provision either for himself or for his wife and the daughter, grand-daughters etc. When these facts were brought on record, it was for the defendants to have satisfactorily explained the matter.

The court further observed that, it is the case of the defendants that plaintiff has purchased the stamp, therefore, it was for the defendants to prove this fact because the plaintiff has denied in so many words and it is settled principles of law that negative cannot be proved.

Once the plaintiff denied the facts, the presumption of genuineness of the gift deed stands rebutted and the onus shifted on the defendants to prove positively the fact asserted by the defendants.

It is settled principles of law that for proving fraud, the circumstance is to be shown satisfactorily to the conscience of the Court because no direct evidence will be found. Here, the plaintiff has proved the fact that he has his wife, daughter, grand-daughters and son-in-law whom he loves. Now the question is, can it be believed that one person will gift all the properties to some persons, who are either not related or distantly related without making provision even for himself and his wife? The court held that, this cannot be the natural conduct of a person.

This is one of the strong circumstances which raises a strong suspicion about the genuineness of the gift deed as there is no explanation at all. Can it be believed that the plaintiff’s love and affection towards his wife, daughter, grand-daughters and son-in-law and even towards himself was lesser than the love and affection towards the defendants?

The other aspect is that in fact the plaintiff was in need of money when he was ailing and was being treated. In such circumstances, he would have sold the property for arranging money but he did not sell. Rather, he obtained assistance from the defendants and then gifted everything, which again creates a strong doubt.

All these are the circumstances, which have been proved by the plaintiff, which clearly indicate that in fact the defendants played a fraud on the plaintiff and got the gift deed executed by him.

In view of above, the Court held that the plaintiff had been able to prove that the defendants fraudulently got the gift deed executed. As such the gift deed was not a genuine document and no title passed on the defendants on the basis of this gift deed.

Nominations – Securities – Nominee continues to hold the Securities in trust and as a fiduciary for claimants under succession law : Succession Act 1925 Section 58:

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Jayanand Jayant Salgaonkar vs. Jayshree Jayant Salgaonkar AIR 2015 Bom 296

The issue arose as to whether the decision of a learned single Judge of Court in Harsha Nitin Kokate vs. The Saraswat Cooperative Bank Ltd. & Ors. 2010(112) Bom. LR 2014 was per incuriam and not a good law wherein the Court had considered the provisions of section 109A of the Companies Act, 1956 and Bye-Law 9.11 under the Depositories Act, 1996, and found that once a nomination is made, the securities in question: automatically get transferred in the name of the nominee upon the death of the holder of the shares.

In the present matter the Hon’ble Court observed that The Depositories Act, 1996. is an act to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto.

This Act has nothing whatever to do with succession or disposition inter vivos. Plainly, the Depositories Act is concerned with the regulation of depositories, i.e., those entities providing depository services, and not in relation to the holders of the securities in such services, or the manner in which those security-holders might choose to conduct their affairs or to leave the distribution of these securities either to be governed by actions and deeds inter vivos, testamentary succession or inheritance.

A nomination, though said to be a ‘testament’, requires no probate or other proof ‘in solemn form’. Witnesses need not be in the presence of the nominator. Witnesses need not act at the instance of the nominator. Witnesses need not see the nominator execute the nomination. No nomination can be assailed on the ground of importunity, fraud, coercion or undue influence; section 61 of the Indian Succession Act is wholly defenestrated, as is section 59. There can be no codicil to a nomination. There is no particular form for a will, but there are requirements attendant to its proper making. These do not apply to all nominations. Even the requirement of witnesses is a matter of prudence rather than statute. If that be so, no nomination per se requires attestation, and if that be so, it is admissible in evidence u/s. 68 of the Evidence Act, 1872 without the evidence of any witness (simply because a witness to a nomination is not, in any sense, an ‘attesting witness’). But no Will can be so read in evidence without such evidence. From the fundamental definitions to the decisions cited, it is clear that a nomination only provides the company or the depository a quittance. The nominee continues to hold the securities in trust and as a fiduciary for the claimants under the succession law. Nominations u/ss 109A and 109B of the Companies Act and Bye-Law 9.11 of the Depositories Act, 1996 cannot and do not displace the law of succession, nor do they open a third line of succession.

Judicial Process – Judicial Composure and Restraint – Judicial accountability and discipline are necessary to the orderly administration of justice.

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State of Uttar Pradesh & Anr vs. Anil Kumar Sharma & Anr. (2015) 6 SCC 716

The substantial question of law that was raised in this appeal was, as to what extent a High Court can exercise its powers in issuing directions on judicial side, relating to the procedure to be adopted in criminal trials. The Hon’ble Supreme Court, referring the observation in A. M. Mathur vs. Pramod Kumar Gupta (1990) 2 SCC 533, observed that judicial restraint and discipline are necessary to the orderly administration of justice. The duty of restraint and the humility of function has to be the constant theme for a Judge, for the said quality in decision-making is as much necessary for the Judges to command respect as to protect the independence of the judiciary.

Judicial restraint in this regard might better be called judicial respect, that is, respect by the judiciary. Respect to those who come before the court as well to other co-ordinate branches of the State, the executive and the legislature. There must be mutual respect. When these qualities fail or when litigants and public believe that the judge has failed in these qualities, it will be neither good for the judge nor for the judicial process.

No person, however high, is above the law. No institution is exempt from accountability, including the judiciary. Accountability of the judiciary in respect of its judicial functions and orders is vouchsafed by provisions for appeal, revision and review of orders.

The Apex Court held that in view of law laid down by the Court, as discussed above, the High Court had clearly erred in law in treating the writ petition, which was filed for quashing of an FIR and had become infructuous, as a Public Interest Litigation, and issuing sweeping directions, without there being sufficient data and material before it to pass directions. There is no requirement u/s. 173 Code of Criminal Procedure for the Investigating Officer to produce the accused along with the charge-sheet. The High Court did not care to see that where there are several accused and only some of them could be arrested and remanded to judicial custody, and others are on bail, how all of them can be produced together by the police.

DAUGHTER’S RIGHT IN COPARCENARY – IV

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The 2005 amendment in the Hindu Succession Act, 1956 (“the Act”) by the Hindu Succession (Amendment) Act, 2005 (“the Amendment Act”) and the issue of daughter’s right in coparcenary property have now been a subject matter of substantial litigation all over the country. My articles in BCAJ published in January 2009, May 2010 and November 2011 made an attempt to explain the legal position as per the cases decided by several High Courts.

In the article published in May 2010, we had examined the decision of the Madras High Court in the case of Valliammal vs. Muniyappan (2008 (4) CTC 773) which had relied upon a decision of the Supreme Court in the case of Sheela Devi & Ors. vs. Lal Chand & Anr. reported in (2006) 8 SCC 581; 2007(1) MLJ 797 (SC) and other decided case law and come to the following conclusion:- “Therefore, it is clear that a daughter would get benefit of the Amendment Act only if her father is alive at the time of coming into force of the Amendment Act.”

Amongst varying controversial issues arising out of the Amendment Act, one of the major issues was as to whether the Amendment Act had retrospective effect and in which type of cases a daughter of a coparcener would get right in coparcenary property by birth.

With a view to make this article self-explanatory, it is necessary to reproduce here Section 6(1) of the Act as amended by the Amendment Act:-

“6. Devolution of interest in coparcenary property.
– (1) On and from the commencement of the Hindu Succession (Amendment) Act, 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 coparcenary property as she would have had if she had been a son;
(c) be subject to the same liabilities in respect of the said coparcenary 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.”

While several High Courts have considered the question of retrospectivity, there was no consistency in the approach. The different views taken by High Courts on the question are reflected in the following case law:-

In the case of Pravat Chandra Pattnaik & Ors. vs. Sarat Chandra Pattnaik & Anr., AIR 2008 Orissa 133, the Orissa High Court held that looking into the substance of the provisions (of section 6), it is clear that the Act is prospective. It creates substantive right in favour of a daughter from the date when the amended Act came into force i.e. 9.9.2005, whenever she may have been born.

In the case of Sugalabai vs. Gundappa A. Maradi & Ors. (2007) 6 AIR Kart. R 501, the Karnataka High Court held that as soon as the Amendment Act was brought into force, the daughter of a coparcener becomes by birth a coparcener in her own right in the same manner as the son and that there is nothing in the Amendment Act to indicate that the same will be applicable only in respect of a daughter born on or after the commencement of the Amendment Act.

The Madras High Court in the case of Valliammal vs. Muniyappan (2008 (4) CTC 773) held that the father of the daughter claiming interest in the coparcenary property having died prior to the Amendment Act and the succession having opened to the properties in question before such amendment the daughter was not entitled to any share in the coparcenary property.

In the case of Sadashiv Sakharam Patil vs. Chandrakant Gopal Desale – ( (2012)1 Mah LJ 197; (2011) 5 Bom C.R. 726), the Bombay High Court held that for the purpose of getting benefit of the amended provision it is not necessary that the birth of the daughter should also be after commencement of the amending act and that by virtue of the Amendment Act, the daughter of a coparcener becomes by birth a coparcener even if she was born before the Amendment Act coming into force.

In Vaishali Ganorkar vs. Satish Ganorkar (AIR 2012 Bom 101), the division bench of the Bombay High Court (headed by Chief Justice Mr. Mohit Shah) disagreeing with some other High Courts’ decisions to the contrary, held that only daughters born after 9th September 2005 (being the date of commencement of the Amendment Act) would get benefit under the Amendment Act. It also held that the new rights granted to a daughter which would affect vested rights would be on a wholly different footing and cannot be applied retrospectively. Although appeal to Supreme Court against the said decision was dismissed (2012 (5) Bom CR 210) the question of law was kept open.

In another case of Badrinarayan Shankar Bhandari vs. Omprakash Shankar Bhandari reported in AIR 2014 Bom 151, the division bench of the Bombay High Court (also headed by Chief Justice Mr. Mohit Shah) has reconsidered its own earlier decision cited above and held that a bare perusal of sub-section (1) of section 6 would clearly show that the legislative intent in enacting clause (a) is prospective i.e. daughter born on and after 9th September 2005 will become a coparcener by birth but the legislative intent in enacting clauses (b) and (c) are retroactive and give rights to the daughter who was already born before the amendment and who is alive on the date of amendment coming into force. The court has further held that however if the daughter of a coparcener had died before 9th September 2005, her heirs would have no right in the coparcenary property.

It appears that in view of lack of clarity in the language of the provisions of amended section 6(1) of the Act, different High Courts had put emphasis on some particular wording in the Section in support of their decisions. Thus, while there were different decisions from High Courts, there was no finality and the confusion (and resultant litigation) continued.

Now, the controversy as to whether the Amendment Act is retrospective or not has been settled by a very recent decision of the Supreme Court dated 16th October 2015 in the case of Prakash and Ors vs. Phulavati and Ors. (2015 (6) Kar LJ 177) which has not yet been reported in any official reporter.

In that case the plaintiff Phulavati filed a suit before Additional Civil Judge (Senior Division) Belgaum for partition and separate possession to the extent of oneseventh of her share in the coparcenary property held by her late father Yeshwant, who had died on 18th February 1988. During the pendency of the suit the Amendment Act was passed and the plaintiff amended the plaint to claim a share as per the Amendment Act. The suit was contested and the Trial Court partly decreed the same in favour of the plaintiff. The plaintiff thereupon preferred first appeal before the Karnataka High Court claiming that she had become coparcener under the Amendment Act and was entitled to inherit the coparcenary property equal to her brothers. The High Court followed the decision of the Supreme Court in the case of G. Sekar vs. Geetha and others (AIR 2009 SC 2649) and held that any development of law inevitably applies to a pending proceeding and in fact it is not even to be taken as a retrospective applicability of the law but only the law as it stands on the day being made applicable. Therefore, the High Court considered the case in light of the provisions of the Amendment Act. The High Court (AIR 2011 Kar 78) held that the plaintiff was entitled to a share in the coparcenary property. In appeal by the defendant Prakash to the Supreme Court it was held that the rights of a daughter under the Amendment Act are applicable to living daughters of living coparceners as on 9th September 2005 irrespective of when such daughters are born.

The effect of the Amendment Act is now clear. Therefore the law now stands that a daughter of a coparcener, who is living as on 9th September 2005, shall by birth become a coparcener in her own right in the same manner as the son and have the same rights in the coparcenary property as she would have had if she would have been a son. It is irrespective when such daughter is born.

Let us hope that this final legal position now prevails without any further complications.

When Regulators Overlap: Competition Commission of India and the Draft Indian Financial Code 2015

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The Indian regulatory landscape is dotted with several sectoral regulators. Each of these specialised sectoral regulators is entrusted the task of maintaining the market dynamics of its own sector and preventing market failure. However, often their regulatory mandates overlap with each other, and nowhere is this blurring of boundaries more pronounced than in the efforts to foster and fuel competition in the Indian economy.

The Competition Commission of India (‘CCI’) is a specialised sector-agnostic regulator tasked with preserving and promoting competition. Given its pansector mandate, it is no surprise that the CCI often ventures into the domain of sectoral regulators. Many sectoral regulators, such as the Telecom Regulatory Authority of India, Insurance Regulatory & Development Authority, Securities and Exchange Commission and the Petroleum & Natural Gas Regulatory Board, are also meant to independently encourage competition in their respective markets. Given the already existing jurisdictional tension among regulators with overlapping functions, the Government of India (‘GoI’) has further obscured the sectoral delineations with the Draft Indian Financial Code 2015 (‘Draft 2015 Code’) which was released on July 23, 2015 by the Financial Sector Legislative Reforms Commission (‘FSLRC’).

The Draft 2015 Code seeks to regulate the financial sector and financial agencies, including the Financial Authority, the Reserve Bank of India (‘RBI’), the Financial Redress Agency, the Resolution Corporation, the Financial Stability and Development Council and the Public Debt Management Agency (together called the ‘Financial Regulators’). When in place, it will replace a plethora of existing laws and attempt to bring coherence and efficiency to financial regulation in India.

The Competition Act, 2002 (‘Competition Act’) currently allows sectoral regulators to make references to the CCI on competition law issues and vice versa. Furthering this theme of inter-regulator cooperation, the Draft 2015 Code seeks to impose an obligation on the CCI to make a reference to the Financial Regulator, albeit as a nonvoting participant, when it undertakes any proceedings under the Competition Act where at least one of the parties is a financial services provider. In such cases, the Financial Regulator would be entitled to nominate a member or senior official to attend CCI proceedings. On the other hand, under the Draft 2015 Code, the Financial Regulator would be obligated to make a reference to the CCI to report any conduct of a financial service provider which it believes to be in violation of the Competition Act.

However, the Draft 2015 Code goes further and empowers the CCI to intervene in the issuance of any regulations, guidance or codes proposed by the Financial Regulators, if it feels they will, or are likely to, create any restriction or distortion of competition in the market for financial products or financial services (‘Negative Effect’). The CCI may comment even when the Negative Effect has been created on account of ‘a feature or combination of features of a market that could be dealt with by regulatory provisions or practices’. ‘Features of a market’ include both the structure of the market for financial products/ services as well as the conduct of financial service providers and/or consumers (even if this conduct is not in the market for the concerned financial product/services).

However, the CCI’s powers, as envisaged under the Draft 2015 Code, do not stop at the provision of commentary alone. The Financial Regulator in question is also required to respond to the CCI outlining what action it proposes to take to address the concerns raised by the CCI or provide reasons if it is not adopting any such actions. Nonetheless, if the CCI continues to remain of the opinion that a Negative Effect is/will be created, the CCI may issue binding directions to the Financial Regulator requiring it to take particular actions to remedy the same. These binding directions would need to be submitted to the Central Government and receive parliamentary approval. While the intention behind the Draft 2015 Code may have been to advance and nurture free and fair competition in the market for financial services and products it does raise certain fundamental issues which need closer scrutiny.

Vast increase in the powers of the CCI – While the requirement of parliamentary approval of any binding directions by the CCI does signal an acknowledgment by the FSLRC that these powers should be exercised sparingly by the CCI; given the absence of any specific guidelines to this effect, the end result could be a vast increase in the CCI’s powers. This could result in significant distortion of the boundaries between sectoral regulators and the CCI, particularly when the Financial Regulators are trying to address distinct structural and/or conduct related issues in the market.

CCI review of policy decisions in the financial services/products market – The CCI is a pan-sectoral regulator with the mandate to promote competition across all markets in India. However, the Draft 2015 Code empowers the CCI to influence policy decisions of the Financial Regulators if it is of the opinion that these decisions cause a Negative Effect in the market. While Financial Regulators focus on correcting specific issues in the markets for financial services/products, the CCI’s intervention could alter the focus of the policy actions in question.

Intervention in proceedings before the CCI – As mentioned earlier, any proceeding under the Competition Act where at least one of the parties is a financial services provider, the Financial Regulator would be entitled to nominate a member or senior official to attend the CCI’s proceedings, albeit as a non-voting participant. Such a nomination mechanism appears to be a reasonable way to lend sectoral expertise to the CCI’s proceedings, but the extent to which the said nominee may participate in the proceedings is not clear. Even without a vote, any active intervention by the nominee could influence the proceedings. This is especially so in cases where a Financial Regulator is a party to the proceeding., This provision may create due process issues that could effect enforcement under the Competition Act since the procedural guidelines on the conduct of nominees during the CCI’s proceedings are pending and unclear.

Competition regulators in other jurisdictions have not been granted similar powers of review and oversight into the financial sector. Whilst the Draft 2015 Code is a positive step towards harmonising various financial norms and regulators, it could blur the line between the mandates of financial and competition regulators. Comprehensive guidelines that delineate the extent of CCI oversight on the market for financial services and products in India, as distinct from its own mandate under the Competition Act could bring welcome clarity. Equally, some clarity on the role and participation of other stakeholders in CCI proceedings is also needed.

A. P. (DIR Series) Circular No. 39 dated January 14, 2016

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Export of Goods and Services – Project Exports

This circular provides that: –

i) The ‘OCCI’ will now be known as ‘Project Export Promotion Council’ (PEPC).

ii) Civil construction contracts can include turnkey engineering contracts, process and engineering consultancy services and Project construction items (excluding steel & Cement) along with civil construction contracts.

The Memorandum of Instructions on Project and Service Exports (PEM) containing the above changes is enclosed with this circular.

FED Master Directions dated January 4, 2016

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On January 4, 2016 RBI has issued the following 17 Master Directions (There is no Master Direction 1 & Master Direction 11). Each Master Direction consolidates / complies various instructions issued by RBI, from time to time, with respect to the Regulations covered in the Master Directions.

RBI will continue to issue directions to Authorised Persons through A.P. (DIR Series) Circulars in regard to any change in the Regulations or the manner in which relative transactions are to be conducted and the Master Direction will also be amended suitably.

2. M aster Direction – Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Nonresident Exchange Houses 3. M aster Direction – Money Changing Activities

4. Master Direction – Compounding of Contraventions under FEMA, 1999 5. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers

6. Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians / Persons of Indian Origin

7. M aster Direction – Liberalised Remittance Scheme (LRS)

8. M aster Direction – Other Remittance Facilities

9. M aster Direction – Insurance

10. M aster Direction – Establishment of Liaison / Branch /Project Offices in India by foreign entities

12. M aster Direction – Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act, 1999

13. Master Direction – Remittance of assets

14. Master Direction – Deposits and Accounts

15. Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad

16. Master Direction – Export of Goods and Services

17. Master Direction – Import of Goods and Services

18. Master Direction – Reporting under Foreign Exchange Management Act, 1999

19. Master Direction – Miscellaneous

Confidential Information

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Every person, whether a corporation or an individual has his own secrets and/or information which they consider to be confidential in nature. The question that arises is how does one protect such information, which may be of a commercial nature. Of course, a person may choose never to divulge or disclose his secret or confidential information and in a manner of speaking, take the information to his grave, in which case the question of the information ever being misappropriated cannot and does not arise. However, if one had to divulge or disclose the confidential information for its commercial exploitation, then the question of preventing its misappropriation would surely arise.

If the confidential information is patentable in nature then one may choose to apply for a patent and seek protection. The confidential information which makes up the invention in such a case would be published through the patent office, considering the quid pro quo for the grant of a patent is the disclosure of such confidential information/ invention. However, in lieu of the disclosure the person/ corporation would get statutory protection and a monopoly for the term of the patent.

On the other hand, there may be information which is not patentable but which is otherwise not in the public domain and which is proprietary in nature. Such information would be entitled to protection under the law relating to confidential information. The law relating to protecting confidential information is a part of common law and is based on the broad principles that “If a defendant is proved to have used confidential information, directly or indirectly obtained from the plaintiff, without the consent, express or implied, of the plaintiff, he will be guilty of an infringement of the plaintiff’s rights1 ” and that “It depends on the broad principle of equity that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent.2”

A classic example of a Company deriving huge benefits out of its confidential information would be the case of Coca-Cola. The formula/recipe to the soft drink is a closely guarded secret known only to the top officials in the Company. A more local and indigenous example could be of the “Tunday Kebabs” in Lucknow. Before the brothers split a few years ago, it was believed that the recipe to their famous kebabs was known only to the male members of the family and not even revealed to the wives or daughters in the family so as to ensure the confidentiality thereof. Evidently, confidential information can be extremely valuable in certain cases. It is this very branch of law, which would in a sense be the broad basis of the non-disclosure and confidentiality agreements that are drawn up regularly, for example between two companies or between an employer and an employee.

This article is addressed towards explaining the basic concepts of the law relating to confidential information. I shall be addressing the basics of the law of confidential information such as when would the law apply, what information can be considered to be confidential, the springboard doctrine and the necessary requisites a Plaintiff must prove in an action for breach of confidence.

Confidential Information
The first and foremost aspect of the law of confidential information is that it is not restricted to cases of contractual obligations of confidentiality3. Hence, even if parties have shared confidential information with one another without entering into a formal agreement for non-disclosure or protecting confidentiality, the law would protect the disclosure of such information subject to the other requirements, explained hereinafter, being met. Hence, even if an employee was not bound by an express term of confidentiality, he would be bound by an implied duty of good faith to his employer not to use or disclose the confidential information.

At this juncture, it may be relevant to note that there is a distinction between preventing disclosure of confidential information and a clause in restraint of trade. As explained by the Bombay High Court in the case of Star India Pvt. Ltd. vs. Laxmiraj Nayak & Anr.5 , a distinction must be drawn between the confidential information imparted and the skill acquired by the employee. It cannot be said that the employee cannot be permitted to exercise his skill merely because it has been acquired by possessing a trade secret of any one. The Bombay High Court, illustrated its point by stating, inter alia, that “No hospital can prevent a heart surgeon from performing heart surgery in some other hospital by saying that the heart surgeon had acquired skill by performing heart surgeries in that hospital. It is a personal skill which the heart surgeon acquired by experience. Same is the case with the salesman who negotiates with the customer for the sale of the product of his employer. He learns from experience how to talk with different people differently and how to canvas for the sale of the product successfully. He knows the selling points of a particular product by experience. He acquires a good and sweet tongue if he is a salesman dealing with the female folks for the products required by them. He learns the art of tackling the illiterate people. He comes to know how to deal with the old and aged people. He knows the quality of his products. He knows the rates. He might perhaps also be knowing the cost of the products and the profit margin of the employer. All these factors cannot be called trade secrets.” Hence, what can be prevented by an employer is the use and disclosure of the confidential information by an employee but not the exercise of a skill by the employee.

The most important aspect, though would be as to what information can be treated as being confidential in nature. Does information become confidential merely because one entitles it as such. Is information to be treated as confidential merely because one party asserts it to be confidential. To illustrate, can Company A in a contract with Company B assert that information pertaining to the composition of its Board of Directors is confidential and cannot be divulged? To my mind, the answer to this question would be in the negative since this information would otherwise be available from a search of the records of the Registrar of Companies and would as such be in the public domain.

Thus, broadly speaking it is information which is not available in the public domain and which therefore, can be treated as being proprietary in nature that could be treated as being information which is confidential in nature. Even, at times information which is otherwise in the public domain may be treated as confidential since the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process6 .

The information must have a significant element of originality not already known in the realm of public knowledge. The originality may consist in a significant twist or slant to a well known concept. The originality may also be derived from the application of human ingenuity to well known concepts7. An example of a case where the originality of the information came from an application to a well known concept would be the “Swayamvar” case before the Delhi High Court. In that case, the Plaintiff sought to protect the idea of a TV show based on the concept of a Swayamvar. Even though the concept of a swayamvar was a well known concept and as such in the public domain, the Delhi High Court observed that “The novelty and innovation of the concept of the plaintiff resides in combining of a reality TV show with a subject like match making for the purpose of marriage. The Swayamvar quoted in Indian mythology was not a routine practice. In mythology, we have come across only two Swayamvars, one in Mahabharat where the choice was not left to the bride but on the act of chivalry to be performed by any prince and whosoever succeeded in such performance got the hand of Draupadi. Similarly, in Ramayana choice was not left to the bride but again on performance of chivalrous act by a prince who could break the mighty Dhanusha (Bow). Therefore, originality lies in the concept of plaintiff by conceiving a reality TV programme of match making and spouse selection by transposing mythological Swayamvar to give prerogative to woman to select a groom from a variety of suitors and making it presentable to audience and to explore it for commercial marketing. Therefore the very concept of matchmaking in view of concept of the plaintiff giving choice to the bride was a novel concept in original thought capable of being protected.8 ”

Hence, in each case, the confidential information would have to be identified with a degree of certainty and merely by entitling the information as confidential, the same would not become confidential. The person claiming the information to be confidential must be in a position to identify and assert how the information he claims to be confidential is in fact such information as is not available in the public domain and contains the element of originality as required in such cases.

Another facet of what information may be claimed as confidential pertains to cases where the information is partly public and partly private. In such cases also, the Courts have held that where confidential information is communicated in circumstances of confidence the obligation thus created would endure even after all the information has been published or is ascertainable by the public so as to prevent the recipient from using the communication as a spring-board9 . In Seager vs. Copydex Ltd.10 the Court, observed, inter alia, that “As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public …The law does not allow the use of such information even as a spring-board for activities detrimental to the plaintiff.”

The spring board doctrine refers to the fact that the recipient of information which is partly public and partly private cannot take advantage of the private information to spring board the development of his activities. As explained by Lord Denning, when information is mixed as in partly private and partly public, then the recipient must take special care to use only the material which is in the public domain11 .

Hence, the necessity and/or importance of identifying the confidential information would be paramount. Identifying the confidential information, however, is only but one aspect of what a Plaintiff would be required to prove in a case filed for breach of confidence. As held by the Bombay High Court in the recent case of Beyond Dreams Entertainment Private Limited vs. Zee Entertainment Enterprises Limited12, a Plaintiff would be required to prove three elements viz. that firstly, it must be shown that the information itself is of a confidential nature, secondly, it must be shown that it is communicated or imparted to the defendant under circumstances which cast an obligation of confidence on him. and that thirdly, it must be shown that the information shared is actually used or threatened to be used unauthorizedly by the Defendants, that is to say, without the licence of the Plaintiff. The High Court also observed that each one of these three elements had its own peculiarities and sub-elements.

Thus, in every case of breach of confidence, a Plaintiff would be required to plead and prove the aforesaid factors. A plaintiff to succeed in a case for breach of confidence would not only have to identify that the information imparted was confidential but also show that it was imparted under circumstances which implied a relationship of confidence and that there has been a threat to disclose and/or divulge such information.

Conclusion
Whilst the law on the subject is extremely vast, I hope that the above summarisation of the basic concepts of the subject, would make clear the minimum requirements that must be borne in mind whilst dealing with confidential information. The draftsman of a contract or a plaint would have to endeavour to determine whether or not there is any confidential information involved and to identify the same. It must be made clear to the recipient of the information that the information being shared is confidential in nature and cannot be divulged. It may be appreciated that it is very important to understand and identify what information is in the public domain and what information is private. It is essential that parties and/or draftsmen endeavour to identify the information which is not in the public domain and/or which cannot be arrived at without applying one’s mind. Parties must bear in mind that merely by labelling information as confidential it would not become confidential and that certain information even though not labelled confidential if given in circumstances implying confidence may be protected.

An endeavour has been made to codify the subject, by the Department of Science and Technology, by publishing a draft legislation titled the National Innovation Act of 2008, the preamble to which provides that it is, inter alia, “An Act to … codify and consolidate the law of confidentiality in aid of protecting Confidential Information, trade secrets and Innovation.” The draft legislation has however, not yet seen the light of the day and we continue to be governed by the vast amount of case law based on the common law principles of preventing breach of confidence.

Part D | ETHICS, GOVERNANCE & ACCOUNTABILITY

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A democracy can only be as strong as its institutions. A vibrant and effective democracy needs to be underpinned by strong institutional support. Unfortunately, there has been a serious and long-term undermining of institutions crucial for India’s governance. This includes governors, C & AG, public service commissions, Lok Ayuktas, election commissioners at the state and central levels, higher civil services, police, and regulatory bodies. Each of these institutions has been deliberately undermined and weakened over the years. (From the book, “GOOD GOVERNANCE” by Madhav Godbole, page 233)

RTI Clinic in December 2015: 2nd, 3rd, 4th Saturday, i.e. 12th, 19th, and 26th, 11.00 to 13.00 hrs. at BCAS premises.

A. P. (DIR Series) Circular No. 62 dated April 13, 2016

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Overseas Direct Investment (ODI) – Rationalization and reporting of ODI Forms

This
circular contains the changes made to information that needs to be
submitted with respect to Overseas Investment. Form ODI with respect to
Overseas Direct Investment. The new Form ODI is given in Annex 1 to this
circular.

1. The revised Form ODI will contain the following: –

Part I – Application for allotment of Unique Identification Number (UIN) and reporting of Remittances / Transactions:

Section A – Details of the IP / RI.

Section B – Capital Structure and other details of JV/ WOS/ SDS.

Section C – Details of Transaction/ Remittance/ Financial Commitment of IP/ RI.

Section D – Declaration by the IP/ RI.

Section E – Certificate by the statutory auditors of the IP/ self-certification by RI.

Part II – Annual Performance Report (APR)

Part III – Report on Disinvestment by way of

a) Closure / Voluntary Liquidation / Winding up/ Merger/ Amalgamation of overseas JV / WOS;

b) Sale/ Transfer of the shares of the overseas JV/ WOS to another eligible resident or non-resident;

c)
Closure / Voluntary Liquidation / Winding up/ Merger/ Amalgamation of
IP; and d) Buy back of shares by the overseas JV/ WOS of the IP / RI.

2.
New reporting formats, Annex II and Annex III, have been introduced for
Venture Capital Fund (VCF) / Alternate Investment Fund (AIF), Portfolio
Investment and overseas investment by Mutual Funds.

3. Post investment changes, subsequent to the allotment of UIN, are to be reported in Form ODI Part I.

4.
Form ODI Part I must be obtained bank before executing any ODI
transaction and the bank must report the relevant Form ODI in the online
OID application and obtain UIN at the time of executing the remittance.

5. A RI undertaking ODI can self-certify Form ODI Part I and
certification by Statutory Auditor or Chartered Accountant must not be
insisted upon.

6. A concept of AD Maker, AD Checker and AD Authorizer has been introduced in the online application process.

7.
Any non-compliance with the guidelines / instructions will be viewed
seriously penal action as considered necessary may be initiated.

A. P. (DIR Series) Circular No. 61 dated April 13, 2016

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Overseas Direct Investment – Submission of Annual Performance Report

Presently, an Indian Party (IP) which / Resident Individual (RI) who has made an Overseas Direct Investment under ODI / LRS is required to file an Annual Performance Report (APR) in Form ODI Part III with RBI by June 30, every year in respect of each Joint Venture (JV) / Wholly Owned Subsidiary (WOS) outside India set up or acquired by the IP / RI. However, in violation of the provisions of FEMA: –

a) IP / RI are either not regular in submitting the APR or are submitting it with delay.

b) Banks facilitate Remittance(s) and other forms of financial commitments under the automatic route even though APR in respect of all overseas JV / WOS of the IP / RI have not been submitted.

To avoid these problems, this circular states that: –

a) The online OID application has been suitably modified to enable the nodal office of the bank to view the outstanding position of all the APR pertaining to an applicant including for those JV / WOS for which it is not the designated bank. Henceforth the bank, before undertaking / facilitating any ODI related transaction on behalf of the eligible applicant, must necessarily check with its nodal office and confirm that all APR in respect of all the JV / WOS of the applicant have been submitted.

b) Certification of APR by the Statutory Auditor or Chartered Accountant must not be insisted upon in the case of Resident Individuals. Self-certification can be accepted.

c) In case multiple IP / RI have invested in the same overseas JV / WOS, the obligation to submit APR will lie with the IP / RI having maximum stake in the JV / WOS. Alternatively, the IP / RI holding stake in the overseas JV / WOS can mutually agree to assign the responsibility for APR submission to a designated entity which must acknowledge its obligation to submit the APR by furnishing an appropriate undertaking to the bank.

d) An IP / RI, which has set up / acquired a JV / WOS overseas has to submit, to the bank every year, an APR in Form ODI Part II in respect of each JV / WOS outside India and other reports or documents by 31st of December each year or as may be specified by RBI from time to time. The APR, so required to be submitted, must be based on the latest audited annual accounts of the JV / WOS unless specifically exempted by RBI.

Any non-compliance with the instruction relating to submission of APR will be treated as contravention of Regulation 15 of the Notification No. FEMA 120/RB-2004 dated July 07, 2004 as amended and viewed seriously.

A. P. (DIR Series) Circular No. 60 dated April 13, 2016

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Issuance of Rupee denominated bonds overseas

This circular has made the following changes with respect to issuance of Rupees Denominated Bonds overseas: –

a)
The maximum amount that can be borrowed by an entity in a financial
year under the automatic route by issuance of these bonds will be Rs. 50
billion and not US $ 750 million. Borrowing beyond Rs. 50 billion in a
financial year will require prior approval of RBI.

b) These
bonds can only be issued / transferred / offered as security overseas in
a country and can only be subscribed by a resident of a country:

a. That is a member of Financial Action Task Force (FATF ) or a member of a FATF – Style Regional Body; and

b.
Whose securities market regulator is a signatory to the International
Organization of Securities Commission’s (IOSCO’s) Multilateral
Memorandum of Understanding (Appendix A Signatories) or a signatory to
bilateral Memorandum of Understanding with the Securities and Exchange
Board of India (SEBI) for information sharing arrangements; and

c. Should not be a country identified in the public statement of the FATF as:

i.
A jurisdiction having a strategic Anti-Money Laundering or Combating
the Financing of Terrorism deficiencies to which counter measures apply;
or

ii. A jurisdiction that has not made sufficient progress in
addressing the deficiencies or has not committed to an action plan
developed with the Financial Action Task Force to address the
deficiencies.

c) The minimum maturity period for these bonds
will be three years in order to align them with the maturity
prescription regarding foreign investment in corporate bonds through the
Foreign Portfolio Investment (FPI) route.

d) Borrowers have to
obtain the list of primary bond holders and so that the same can be
provided to Regulatory Authorities in India as and when required.

e)
Banks are required to report to the Foreign Exchange Department,
External Commercial Borrowings Division, Central Office, Shahid Bhagat
Singh Road, Fort, Mumbai – 400 001, the figures of actual drawdown(s) /
repayment(s) by their constituent borrowers quoting the related loan
registration number. However, reporting by email shall be made on the
date of transaction itself.

A. P. (DIR Series) Circular No. 59 dated April 13, 2016

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Acceptance of deposits by Indian companies from a person resident outside India for nomination as Director

This
circular clarifies that making a deposit, u/s. 160 of the Companies
Act, 2013, by a person who intends to nominate either himself or any
other person as a director in an Indian company is a Current Account
Transaction and does not require any approval from RBI.

Similarly,
refund of such deposit upon selection of the person as director or his /
her getting more than 25% votes is also a Current Account Transaction
and does not require any approval from RBI.

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

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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.

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

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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.

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

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Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016

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. 58 dated March 31, 2016

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Notification No.FEMA.366/ 2016-RB dated March 30, 2016
Foreign Direct Investment (FDI) in India – Review of FDI policy –Insurance sector

This circular makes the following changes in Annex B to Schedule 1 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 – Notification No. FEMA 20/2000-RB dated 3rd May 2000: -The existing entry F.7, F.7.1 and F.7.2 shall be substituted by the following:

A. P. (DIR Series) Circular No. 57 dated March 31, 2016

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Import of Rough, Cut and Polished Diamonds

Presently, banks can approve Clean Credit i.e. credit given by a foreign supplier to its Indian customer / buyer, without any Letter of Credit (Suppliers’ Credit) / Letter of Undertaking (Buyers’ Credit) / Fixed Deposits from any Indian financial institution for import of Rough, Cut and Polished Diamonds, for a period not exceeding 180 days from the date of shipment.

This circular permits banks, with immediate effect, to approve clean credit for a period exceeding 180 days from the date of shipment, subject to the following conditions: –

i) Banks must be satisfied about the genuineness of the reason and bonafides of the transaction and also that no payment of interest is involved for the additional period.

ii) The extension must be due to financial difficulties and / or quality disputes, as in the case of normal imports (for which such extension of time period for delayed payments has already been delegated to the AD banks).

iii) The importer requesting for such extension must not be under investigation / no investigation must be pending against the importer.

iv) The importer seeking extension must not be a frequent offender. Since there is a possibility that the importer may have dealings with more than one bank, the bank allowing extension must devise a mechanism based on their commercial judgement, to ensure this.

v) Banks can allow such extension of time up to a maximum period of 180 days beyond the prescribed period / due date, beyond which they must refer the case to respective Regional Office of RBI.

Banks must submit, customer-wise, a half yearly report of such extensions allowed, to the respective Regional Office of RBI.

A. P. (DIR Series) Circular No. 56 dated March 30, 2016

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External Commercial Borrowings (ECB) – Revised framework

This circular makes the following changes: –

1. ECB framework

i. Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFC), NBFC-Asset Finance Companies (NBFC-AFC), Holding Companies and Core Investment Companies (CICs) are also eligible to raise ECB under Track I of the framework with minimum average maturity period of 5 years, subject to 100% hedging.

ii. For the purpose of ECB, “Exploration, Mining and Refinery” sectors that are not presently included in the Harmonized list of infrastructure sector but which were eligible to take ECB under the previous ECB framework (c.f. A.P. (DIR Series) Circular No. 48 dated September 18, 2013) will be deemed to be in the infrastructure sector, and can access ECB as applicable to infrastructure sector under (i) above.

iii. Companies in the infrastructure sector must utilize the ECB proceeds raised under Track I for the end uses permitted for that Track. NBFC-IFC and NBFC-AFC are, however, allowed to raise ECB only for financing infrastructure.

iv. Holding Companies and CIC must use ECB proceeds only for on-lending to infrastructure Special Purpose Vehicles (SPV).

v. Individual limit of borrowing under the automatic route for aforesaid companies will be as applicable to the companies in the infrastructure sector (currently USD 750 million).

vi. Companies in infrastructure sector, Holding Companies and CIC will continue to have the facility of raising ECB under Track II of the ECB framework subject to the conditions prescribed therefore.

Companies added under Track I must have a Board approved risk management policy. Further, the bank has to verify that 100% hedging requirement is complied with during the currency of ECB and report the position to RBI through ECB 2 returns.

2. Clarification on Circular dated November 30, 2015

i. Banks can, under the powers delegated to them, allow refinancing of ECB raised under the previous ECB framework, provided the refinancing is at lower all-incost, the borrower is eligible to raise ECB under the extant ECB framework and residual maturity is not reduced (i.e. it is either maintained or elongated).

ii. ECB framework is not applicable in respect of the investment in Non-Convertible Debentures (NCD) in India made by Registered Foreign Portfolio Investors (RFPI).

iii. Minimum average maturity of Foreign Currency Convertible Bonds (FCCB) / Foreign Currency Exchangeable Bonds (FCEB) must be 5 years irrespective of the amount of borrowing. Further, the call and put option, if any, for FCCB must not be exercisable prior to 5 years.

iv. Only those NBFC which are coming under the regulatory purview of the Reserve Bank can raise ECB. Further, under Track III, the NBFC can raise ECB for on-lending for any activities including infrastructure as permitted by the concerned regulatory department of RBI.

v. The provisions regarding delegation of powers to banks are not applicable to FCCB / FCEB.

vi. In the forms of ECB, the term “Bank loans” shall be read as “loans” as foreign equity holders / institutions other than banks, also provide ECB as recognised lenders.

A. P. (DIR Series) Circular No. 46 [(1)/9(R)] dated February 4, 2016

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Notification No. FEMA.9(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 9/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2000.

A. P. (DIR Series) Circular No. 45 [(1)/6(R)] dated February 4, 2016

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Notification No. FEMA.6(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Export and Import of Currency) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 6/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Export and Import of Currency) Regulations, 2000.

A. P. (DIR Series) Circular No. 44 [(1)/10(R)] dated February 4, 2016

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

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

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

A. P. (DIR Series) Circular No. 43 [(1)/7(R)] dated February 4, 2016

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Notification No. FEMA 7(R)/2015-RB dated January 21, 2016 Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 7/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000.

A. P. (DIR Series) Circular No. 42 dated February 4, 2016

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Settlement of Export/Import transactions in currencies not having a direct exchange rate

This circular provides that in respect of export and import transactions where the invoicing is in a freely convertible currency and the settlement takes place in the currency of the beneficiary which does not have a direct exchange rate, banks can permit settlement of such export and import transactions (excluding those put through the ACU mechanism), subject to the following: –

a) Exporter / Importer must be a customer of the Bank.
b) Signed contract / invoice must be in a freely convertible currency.
c) The beneficiary is willing to receive the payment in the currency of beneficiary instead of the original (freely convertible) currency of the invoice / contract / Letter of Credit as full and final settlement.
d) Bank is satisfied about the bonafide of the transactions.
e) The counterparty to the exporter / importer of the bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Cooperative Jurisdictions on which FATF has called for counter measures.

A. P. (DIR Series) Circular No. 40 dated February 1, 2016

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Foreign Direct Investment – Reporting under FDI Scheme, Mandatory filing of form AR F, FCGPR and FCTRS on e-Biz platform and discontinuation of physical filing from February 8, 2016

Presently, there is an option given to the investee entity / transferors / transferees to submit Advance Remittance Form, Form FCGPR and Form FCTRS either online or by way of physical filing.

This circular provides that on and from February 8, 2016 it will be mandatory for all concerned to submit Advance Remittance Form, Form FCGPR and Form FCTRS online through the e-Biz portal as physical filing of these forms will no longer be accepted.

Insider Trading – Impact of a Recent Decision

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Background
A recent SEBI order on insider trading is worth considering for certain reasons. It is a case concerning Promoters of a listed company and persons connected with them who have allegedly engaged in insider trading. The case is a good case study on how SEBI investigates into and determines the connections between the parties. Interestingly, for one of the persons, the fact that he was connected with another through Facebook, even if indirectly, was considered a relevant factor to establish connection between them. Further, the manner in which the pattern of investments and their funding were scrutinized, even if fairly basic, is also illuminating. Finally, the recent trend of how SEBI takes quick interim action in this regard is also noteworthy. SEBI is increasingly into passing interim orders whereby the illegal profits made, along with interest till date of order, are impounded and required to be deposited till final orders are passed. Till they deposit such amounts, their bank and demat accounts are effectively frozen.

This case is under the regulations relating to insider trading of 1992, which have since been replaced by the Regulations of 2015. However, the case has full relevance since the findings and conclusion would not have been different under the new law.

Brief summary of the case
The case concerns a software company (Palred Technologies Limited or “Palred”) that had run into financial difficulties from which it recovered and achieved some stability. Thereafter, it decided to sell its business on a slump sale basis to another party. The price of the shares of the Company was low following the period of recovery. However, the proposed restructuring would enable the Company to raise substantial cash and value. The Company had, following such a deal, decided to declare a hefty special dividend and/or also carry out a buyback of shares. The dividend itself would have resulted in the shareholders receiving an amount far higher than the then ruling market price. The price of the shares thus rose substantially.

It later came to light that insiders consisting of the Promoters and certain persons allegedly connected with them had purchased the shares of the Palred at the earlier low ruling price. While they held on to most of the shares so purchased, obviously they benefitted from the very significant appreciation in the market price.

SEBI investigated the matter, examined the direct and indirect connections between such parties and Palred and the nature of their transactions in the shares of Palred. SEBI listed the transactions of such persons and the notional profits made by them considering the appreciation in the price of the shares of the Company. It then passed an interim order impounding such notional profits with interest. SEBI also issued orders effectively freezing the bank and demat account of such parties till they deposited such amount.

In the following paragraphs, some interesting features of this Order have been discussed in detail.

Date from which unpublished price sensitive information can be said to have arisen
A core component of any case of profiting from insider trading is that there should be unpublished price sensitive information (UPSI). UPSI, simply stated, is that information which is not yet made public by the Company but which, if published, would materially affect the ruling market price of the shares of the Company. In the present case, the UPSI obviously related to (i) the slump sale of the business of the Company and (ii) proposal to distribute, thereafter, substantial special dividend/return of money through buyback.

It was noted that the first board meeting of Palred held to formally approve the slump sale of business and consider declaration of special dividend was on 10th August 2013, which was reported to the stock exchanges two days later. However, the discussions relating to the slump sale of business with the proposed buyer was initiated almost a year earlier on 5th September 2012. The Nondisclosure Agreement with the buyers was signed on 18th September 2012. Thus, SEBI considered this date of 18th September 2012 as the date on which the UPSI had come into being. As will be seen later, transactions of the parties on and from this date till the date when the UPSI was made public were held to be insider trading in violation of the law.

SEBI observed:-

“The PSI regarding the ‘slump sale of software solutions business to Kewill group’ came into existence on September 18, 2012, i.e. when the non-disclosure agreement was executed between Kewill group and PTL. The non-disclosure agreement (having a confidentiality clause) was a binding contract on both the sides. Disclosure of the agreement would certainly have an impact on the deal. Therefore, the same can be considered to be an ‘unpublished price sensitive information’ (hereinafter referred to as ‘UPSI’) which had definitely originated on September 18, 2012 and the same had remained unpublished till August 10, 2013 at 13:01 hrs., in terms of the Regulation 2(ha)(vi) of the PIT Regulations. The period of such UPSI was from September 18, 2012 to August 10, 2013.”

It is noteworthy that the price of the shares of the Company on 5th November 2012, from which date an insider was found to have acquired shares, was Rs. 10.71. The price thereafter rose to Rs. 39.20 on the day when the UPSI was made public.

Similarly, the date when the UPSI relating to declaration of special dividend/buyback was also determined and transactions from that date were considered.

Determination of parties found connected for purposes of insider trading
The connections between the parties who had traded from the time when the UPSI came into being were considered.

Mr. Palem Srikanth Reddy, the Chairman and Managing Director of Palred, was a connected person under the Regulations and the Company accepted that he, along with two other persons, were privy to the UPSI relating to slump sale. Mr. Reddy was also accepted to be privy to the UPSI relating to special dividend.

Connections with the other parties were found on various grounds. One person – Ameen Khwaja – was found to be common director/promoter with the Chairman on another company which incidentally had also provided services to the Palred. This company was also proposed to be merged with Palred. It was found that while Ameen himself did not deal in the shares of Palred during the relevant period, several of his family members did and thus such dealing was held to have carried out insider trading.

Common friends on Facebook as basis of determination of “connection”
Perhaps for the first time in my recollection, SEBI considered connections on social media on internet between the parties and in this case, the social media was Facebook. SEBI observed that, “Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’”. While this was not the only basis for alleging connection, it is still noteworthy.

It is strange though that having “mutual friends” on Facebook is treated as a relevant factor. Facebook is a relatively open social media network and “friends” are often made (and removed) without knowing in detail the background of parties. Such “friends” are often strangers with whom there are no other connection and sometimes not even offline contact. Having common mutual friends (which is what seems to be meant from the slightly unclear sentence in the Order) makes the connection even less strong. Nevertheless, it is safe to say that SEBI would resort in the future to examine social media connections of parties in its investigation for insider trading and even other purposes. Prominent social media networks include Facebook, Linkedin, Twitter, etc.

Consideration for determining whether the dealing was insider trading
An argument is often put forth by a person alleged to have committed insider trading that his dealing was in ordinary course of business. SEBI examined the background of trading by the parties in the shares of Palred and other scrips and generally other relevant factors to determine whether the dealings were in the ordinary course of business. It was found, for example, that some of the parties had dealings in the shares of Palred either as their only trading or the main one. In some cases, the parties had opened trading accounts just prior to dealing in shares of Palred. In another case, it was found that cash deposits were made in the bank account to make payments for purchase of the shares of Palred during the relevant period. These factors were held by SEBI to be sufficiently indicative of the trading in shares of Palred being in nature of insider trading and not regular trading by the parties.

Interim order of impounding
Such orders impounding profits are of course not wholly new. But they seem to have been used in a particular way in recent times by SEBI and hence some aspects of such orders need emphasis. Such orders are interim orders, in the sense that they are made in the interim pending further investigation. More importantly, they are made not only without giving any hearing to parties but even without giving them any notice. Thus, they often come as a bolt from the blue. The parties wake up one morning to find that their bank and demat accounts are frozen and they cannot operate them. They are of course given postorder opportunity to present their case, including, if they so desire, by way of a personal hearing. The objective is that certain preventive action is taken so that parties are not forewarned and thus they do not take any steps such as diversion of funds.

Manner of determination of profits made in the interim order
The Interim Order makes a finding, which is provisional pending final order, of the amount of profits from insider trading said to have made. In this case, SEBI has determined the purchase price of the shares during the relevant period. Since most of the shares were continued to be held till the date when the UPSI was made public, the price of the shares at the end of such relevant period is noted. The notional profits were then calculated which is the difference between such closing price and the purchase price. To that, simple interest @12% per annum has been added. The total amount is thus held to be the profits form insider trading.

Order of impounding of unlawful gains from insider trading
SEBI thus made this interim order impounding the unlawful profits made along with interest. For this purpose, it froze the bank and demat accounts of the parties whereby no debits to such accounts were permitted. The parties were also ordered not to alienate any of their assets till the amount impounded was duly deposited in an escrow account.

Conclusion
Such decisions over a period have displayed not just the development of the law and the improved detection and investigation of acts of insider trading by SEBI, but also the effective measures to ensure disgorgement of unlawful profits, and also the deterrent punishment being meted out.

The End of Male Exclusivity as HUF kartas

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Introduction
Quick quiz – when you hear the word ‘karta’, signifying a manager of a Hindu Undivided Family (“HUF”) what is the first thing which comes to mind? In most cases, the answer would be that it signifies a male descendant of the joint family who is the manager of the joint family business or estate. This has been the norm for several hundreds of years, i.e., only a male relative can be a karta. This is because under the Hindu Law, only men could be coparceners of an HUF. Women could be members but not coparceners. However, an epic amendment in September 2005 to the Hindu Succession Act, 1956 (“the Act”) changed all of that. The repercussions of that amendment are being felt even today and are the subject matter of various novel legal issues.

The 2005 amendment provided that a daughter has an equal right as that of a son in an HUF. One of the questions which has arisen as a result of this amendment is that can a daughter also be a karta of an HUF? While there has been a strong opinion in favour of this view, it is only now that this issue was tested before a judicial forum and the Delhi High Court has given its favourable view. Let us analyse this interesting question and some more questions emanating from the same.

Concept of an HUF
The Act governs the law relating to intestate succession among Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew.

Traditionally speaking, an HUF was a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consisted of male coparceners and other members. Thus, the sons and grandsons of the person who was the first head of the HUF would automatically become coparceners by virtue of being born in that family. A unique feature of an HUF is that the share of a member is fluctuating and ambulatory which increases on the death of a member and reduces on the birth of a member. A coparcener is a person who acquires an interest in the joint family property by virtue of being born in the family. Earlier, only men could be coparceners. A wife and a mother of a person also could not become a coparcener in an HUF.

The Watershed Amendment which started the Revolution
Under section 6 of the Act, on the death of a Hindu, his interest in an HUF devolves by Will or by intestate succession and not by survivorship. This is contrary to the position prior to 2005 when the interest devolved by survivorship. Thus, under survivorship, if a father died, his interest in the HUF devolved upon the other surviving HUF members. Now the position is that his interest would go either as per his Will or in cases where he has not made a Will, then as per the intestate succession pattern laid down under the Act.

To neutralise gender biases existing prior to 2005, the Central Government amended the Hindu Succession Act, 1956 by the 2005 Amendment Act which was made operative from 9th September 2005. This marked a watershed in the Hindu Law History because covenants laid down by Manusmriti where done away with. The amendment not only altered the succession pattern, but also changed the way HUFs were hitherto managed.

Section 6 of the amended Hindu Succession Act, 1956 provides that a 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 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 said coparcenary property as that of a son.

Thus, the amendment, by one stroke, put all daughters at par with sons and they could now become a coparcener in their father’s HUF by virtue of being born in that family. In Ram Belas Singh vs. Uttamraj Singh, AIR 2008 Patna 8, the High Court held that the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son and will have the same rights in the coparcenary property as she would have if she had been a son and shall also be subject to the same liabilities in respect of the said coparcenary 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. It held that the Act makes it very clear that the term “Hindu Mitakshara coparcener” used in the Act now includes daughter of a coparcener, also giving her the same rights and liabilities by birth as those of the son.

In Ganduri Koteshwaramma vs. Chakiri Yanadi, (2011) 9 SCC 788, the Court held that the effect of the amendment was that the daughter of a coparcener had the same rights and liabilities in the coparcenary property as she would have been a son and this position was unambiguous and unequivocal. Thus, on and from September 9, 2005, the daughter was entitled to a share in the ancestral property and was a coparcener as if she had been a son.

A daughter, thus, has all rights and obligations in respect of the coparcenary property, including testamentary disposition. Importantly, this position continues even after her marriage. Hence, all though she can only be a member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF.

Meaning of a Karta
A karta of an HUF is the manager of the joint family property. Normally, the father and in his absence the senior most member acts as the karta of the HUF. It is the karta who takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF.

In the case of CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that the managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the copartner of the joint family.

The Supreme Court in Tribhovandas Haribhai Tamboli vs. Gujarat Revenue Tribunal, 1991 SCR (2) 802 held that the managership of the Joint Family Property went to a person by birth and was regulated by seniority and the Karta or the Manager occupied a position superior to that of the other members. It further held that the father’s right to be the manager of the family was a survival of the patria potastas (Latin for power of the father) and he was in all cases, naturally, and in the case of minor sons, necessarily, the manager of the joint family property. In the absence of the father, or if he resigned, the management of the family property devolved upon the eldest male member of the family provided he is not wanting in the necessary capacity to manage it.

In Varada Bhaktavatsaludu vs. Damojipurapu Venkatanarasimha (1940) 1 MLJ 195, the Madras High Court held that when there was an eldest member of an HUF, the presumption was that under the Hindu Law he was the manager of the family.

Can a Female be a Karta – Position till 2005
Till 2005, the unanimous opinion was that only a male descendant of an HUF could become a karta. Let alone a karta, a female could not even become a coparcener. In CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that coparcenership is a necessary qualification for managership of a joint Hindu family. The Court further held that even the senior most female member of an HUF could not be a karta. She would be a guardian of her minor sons till they become major but never the karta because of the fact that she was not a coparcener. Similarly, various decisions have held that a wife cannot be a karta of her husband’s HUF.

Delhi High Court’s Decision
In Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015, the Delhi High Court was faced with the crucial decision of whether a lady who was the eldest child of all the coparceners of the HUF could be a karta or would the eldest son instead be the karta? It was contended by the son that the amendment to the Act only dealt with succession issues and did not expressly deal with the managership of an HUF.

However, the daughter countered this argument by relying on the Supreme Court’s observations in the case of Seth Govindram Sugar Mills (supra). According to the Supreme Court, being a coparcener was a necessary qualification for becoming a karta and since a female was not a coparcener she could not become a karta. She further contended that after the 2005 amendment, this impediment has been removed and a daughter is now statutorily recognised as a coparcener. Hence, reading the aforesaid Supreme Court judgment and the 2005 amendment together, she could become a karta. The 174th Report of the Law Commission of the India, dated 5th May 2000 was also relied upon which recommended that the eldest daughter can become a karta. The Delhi High Court found favour with the arguments raised on behalf of the daughter and held that it would indeed be odd if a daughter had equal rights of inheritance in an HUF property but could not become a karta of the same HUF. It further held that the Act was a socially beneficial legislation which gave equal rights of inheritance to both males and females. It held that the Act recognised the rights of females to be coparceners and provided for gender equality. In such a scenario, there was no reason why a daughter could not be a karta. It even added that this would be the case even after her marriage. Thus, the High Court declared the eldest daughter to be the karta of her father’s HUF.

Some More Questions
Is it not paradoxical that a married daughter can be a karta of the HUF of her father but not of the HUF of her husband? Is that not a classic case of there yet being a gender bias? There is a lady who is good enough to be a coparcener in her father’s HUF but not fit enough to be a coparcener of her own husband’s HUF? Indeed, this is an area which needs immediate rectification. Unfortunately, in this case, the remedy cannot be judicial since it would have to be through an amendment to the Act.

Further, since a daughter can now become a coparcener in her father’s HUF, do her children automatically become coparceners in their maternal grandfather’s HUF? The answer seems to be yes since the amendment Act clearly provides that the daughter would have the same rights as a coparcener as those of a son! Thus, if the daughter’s son or daughter is the eldest amongst the cousins, would he /she become the coparcener in their maternal grandfather’s HUF, in precedence to the son’s children? The answer, again, seems to be yes! So there could be a scenario where the daughter’s daughter is a karta of an HUF?

Inspite of the 2005 amendment, several HUFs have yet continued with the son as the karta even in cases where his sister is elder to him. What happens in such cases? Does the karta get automatically replaced or does the sister in all cases need to move Court? What happens to the transactions carried out by the son post September 2005 as karta of the HUF? Can the other members of the HUF /the sister challenge them for want of authority? These are some of the interesting questions which come to mind. One wishes that the amendment was more holistic and far sighted in nature.

Conclusion
With this judgment, another male bastion falls… and it’s about time. One wishes that the Legislature had expressly clarified this issue of managership when it carried out the 2005 amendment. Maybe it is time for an altogether new Hindu Succession Act, instead of carrying out another ad-hoc amendment to the present Act which is already celebrating its 60th anniversary. HUFs yet constitute entity for owning properties and businesses in India and hence, the Act urgently needs a Version 2.0. On a lighter vein, one wonders, whether, in case of a female manager, the term karta should now be joined by the term ‘Karti’?

Precedent – Judgement delivered earlier in point of time – Must be respected and followed – Constitution of India, Article 141.

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New India Assurance Co. Ltd. vs. Hill Multi purpose Cold Storage P. Ltd. AIR 2016 SC 86

While considering the interpretation of section 13(2)(a) OF The Consumer Protection Act, 1986 the Court observed that in Central Board of Dawoodi Bohra Community and Anr. vs. State of Maharashtra and Anr. [(2005) 2 SCC 673], wherein a question had arisen whether the law laid down by a Bench of a larger strength is binding on a subsequent Bench of lesser or equal strength. After considering a number of judgments, a five-Judge Bench of the Supreme Court, opined as under:

“12. Having carefully considered the submissions made by the learned senior Counsel for the parties and having examined the law laid down by the Constitution Benches in the above said decisions, we would like to sum up the legal position in the following terms:

(1) The law laid down by this Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength.

(2) A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

(3) The above rules are subject to two exceptions: (i) The above rules do not bind the discretion of the Chief Justice in whom vests the power of framing the roster and who can direct any particular matter to be placed for hearing before any particular Bench of any strength; and

(ii) In spite of the rules laid down here in above, if the matter has already come up for hearing before a Bench of larger quorum and that Bench itself feels that the view of the law taken by a Bench of lesser quorum, which view is in doubt, needs correction or reconsideration then by way of exception (and not as a rule) and for reasons given by it, it may proceed to hear the case and examine the correctness of the previous decision in question dispensing with the need of a specific reference or the order of Chief Justice constituting the Bench and such listing. Such was the situation in Raghubir Singh and Hansoli Devi.”

In view of the aforestated clear legal position depicted by a five-Judge Bench, the subject is no more res integra. Not only this three-Judge Bench, but even a Bench of coordinate strength of this Court, which had decided the case of Kailash (supra), was bound by the view taken by a three-Judge Bench in the case of Dr. J.J. Merchant(supra)

Precedent – Binding precedent – Judicial propriety – Single Judge is bound by opinion of Division Bench: Constitution of India, Article 226

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Farooq Mohammad vs. State of M.P. & Others AIR 2016 AIR MP 10 (FB)

The petitioner filed writ petition before the High Court challenging the entire action of election on the ground that the notice period for convening the first meeting after general election was not in conformity with section 56 (3) of the Act. The sole ground was that the notice was dated 1.1.2015 and was dispatched to the Councillors only on 2.1.2015 for convening meeting on 6.1.2015. As a result, the entire action including election of Vice President and two members of Appeal Committee be declared as vitiated in law. The writ petitioner had relied on the decision of the Division Bench of our High Court in the case of Awadh Behari Pandey vs. State of Madhya Pradesh and others 1968 MPLJ 638. The learned Single Judge, however, doubted the correctness of the view taken by the Division Bench that requirement of dispatching the notice to convene first meeting after general election of the Council as per section 56 (3) of the Act, of seven (7) clear days before the first meeting is mandatory.

The Court observed that it was also not open to be doubted on the principles of stare decisis, in particular by the Single Judge. The Constitution Bench of the Supreme Court in the case of Central Board of Dawoodi Bohra Community and another vs. State of Maharashtra and another, (2005) 2 SCC 673 had laid down the law that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength. A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of co-equal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

By now it is well established position that the Single Judge is bound by the opinion of the Division Bench and more so, on legal position which has been in vogue for such a long time if not time immemorial. Merely because some other view may also be possible, cannot be the basis to question the settled legal position. Such approach is not only counterproductive but has been held to be against the public policy.

Partition – Only partition effected by way of registered deed prior to 20/12/2004 debars daughter from staking an equal share with son in co-parcenary property : Hindu Succession Act 1956, section 6.

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Smt. Lokamani & Ors vs. Smt. Mahadevamma & Ors. AIR 2016 Karnataka 4

The Suit was in respect of four landed properties and one house property. The case of the plaintiffs was that they along with defendants 1 to 4 constituted undivided Hindu Joint Family owning ancestral agricultural lands and house property.

The Trial Court held that the plaintiffs had proved that the suit properties were joint family properties; the suit was maintainable and that it was not a suit for partial partition as contended by the defendants; the plaintiffs and Mahadevappa being Class-I heirs of the deceased Sannamadiah, were entitled to equal share in the suit properties as per section 8 of the Hindu Succession Act, 1956 (the Succession Act).

On appeal, the Hon’ble Court observed that the Explanation to sub-section (5) of section 6 of the Succession Act categorically declares that nothing contained in section 6 applies to a partition, which has been effected before 20th day of December 2004. In other words, if a partition had taken place in the family before 20th December 2004, a daughter cannot claim share in the co-parcenary property by virtue of the amendment to the Succession Act.

Further Explanation to sub-section (5) explains the meaning of partition for the purpose of section 6 as below: “Explanation: For the purposes of section 6, “partition” means any partition made by execution of a deed of partition duly registered under the Registration Act, 1908 or partition effected by a decree of a Court.”

Thus, oral partition, palu-patti, unregistered Partition Deed are excluded from the purview of the word “partition” used in section 6. It is only the partition effected by way of a registered Deed prior to 20th December 2004, which debars a daughter from staking an equal share with a son in a co-parcenary property.

The High Court held that in the case on hand, admittedly there was no registered Partition Deed between Sannamadaiah and Mahadevappa, evidencing the alleged partition that took place in the year 2000. Even if there was a partition, oral or by an unregistered Partition Deed of the year 2000 as contended by the defendants, it could not be treated as a partition for the purpose of Section 6 and the rights of the daughters to claim an equal share as coparceners along with Sannamadaih’s son Mahadevappa remained unaffected. The trial Court was fully justified in rejecting the contention of the defendants and holding that the plaintiffs were entitled to equal share with the son of Sannamadaiah in the suit properties, which were admittedly co-parcenary properties.

The court further observed that the Repealing and Amending Act, 2015 does not disclose any intention on part of Parliament to take away status of a co-percener conferred on a daughter giving equal rights with the son in co-parcenary property. Similarly, no such intention can be gathered with regard to restoration of sections 23 and 24 of Principal Act which were repealed by Hindu Succession (Amendment) Act, 2005. On the contrary, by virtue of Repealing and amending Act, 2015, the amendments made to the Succession Act in the year 2005, became part of the Act and the same is given retrospective effect from the day the Principal Act came into force in the year 1956, as if the said amended provision was in operation at that time. Thus, equal rights conferred on the daughter by the Amending Act have not been taken away by the Repealing Act. The main object of the Repealing and Amending Act is not to bring in any change in law, but to remove enactments which have become unnecessary.

Mortgage debts – Priority of charge recovery certificate in favour of bank cannot effect prior charge of mortgage : Transfer of Property Act – Section 48.

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Punjab & Sind Bank vs. MMTC Ltd & Ors. AIR 2016 Del. 15

The Debt Recovery Appellate Tribunal vide order dated 23.03.2011 accepted the First Respondent’s Minerals and Metals Trading Corpn’s. (MMTC) plea that the mortgage inuring in its favour had to prevail over the PSB’s claim in execution of a money decree and directing that proceeds from the sale of a property by the Recovery Officer be used first to satisfy MMTC claim. The Punjab and Sind Bank aggrieved by the order approached the Hon’ble Court.

The Hon’ble High Court observed that if the mortgage exists, it will create a prior charge over the property, being prior in time vide section 48 of Transfer of Property Act, 1982 (the TP Act). In the instant case, prior mortgage was created by deposit of title deeds in favour of MTC) Subsequently, the mortgagor also obtained cash credit facilities from Bank and defaulted in payment. MMTC invoked arbitration clause and procured award in its favour. The Bank initiated recovery proceedings under The Recovery of Debts Due to banks and Financial Institutions Act, 1993 (the RDDBFI Act). The award of arbitrator was sought to be executed as decree of Civil Court. The fight was between the two lenders over the priority of claims.

The Court held that the non obstante clause in section 34 of the RDDBFI Act would not override the prior charge. The non obstante clause would operate only where there is a conflict. The applicable rules themselves envision a situation where the Recovery officer is confronted with a property that is already charged. If an earlier mortgage existed it would take prior claim by virtue of section 48 of the TP Act.

The fact that the mortgage debt must be enforced by sale through a separate civil suit does not obviate the mortgage itself. So far as the Debt Recovery Officer concerned, Rule 11 merely requires him to investigate if evidence of a prior charge on the property exists, and then proceed accordingly. His task is not to finally give effect to the mortgage debt, nor is to deny its existence in law. His determination is not final and is subject to a civil suit that may be filed in that regard.

Nominee-Right of Nominee–Existence of Joint Family-Hindu widow is not coparcener in HUF of her husband: Hindu law Prior to amendment of the Hindu Succession Act, 2005.

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Shreya Vidyarthi vs. Ashok Vidyarthi and Ors. AIR 2016 SC 139

In the year 1937, one Hari Shankar Vidyarthi married Savitri Vidyarthi, the mother of the Respondent – Plaintiff. Subsequently, in the year 1942, Hari Shankar Vidyarthi was married for the second time to one Rama Vidyarthi. Out of the aforesaid second wedlock, two daughters, namely, Srilekha Vidyarthi and Madhulekha Vidyarthi (Defendants 1 and 2) were born.

The dispute in the present case revolves around the question whether the suit property, purchased by sale deed dated 27.9.1961 by Rama Vidyarthi was acquired from the joint family funds or out of her own personal funds.

The Hon. Court held that though the claim of absolute ownership of the suit property had been made by Rama Vidyarthi in the affidavit, she had also stated that she received the insurance money following the death of Hari Shankar Vidyarthi and the same was used for the purchase of the suit property along with other funds. The claim of absolute ownership is belied by the true legal position with regard to the claims/entitlement of the other legal heirs to the insurance amount. Such amounts constitute the entitlement of all the legal heirs of the deceased though the same may have been received by Rama Vidyarthi as the nominee of her husband. The above would seem to follow from the view expressed by this Court in Smt. Sarbati Devi and Anr. vs. Smt. Usha Devi : 1984 (1) SCC 424.

The facts that the family was peacefully living together at the time of the demise of Hari Shankar Vidyarthi; the continuance of such common residence for almost 7 years after purchase of the suit property in the year 1961; that there was no discord between the parties and there was peace and tranquility in the whole family were also rightly taken note of by the High Court as evidence of existence of a joint family. The execution of sale deed dated 27.9.1961 in the name of Rama Vidyarthi and the absence of any mention that she was acting on behalf of the joint family has also been rightly construed by the High Court with reference to the young age of the Plaintiff -Respondent (21 years) which may have inhibited any objection to the dominant position of Rama Vidyarthi in the joint family, a fact also evident from the other materials on record. The Court, therefore, held that there can be no justification to cause any interference with the conclusion reached by the High Court on the issue of existence of a joint family.

Issue also arose as to how could Rama Vidyarthi act as the Karta of the HUF in view of the decision of this Court in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd. : AIR 1966 SC 24 holding that a Hindu widow cannot act as the Karta of a HUF which role the law had assigned only to males who alone could be coparceners (prior to the amendment of the Hindu Succession Act in 2005).

While there can be no doubt that a Hindu widow is not a coparcener in the HUF of her husband and, therefore, cannot act as Karta of the HUF after the death of her husband, the two expressions i.e. Karta and Manager may be understood to be not synonymous and the expression “Manager” may be understood as denoting a role distinct from that of the Karta. Hypothetically, we may take the case of HUF where the male adult coparcener has died and there is no male coparcener surviving or as in the facts of the present case, where the sole male coparcener (Respondent – Plaintiff Ashok Vidyarthi) was a minor. In such a situation obviously the HUF does not come to an end. The mother of the male coparcener can act as the legal guardian of the minor and also look after his role as the Karta in her capacity as his (minor’s) legal guardian. Such a situation has been found, and rightly, to be consistent with the law by the Calcutta High Court in Sushila Devi Rampuria vs. Income Tax Officer and Anr.: AIR 1959 Cal 697 rendered in the context of the provisions of the Income Tax Act while determining the liability of such a HUF to assessment under that Act. Coincidently the aforesaid decision of the Calcutta High Court was noticed in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd.

Net Neutrality

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A lot has been written and spoken about Net Neutrality in the recent
past. We have also seen full page advertisements in our newspapers by
FaceBook exhorting Indians to support Free Basics which is Mark
Zuckerberg’s version of Face Book for the poor. So, what is Net
Neutrality? And what is the big controversy around it that has suddenly
made it the centre of such a roaring debate?

Net neutrality is
the concept of treating the Internet Services as a Public Utility
similar to electricity, water or gas supply.

Net neutrality is
endorsing a view to treat all data on the Internet at par without
discriminating or charging differentially irrespective of user, content,
site, platform, application or instrument

The term “Net
Neutrality” was coined way back in 2003 by Timothy Wu, a professor at
Columbia Law School in his paper “Network Neutrality, Broadband
Discrimination”. The Paper by Tim Wu rooted for neutrality among
applications, data, quality of service and also proposed some sort of
legislation to deal with these issues.

Though this concept was
coined in 2003 and has become part of legislation in many countries
since 2010. In India, the hue and cry began only in December 2014, when
one of the telecom operators announced additional charges for making
voice calls on its network using apps like WhatsApp, Skype, etc.

To
clear the prevailing confusion, in March 2015, TRAI released a
consultation paper on Regulatory Framework for Over-the-Top (OTT)
Services. The consultation paper was heavily criticised in all quarters
for being one sided and not having clarity in many areas.

Let’s
understand what this hue and cry is and how it is affecting content
companies like YouTube, Facebook, Skype etc., Vis network providers,
telecom operators, etc.

Though this concept was discussed all
these years, there was no pressure on either internet service providers
or telecom operators. However, with the advance of YouTube and other
video content companies, load on the network increased tremendously.
Similarly, photos and video on Facebook and other popular social media
sites too became all pervasive and miilions of MBs of content is now
being uploaded every day onto these sites. As a result, the internet
network started feeling the heat of overburden of content over
internet/telecom highway.

Most of the telecom companies argue
that they are investing heavily in internet highway and hence those
using this highway should either pay charges or share their revenue with
telecom/internet companies.

A major factor that has raised this
storm is the fact that social media companies with low investment draw
huge traffic and huge revenue from advertisements, etc., and as compared
to that, telecom/internet companies who invest heavily into
infrastructure and enable all those users to reach particular content
site get hardly anything.

One more factor which led to a dent in
telecom companies’ margins was the heavy fall in the number of sms
messages after evolvement of many free messenger apps. This was further
worsened by voice over internet protocol (VOIP) calls provided by
various apps, which has directly impacted the telecom companies earning
revenues from STD / ISD calls. This stream of revenue has literally
vanished after evolvement of these messenger apps.

Video content
sharing on almost all the social media platforms has put tremendous
pressure on all the carriage providers who are now reluctant to upgrade
their network capacity unless cost for the same shared by such content
companies.

In some quarters, arguments in favour of Net
Neutrality are cracking down as attempt to differentiate content from
network is not able to sail through.

Let’s understand this
problem from another angle. What if concept of Net Neutrality is not
there? Let us assume a life without Net Neutrality. In that scenario,
telecom companies will start charging content companies and will in turn
offer Sponsored Data or Free Data for such content companies over its
network.

Real trouble will start here when those content
companies with very little start up who are not able to share either
cost or revenue with internet/telecom companies will see lesser traffic
as these infrastructure companies will be partial to content companies
sharing cost/revenue as against those who are using their information
highway free of cost.

Recently, we are seeing free Facebook
plans by various telecom companies which are nothing but some type of
similar arrangement wherein telecom companies will be compensated by
content companies.

Now let’s analyse the entire scenario to understand as to who will gain and who will lose from this concept of Net Neutrality.

Presently,
without Net Neutrality, those content companies which don’t have to
share cost or revenue with infrastructure companies (which are heavily
burdened) are benefitted as compared to the infrastructure companies
which have to provide hassle free info highway which in turn pushes them
to invest more and more into towers and related infrastructure without
any corresponding increase in the revenue.

With Net Neutrality,
telecom companies will be further burdened to provide better information
highway which will require them to invest more and this concept won’t
allow telecom companies to enter into any arrangement of sharing cost
with or revenue from content companies for any sponsored data type
packages.

Now in last limb, let us understand how things will
worsen without this concept. In absence of any regulation of internet
highway, most telecom companies will enter into arrangement with content
companies for sponsored data and will not charge end users any fees for
usage of visit to such content companies. E.g., Reliance offering free
internet for Facebook or Airtel offering free internet for Flipkart.

Any
such arrangement will simply push users towards content companies which
are providing free access at the cost of new or low funded start-up
companies which many not be able to share cost or revenue with telecom
companies.

This can lead to a very big negative impact affecting
the whole internet revolution which started with free world wide web.
With all such sponsored data packages, telecom companies and content
companies can drive and decide as to what end user should read, watch or
listen.

To conclude, we can summarize that this subject is not
that easy to tackle. Implementing Net Neutrality can either kill
efficiency of telecom operators or their financial /economic viability.
With regulators and consumer forum just focussing on better quality and
better network and not addressing fallacy in revenue models of telecom
operator will hurt economy in long term.

On the other hand, the
risk of not implementing or regulating Net Neutrality may leave business
in the hands of large content companies and telecom operators, who will
mould, drive and drag users in the way they want. Such laissez faire in
the long term will choke the growth of any small content company whose
financial health cannot allow it to bear the cost or share the revenue
with telecom operators. Without Net Neutrality, users will lose the real
benefit of information technology revolution as they will be at mercy
of partial or biased approach of internet highway operators, i. e.
internet/telecom companies.

The whole world is exploring various
options for striking a balance between the two extremes. Most of the
western or developed countries which have implemented Net Neutrality are
facing tremors as veneer of this concept is cracking in the tussle of
carriage and content.

In long term, government, regulators and
industry bodies will have to come together and work for balance between
Net Neutrality along with reasonable compensation for telecom companies
who will keep pumping money into establishing and improving better and
better information highway. The next few months will prove very
interesting as the debate continues and the haze begins to clear.

A. P. (DIR Series) Circular No. 53 dated March 03, 2016

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Grant of EDF Waiver for Export of Goods Free of Cost

Presently, Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is higher.

This circular now provides that Status Holder exporters can export, free of coat, freely exportable items for export promotion annually up to Rs 10 lakh or 2% of average annual export realization during preceding three licensing years, whichever is lower.

Notification No.FEMA.362/2016-RB dated February 15, 2016

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

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. In Regulation 2 – new clause (viiAA) has been inserted as under: –

“(vii AA) “Manufacture”, with its grammatical variations, means a change in a non-living physical object or article or thing- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.”

B. In Regulation 14 the following amendments have been made
a. In sub-regulation 1, existing clause (i) and clause (ia) have been amended.
b. In sub-regulation 3, existing sub-clause (D) in clause (iv) has been amended.
c. Sub-regulation 5 – Guidelines for establishment of Indian companies/ transfer of ownership or control of Indian companies, from resident Indian citizens to non-resident entities, in sectors under government approval route – has been amended.

d. In sub-regulation 6, the existing clause (ii) has been amended.

C. In Schedule 1 the following amendments have been made: –

a. In paragraph 2, paragraph beginning with “Provided further that the shares or convertible debentures…..” and ending with “…………permitted to the extent specified in Regulation 14.” has be deleted.

b. In paragraph 2, new clause (v), has been inserted as under: –

“(v) by way of swap of shares, provided the company in which the investment is made is engaged in an automatic route sector, subject to the condition that irrespective of the amount, valuation of the shares involved in the swap arrangement will have to be made by a Merchant Banker registered with SEBI or an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
c. Note: A company engaged in a sector where foreign investment requires Government approval may issue shares to a non-resident through swap of shares only with approval of the Government”
d. In paragraph 3, the existing sub-paragraph (c) has been deleted.
e. In ‘Annex B’, the existing table – Foreign Investments caps and entry route in various sectors – has been substituted.

D. In Schedule 9 the following amendments have been made: –
a. Existing paragraph 4 – Entry Route – has been amended.
b. Existing paragraph 8 – Downstream Investment – has been deleted.

E. E xisting Schedule 11 – Investment by a person resident outside India in an Investment Vehicle – has been substituted.

Notification No.FEMA.361/2016-RB dated February 15, 2016

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

This Notification has amended Notification No. FEMA. 20/2000-RB dated 3rd May 2000 as under: –

A. Substituted clause (viia) in Regulation 2 as follows: – “(viia) Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955.”

B. Substituted Regulation 5(3) as follows: – “(i) A Non- Resident Indian (NRI) may acquire securities or units on a Stock Exchange in India on repatriation basis under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 3. (ii) A Non- Resident Indian (NRI) may acquire securities or units on a non-repatriation basis, subject to the terms and conditions specified in Schedule 4.”

C. Substituted Schedule 3.

D. Substituted Schedule 4.

SEBI debars Auditor for one year – a precedent for other professionals too?

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SEBI has, probably for the first time, barred a Chartered Accountant and auditor of a listed company from issuing certificates for a wide range of entities and purposes. The bar, though not a total one, is fairly wide both in respect of the services he can render and the entities to which he can render such services.

The order of SEBI (“the Order”) is in the case of Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co., in the matter of Ritesh Properties and Industries Limited (Order No. WTM/RKA/EFD/23/2016 dated 17th February 2016).

Summary of THE Order
The matter concerned a listed company (“the Company”) that was alleged to have carried out several accounting irregularities such as inflated revenues/profits, incorrect classification of assets, etc. The report of the Auditors did not point out these irregularities. In a subsequent year, the Company actually reversed by way of restatement the whole of such inflated revenues of the two years under consideration. The price of the shares of the Company had moved from Rs. 3.52 to Rs. 123.50 during the period that the order covered. An earlier order of the SEBI on the Company gives more details of other alleged violations by the Company.

The Company, as per the order, was engaged in real estate/ land related activities. The Company had recognized substantial revenues that were shown to have resulted in significant profits. SEBI appointed an independent Chartered Accountant to conduct special examination of the accounts of the Company. SEBI recorded a finding that there were serious accounting irregularities that had resulted in overstatement of revenues/profits. SEBI considered this not only to be a fraud by the Company but also alleged that the auditors abetted the company in doing so. Consequently, SEBI passed prohibitory directions to such Chartered Accountant.

Violations of Accounting Standard/Guidance Notes
SEBI considered the relevant requirements of Accounting Standard 9 on Revenue Recognition and the Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Institute of Chartered Accountants of India. It examined the detailed facts of the case and contrasted the requirements of such Accounting Standard/ Guidance Note with the actual accounting practices followed by the Company. According to SEBI, “correct accounting procedures and practices had not been followed in preparation of financial statements of the Company”.

Allegations/findings of SEBI against the Auditors
SEBI stated that, “It was observed from the analysis of the report that the auditor had fraudulently certified the annual report, which it did not believe to be true and had fraudulently caused the annual reports of the relevant period to be published with untrue information, in spite of the presence of unusual features in the accounts of the Company”. SEBI made certain further observations such as:-

“… the Auditor had fraudulently omitted to disclose…”

“It was alleged that as a statutory auditor of the Company, the Auditor failed to notice that the Company had not followed the accounting standards for recognising revenue.”

– “The Auditor had certified the overstated revenue and profits recognised by the Company in violation of the applicable Accounting Standards for recognising revenue from real estate business.”

– “In spite of the presence of unusual features in the accounts which prima facie gave reason to believe that the revenue recognised by the Company was not in order, the Auditor had willfully/ fraudulently failed to take note of the same while certifying the accounts of the Company. The aforementioned commissions and omission by the Auditor prima facie indicated the intention to benefit the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position.”

– “…it was observed that knowing very well that what was being certified was not true and fair report of the Company, the Auditor had certified its Annual Reports, suppressing Related Party Transactions and showing inflated and false financial position of the Company only to defraud the general investors.”

SEBI alleged that the Auditors had contravened several provisions of the SEBI Act and PFUTP Regulations relating to fraudulent and other practices. After reviewing the submissions of the Auditors, SEBI concluded that:-

“…it has been established that correct accounting procedures and practices had not been followed in preparation of financial statements of the Company and the Noticee had falsely certified misleading Annual Accounts of the Company, containing distorted information, which he did not believe to be true but certified knowing that the same when published would be relied upon by the investors to be true and fair and such certification was intended for the benefit of the Company and its promoters/ directors in their alleged manipulation of price in the scrip of the Company. I, therefore, find that by the aforesaid acts and omissions the Noticee aided and abetted the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position and, thus, its acts and omissions amount to aiding and abetting in the fraudulent, unfair and manipulative acts in connection with dealing in the shares of Ritesh Properties and are covered within the definition of “fraud” and “fraudulent” under regulation 2(1)(c) of the PFUTP Regulations…” (emphasis supplied)

Direction of debarment against the Auditors
In view of this, SEBI passed prohibitory directions debarring the Auditors. The wording of the debarment are interesting (emphasis supplied):-

“… hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992 (sic), the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”

Some aspects need attention:-
– the prohibition is on issue of certificates and not reports.
– The certificate may be under any of the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder. The laws specified, particularly the rules, regulations and guidelines are numerous.
– The certificate may be even under the the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by the Securities and Exchange Board of India.
– The certificate must be required under the said specified laws.
– The certificates may relate to listed companies as well as intermediaries registered with SEBI. The term intermediaries covers a wide range of entities active in the securities market.

Applicability to other professionals
It is not uncommon for SEBI to find such entities engaging in accounting irregularities. Clearly, while SEBI would take actions against such persons for such matters, the role of the Auditors would also now increasingly come into focus. This order may become thus one of the first of many such orders in the future.

While passing the order, SEBI stated, “This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.” (emphasis supplied). While these words do show SEBI’s desire to act strictly, the use of the word “professionals” needs attention. Other professionals such as Company Secretaries, lawyers, etc. too associate themselves with and advise entities in the securities markets. It can thus be expected that, in appropriate and similar cases, such orders may also be passed against other professionals such as Company Secretaries, lawyers, etc.

Locus standi of SEBI to pass such orders
It will be interesting to watch the progress of such orders and how appellate authorities/courts act in that regard. In Price Waterhouse vs. SEBI ((2010) 103 SCL 96), the Bombay High Court had observed that, “isst cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed Company….. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.” (emphasis supplied). Thus, the Court endorsed the power of SEBI to take action against auditors who engage in such acts.

Whether SEBI has exclusive, parallel or overlapping jurisdiction over auditors?

In the present case, SEBI held the Chartered Accountant to have acted in a manner aiding and abetting in the fraudulent, unfair and manipulative acts, etc. as prohibited under the SEBI PFUTP Regulations. However, this obviously does not rule out actions by other authorities including ICAI depending on facts of each case. The auditor may also face action for non-reporting of fraud u/s. 143(12) of the Companies Act, 2013. Thus, Auditors (and other professionals) may see multiple actions under different provisions and from different authorities/ persons. And it is possible that the parties who can take action may only increase. For example, if and when the provisions relating to class actions u/s. 245 of the Companies Act, 2013, are brought into effect, there may be claims for damages/compensation too. Similarly, when brought into effect, NAFRA may also have a role. Concerns may also arise whether such actions can be exclusive or overlapping/multiple for essentially the same default.

The Bombay High Court in Price Waterhouse’s case cited earlier did make some distinction between the role of ICAI and SEBI. For example, it stated that, “It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of Chartered Accountant. This proposition cannot be disputed in any manner”. However, it also held if SEBI takes “remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by SEBI, it can never be said that it is regulating the profession of the Chartered Accountant”. Importantly, it also observed, “In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence, SEBI cannot give any further directions.”

These words do give broad guidance of what role SEBI has and where it can and cannot act. They affirm SEBI’s powers but at the same time limit them. Having said that, several concerns and issues still remain as to where the lines of demarcation, if any exist, are to be drawn, whether the role will be overlapping, whether the defense of double jeopardy for multiple punishments would be available, etc. Discussion of this would be beyond the scope of this article and competence of this author.

Conclusion
SEBI has powers to take action against a wide range of persons who are associated with the securities markets. Such persons are not merely those who are registered with SEBI as intermediaries or are listed companies whose securities are listed on stock exchange. Auditors and other professionals, independent directors, key managerial personnel, etc. are also persons who have been over the years been acted against by SEBI. The law is clearly developing and there are grey areas and concerns that hopefully will see more light on as time passes.

SICA vs. SARFAESI – And the Winner Is…..

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Introduction
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) is an Act meant to protect the interests of secured creditors by giving them a mechanism by which they can enforce their secured interests without resorting to any Courts or Debt Recovery Tribunals. Thus, it is a creditor protection Act. On the other hand, the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) is an Act to protect and revive companies suffering from industrial sickness. Thus, it is a debtor protection Act.

A very interesting question arises here – should these two special Acts have a head-on collision, which one would prevail? This was the issue which the Supreme Court was faced with in M/s. Madras Petrochem Ltd vs. BIFR, Civil Appeal Nos.614-615/2016, (Order dated 29th January 2016). The Apex Court analysed the interplay between the SARFAE SI and the SICA.

At a time when the Indian banking system is creaking under the weight of bad loans/NPAs and we are witnessing several high-profile loan default cases, this decision has several far reaching ramifications. According to press reports, over Rs. 1.14 lakh crore of bad loans were written off by public sector banks alone in 2012-15!

Overview of the SARFAESI
According to the SARFAE SI, a secured creditor can enforce any security interest created in its favour. This can be done without the intervention of any Court or Tribunal. If the borrower fails to repay the liabilities then the creditor can adopt one or more of the measures enshrined under this Act which includes, taking possession of or taking over the management of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset; appointing a manager to manage the secured assets taken over by the secured creditor; requiring any person who has acquired any of the secured assets from the borrower and who has to pay any money to the borrower, to pay such amount to the secured creditor, etc. Details of the procedures have been laid down for taking over possession of and selling of movable/ immovable assetsby the secured creditor.

Section 37 of this Act states that the provisions of the Act would be in addition to and would not override the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. Further, section 35 of this Act provides that the provisions of the SARFAE SI would have effect over any other inconsistent law.

Overview of the SICA
Under the SICA, any company whose networth has been fully eroded by its losses must make a reference to the Board of Industrial and Financial Reconstruction (BIFR). If the BIFR decides to admit the reference, then an inquiry will be made by the BIFR and efforts will be made to revive the company or if these efforts fail or are not possible, then the BIFR would order winding-up. However, no reference can be made to the BIFR where financial assets, i.e., any loan given to the sick company has been acquired by a securitisation company under the SARFAE SI. Further, if a reference is pending before the BIFR, then it would abate if 3/4th of the secured creditors decide to take recourse to the SARFAE SI to enforce their secured interest.

One of the most relevant provisions of the SICA is section 22 which provides that where any reference is made to the BIFR and it is admitted then no suit/proceedings will lie against the sick company for recovery of money or for the enforcement of any security against the sick company except with the consent of the BIFR. Thus, section 22 provides a shield to sick companies against any recovery proceedings. Accordingly, the issue before the Supreme Court in the current case was whether section 22 would bar any recovery measures by banks / FIs under the SARFAESI Act?

DRT Act
Yet another legislation to assist banks and financial institutions to deal with the menace of bad loans is the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) which allows banks/FIs to approach specially constituted Debt Recovery Tribunals for expeditious adjudication and recovery of debts. The Supreme Court in Mardia Chemicals Ltd. vs. Union of India (2004) 4 SCC 311 held that the SARFAE SI was enacted because the DRT Act had failed to achieve its desired results.

Contours of the 3 Statutes
The Supreme Court considered the genesis of these three legislations. It held that each of these dealt with different aspects of recovery of debts due to banks and financial institutions. Two of them referred to the creditors’ interests and how best to deal with recovery of outstanding loans and advances made by them, whereas the SICA dealt with certain debtors which were sick industrial companies and whether such debtors having become sick, were to be rehabilitated.

Interplay between SICA and Ot her Acts
The Supreme Court analysed the SICA’s relationship visa- vis other statutes. The decided cases on this issue were as follows:

(a) The SICA prevailed over the State Financial Corporations Act, 1951 since both were special statutes dealing with sickness/recovery of debts and containing non-obstante clauses, but SICA was the later Act– Maharashtra Tubes Ltd vs. State Industrial and Investment (1993) 2 SCC 144.

(b) The SICA prevailed over the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 by virtue of an amendment in 1994 to SICA since the amendment was later than the 1993 Act – Jay Engineering Works vs. Industry Facilitation Council (2006) 8 SCC 677.

(c) The Arbitration and Conciliation Act, 1996 which contained a non-obstante clause was subordinate to SICA because the Arbitration Act’s non-obstante clause had a limited application to the extent of judicial intervention in arbitration proceedings – Morgan Securities and Credit P Ltd vs. Modi Rubber Ltd (2006) 12 SCC 642.

(d) The Companies Act being a general Act would yield to the SICA being a special Act – Tata Motors Ltd vs. Pharmaceutical Products of India Ltd (2008) 7 SCC 619. The same was the verdict in the case of Raheja Universal Ltd vs. NRC Ltd (2012) 4 SCC 148 which held that the Transfer of Property Act, 1882 being a general law was subordinate to the SICA which was a special law.

(e) The DRT Act and the SICA are both special laws – one to provide measures for restoration of sick companies and the other to provide for speedy recovery of debts of banks. However, with specific reference to sick companies, the SICA is a special law while it is a general law when it came to recovery of debts. In this respect, DRT was a special law. The DRT Act was also later in time than the SICA. However, since the DRT Act contained a specific provision in s.34(2) which provided that it would be in addition to and not in derogation of the SICA, it was held that the SICA would prevail over DRT – KSL & Industries Ltd vs. Arihant Threads Ltd (2015) 1 SCC 166.

SC’s Observations
The Supreme Court observed that section 37 of the SARFAE SI expressly provided that it would not be in derogation but in addition to 4 Acts ~ the Companies Act, the Securities Contracts (Regulation) Act, the Securities and Exchange Board of India Act and the Recovery of Debts Due to Banks and Financial Institutions Act. The SICA was not one of these 4 Acts. Hence, the Legislature was conscious of the fact that SARFAE SI would not be in addition to the SICA and could in fact, override it. This proposition was strengthened by the fact that section 41 of the SARFAESI amended the SICA but section 37 excluded the SICA. While the DRT Act was expressly mentioned u/s. 27, the SICA was not. Therefore, the SARFAESI must be given precedence over the SICA.

Further, section37 contained the words “or any other law for the time being in force” and section 35 contained that the provisions of the SARFAE SI would override any other inconsistent law. The Supreme Court applied the harmonious construction rule and held that section 35 was subject to the 4 laws expressly carved out in section 37. Thus, as respects these 4 laws, the SARFAESI would not override them. Moreover, the words “or any other law for the time being in force” contained in section 37, when viewed in connection with the 4 securities’ market laws, would only be restricted to other laws having relation to the securities market. Even on this count, the SICA would not be included u/s. 37 since it is not a special law dealing with the securities market.

It also observed that the Companies Amendment Act, 2002 as well as the Companies Act, 2013 incorporated the provisions of the SICA by providing for a reference to be made to the National Company Law Tribunal instead of the BIFR. Neither of these have been notified but interestingly, none of these Acts contain a provision similar to section 22 of the SICA. Thus, going forward, creditors would be able to initiate recovery proceedings even when reference is pending before the Tribunal. The modified laws lean in favour of creditors being able to realise their debts outside of the court process. It analysed statistics of debt recovery which showed that of the total bad loans recovered in 2011-12, over 70% was under the SARFAESI Act and only 28% was under the DRT Act. This according to the Court, showed the efficacy of the SARFAESI Act. Hence, it concluded that it would be loathe to give an interpretation which would thwart the recovery process under the SARFAE SI, which alone seems to have worked at least to some extent. Accordingly, it held that section 22 of the SICA would have to yield way to the recovery proceedings taken by banks/FIs under the SARFAE SI and the SICA would not offer a shield to the debtor company.

The SARFAESI Act is a complete code in itself and the earlier judgments rendered under the DRT Act cannot apply to it. Further, the incorporation of certain provisions of the Companies Act in the SARFAE SI Act shows that even the Companies Act is harmonised with it – Pegasus Asset Reconstruction P Ltd vs. M/s. Haryana Concast Ltd, Civil Appeal 3646/2011 (SC).

There are many situations in which the bar u/s. 22 of the SICA would not apply, for instance a rent act eviction petition on the ground of non-payment of rent. Such eviction petitions have been held not to be suits for recovery of money – Gujarat Steel Tube Co. Ltd. vs. Virchandbhai B. Shah, (1999) 8 SCC 11. In Kailash Nath Agarwal vs. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, the U.P. Act under which recovery proceedings initiated against guarantors at a post-decree stage were held to be outside the purview of section 22.

Recovery Matrix
The Supreme Court laid down the recovery matrix for banks/other creditors in case of a sick company as follows: (a) In all cases where unsecured creditors of a sick company are involved, the SICA would override all the recovery proceedings, including under the DRT Act.

(b) Where secured creditors of a sick company are involved, the SICA would give way to the recovery proceedings, if any, initiated by the banks / FIs under the SARFAE SI. In this event, the recovery proceedings would be as under:

(i) If there is more than one secured creditor, then 60% of the secured creditors must agree to enforce their security under the SARFAE SI. In such a case, the SICA proceedings would abate.

(ii) If 60% consent is not achieved, then the bar on legal provisions u/s.22 of the SICA would apply.

(c) If instead of taking recourse under the SARFAE SI, secured creditors decide to approach the DRT under the DRT Act, then the shelter under the SICA would continue to be available to the sick company since the Supreme Court has held that the SICA is superior to the DRT Act.

Conclusion
This is a path-breaking judgment as far as banks are concerned. There are numerous instances of sick companies taking shelter under the SICA to prevent loan recoveries by banks and FIs. This decision should act as a booster shot to the floundering banking sector. At a time when the RBI is goading the banks to fasten the recovery process, this should encourage banks and asset reconstruction companies to monetise all NPAs under the SARFAE SI. It is interesting to note that in the decision under discussion, the company was referred to the BIFR in December 1989 while the Supreme Court’s decision permitting sale came in January 2016, a time gap of 27 years! Is it not surprising that the Indian banking system is mired with bad loans?

Numerous attempts to repeal the SICA have failed with this Act yet ruling the roost. Recently, the Finance Minister blamed the slow and complex legal system plagued with delays for the bad loan mess. He also mentioned that India desperately needed a comprehensive bankruptcy and insolvency code. Till the time something urgently is done on this front, this judgment would provide some solace to the banks.

Vakalatnama – An Advocate who does not have Vakalatnama in his favour cannot concede claim or confess judgement affecting rights of party.

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Manuel Sons Financial Enterprises (P) Ltd. vs. Ramakrishnan and Ors. AIR 2016 Ker. 47.

An important and an interesting legal question arose before the Kerala High court about the authority of a counsel, who does not hold a vakalat for the party, to make an endorsement on the plaint that the party-defendant has no objection in decreeing the suit as prayed for.

In this case while the suit for redemption of mortgage was pending, one advocate by name Sri Mahadevan endorsed on the reverse of the plaint, said to be on behalf of the defendant company, that it had no objection in decreeing the suit. On the basis of this endorsement, learned trial Judge passed a decree in the suit as prayed for on 29.06.2006. Later on, the said decree was challenged by the defendant.

The High Court held that from the records of the trial court it was found that the Managing Director of the defendant company had authorised Advocate Sri Unnikrishnan by executing a vakalat to appear and act on behalf of the company. Advocate Sri. Mahadevan’s name, who made the endorsement on the reverse of the plaint on 27.06.2006 agreeing to decree the suit, was not seen mentioned in the said vakalat. Further, there was no reason brought out from the records to hold that the counsel who filed a vakalat for the defendant company had authorised another counsel to plead on his behalf for the party. Even if one assumes so, such counsel gets no authority to confess judgment against the interest of the party for whom he was only authorised to plead. In other words, an advocate cannot, unless he has filed in the court a memorandum of appearance (vakalat) prescribed by the Rules, concede the claim or confess judgment affecting the rights of a party as it exceeds the authority. The power to “plead” would include within its scope and ambit, the right to examine witnesses, seek adjournments, address arguments, etc. But such a pleader however cannot have the power to compromise a case or withdraw a case or to do any other act which may have the effect of compromising the interest of the client. No court shall accept or act on such a compromise or confession or admission without verifying whether the advocate doing so had been authorised by the party by executing a vakalatnama. A decree passed in a case on the basis of an endorsement by an advocate, who had no vakalat in the case, cannot be said to be a consent decree.

Tenants – tenants covered by the Rent Control Act cannot be dispossessed in an action initiated by the bank against the landlord debtor under the SARFAESI Act. [SARFAESI Act, 2002, Section 14 ]

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Vishal N. Kalsaria vs. Bank of India and Others. AIR 2016 SC 530

The landlords had approached the Bank of India for a financial loan, which was granted against equitable mortgage of several properties belonging to them, including the property in which the Appellant before the Apex Court was a tenant. As the landlords failed to pay the dues within the stipulated time in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAE SI Act), their account became a non-performing asset. Consequently, the Bank filed an application before the Chief Metropolitan Magistrate, Mumbai, u/s. 14 of the SARFAE SI Act for seeking possession of the mortgaged properties which were in actual possession of the Appellant. The Appellant then filed an application as an intervenor to stay the execution of the order passed by the Chief Metropolitan Magistrate. The learned Chief Metropolitan Magistrate vide order dated 29.11.2014 dismissed the application filed by the Appellant. The matter ultimately reached the Apex court.

The broad point which required consideration was whether a protected tenant under the Maharashtra Rent Control Act, 1999 (Rent Control Act) can be treated as a lessee and whether the provisions of the SARFAE SI Act will override the provisions of the Rent Control Act.

The Apex court also laid down the law where the tenancy is not registered. The Apex court held that the provisions of the SARFAE SI Act cannot be used to override the provisions of the Rent Control Act. Once tenancy is created, a tenant can be evicted only after following the due process of law, as prescribed under the provisions of the Rent Control Act.

The Apex Court further held that according to section 106 of the Transfer of Property Act, 1882 a monthly tenancy shall be deemed to be a tenancy from month to month and must be registered if it is reduced into writing. The Transfer of Property Act, however, remains silent on the position of law in cases where the agreement is not reduced into writing. If the two parties are executing their rights and liabilities in the nature of a landlord – tenant relationship and if regular rent is being paid and accepted, then the mere factum of non-registration of deed will not make the lease itself a nugatory. Further, in terms of section 55(2) of the Rent Control Act, the onus to get such a deed registered is on the landlord. In light of the same, neither the landlord nor the banks can be permitted to exploit the fact of non-registration of the tenancy deed against the tenant.

Partition of property – A Hindu widow can on her own file suit for partition under Hindu Succession Act 1956 in respect of her husband’s share in the property. [Hindu Succession Act, 1956]

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Santosh Popat Chavan & Others vs. Mrs. Sulochana Rajiv & Others. AIR 2016 Bombay 29

The plaintiff-respondent herein, Sulochana, widow of Rajiv Chavan filed Civil Suit for partition against the brothers and sister of her deceased husband. The matter ultimately travelled to the Bombay High Court.

The Bombay High Court in the case of Ananda Krishna Tate since deceased by Legal Heirs vs. Draupadibai Krishna Tate and others; 2010 (1) BCJ 714, had taken a view that a Hindu woman (mother, in that case) had no right to file a suit for partition under the provisions of the Hindu Succession Act, 1956 (the Act of 1956), which was earlier available as per section 3(3) of the Hindu Women’s Rights to Property Act, 1937 (the Act of 1937). In the absence of any other coparcener in the joint family demanding partition of the joint family property, the suit on her own was not maintainable.

The Bombay High Court held that the Hindu Succession Act was brought into force in the year 1956 and for emancipation of right to the women, the widow was given exclusive right to the property by removing the limited right that was given to her under the Act of 1937. Thus, right to share has been given to a widow upon death of her husband as per the Act of 1956. Further, the Act of 1956 does not carve out any prohibition on her from filing the suit independently. Hence, it must be held that she has the right to file the suit independently.

Thus, the right having been given to a widow or mother or women under the Act of 1956, she cannot be told that though she has a right to get the share, she cannot file a suit for recovery of share of her deceased husband as she had no right to file a suit. When a right is given, the remedy has to be there namely remedy to file a suit for partition, which cannot depend upon the desire or demand of other coparceners in the family to have a partition of the joint family property. The decision in the case of Ananda (supra) was held to be per incuriam.

WRIT POWER OF THE HIGH COURT IN A COMMERCIAL MATTER

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Introduction
Article 226 of the Constitution of India (Constitution) confers a writ jurisdiction on a High Court. This is an extra ordinary jurisdiction and extends to the action of the State or any authority endowed with State authority and empowers the High Court to issue direction to the State and the authorities to act in accordance with those directions. Courts have time again emphasised that this extra ordinary power must be exercised sparingly, cautiously and in exceptional situations only.

Can a writ jurisdiction be exercised when the State is not acting in an administrative capacity but acting only as a party to a contract i.e in a contractual capacity? The Supreme Court of India (SC) had the occasion to reiterate some of the basic principles governing the subject recently in the case of Joshi Technologies International Inc vs. UOI in the context of section 42 of the Income-tax Act, 1961(the Act).

FACTS IN BRIEF
Joshi Technologies (Petitioner/appellant) had entered into two contracts dated 20.02.1995 with the Union of India, through Ministry of Petroleum and Natural Gas (MoPNG) relating to exploration of certain oil fields. These contracts were on production sharing basis (Production Sharing Contracts,i.e PSC). It started production after entering into the contract and submitted its return of income on the income generated from the aforesaid production. The appellant claimed benefit of section 42 of the Act in the return of income.

Section 42 is a special provision for deductions in the case of business for prospecting, etc. for mineral oil. It provides for certain additional deduction of expenditure as specified in the PSC. It may be noted that such allowances, as stipulated in the section, are to be specifically mentioned in the PSC as well, which is entered into with the Central Government and it is also necessary that such an agreement has been laid on the Table of each House of Parliament.

It may be noted that Article 16 of the Model Production Sharing Contract (MPSC) contained a specific provision, which provided certain financial benefits and deductions in relation to taxes etc. that would be allowed to contractors/developers, as per the requirements of section 42 of the Act. According to the appellant, since no amendments to Article 16 of MPSC had been suggested nor contemplated by the Union of India, it was (and is) the belief and legitimate expectation of the appellant that all the benefits, financial or otherwise, offered in Article 16 of the MPSC to the prospective bidders were duly included in the above two PSCs.

The Assessing Officer (AO) granted deductions u/s. 42 of the Act from the assessment year 2001-02 onwards. However, while making assessment for the Assessment Year 2005-06, the AO observed that there were no such provisions in the PSC/Agreements which were signed between the Central Government and the appellant and in the absence of such stipulation in the agreements, the appellant was not entitled to deductions u/s. 42 of the Act.

It is worth noting that the Union of India signed many PSC’s with the private developers at the relevant period of time and there were 13 PSCs which did not contain the provisions for the deduction as envisaged under Article 16 of MPSC read with section 42 of the Act. A Joint Secretary of the MoPNG vide his communication dated 11.04.2007 wrote to the MoF specifically admitting that in certain PSCs, a reference to section 42 deductions had been omitted by oversight. The MoF was, accordingly, requested to extend the benefits of section 42 to the 13 PSCs (including the appellant’s two PSCs) in line with all other signed PSCs.

Realising that the Agreements did not contain such a provision, the appellant wrote to the MoPNG stating that there was an arrangement agreed to as per the understanding between the two parties to grant deduction as envisaged u/s. 42, non-inclusion thereof was an inadvertent omission in the agreements that were signed.

The MoPNG wrote to Ministry of Finance (MoF) accepting the aforesaid omissions and requested the MoF to give clarification in this behalf. However, no clarification came from the MoF and hence, the AO disallowed the claim for deduction u/s. 42of the Act.

At this stage, the appellant preferred writ petition under Article 226 of the Constitution in the High Court of Delhi.

In this background, the petitioner prayed among other prayers that a writ, order or direction be issued that considering the total facts of the case the petitioner is entitled to the benefit of the said deductions u/s. 42 of the Act, from the date of these Production Sharing Contracts. The prayer did not include a specific prayer to direct the authorities to amend the PSC.

The High Court examined the notice inviting the tender (Bid documents), MPSC and other relevant documents. It noted that, no statement or promise, that advantage u/s. 42 would be available to the successful bidder, was promised or made. It concluded that appellant was fully aware of Clause 16.2 of MPSC which specifically makes reference to benefit u/s. 42 of the Act, but did not advert to and refer to the same in their tender bid and did not ask for this benefit. Therefore, it was not possible to accept the contention of the appellant that benefit u/s. 42 of the Act was inadvertently missed out, or due to an act of oversight, not included in the contract.

The High Court accepted the explanation put forth by the respondents that 13 PSCs formed a different class in as much as their contract was in respect of small oil fields which had already been discovered and, therefore, the risk factor was less. On the other hand, other PSCs were in respect of undiscovered oil fields and for this reason benefit u/s. 42 had been granted to them.

The High Court dismissed the writ petition vide its judgment dated 28.05.2012 holding that the appellant is not entitled to any deductions u/s. 42 of the Act in the absence of stipulations to this effect in the Contracts signed between the parties. The matter went to the SC.

PROCEEDINGS BEFORE SUPREME COURT
One of the submissions of the counsel for the petitioner was that a writ of Mandamus be issued for amending the contract and including the clause for granting the benefit of section 42 of the Act. It was also submitted that when the other contracting parties, namely, MoPNG specifically admitted that this provision was left out inadvertently, the Court should have given a direction for amendment of the Contract and that such a direction can be issued by the High Court in exercise of its powers under Article 226 of the Constitution. In support of his submission the counsel relied on various judicial precedents.

Opposing the said prayer for issue of a writ, the counsel for the respondent submitted that in the realm of contractual relationship between the parties, this plea was inadmissible. He pleaded that PSCs are in the nature of contract agreed to between two independent contracting parties and each of the PSCs are distinct from the other and is not a copy of MPSC. He also pointed out that before signing the PSC, the approval of the Cabinet was obtained, which meant that the PSCs as submitted to the Cabinet, had the approval of one of the contracting parties, i.e. Government of India and when signed by the other party it became a binding contract.

Therefore, the appellant could not claim to be oblivious of the provisions of law or the contents of the contract at the time of signing and was precluded from seeking retrospective amendment as a matter of right when no such right was conferred under the contract. He submitted that the doctrine of fairness and reasonableness applies only in the exercise of statutory or administrative actions of a State and not in the exercise of a contractual obligation and that the issues arising out of contractual matters will have to be decided on the basis of the law of contract and not on the basis of the administrative law. He also relied on the various precedents in support of his submissions.

The SC took note of the Article 32 of the PSC entered into between the parties and observed that Article 32.2 categorically provided that the PSC shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the parties, which shall state the date upon which the amendment or modification shall become effective. Thus, even if it is presumed that there was an understanding between the parties before entering into an agreement to the effect that benefit of section 42 shall be extended to the appellant, the understanding vanished into thin air with the execution of the two PSCs. Now, for all intent and purpose, it was only the PSCs signed between the parties, which could be looked into. Thus, unless respondents agreed to amend, modify or vary/supplement the terms of the contract, no right accrued to the appellant in this behalf.

The SC noted that the PSCs in question were governed by the provisions of Article 299 of the Constitution. These were formal contracts made in the exercise of an executive power of the Union (or of a State, as the case may be) and are made on behalf of the President (or by the Governor, as the case may be). Further, these contracts are to be made by such persons and in such a manner as the President or the Governor may direct or authorise. Thus, when a particular contract is entered into, its novation has to be on fulfillment of all procedural requirements.

Whether, in such a case, can the Court issue a Mandamus?

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court among other questions framed the question whether mandamus can be issued by the Court to the parties to amend the contract and incorporate provisions to this effect? In other words, whether the Court has the power to issue a writ of mandamus or direction to the Government?

The Supreme Court observed that in pure contractual matters extraordinary remedy of writ under Article 226 or Article 32 of the Constitution cannot be invoked. However, in a limited sphere, such remedies are available only when the non-Government contracting party is able to demonstrate that it is a public law remedy which such party seeks to invoke, in contradistinction to the private law remedy.

The Supreme Court examined various judicial precedents in this regard and observed that under the following circumstances, ‘normally’, the Court would not exercise such discretion to issue a writ:

a) the Court may not examine the issue unless the action has some public law character attached to it.

(b) Whenever a particular mode of settlement of dispute is provided in the contract, the High Court would refuse to exercise its discretion under Article 226 of the Constitution and relegate the party to the said mode of settlement, particularly when settlement of disputes is to be resorted to through the means of arbitration.

(c) If there are very serious disputed questions of fact which are of complex nature and require oral evidence for their determination.

(d) Money claims per se particularly arising out of contractual obligations are normally not to be entertained except in exceptional circumstances.

The Supreme Court examined various case laws on the subject and legal position emerging from them. The same are summarised as under:

(i) At the stage of entering into a contract, the State acts purely in its executive capacity and is bound by the obligations of fairness. In its executive capacity, even in the contractual field, the state cannot practice discrimination. It has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if State or instrumentality of the State has acted in contravention of the above said requirement of Article 14 then a writ court can issue suitable directions to set right the arbitrary actions.

(ii) In cases where question is of choice or consideration of competing claims before entering into the field of contract, facts have to be investigated and found. If those facts are disputed and require assessment of evidence, the correctness of which can only be tested satisfactorily by taking detailed evidence, examination and crossexamination of witnesses, the case could not be decided in proceedings under Article 226 of the Constitution. In such cases court can direct the aggrieved party to resort to alternate remedy of civil suit etc.

(iii) Writ jurisdiction of the High Court under Article 226 cannot be used to avoid voluntarily obligation undertaken. Occurrence of commercial difficulty, inconvenience or hardship in performance of the conditions agreed to in the contract cannot provide justification in not complying with the terms of contract which the parties had accepted with open eyes. Writ petition cannot be maintained in such cases.

(iv) Ordinarily, where a breach of contract is complained of, the party complaining of such breach may sue for specific performance of the contract, if contract is capable of being specifically performed. Otherwise, the party may sue for damages.

(v) Writ can be issued where there is executive action unsupported by law or there is denial of equality before law or equal protection of law or it can be shown that action of the public authorities was without giving any hearing and violation of principles of natural justice after holding that action could not have been taken without observing principles of natural justice.

(vi) If the contract between private party and the State/ instrumentality and/or agency of State is under the realm of a private law and there is no element of public law, writ jurisdiction generally would not survive .In such cases the aggrieved party should invoke the remedies provided under ordinary civil law.

(vii) The distinction between public law and private law element in the contract with State is getting blurred. However, it has not been totally obliterated. Dichotomy between public law and private law, rights and remedies would depend on the factual matrix of each case and the distinction between public law remedies and private law, field cannot be demarcated with precision.

Once on the facts of a particular case, it is found that the nature of the activity or controversy involves public law element, then the matter can be examined by the High Court under Article 226 of the Constitution to see whether action of the State and/or instrumentality or agency of the State is fair, just and equitable or that relevant factors are taken into consideration and irrelevant factors have not gone into the decision making process or that the decision is not arbitrary.

(viii) Failure to consider and give due weight to reasonable or legitimate expectation of a citizen, may render the decision of the state or its instrumentality arbitrary, and this is how the requirements of due consideration of a legitimate expectation be made part of the principle of non-arbitrariness.

(ix) If the rights are purely of private character, no mandamus can be issued. The condition which has to be satisfied for issuance of a writ of mandamus is the public duty. In a matter of private character or purely contractual field, no such public duty element is involved and, thus, mandamus will not lie.

(x) Where an authority appears acting unreasonably, a writ of mandamus can be issued for enforcing it to perform its duty free from arbitrariness or unreasonableness.

(xi) when an authority has to perform a public function or a public duty if there is a failure a writ petition under Article 226 of the Constitution is maintainable.

Keeping in mind the aforesaid principles and after considering the the facts of the case, the SC held that this was not a fit case where the High Court should have exercised discretionary jurisdiction under Article 226 of the Constitution. According to the court, the matter is in the realm of pure contract and it is not a case where any statutory contract is awarded. The SC confirmed the order of the High Court that the appellant is not entitled to benefit of deduction u/s. 42 of the Act.

CONCLUSION
It is clear from the above that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may be limited. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provisions of the Constitution. The High Court having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. This plenary right of the High Court to issue a writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the court thinks it necessary to exercise the said jurisdiction.

The reiteration of the aforesaid principles by the Supreme Court is very important today, especially when the Government is entering into partnership with private parties for various infrastructure projects under PPP model.

It is very clear from the above that the real challenge will lie in demarcating and identifying the line between the public law domain and the private law field, identifying the public duty, public cause. It is impossible to draw the line with precision and lay down in black and white the principles governing such demarcation. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances.

The Most Unkindest Cut of All….. Or is it?

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Introduction
It was Julius Caesar who described the backstabbing by Brutus as the most unkindest cut of all, since it came from a trusted friend. A similar feeling of distrust is brewing amongst Hindu women in India on the passage of the Repealing and Amendment Act, 2015 by the Parliament which was notified on 13th May, 2015. This is an Act to repeal certain old and obsolete Acts as a part of the Government’s push towards ease of doing business. Why then this resentment, would be the first question which crops up.

One of the several Acts which have been repealed is the Hindu Succession (Amendment) Act, 2005. Jog your memory a bit and you would recall that the Hindu Succession (Amendment) Act, 2005 was the very same path-breaking Act which placed Hindu daughters on an equal footing with Hindu sons in their father’s HUF. Hence, after this Act has been repealed with effect from 13th May 2015 does it mean that Hindu daughters again stand to lose out on this parity with Hindu sons and are relegated to the earlier position? Has the Parliament taken away an important gender bender right? Let us unravel this seemingly Sherlockian mystery.

The 2005 Amendment Act
The Hindu Succession (Amendment) Act, 2005 ushered in great reforms to 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.

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 amended section provided that a daughter of a coparcener:

a) became, by birth a coparcener in her own right in the same manner as the son;
b) had, the same rights in the coparcenary property as she would have had if she had been a son; and
c) was, 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 could now become a coparcener in their father’s HUF by virtue of being born in that family. She had all rights and obligations in respect of the coparcenary property, including testamentary disposition. Thus, not only did 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.

One issue which remained unresolved was whether the application of the amended section 6 was prospective or retrospective? This issue was recently resolved by the Supreme Court in its decision rendered in the case of Prakash vs. Phulvati, CA 7217/2013, Order dated 16th October 2015. The Supreme Court examined the issue in detail and held that the rights under the amendment are applicable to living daughters of living coparceners (fathers) as on 9th September, 2005 irrespective of when such daughters are born and irrespective of whether or not they are married. Thus, 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. Conversely, a daughter whose father was not alive on that date cannot be entitled to become a coparcener in her father’s HUF.

Effect of the Repealing Act of 2015
As explained earlier, the Repealing and Amendment Act, 2015 has repealed the Hindu Succession (Amendment) Act, 2005. What is the effect of this repeal? Does s.6 of the Hindu Succession Act now hark back to the preamended position? Would a daughter whose father was alive on 9th September 2005 no longer be entitled to be a coparcener in her father’s HUF? Further, if she is the eldest coparcener, would she no longer be entitled to be the karta of her father’s HUF?

The answer to these dreaded questions is an emphatic No! Recourse may be made to section 6-A of the General Clauses Act, 1897 which states that when any Act repeals any other Act by which the text of another Act was amended by express omission/insertion/substitution of any matter, then unless a different intention appears, the repeal shall not affect the continuance of any such amendment made by repealed Act.

This position was also explained by the Calcutta High Court in Khuda Bux vs Manager, Caledonian Press, AIR 1954 Cal 484. In this case, the Factories Act, 1934 was repealed by section 120 of the Factories Act 1948. The Repealing and Amending Act of 1950 repealed section 120 of the 1948 Act. Hence, it was contended that even the repeal of the Factories Act of 1934 had now disappeared, because the repeal effected by section 120 of the Act of 1948 had itself been repealed. The Act of 1934 could no longer be said to have been repealed or, in any event, the Act of 1948 could no longer be said to have repealed and re-enacted it. The High Court set aside this plea and held that this was based upon a mistaken belief of the scope and effect of a Repealing and Amending Act. Such Acts had no legislative effect, but were designed for editorial revision, being intended only to excise dead matter from the statute book and to reduce its volume. Mostly, they expurgate amending Acts, because having imparted the amendments to the main Acts, those Acts had served their purpose and had no further reason for their existence. The only object of such Acts was legislative spring-cleaning and they were not intended to make any change in the law. Even so, they are guarded by saving clauses drawn with elaborate care. Besides providing for other savings, that section said that the Act shall not affect “any principle or rule of law notwithstanding that the same may have been derived by, in, or from any enactment hereby repealed.”

Thus, the repeal of an amending Act has no repercussion on the parent Act which together with the amendments remained unaffected. On the same principles is the decision of the Supreme Court in Jethanand Betab vs The State of Delhi, AIR 1960 SC 89. The Indian Wireless Telegraphy Act,1933 provided that no person shall possess a wireless telegraphy apparatus without a licence and section 6 made such possession punishable. The Indian Wireless Telegraphy (Amendment) Act,1949, introduced section 6(1A) in the 1933 Act, which provided for a heavier punishment. The Repealing and Amending Act, 1952, repealed the whole of the Amendment Act of 1949. A person was convicted u/s. 6(1A) but he contended that section 6(1A)was repealed and thus, his conviction should be set aside. The Supreme Court negated the accused’s plea and held that the general object of a repealing and amending Act is stated in Halsbury’s Laws of England, 2nd Edition, Vol. 31, at p. 563, thus:“…..does not alter the law, but simply strikes out certain enactments which have become unnecessary. It invariably contains elaborate provisos.” The Apex Court held that it was clear that the main object of the 1952 Act was only to strike out the unnecessary Acts and excise dead matter from the statute book in order to lighten the burden of ever increasing spate of legislation and to remove confusion from the public mind. The object of the Repealing and Amending Act of 1952 was only to expurgate the amending Act of 1949, along with similar Acts, which had served its purpose.

Karnataka High Court’s decision
The Karnataka High Court in Smt. Lokamani vs. Smt. Mahadevamma AIR 2016 Kar 4 had an occasion to consider the impact of the Repealing Act of 2015 on section 6 of the Hindu Succession Act, 1956. In this case it was argued that section 6 of the Hindu Succession (Amendment) Act, 2005 was now repealed by the Repealing and Amending Act, 2015. Therefore, the status of coparcener conferred on the daughter of a coparcener under the amended Act was no more available to the plaintiffs. Thus, the express question considered by the High Court was whether the Repealing and Amending Act, 2015, which repealed the Hindu Succession (Amendment) Act, 2005 to the whole extent, had the effect of repealing amended section 6 and restoring the old section 6 of the Hindu Succession Act, and thereby took away the status of coparcener conferred on the daughters giving them equal right with the sons in the coparcenary property? The High Court negated the contention that the 2005 amendment to section 6 was repealed. It relied on section 6A of the General Clauses Act and a decision of the Constitution Bench of the Supreme Court in Shamrao Parulekar vs. District Magistrate Thana, AIR 1952 SC 324 and held that it was clear that section 6 of the Hindu Succession Act, 1956 was substituted by section 6 of the Hindu Succession (Amendment) Act, 2005. The effect of substitution of a provision by way of an amendment was that, the amended provision was written in the place of earlier provision with pen and ink and automatically the old section was wiped out. So, there was no need to refer to the amending Act at all. The amendment should be considered as if embodied in the whole statute of which it had become apart. The statute in its old form is superseded by the statute in the amended form. The Court held that amended Section of the statute took the place of the original section, for all intent and purpose as if the amendment had always been there.

Further, the Repealing and Amending Act, 2015 did not disclose any intention on the part of the Parliament to take away the status of a coparcener conferred on a daughter giving equal rights with the son in the coparcenary property. On the contrary, by virtue of the Repealing and Amending Act, 2015, the amendments made to Hindu Succession Act in the year 2005, became part of the Act and the same is given retrospective effect from the day the Principal Act came into force in the year 1956, as if the said amended provision was in operation at that time. The Court concluded that though the Amended Act came into force on 9.9.2005, section 6 as amended was deemed to have been there in the statute book since 17.6.1956 when the Hindu Succession Act came into force.

While the Karnataka High Court’s decision on the effect of the Repealing Act is in order, the latter part of the decision (refer portion in italics above) does raise a question mark. It concluded that the amendment was given retrospective effect from the date the 1956 Act came into force. This decision was rendered prior to the Supreme Court’s decision in the case of Prakash vs. Phulavati (supra) wherein it was held that the amendment to s.6 was prospective and was applicable only to living daughters of living fathers as on 9th September 2005. The Repealing Act was neither cited nor considered by the Supreme Court. The decision of the Karnataka High Court in Smt. Lokamani’s case was also not cited before the Supreme Court. Does the ratio of the Supreme Court’s decision change in the light of the Repealing Act? Does the Repealing Act make the amendment retrospective as held by the Karnataka High Court?

In my humble submission, the Repealing Act does not change the position as laid down by the Supreme Court. This view is fortified by the fact that the Supreme Court’s decision was against the Karnataka High Court’s judgment (AIR 2011 Kar 78) in the very same case which had held that the amendment to section 6 was retrospective in nature. The Supreme Court held that an amendment to a substantive provision was always prospective unless either expressly or by necessary intendment it is retrospective. In the Hindu Succession (Amendment) Act, 2005, there was neither any express provision for giving retrospective effect to the amended provision nor necessary intendment to that effect. Hence, the amendment was clearly prospective.

Conclusion
Hindu daughters should rest assured that their rights are in no way abrogated by the Repealing Act of 2015. The Indian Parliament has not played a ‘Brutus’ on them. However, the issue of prospective vs. retrospective operation of the 2005 Act may yet play out before the Courts in the light of the added angle of the Repealing Act. How one craves for the usage of clear language by the draftsman when drafting a law so that such ambiguities and technicalities do not rob the sheen of the substance of the Act!

Tenant – Where partnership is held to be created to conceal the real transaction of subletting, tenant is liable to be evicted on grounds of wrongful subletting. [Bombay Rents Act, 1947, Section 13]

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Smt. Taralakshmi Maneklal vs. Shantilal Makanji Dave and Ors. AIR 2006 (NOC) 228 (BOM).

The Bombay High Court was concerned with a petition where Landlords suit for eviction of tenant on the ground of unlawful subletting without consent was dismissed by the lower court and confirmed by the appellate court. According to the tenant, whilst retaining the possession of the suit premises he had merely entered into partnership for carrying on business through the suit premises and as per the law laid down by the Apex Court in the case of Helper Girdharbhai vs. Saiyed Mohmad Mirasaheb Kadri & Ors. (1987) 3 SCC 538, such arrangement, does not amount to subletting. According to the Landlord, the partnership was merely a cloak to conceal the real transaction of subletting. It was held that that the clauses in the partnership deed that profit of partnership would be shared by sub-tenants only and tenant would receive fixed monthly amount irrespective of profit or loss in partnership business showed that partnership was not genuine and it was created to conceal real transaction of subletting. It was held that the tenant was liable to be evicted.

Stamp Papers – Use of old stamp papers i.e., stamp paper purchased more than six months prior to proposed date of execution may certainly be a circumstance that can be used as a piece of evidence to cast doubt on authenticity of agreement but that cannot be clinching evidence to invalidate the agreement. [Indian Stamps Act,1899, Section 54].

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Thiruvengadam Pillai vs. Navaneethammal and Anr (2008) 4 SCC 530.

In
this case, the Apex Court was concerned with the issue whether where
the stamp papers used in the agreement of sale were more than six months
old, they were not valid stamp papers and consequently, the agreement
prepared on such ‘expired’ papers was also not valid. This issue
required interpretation of section 54 of The Indian Stamps Act, 1899.

The
Apex Court held that The Indian Stamp Act, 1899 nowhere prescribes any
expiry date for use of a stamp paper. Section 54 merely provides that a
person possessing a stamp paper for which he has no immediate use (which
is not spoiled or rendered unfit or useless), can seek refund of the
value thereof by surrendering such stamp paper to the Collector provided
it was purchased within the period of six months next preceding the
date on which it was so surrendered. The stipulation of the period of
six months prescribed in section 54 is only for the purpose of seeking
refund of the value of the unused stamp paper, and not for use of the
stamp paper. Section 54 does not require the person who has purchased a
stamp paper, to use it within six months. Therefore, there is no
impediment for a stamp paper purchased more than six months prior to the
proposed date of execution, being used for a document. Even assuming
that use of such stamp papers is an irregularity, the court can only
deem the document to be not properly stamped, but cannot, only on that
ground, hold the document to be invalid.

The fact that very old
stamp papers of different dates have been used, may certainly be a
circumstance that can be used as a piece of evidence to cast doubt on
the authenticity of the agreement. But that cannot be a clinching
evidence.

A. P. (DIR Series) Circular No. 52 dated February 11, 2016

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Regulatory Relaxations for Startups – Clarifications relating to Issue of Shares

This circular, with respect to facilities available to start-ups, clarifies as follows: –

1. Issue of shares without cash payment through sweat equity

Indian companies can issue sweat equity under a scheme drawn either in terms regulations issued under: –

a. The Securities Exchange Board of India Act, 1992 in respect of listed companies; or
b. The Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013 in respect of other companies.

2. Issue of shares against legitimate payment owed

Indian companies can issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or RBI under FEMA, 1999 and complies with the FDI policy and applicable tax laws.

A. P. (DIR Series) Circular No. 51 dated February 11, 2016

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Regulatory relaxations for start-ups – Clarifications relating to acceptance of payments

This
circular clarifies that a start-up with an overseas subsidiary, which
has a appropriate contractual arrangement between itself, its overseas
subsidiary and the customers concerned, is permitted to: –

1. O pen foreign currency account abroad to pool the foreign exchange earnings out of the exports / sales made by it.

2.
Pool its receivables arising from the transactions with the residents
in India as well as the transactions with the non-residents abroad into
the said foreign currency account opened abroad in its name.

3.
Avail of the facility for realising the receivables of its overseas
subsidiary or making the above repatriation through Online Payment
Gateway Service Providers (OPGSPs) for value not exceeding US $ 10,000
or such limit as may be permitted by RBI from time to time.

Balances
in the said foreign currency account that are due to the Indian
start-up must be repatriated to India within a period as applicable to
realisation of export proceeds (currently nine months).