This article is written by Catakam Viswesh Kumar and Deepika Mathur, 4^th Year B.B.A. LL.B. (Hons.) students at School of Law, CHRIST (Deemed to be University), Bengaluru.

Introduction

Continuous disclosure is a mechanism to ensure that the market is informed of all material developments pertaining to listed entities at all times. While it enhances accountability of such companies and ensures transparency, it also helps in maintaining parity of information disclosed so that all investors are able to make informed investment decisions and no investor is at a disadvantage against another. Clause 36 of the Listing Agreement requires a listed entity to disclose to Stock Exchange(s), details of all events which will have bearing on the performance/operations of the listed entity as well “price sensitive information”. This post seeks to analyse the relevant disclosures that are to be made under relevant law when indirect acquisition through the mode of a trust takes place, as was analysed in the case of Victor Fernandes & Anr. v. Securities and Exchange Board of India & Ors.

Indirect Acquisition of Control

In order to ascertain the specific disclosure requirements in cases of indirect acquisition through trust, it is imperative to understand the meaning and scope of ‘indirect acquisition’. As per Regulation 5 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, acquisition of shares or voting rights in, or control over, any company or other entity, that would enable any person and persons acting in concert with him to exercise or direct the exercise of such percentage of voting rights in, or control over, a target company, the acquisition of which would otherwise attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations, shall be considered as an indirect acquisition of shares or voting rights in, or control over the target company.

HUF as mode of acquisition

There have been several instances wherein business vehicles and other entities have been used as a means to acquire indirect control. Nevertheless, all these modes are considered in order to trigger disclosure requirements under the Listing Agreement as well as open offer obligations under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011. In the case of Kiron Margadarsi Financiers v. SEBI, an HUF was held to have become an acquirer of shares registered in its name on the target company’s register of members even though it claimed to have acquired those shares as security for a loan given by it. Therefore, the mode of acquisition is irrelevant to the determination of a person’s identity as an acquirer.

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Facts

Victor Fernandes’ case arose out of an Impugned Order of SEBI dated 9/1/2017. Wherein SEBI on the basis of a wholly unsustainable ground held that the Independent Media Trust (‘IMT’), a Trust which had been established for the benefit of Reliance Industries Limited (‘RIL’) was not a Subsidiary of RIL. Thereby SEBI held that the non-Disclosure of the acquisition of Indirect Control over Network 18 Media (‘NW 18’) and TV 18 Ltd by RIL through IMT was in accordance with the Law due to the material fact that a Trust is not a Subsidiary of a company. In relation to this the appellants who were shareholders of NW 18 Appealed against the decision of SEBI to the SAT claiming that their rights as shareholders were Prejudicially affected by these violations. Hence the main issue framed in this case before the SAT was whether the Violation of Clause 36 of the Listing Agreement, arising out of the Non-disclosure of Acquisition of Indirect control of RIL by way of IMT would violate the rights of Shareholders and subsequently be in violation of disclosure requirement regulations framed.

Analysis on the Matter heard before SEBI in the case of Victor Fernandes and Ors v. SEBI on 13.04.16

One of the Key aspects which were taken into consideration by the SAT while passing an order upon these issues was brought forth in the decision of the same tribunal on 13/04/16. Wherein the Tribunal had held that SEBI on no merits and in contrary to the Competition Commission of India passed its order on 09/02/2015 by not considering the execution of ZOCD (‘Zero Coupon, Optionally & Fully Convertible Debentures’) agreement which in turn resulted in IMT acquiring indirect control over NW18 & TV18. SEBI on without any merits devalued the relevance placed on the ZOCD agreement and stated as to how there was no divesture in control of NW18 in favour of IMT. Hence the Tribunal on the basis of CCI’s holding that “subscription of ZOCD agreements by IMT would amount to acquiring indirect control over NW18 & TV18” and in Public interest had ordered the SEBI to re-examine the issue and submit a report. However SEBI submitted an affidavit on the same stating that “effective control over NW18 was not divested in the execution of ZOCD agreement” again reiterating its previous stance on the basis of no conclusive evidence as to how it arrived on the said conclusion.

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Clause 36 of the Listing Agreement:

In the instant case, the SEBI, by virtue of an order dated 9/2/2015 had held that since IMT was not a subsidiary of RIL, no disclosures were required to be made by RIL under Clause 36 of the Listing Agreement. However, the SAT arrived at the conclusion that sustaining this view would be detrimental to the interests of investors in the securities market and would encourage listed companies to acquire indirect control over other companies through a Trust or some other entity without making disclosures under Clause 36 of the Listing Agreement. The SAT opined that the SEBI’s decision was patently erroneous and contrary to the spirit of Clause 36, and was thus liable to be set aside.

While in general, the company is required to keep the Stock Exchange informed of events such as strikes, lock-outs, closure on account of power cuts etc., the following material events are also prescribed for disclosure:

1. Change in the general character or nature of business
2. Disruption of operations due to natural calamity
3. Commencement of Commercial Production / Commercial Operations
4. Developments with respect to pricing/realization arising out of change in the
5. regulatory framework
6. Litigation / dispute with a material impact
7. Revision in Ratings
8. Any other information having bearing on the operation/performance of the listed entity as well as price sensitive information, including but not restricted to, inter alia, Acquisition, merger, demerger, amalgamation restructuring, scheme of arrangement, spin off of setting divisions of the company, etc.

This implies that disclosures are to be made regarding all forms of corporate restructuring. Further, acquisition of indirect control through trust could also fall within the ambit of ‘other restructuring’, wherein details and reasons for restructuring, details of benefit, if any, to the promoter/promoter group/group companies from such proposed restructuring, and brief details of change in shareholding pattern of all entities are required to be disclosed. These disclosures were mandated on listed entities to enable the shareholders and the public to be appraised of the position of the Company and to avoid the establishment of a false market in its securities. While initial disclosures provide entry level transparency requirements for companies seeking listing, the continuous disclosure requirements strive to achieve the same transparency levels during the lifetime of the listed entity.

Conclusion

The SAT while deliberating open this case took into consideration various factors namely, the reasoning behind the creation of IMT, the ZOCD agreement by which NW18 came under the control of IMT, Clause 36 of the listing agreements and most importantly the rights of the shareholders. Through the course of its deliberation the SAT heavily relied on the view of the CCI in holding that there was a divesture of control of NW18 in favour of IMT. The SAT went on to quash and set aside the Impugned order of SEBI dated 09/01/17 on the basis that there was clear violation of clause 36 of the listing agreements as RIL had failed to disclose its acquisition of indirect control over NW18 by way of IMT. The SAT’s reasoning behind doing so is solely on the basis of its duty to apply Clause 36 and protect the interests of the shareholders which were being prejudicially affected. Hence it passed the order accordingly, and while doing so it also directed SEBI to deicide afresh the question as to whether on execution of ZOCD Agreement RIL had acquired indirect control over NW18 through IMT and failed to disclose the same in violation of Clause 36 of the Listing Agreement and if SEBI’s decision was in contrary to that of the CCI, then to substantiate the same with recorded reasons. The Appeal was disposed and SEBI’s response to the same is pending.

In this article, Shreyas Chandrashekar discusses Decriminalizing of Offences Under the Indian Companies Act.

Introduction

The Ministry of Corporate Affairs vide its order dated 13/7/2018 had constituted a 10 member panel to be headed by the Corporate affairs Secretary Injeti Srinivas in order to review the penal provisions under the Companies Act of 2013. The ten-member panel, which submitted its report on 21^st August of 2018, comprised of members such as noted banker Uday Kotak, former Lok Sabha Secretary General T K Vishwanathan, Shardul Amarchand Mangaldas’ Executive Chairman Shardul S Shroff and AZB & Partners’ Founder Managing Partner Ajay Bahl.

Need for re-look at the penal provisions under the Companies Act vis-à-vis decriminalization of certain offences.

Such a need arose as a result of the hurdles and challenges posed as a result of the penal provisions in the Companies Act of 2013, which came into force as a result of the various high-end financial and corporate frauds and scams which had taken place in India due to ailing standards of corporate governance. Therefore, the new Companies Act, 2013 introduced more stringent punishments and penalties for non-compliance of various provisions and rules under the Act as compared to the former Companies Act, 1956. However noble the intentions may have been, these regulations have created numerous prohibitions and command structures, wherein a mere violation of them would incur criminal liability and increase the burden of the Courts as they would have to deal with every single instance violation, however trivial such matter may be.  Thus, these penal provisions which are meant to create a stringent regulatory regime and promote a discipline in this domain of private laws, have ultimately ended up being roadblocks in the path of doing business with ease in India.

This dire situation was the catalyst behind such a move whose aim was to ensure that the efficiency of the courts while dealing with matters under the Companies Act would be much enhanced if the Court were to deal only with matters only of a serious nature and not otherwise be hindered by complaints that are less serious in nature. This would not only ensure speedy disposal of cases due to their being fewer in number but also increase the ease of doing business as under the proposed framework, most of the less-serious offences would be dealt by an in-house framework.

The panel took into consideration three types of offences under the Companies act in order to under understand the penal nature of the act. The first was offences wherein imprisonment was mandatory, the second type involved offences wherein imprisonment was optional and depended on the discretion of the authorities and the final categories were for which no imprisonment was provided for. Further, such offences were classified into both compoundable and non-compoundable in nature.

The rationale behind such a move was to ensure a widespread check of imposition of penal provisions under the Act, if certain classes of offences could be decriminalized.  The first class regards offences which are punishable with imprisonment mandatory, which can be categorized into offences in which imprisonment be optional or some additional fine in consonance with imprisonment;  whereas the second class would comprise of offences for which Imprisonment is a mere option,  could be categorized into such offences that impose only fine as a penalty. In furtherance of this, the panel has recommended the re-categorization of 16 of the 81 compoundable offenses by shifting them to an in-house e-adjudication framework wherein the adjudicating officer at the Registrar of Companies would levy a penalty on defaults, with the penalties for the remaining compoundable offences and non-compoundable offences of serious nature remaining the same, which is tune with the aim of the panel to reduce the burden of the courts to decriminalize the other small and non-serious offences.  Offences such as making certain disallowed payments to directors for loss of office, breach of overall managerial remuneration limit and non-appointment of key managerial person in case of companies are among the offences proposed to be dealt with by the in-house regulatory authority.

Advantages behind the decriminalization of offences

With regards to the advantages provided under this Act, the often cited advantage is the fact that it seeks to lessen the burden on the Adjudicating Authority if it were to simply deal with matters of only the most important and not deal with every single violation of the act, some of which are so trivial that it is better to be taken care of by an in-house mechanism or a small fine. Such a move, it has been argued will unclog the Tribunals which are overburdened with plenty of pending cases, and enable it to focus on more serious violations.

Another often cited reason is the nature of criminal law and its interplay with the company law, which is a private law by nature and the fact that their characteristics stand in stark contrast with each other. Criminal Law is primarily a stigma and censure move and deals with only conduct unacceptable to society and that company offence, at least the minor ones, although not condonable, do not fall under the umbrella of crimes that are so moralistic wrong so as to be anti-society in nature.

Another argument that is put forth against decriminalization of offences is the fact that is the penal provisions are used indiscriminately, as they are being done so today, convictions will may generate little stigma, little by way of deterrence may be achieved, and little by way of punishment may be justified and even undermine the rationale of it being a punishable offence.

From the above grounds it can be easily seen that there exists a wide prevalence regarding the fact that criminalization of Company offences should be used very sparingly and only as a last resort.

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However, such a move is not without its critics. The detractors behind such a move argue that it opens the door for potential rise in violations of the Act as those who are able to afford such in house penalties may view such a penalty as a mere slap on the wrist or the cost of doing business and view such penalties with mere indifference, which would take away the main purpose of those acts existing as offences and lead to a similar situation pre-2013 which necessitated such heavy penalizing provisions in the Companies Act.

Conclusion

In conclusion, it can be stated that the decriminalization of minor offences under the Companies Act is indeed the way forward. Various other countries like the United Kingdom as well as the United States have adopted this approach. The penal provisions must be used only as a last resort to severely punish if there has been a large scale offence or a fraud and not to regulate the behaviour of personnel. The present scenario, which for a hierarchy of offences wherein civil penalties deal with non-serious behaviours will indeed help to increase the efficiency of the Act as well as the adjudicating authority as the Tribunal today is being swamped with cases beyond its capacity. It is indeed hoped that the Government would adopt the recommendation of the panel and allow the decriminalization of certain offences under the Companies Act.

In this article, Ana Khan discusses the Challenges to Juvenile Justice Laws in India.

Introduction

“If you want real peace in the world, start with the children.” – Mahatma Gandhi

The growth of any civilization depends upon its children because they are the future. On the other hand, there are juvenile delinquents since the beginning of human civilization and in every time-phase it was decided to treat the cause not the symptoms, that is, to help the juvenile delinquents to help them through restorative process rather than penalising them, that’s why we have incorporated juvenile welfare laws in India. Moreover, in India, almost 440 billion children are below 18 years and it serves as home to 19% of the world’s children^[1].

Who is a Juvenile?

• According to Rule 4 of United Nations Standard Minimum Rules for the Administration of Juvenile Justice, In those legal systems recognizing the concept of the age of criminal responsibility for juveniles, the beginning of that age shall not be fixed at too low an age level, bearing in mind the facts of emotional, mental and intellectual maturity^[2].
• United Convention on the Rights of Child defines “child” as “every human being below the age of eighteen years unless under the law applicable to the child, majority is attained earlier^[3]”.
• Juvenile Justice (Care & Protection) Act, 1986 defines “a juvenile or child, who in case of a boy has not completed age of 16 years and in case of a girl 18 years of age^[4]”.
• Juvenile Justice(Care and Protection of Children) Act, 2000 defines “juvenile” or “Child” as a person who has not completed eighteenth year of age^[5].
• Juvenile Justice Care and Protection Act, 2015 defined “child” “means a person who has not completed 18 years of age^[6]”

Definition and Nature of “Delinquency”

Delinquency is unwelcomed action of a child, which is socially not permitted in the society. A juvenile delinquent is a disorder which is defined as “a child acting like an adult”. The action of the child may seem to be very foolish but actually it’s a matter of serious concern. It is believed that delinquency is considered only when the behaviour of the child is harmful. Frederick B. Sussmann, who wrote a book on “Law of Juvenile Delinquency” presented a list of acts or conditions included in delinquency definition as “infringement of any law or ordinance, habitual absence, alliance with thieves, brutal or immoral persons, and beastly beyond authority of parent or guardian”.

To know more about introduction and overview of the Juvenile Justice Care and Protection Act, 2015, please watch the video below:

Causes of Child Delinquency

Juvenile delinquency takes place at different places and it may vary in degree. The child being the future of the country should be given a good environment in which he/she can nurture himself/herself. Nowadays, juveniles are engaging in various serious offences like rape, murder, dacoity, theft, robbery. There are innumerable causes behind the psychic of a delinquent child which is further defined in two broad categories:

• Biological causes
• Societal and Environmental causes

1. Biological causes
2. Ocular Ailments- It is a disease of retina which can result in the loss of vision. It leads to irritability and discomfort which will further hamper them in leading a moral life.
3. Hearing Problem- deafness or incapability of hearing leads to the incapability to do any work properly which further leads to antisocial behavior.
4. Excessive Strength- A child who is possessed with excessive strength and his mental trait being uncultured will lead to the imbalance in the body which will further encourage a child to do a crime.

Societal and Environmental Causes

1. Cultural Conflicts- The urbanization and modernization have resulted in drifting of people which has further led to the conflict between the immigrants and the inhabitants. India also played as a victim of cultural conflict during the time of Indo-Pak partition in 1947, where the immigrants from Sindh settled down in India and resulted into a massive increase in the crime rate.
2. Family Background-Sutherland said that “the family background has greatest influence on the criminal behaviour of offender or Juvenile. The Children divert themselves towards criminal tendencies, if they find their parents or members of the family behaving in the similar manner^[7]. A child who is grown up in a hostile aggressive parenting atmosphere becomes an easy prey to criminality”
3. Socio-Economic Condition- Nowadays, money is a parameter to judge a person’s societal status. Everyone around is so busy in earning that the  parents are not been able to look after their wards which further leads a child to indulge in illegal activities.
4. Neighbourhood- One thing leads to another, as the parents/guardians are busy in their own livelihood, the bad influence of neighbours also tend to destroy the genesis of a child.
5. Trend of Alcoholism- it has become a fashion among the youth to have a shot of vodka. Generally, it is the reason for a fight amongst the Husband and the Wife, which leads a bad impression on the child. It is necessary to keep a discipline in the home for the proper upbringing and to create a friendly atmosphere for a child.The family should take care of child otherwise they might be indulging in commission of offence^[8].
6. Peer Pressure- The behaviour of an individual usually depends upon the peers. Gangs act as a contributory factor towards the commission of a crime. If a child remains with other delinquents then he will be more prone to the criminal activities which he could not think of alone.
7. Cinema and Social Media- cinema and social media plays an important role in the overall development of a person. What they watch on social media and television they try to do in their real life also. The parents must pay attention to their children, they should not refrain from watching any content but rather they should try to inculcate some moral values in the children.
8. Significance of School- The school plays a significant role in the upbringing of a child, it is the school where the child has the closest relation with other children for such a long time. “School is usually thought as a constructive agency but when it fails) to perform its designated functions, it may become by virtue of its negligence, a main contributor to delinquency.”^[9]

Provisions under Indian statutes regarding the Juvenile Justice laws in India

Constitutional Provisions

The Constitution of India provides a comprehensive study and understanding of child rights. State owes special care and protection towards them and therefore constitution of India has provided with several rights dealing with their liberty, development and care, non discrimination, educational rights, etc. It is further supported with comprehensive legal regime^[10]. Article 15(3), which provides the state to make special laws for women and children^[11]. Article 39(f) was inserted in the Constitution of India by the 42nd Amendment Act, provides that the children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and they must be protected against exploitation and against moral and material abandonment.^[12] Article 47, which imposes a duty on the State to raise the level of nutrition and the standard of living to improve public health^[13].

Indian Penal Code and Code of Criminal Procedure(CrPc) Provisions

Indian Penal Code provides different provisions for the protection of child. According to Section 82 of the Indian Penal Code, it says “Nothing is an offence which is done by a child under seven years of age^[14]”. Under the age of 7 years, no infant can be guilty of a crime; for, under that age an infant is, by presumption of law, doli incapax, and cannot be endowed with any discretion. Section 83 provides an act of a child above seven and under  twelve of immature understanding. Where the accused is a child between 7 and 12 years of age, the capacity to commit an offence only arises when the child has attained sufficient maturity of understanding to judge the nature and consequences of his conduct^[15].

Section 27 of CrPc, provides that any person who at the date of appearing before the court is under 16 years of age is not punishable with death or imprisonment for life. According to Section 318 of CrPc where the accused does not understand the proceedings (though not of unsound mind) the court can have the inquiry or trial, in case of a court other than High Court if the proceedings result in conviction, the proceedings shall be forwarded to the High Court with the circumstances of the case  and the High Court shall pass the order as it thinks fit^[16].

History

The Apprentices Act, 1850 was the first legislation to deal with children in conflict with law in India. It provided that children under the age of fifteen who were found guilty of committing petty offences were to be placed as apprentice in a trade^[17]. In 1919, a jail committee was designated and according to the recommendations of the committee, different legislations were enacted at different provinces. The first Children Act was the Madras Children Act, 1920 followed by Bengal Children Act, 1922 and Bombay Children Act,1924. In February 1924, a voluntary state-aided agency, the Children’s Aid Society, was formed to implement the provisions of the Bombay Children Act in the Municipal Corporation of Bombay. The institutions established by the agency for care and protection of children which continue till date^[18].

The first central legislation, The Children Act,1960 was enacted as the model legislation which was to be followed by the states while enacting their own legislation. The Act provided for a discriminatory definition of “child” since a boy below 16 years of age was considered to be a child as opposed to 18 years for a girl child^[19]. The Act also initiated two distinct bodies to determine matters involving “children in conflict with law” and “children in need of care” known as the Children’s Court^[20] and Child Welfare Board^[21] respectively. It prohibits imposition of death penalty, imprisonment, or use of police station or jails for housing children under any circumstance. Before the amendment in 1978, it did not recognize the right to a lawyer in the proceedings in the children’s court^[22].

In Spite of all these legislations, the problem still remained the same because several states had several laws concerning juvenile justice which treated differently in the same situation. There was no concrete definition of “child”, different state laws recognized child differently^[23]. In Sheela Barse v. Union of India^[24], it was held by the Supreme Court:

“…we would suggest that instead of each State having its own Childrens’ Act different in procedure and content from the Children’s Act in other States, it would be desirable if the Central Government initiates Parliamentary Legislation on the subject, so that there is complete uniformity in regard to the various provisions relating to children in the entire territory of the country. The Children’s Act which may be enacted by Parliament should contain not only provisions for investigation and trial of offences against children below the age of 16 years but should also contain mandatory provisions for ensuring social, economic and psychological rehabilitation of the children who are either accused of offences or are abandoned or destitute or lost. Moreover, it is not enough merely to have legislation on the subject, but it is equally, if not more, important to ensure that such legislation is implemented…”.

On November,1985 United Nations Standard Minimum Rules for the Administration of Juvenile Justice^[25], was adopted by UN General Assembly, where the term “juvenile” and “juvenile justice” were used for the first time in the realm of International Law.

Juvenile Justice (Care & Protection of children) Act,1986

The Juvenile Justice Act,1986 was the first act regarding the care and protection of children which was uniform all over the country. While it retained the scheme and primary features of The Children Act,1960^[26]. The age of the juvenile remained the same as it was mentioned in the Children Act, 1960. The new feature which was introduced under this act was that the juveniles were divided into two broad categories: (a) Delinquent Juveniles (b) Neglected Juveniles. Both the children were to be kept in “Observation Homes” as long as their inquiries are pending.

The Juvenile Justice (Care & Protection) Act, 1986 was replaced by Juvenile Justice (Care & Protection) Act, 2000 because the previous act did not provide the wider scope on “Delinquent Juveniles” and “Neglected Juveniles”.

Juvenile Justice (Care & Protection) Act, 2000.

The Juvenile Justice Act,2000 provides two main broad categories named as “child in conflict with law” and “child in need of care and protection” which the JJA,1986 failed to do. It lays down that the “child in conflict with law” must be kept in observation homes and “child in need for care and protection” must be kept in the children home during the pendency of their proceedings.

A revolutionary change made by the JJA, 2000 is the establishment of Children’s Court known as Juvenile Justice Board(JJB). It constituted of a bench of one Magistrate and two social workers.

Juvenile Justice Board have the jurisdiction to decide:

• Determination of the age of a juvenile.
• Grant of bail.
• To determine whether the child has committed the alleged offence or not.
• To pass the appropriate orders regarding the same.

International Obligations under Juvenile Justice Act, 2000

The Juvenile Justice Act,2000 supplicate international obligations of the Convention on the Rights of the Child (CRC). There are two kinds of provisions under the CRC for a child in conflict with law, which is mentioned as:

1. General Provisions- such as Article 2^[27] and Article 6^[28] of the Convention which talks about the non discrimination on the grounds of race, color, sex and language and right to freely express his/her own feelings.
2. Specific Provisions- such as Article 37 and  Article 40 of the Convention. Article 37(a)^[29] of the Convention provides capital punishment and long term imprisonment shall not be imposed on the child.

Challenges to Juvenile Justice (Care & Protection) Act, 2000

• According to Article 37(a) of the Convention on the Rights of the Child, No child shall be subjected to torture or other cruel, inhuman or degrading treatment or punishment^[30]. This provision has not been mentioned under the JJA, 2000 and keeping in mind, the sad and uncomfortable reality of child abuse, this provision has to be incorporated.
• Article 40 of the CRC mandates the state to incorporate certain basic guidelines for a child in conflict with law, but the same has not been incorporated in the JJA, 2000. Though CrPc and Constitution of India provide laws for the protection of children but according to JJA, 2000 the laws must be made by the state, thus leaving space for the state to do unjust and exploit the rights of the child.
• According to Article 40(3)(b) of the Convention, Human Rights and Legal safeguards are fully respected while dealing with such children. The appointment of JJB consists of one magistrate and two social workers, which in majority can even overrule the judgment of magistrate, it is not in compliance with the legal safeguards in India by giving such powers to the social workers (who may not have the legal knowledge).
• According to Section 29^[31] of the Act, the Government “may” form Child Welfare Committee for the exercise of the powers. The use of the word “may” is a big mistake because unless the making of rules is made compulsory, the execution of the act will remain uncertain.
• According to Section 14^[32] of the Act, the inquiry needs to be completed within 4 months from the date of the onset unless it is extended because of some special cases. Here, the Act fails to justify the “special cases”, thus leaving the scope of arbitrariness in the hands of Juvenile Justice Board (JJB).
• Section 23^[33] of the Act defines for the punishment of cruelty done to the child. As the punishment prescribed is not deterrent in nature. The potential of fine and punishment needs to be increased so that it instills fear on the minds of the people.
• Section 63 of the Act provides for the Special Police Unit for the juveniles. But this is nothing but a mere lip service because there is no guidelines mentioned regarding the training of the police.

Juvenile Justice (Care & Protection) Act, 2014

In the case of Mukesh & ors. V. State of Delhi, popularly known as “Delhi Gang Rape” case, a juvenile, who was few months less to 18 years have been sentenced to 3 years custodial sentence, however, it was said that he was the active member in the rape case. It outraged the spark amongst the people and it was contended that there is a need to amend the Juvenile Justice (Care & Protection) Act, 2000. According to the data collected by the National Crime Record Bureau cases registered for juveniles under the age of 16-18 year are mentioned as: There were a total of 36,138 cases registered in 2014. Of these cases, the highest pertained to riots (1,733 cases), kidnapping at rank two (1,635 cases) and cases of rape stood third (1,488 cases)^[34].

Other crime heads under which juveniles between the age group of 16-18 years were reported, were, assault on women to outrage her modesty (1,392 cases); murder (844 cases); and attempt to murder (806 cases)^[35].

As a result of amendment, on 8th August, 2014, Juvenile Justice (Care & Protection) Act, 2014 where the age of the juvenile was reduced from 18 years to 16 years, that is, any child who have alleged for the heinous crime under the age of 16 to 18 years shall be tried as an adult. The power is constituted with the Juvenile Justice Board (JJB) to decide whether the juvenile is to be sent to rehabilitation home or tried as an adult.

Challenges to Juvenile Justice laws in India

• Section 4(2)(viii) provides child in need of care and protection for those who have been tortured, abused and exploited for the purpose of sexual abuse. The section provides protection for children but ignores the one who have faced the sexual abuse in the past. It grossly affects the mind of the child which leads to social stigma.
• According to Section 2(5) defines the word “aftercare” to provide them financial support to persons who have completed the age of 18 years but are less than 21 years of age. But the following problems could have enumerated against the proper results of after-care institutions^[36]:

1. Lack of finances.
2. Stigma in institualization.
3. Unconsciousness of society towards the after care programme.
4. Non compliance of parents in the after care plan.
5. A little inter-relationship between the juveniles and the after-care workers.

• According to Section 21 of the Act, after attaining the age of 21, the Children’s Court may decide if the child has undergone the reformative changes and needs to be released or he should be transferred to a jail. This provision is in violation of article 20(1)^[37] of the Indian Constitution and also by keeping a 21 year old adult with hardened criminals will make a child like them and this will not serve the purpose of Reformative Theory.
• According to Section 16 of the Act, the heinous offence committed by a child who has completed the age of 16 years, the Juvenile Justice Board shall conduct the inquiry about the physical and mental state of the child and then only the Board will decide whether to dispose off the case or to start a trial. The foremost flaw with the section is it implies an assumption that the child is guilty of an offence and a clear infringement of Article 14 and 21 as prescribed under Part III of the Indian Constitution, as the procedure is arbitrary and irrational.

The case of Darga Ram v. State of Rajasthan

The facts of the case are as follows:

The Complainant had organized the jagran somewhere in the outskirts of the village in Rajasthan. Around 50 persons including men,women and children were there till midnight including 7 year old Kamala (victim) and Darga Ram(appellant). Kamala went to sleep along with other children in a nearby place. When the complainant i.e the father of the victim came to the house he found Kamala missing. Assuming that she may have gone to the relative’s home, a search was made at their houses but Kamala was not been found. The search was then extended in the outskirts of the village and it was found dead by one of the member of the village. On further inquiry, it was found that Kamala had been raped and killed by crushing her head with the stone. A case under Section 302 and 376 of the Indian Penal Code was registered. The police further investigated and arrested Darga Ram who was a deaf, dumb and an illiterate adolescent on the basis of the injuries found on his private part along with blood stains which matched the blood group of the victim (Kamala).

The Sessions Court and the High Court convicted the appellant under section 302 and 376 of IPC and awarded the punishment of life imprisonment.

On the final appeal the appellant raised the additional plea of juvenility on the date of the commencement of the crime.

Since the appellant was illiterate and did not have any documentary evidence like school or any other certificate. So the court has directed the Medical College, Jodhpur for medical examination of the appellant. After all the procedure done the age of the appellant was found between 33 to 36 years.

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A Critical Analysis of Darga Ram v. State of Rajasthan

The contention of Juvenility at the Apex Court

The apex court submitted that there was enough explanation for the determination of age on the basis of medical examination as per Section 7A of the Juvenile Justice Act, 2000 which provides that whenever it is contended that the accused was a juvenile on the date of the commission of an offence, the court shall make and inquiry and take such evidence as may be necessary to determine the age of the child and Rule 12(3)(b) of the Juvenile Justice Rule,2007, which says in the absence of matriculation certificate, birth certificate from the school and birth certificate from the municipal corporation, medical report will be considered from the Medical Board to determine the age of the Juvenile.

However, the lower court ordered the life imprisonment which the appellant had already suffered for 4 years. The appellant’s hearing and speech impairments never attracted Section 2(d)(iii)^[38] of the JJA, 2000 which protects physically and mentally challenged children.

In the case of Kulai Ibrahim v. State of Coimbatore^[39], the court held that the juvenile at any point of time during the trial has the right to raise the question of juvenility even after the disposal of the case under proviso of section 9 of Juvenile Justice Act, 2015.

It is necessary to raise the issue as to why hearing and speech impairment and lack of schooling till the age of seventeen years not considered as a ground of mitigating circumstances.

Perceiving Children’s Intellectual Capacity and Determining Capability

John Locke described minors as those who are lacking certain amount of explanation and comprehension because of which they are neither free as adults not they are equal to them.

However, our recent criminal law system advises that any offender within the age of 16 to 18 years, who have been alleged for the heinous crime shall be treated as an adult (Juvenile Justice Act, 2014).

It has always been argued that the children are mentally deficient either because of the insufficient socialization or because of the lack of domestication.

The last 2 decades of research on adolescent psychosocial and brain development have helped to reconceptualize adolescence as a period of increased vulnerability (Steinberg, 2014; Casey, 2013). The science of adolescent development documents have found that the youth between the ages of 10 and 20 are biologically and psychosocially less mature than adults. Stimulated by the hormonal change of puberty, their brains are undergoing a period of great plasticity in which the socioemotional system that controls emotions and sensitivity to rewards is developing more rapidly than (or “hijacking”) the cognitive control system that regulates planning, thinking ahead, and self-control. These asynchronously developing brain systems in part account for why many adolescents are risky decision makers, impulsive, quite susceptible to peer influence, and not very future oriented. Individual differences aside, the general consensus is that adolescence is a period of life characterized by vulnerability, malleability, and immaturity in judgment^[40].

According to Laurence Steinberg, In sum, the consensus to emerge from recent research on adolescent brain is that teenagers are not as mature in either brain structure or function as adults. This does not mean that adolescent brains are “defective”, just as no one would say that newborns muscular systems are defective because they are not capable or their language systems are defective because they can’t yet carry conversation^[41].

A juvenile who was the minor during the commission of the crime in the case of Darga Ram v. State of Rajasthan, cannot be held liable as there was an incomplete formation of cognitive capacities and decisional capabilities.

The Fixation of Heinousness of a crime

In Salil Bali v. Union of India & anr^[42], it was contended to amend the present Juvenile Justice law and to reduce the age from 18 years to 16 years and to amend the juvenile law in such a way that the juveniles who have committed the heinous offences like rape and murder should be tried as an adult. The Supreme Court rejected the plea and held that the Juvenile Act is based on the sound principles and with consonance to the Indian Constitution. Several International Instruments also recognizes the child rights like Beijing Rules, Riyadh Guidelines that allows separate criminal justice systems for the juveniles.

Even in the case of Mukesh & ors v. State of Delhi, popularly known as “Delhi Gang Rape case” the apex court refused to grant the harsher punishment on the account of the heinousness of the conduct.

There are of course exception where a child develop the criminal propensities at such a tender age and becomes almost impossible to re-integrate them with the other members of the society, but such examples are very less. It’s better try to reintegrate children into the mainstream society rather than keeping them with the hardened criminals in the jail.

Landmark Cases

In Sanjay Suri v. Delhi Administration^[43], the Supreme Court ordered the release of juvenile undertrial prisoners. The judgement also highlighted that the jail authorities shall not accept the age of the juvenile until and unless the age is specifically mentioned in the documents supporting detention.

In Jayendra v. State of UP^[44],where the order of the High Court sending a child to imprisonment for committing an offence was challenged before the Supreme Court. The Supreme Court called for the report by the medical in charge of the jail to determine the age of the child and it was found that the age of the child at the time of committing an offence was 16 years and 4 months and the sentence for imprisonment was quashed and the convict was released immediately.

In Munna v. State of UP^[45], the apex court released certain directions regarding children in prisons. The supreme Court held that even if a child is found to be guilty of an offence, he should not be mistreated. They should not lock-up their fundamental rights when they enter in jail.

In Bhoop Ram v. State of UP^[46], the Supreme Court followed the decision of Jayendra v. State of UP and it was also held that the time of the commission of an offence is sufficient to determine the age of a person.

In Raj Singh v. State of Haryana^[47], the Supreme Court held that the age of the boy or girl has to be determined at the time of the happening of an offence, whereas the court overruled this judgment in Arnit Das v. State of Bihar^[48], in this case, R.C Lahoti, J. reminds that it is pertinent to note that neither the definition of juvenile, nor any other provision contained in the Act specifically provides the date by reference to which the age of a boy or a girl has to be determined so as to find out whether he or she is a juvenile or not^[49]. Here the Supreme Court held that the age of the boy or girl has to be determined at the time when they are bought before the competent authority. The rationale behind this judgment is the apex court has identified the problem that many children have been lodged in adult jails because they have no evidence to proof their age.

In Raj Singh v. State of Haryana^[50], the juvenile who was less than 16 years of age at the time of the commencement of the offence was convicted under Section 20 of the Narcotic Drugs & Psychotropic Substances Act, 1985 and was awarded with the punishment of imprisonment. But the Supreme Court held that under section 2(e) of the Juvenile Justice(Care & Protection) Act, 1986 defines that a juvenile who has been found to guilty of an offence was a juvenile, hence the entire trial was quashed.

The U.S decision in this regard was held in Gault, In re^[51], here the juvenile offender of 15 years of age was admitted to state industrial school till he turned 18 while the punishment to an adult was fine of $ 50 and 2 months of imprisonment. It was argued that the code of Arizona is unconstitutional because it gives unlimited power in the hands of the judge to decide the punishment of an offence. Arizona argued that the main purpose of the juvenile justice is to separate them from the criminal proceedings and the punishment given to the juvenile was reformative rather than punitive.

Justice Verma Committee Report on Juvenile Justice Laws in India

According to Justice Verma Committee report on “Amendments to Criminal Law” has noted that “the Juvenile Justice Act has failed miserably to protect the children in the country^[52]. We cannot hold the child responsible for a crime before providing to him/her the basic rights given to them by the Indian Constitution.’’ the report looked extensively on the children homes and found them lacking in basic infrastructural requirements, where they are forced to grow and becomes the prey of “sexual offences”. The juvenile homes are unable to provide the basic constitutional rights which are mentioned for the children under the Indian Constitution. The nutritional, emotional, mental requirements are so low that they often not be able to cope up and contribute to the society.

Recommendations

With all due respect to the existing law, the following recommendations are made:

• The court should approach reformative approach towards the child delinquency rather than the punitive one. The state should try to create such an environment so as to re-integrate the delinquent with the mainstream of the society.
• State should not be given so much power so as to make the law regarding the Juvenile Justice Act, rather more power should be given to the International Conventions and CrPc, so that the purpose of the JJA should be attained.
• The Juvenile Justice board is of great importance and hence a special training programme in child psychology should be conducted for the members of the JJB including the Magistrate.
• The Magistrate should not be engaged in any other work except for juvenile cases so as to complete the inquiry within 4 months.
• Children Homes are meant for both “child in conflict with law” as well as “child in need for care and affection”. It is important to separate homes for both the categories of children not only on papers but also on the ground level.
• The homes for children should be under the CCTV surveillance so as to facilitate the inspection process by the board along with the surprise visits.

Conclusion

According to the National Crime Records Bureau Report, 2015 on “Juveniles in Conflict with Law” Out of the total juveniles apprehended in various crimes, 4,757 were illiterate and 14,229 had education up to primary level. These two categories together accounted for 45.9% of the total juveniles apprehended during the year 2015. Children living with parents have accounted for 85.6% (35,448 out of 41,385) of the total juveniles apprehended^[53]. The share of homeless children who were involved in various crimes was just 3.9% (1,622 out of 41,385). Going through the data of NCRB, there is a need to first properly implement the existing policies which the Government has made for the benefit of children like the mid-day meal policy, Samagra Shiksha (recently added by the Union Budget 2018-2019).

Also, according to the National Crime Records Bureau Report, 2015, the data shown below depicts that most of the juvenile delinquents were found between the age group of 16 to 18 years.

Reducing the age of the juvenile delinquents from 18 years to 16 years as mentioned in Juvenile Justice (Care & Protection) Act, 2015 is not a solution. It is appreciable that the Indian Legislature has tried to fulfill the obligations as mentioned under the Convention, the government should try to implement the Act properly and also they should follow the reformative approach and try to engage juveniles in some skilled work so that they can lead a peaceful life afterwards.

References

^[1] Karnika Seth,Protection of Children on Internet,06(Universal Law Publishing Co.Pvt Ltd,New Delhi,2015 edition).

^[2]  “The Beijing Rules”, adopted by General Assembly resolution 40/33 of 29 November 1985.

^[3] United Convention on the Rights of Child,1989, Article 1.

^[4] Juvenile Justice(Care & Protection of Children) Act,1986,Section 2(h).

^[5] Juvenile Justice(Care & Protection of Children) Act,2000,Section 2(k).

^[6] Juvenile Justice(Care & Protection of Children) Act,2015, Section 2(12).

^[7] Sutherland E.H and Cressey D.R.,Juvenile Delinquency. New York: Mcgrawhill Book Co., 1949.

^[8] Annual Report of Children’s Aid society Bombay (1960-61) pp. 33-34.

^[9] Shipra Lavania, ‘Juvenile Delinquency’,(1983) Pub. by Rawat Publications, Jaipur, p.1920.

^[10] Girish Abhyankar & Richa Bathija & Tulika Anand, Light at the End of Tunnel: A Forethought on Age of Criminal Responsibility, (Sept.14,2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482237

^[11] The Constitution of India, ar.15(3).

^[12] The Constitution of India, ar.29(f).

^[13] The Constitution of India, ar.47.

^[14] The Indian Penal Code, 1860, Section 82.

^[15] Ratanlal & Dhirajlal, The Indian Penal Code 466-467(Justice K.T Thomas, M.A Rashid, LexisNexis, 33rd edition,2016)

^[16] Code of Criminal Procedure,1973, Section 318.

^[17]  Ved Kumari, Juvenile Justice: Securing the Rights of Children during 1998-2008, 2 NUJS    L. REV. 557, 558 (2009).

^[18] MAHARUKH ADENWALLA, CHILD PROTECTION AND JUVENILE JUSTICE SYSTEM FOR JUVENILE IN CONFLICT WITH LAW 13 (2006).

^[19] The Children Act,1960, Section 2(e).

^[20] The Children Act,1960, Section 2(f).

^[21] The Children Act,1960,Section 4.

^[22] Gitanjali Ghosh,Stocktaking of the Juvenile Justice Mechanism in India: A Long Overdue Need, NLUA Law & Policy Review,2015,(Jan.7,2017),https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2892546

^[23] Supra note 4.

^[24] (1986) 3 SCC 632

^[25] Supra at note 10.

^[26] Ved Kumari

^[27]States Parties shall respect and ensure the rights set forth in the present Convention to each child within their jurisdiction without discrimination of any kind, irrespective of the child’s or his or her parent’s or legal guardian’s race, colour, sex, language, religion, political or other opinion, national, ethnic or social origin, property, disability, birth or other status.

^[28]States Parties shall assure to the child who is capable of forming his or her own views the right to express those views freely in all matters affecting the child, the views of the child being given due weight in accordance with the age and maturity of the child.

^[29] States Parties shall ensure that:

(a) No child shall be subjected to torture or other cruel, inhuman or degrading treatment or punishment. Neither capital punishment nor life imprisonment without possibility of release shall be imposed for offences committed by persons below eighteen years of age.

^[30] Id.

^[31]  The State Government may, within a period of one year from the date of commencement of the Juvenile Justice (Care and Protection of Children) Amendment Act, 2006, by notification in the official gazette, constitute for every district, one or more, Child Welfare Committees for exercising the powers and discharge the duties conferred on such Committees in relation to child in need of care and protection under this Act.

^[32]  Where is juvenile having been charged with the offence is produced before a Board, the Board shall hold the inquiry in accordance with the provisions of this Act and may make such order in relation to the juvenile as it deems fit.

Provided that an inquiry under this section shall be completed within a period of four months from the date of its commencement, unless the period is extended by the Board having regard to the circumstances of the case and in special cases after recording the reasons in writing for such extension.

^[33] Whoever, having the actual charge of or control over, a juvenile or the child, assaults, abandons, exposes or willfully neglects the juvenile or causes or procures him to be assaulted, abandoned, exposed or neglected in a manner likely to cause such juvenile or the child unnecessary mental or physical suffering shall be punishable with imprisonment for a term which may extend to six months, or fine, or with both.

^[34] Aaron Pereira, 75% of the Juveniles held in 2014 were above 16 years of age, The Indian Express,(Aug.20,2015,6:02:10 pm),https://indianexpress.com/article/india/crime/75-of-juveniles-in-2014-were-between-16-18-years-of-age/

^[35] Id

^[36] Ved Kumar, Treatise on The Juvenile Justice Act, 1986, Indian Law Institute, 1993 at p 107.

^[37] Protection in respect of conviction for offences

(1) No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence

^[38] who is mentally or physically challenged or ill children or children suffering from terminal diseases or incurable diseases having no one to support or look after.

^[39] AIR 2014 SC 2726

^[40] Sandra Graham, ‘Juvenile Justice for Some’ ,Association for Psychological Science, (Feb.2015), https://www.psychologicalscience.org/observer/juvenile-justice-for-some

^[41] Laurence Steinberg, Ph.D., one of the world’s leading experts on adolescence, is a Distinguished University Professor and the Laura H. Carnell Professor of Psychology at Temple University.

^[42] (2013) 7 SCC 705

^[43] AIR 1986 SC 414.

^[44] AIR 1982 SC 685.

^[45] AIR 1982 SC 806.

^[46] AIR 1987 SC 1329.

^[47] 2000 (6) SCC 759.

^[48] AIR 2000 SC 2264.

^[49] Id., p. 2267.

^[50] (2000) 6 SCC 759.

^[51] Decided by U.S Supreme Court, May 15, 1967.

^[52] Bindu Shajan Perappadan, ‘Juvenile Justice Act has failed miserably, The Hindu, (June 13,2016, 10:10), https://www.thehindu.com/news/national/juvenile-justice-act-has-failed-miserably/article4337040.ece

^[53] http://ncrb.gov.in/StatPublications/CII/CII2015/chapters/Chapter%2010-15.11.16.pdf

In this article, Shashwat Sarin discusses the need for a regulatory framework for Blockchain Technology and its application.

This paper evaluates the need for drafting a uniform regulatory framework around the realm of blockchains and its application including but not limited to virtual currencies with an aim to prevent a parallel-unregulated economy. The latter part of the article discusses all you need to know about Blockchain and its various applications.

Is the blockchain platform self-sustainable and fail proof?

It is assumed that virtual currencies are more stable than national government-backed currencies. It is believed to be so because national currencies can devalue when central banks keep printing money, whereas, the monetary value of virtual currencies will only increase over time. [3] Bitcoin and other virtual currencies are decentralized and distributed over peer-to-peer network. Hence, there is no no one server, that processes applications, that the protocol depends upon. Since virtual currencies are untraceable and provide a method for making large sums transactions without the authority’s approval in no time, the author believes that it is the fastest and most disruptive platform having multiple applications.

Inevitable Economic Collapse

A regular currency is used as a currency as well as a commodity. It is used for buying and selling of goods and services. It’s value is stable. On the other hand, value of a commodity is speculative in nature. When we talk about virtual currencies, a lot more of it is being used as a commodity. The economy based on virtual currencies is increasing rapidly. Since both its use, as commodity and currency, are unstable therefore economy at which goods are bought and sold, at the exponential rate, is unstable. Its use as a commodity is further destabilised due to a lot more people buying it, speculating increased price. More people investing in it for speculative purposes results in a bubble, the collapse of which will further lead to a state of recession. This is what the artificial inflation of prices results in eventually. The people using it as a currency is the entire economic structure behind cryptocurrency. The trade of people buying and selling it can be compared to the trade conducted by nations in economic terms.

Let’s take a hypothetical example of a country called bitcoin and its trade (import and export) with the United States. In a scenario where one bitcoin is equal to one dollar. The United States purchases bitcoin for import purposes. Now since the bitcoin like all virtual currencies undergoes exponential price fluctuations, let’s assume that one bitcoin becomes worth 2000 dollars. Then, to purchase the bitcoin currency for import trade purposes, the United States would have to spend 2000 times the amount spent earlier. Since the purchasing power decreases, the imports decreases. Therefore, the production of goods and services falls dramatically leading to a state of trade deficit.

Every virtual currency is limited in the number of units, for example, there are going to be a total of 21 million bitcoins out of which more than 17 million have already been mined as per this article. Since Bitcoin is not a national currency but a private enterprise, there is no incentive to increase the supply. Generally, in case of any national currency, the government increases the amount of currency in rotation. So when the mining reaches its final number on the current basis of an unregulated exponential shifting parallel economy, it will eventually collapse bursting the bubble. The private enterprise cannot control the exponential increase. Even if a small amount of supply is injected, it would result in rapid fall of prices because the systems would be that much more efficient to mine the small supply of bitcoin and cash it out which would bring it closer to the total number of bitcoins.

Let’s suppose, towards reaching the final number of bitcoins, that, people start divesting just before the price fall. They would divest large amounts of money which was a result of the artificial exponential price hike. These units of virtual currency would be diverted into either the next reliable virtual currency or a national currency like dollar, euro or pound. In case it is divested into the next reliable growing virtual currency, the value of that virtual currency will increase at (e^x) times the value at which the previous virtual currency was increasing. Here (e^x) is assumed to be the rate at which the next reliable virtual currency is growing. This next virtual currency will reach the maximum value that much sooner, which will result in the same process of divesting. If the virtual currency is divested into a national currency like dollar or pound, then the value of the national currency will inflate due to large amounts of influx of virtual currency getting traded at artificially inflated prices. In such a case, when the dollar is bought in large sums, it would result in a situation of economic inflation. This is also a reason for concern as to why regulation is needed in this realm. To avoid a situation of economic inflation, the government of the respective national currency will have to print more cash to decrease the price of national currency and thereby equalizing the effect of the inflated currency price. So the government will have no option but to print money to control dollar price influx. That is the only solution to prevent the trade deficit from exploding and the economy from crashing.

Potential financial, operational and security risk

Since virtual currencies are untraceable and provide a means for large sums of transactions without the authority’s approval in no time, making it is the fastest and most disruptive platform having different kinds of applications. It cannot be ignored that anonymous cross-border trade raises issues of illegal activities and transactions. Even though blockchain in principle is decentralized and encrypted, there are many countries which have not legally accepted virtual currencies. As a result, these virtual currencies exchanges are not registered, thereby conducting an illegal trade of virtual currencies. Furthermore, they cannot be held liable for any data loss or malware infection as there is no mandatory requirement of data security and data protection in India which is to be complied with by all. Therefore, it can be said that there is no validity that these operating exchanges have an encrypted and secure data exchange service. Since virtual currencies and other applications are not bound by any universal legislation, there are legal, economic and security concerns for the same. Transfer of virtual currencies into other currencies needs to be under-regulated supervision. Virtual currencies are vulnerable to malware, hacking and loss of personal data. There is an evident potential financial, operational risk coupled with lack of customer protection and security concerns.

Current Indian regulatory framework

The Central Board of Direct Taxes (CBDT) has not yet issued any guidelines on the tax regime of virtual currencies and other applications of the blockchain. The taxability of virtual currencies and other applications of blockchain depends on the definition of virtual currencies and other applications of the blockchain, whether it is an asset or a currency.

Nations such as Singapore, Norway and Canada have defined virtual currencies as an asset. However, there is no instruction on other private blockchain applications that are coming up. Japan has come up with a legislation for putting in place capital requirements for virtual currency exchanges. In addition, these exchanges will also be required to conduct employee training programs and submit to annual audits. However, there still exists a lack of consistency in the tax regulatory structure. [4]

Taxing Regulations for activities relating to Blockchain: Direct and Indirect Tax System in India

Anything that generates income is to be brought under the spectrum of taxation law through amendments. Trading of securities and commodities on blockchain platform, even if without virtual currency tokens, must be covered under the tax regulations. This also makes it imperative to define virtual currencies and other applications of blockchain as assets or currency. Different applications can be given different interpretations based on their purpose and function. There needs to be a consistent and detailed regulation which also identifies whether such income will be a capital gain or revenue gain.

Section 2(24) of the Income Tax Act defines the term ‘income’. This definition is considered to be an inclusive definition. The Hon’ble Supreme Court in the case of Bhagwan Das Jain v. Union of India [5], discussed the meaning of the term ‘income’ by stating its dictionary meaning i.e. ‘a thing that comes in’. The Court held that, “income can also be defined as the gain derived from land, capital or labour; or  any two or more of them. Even in its ordinary economic sense, the expression ‘income’ include not merely what  is received or what comes in by exploiting the use of a property but also what one saves by using it oneself. That  which can be converted into income  can be reasonably regarded as giving rise to income.”

Senator Chuck Grassley introduced the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017” in May in the United States. The Bill requires users to declare cryptocurrency assets exceeding $10,000 whenever they cross a U.S. border.[6]

If Characterized as Currency

• If virtual currency tokens are treated as “currency” in India, then income arising from the exchange of regulated currencies due to currency fluctuations would be treated as ‘income from other sources’ under the Income Tax Act. Income generated through regular trading in virtual currency tokens because of price fluctuations would be treated as ‘income from business’ under the Income Tax Act.
• Individuals, in order to be on the safer side, have preferred to treat it as ‘income from other sources’ where the relevant slab rate of Income Tax applies, as opposed to a 20% tax on long-term capital gains.
• The CBDT issued a circular in 2007 which sets out tests to determine whether shares are held as investment or stock-in-trade. The CBDT recommended that the same parameters can also be applied to virtual currency tokens. In case one is trading as well as selling virtual currency tokens, then the total income would include both the income generated from the sale as well as the difference of income generated from trade, unless the entire amount is traded for some other virtual currency tokens.

If characterized as Asset

• The digitized nature of bitcoin makes a stronger case for its characterization as an intangible asset. In India, such interpretation would imply that virtual currencies, whether sold for cash or in exchange for goods or services, would attract tax on ‘Income from Capital Gain’.
• Definition of Capital Assets under Section 2(14) of the Income Tax Act can be said to include virtual currency tokens. The purchase of virtual currency tokens for the purpose of investment, should be treated as a capital asset. Thus, any gain that arises on sale of the virtual currency would amount to ‘Income from Capital Gains’. Capital gain can further be classified into short-term capital gains and long-term capital gains. The short-term capital gain tax regulation invokes a 30% fee on income above Rs. 10 lakhs based on the income slab. Any time period more than one year amounts to long-term gain and invokes a 20% tax rate. Indexation benefit should be permitted to be availed.

Will mining of virtual currency tokens be counted under taxation?

Production of any virtual currency generates income. The cost of acquisition is generally subtracted from the income before calculating tax liability on the same. But in case of virtual currency, it must be clearly defined as to what all will be considered as legitimate expenses under the cost of production or acquisition. Whether it will be treated as capital gain or currency depends on how the virtual currency tokens and its uses are defined, as specified above.

Impact of GST on virtual currency tokens

• If virtual currency tokens are defined as currency, then the indirect tax implications do not arise.
• If virtual currency tokens are defined as assets, people having them may be compelled to give a monetary value to the holdings for ascertaining indirect tax implications. VAT implications may arise on the exchange of virtual currency tokens.

An important question that arises here is that, if virtual currency is treated as currency then would tax liability be invoked on barter transaction of bitcoin, ethereum or other tokens with some asset or services. Author believes that mining activities may be considered liable for service tax whereas transfer of tokens may be liable for service tax in case of stock or commodities exchanges, or web hosting services and other financial service providers. Intermediaries providing services should also be liable for the indirect tax.

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Regulations for blockchain technology across the Globe

Japan

• It is the first country to legalize bitcoin as a method of payment
• The Japanese legislation has defined bitcoin as an asset and not a currency
• The law strictly differentiates between the government-backed national currency and the different virtual currency tokens
• It invokes capital gains tax liability on virtual currency trading i.e. sale and purchase
• Japan has discontinued the levy of 8% consumption tax on virtual currency exchanges from July 2017 in an effort to reform the complex tax structure. However, the trade of virtual currency for assets or services is still liable for the consumption tax.

European Union Commission

• Recently the European Union Commission proposed a regulation to regulate virtual currency exchanges. The Commission suggested an amendment to the 4th Anti-Money Laundering Directive which will create a central database of virtual currency investors.

“Maintain a central database registering users’ identities and wallet addresses accessible to FIUs, as well as self-declaration forms for the use of virtual currency users”[13]

• This implies that virtual currency exchange transactions will be recorded against an individual’s identity, which will be recorded in a central database.
• There is a serious concern here of the security and integrity of that database and therefore all the personal information and transaction records. In case of a breach, sensitive personal data may be leaked.

Australia

• Reserve Bank of Australia has defined virtual currencies as digital currency and treats the same as an asset.
• Transactions of virtual currencies are subject to regulatory oversight.
• AUSTRAC is the Australian government financial intelligence agency. It has been set up to monitor financial transactions for security and prevention of criminal activities like money laundering, tax evasion, and fraud.
• Under the sections of the Bill, AUSTRAC will regulate virtual currency exchanges.[14]
• These regulations of preventing money laundering and other criminal activities are similar to that of Japan.

United States

In the United States, virtual currency tokens are treated as a commodity and widely accepted.

Many other countries have also begun the regulation of virtual currency and its broad-based applications.

CASE STUDY: State Laws in the U.S. regulating blockchains

Regulations in New York

New York State Department of Financial Services has established a comprehensive regulatory regime on blockchain and its applications. Corporations involving any sort of digital currency business require mandatory license according to regulation 23 NYCRR 200. There is a strict mandatory requirement for supervisory policies, compliance and due diligence in place. Anti-money laundering and cybersecurity regulations have also been enumerated in 23 NYCRR 200. Recently four Bills have been introduced in the New York State Legislature on blockchain and its applications in an attempt to regulate its research and functioning by the government. These proposed legislations cover the studies around different applications like state elections.

1. The first Bill proposes amendments to New York’s technology law which define blockchain technology and applications such as a smart contract. The Bill also provides information of digital signature which is stored on the blockchain. [7]
2. The second Bill deals with researching the use of blockchain technology in state elections. It can help in protection of voter records and election results. This application of blockchain has been given a year for evaluation to determine whether, it can in practical sense be used to prevent fraud, improve cybersecurity, maintain better records and make voting results calculation more efficient. [8]
3. The third Bill is also proposed for research purpose to determine whether blockchain platform can be used for recording state government information efficiently. A similar application got appreciated in Vermont in 2016.[9]
4. Lastly, the final Bill studies the impact of virtual currency tokens on the New York financial markets.[10]

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Guidelines by Securities Exchange Commission

• Securities Exchange Commission is the central authority governing virtual currencies and other applications such as securities trading and commodities trading in the state of New York.
• The Securities Exchange Commission (SEC) has declared that initial coin offerings will be treated as sale of securities for the purpose of regulating these transactions. These trades will be subject to the federal securities laws. [11]
• SEC has made it mandatory for corporations and initial coin offerings to be registered before they conduct trade. The corporations which participate in trading and exchange of virtual currencies without registration will be violating securities laws. Whether a coin offering is registered or not can be verified on the Securities Exchange Commission website (sec.gov through EDGAR).
• If a company claims an offering to be exempted from registration then non-institutional buyers need to be careful.
• Investors must know the purpose for which the blockchain application is having coin offerings. They should be informed about the nature of the blockchain application, whether it is an open or private distributed ledger system.
• There is no central authority that collects virtual currency user information. Law enforcement officials may have difficulty freezing or securing funds that are held in a virtual currency as it is an encrypted program. [12]

Other State Regulations

Within the United States, some states have issued warnings and guidance notices while others like Washington and New York have drafted rigorous and stringent regulations. On the contrary, there are some states with no specific enacted or pending regulation. While some states have specific financial regulatory bodies others have partially incorporated a few definitions of virtual currency and practices around it.

• Alabama has included virtual currencies in the definition of monetary currency. Under the Alaskan law, there is no virtual currency regulation or any specific regulation on the use of blockchain or its applications after the House Bill 180 was stalled.
• There are no virtual currency regulation or any specific regulation on the use of blockchain or its applications in states of Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Colorado, Minnesota, Mississippi, Missouri, New Mexico, North Dakota, South Dakota, South Carolina, Arkansas, and Tennessee.
• The state of Arizona has legislated two statutes for storing information on the blockchain. 44-7061 legally validates and ensures the security of digital signature, records and contracts on blockchain platform. The state introduced Assembly Bill 1123 which creates a database for all virtual currency businesses that store, transfer, exchange or make available for the purchase of virtual currencies.
• In the case of Connecticut, House Bill 7141 has been executed in October 2017, which mandates issuing of licensing before conducting business on any blockchain platform. The Bill states: “Each licensee that engages in the business of money transmission in this state by receiving, transmitting, storing or maintaining custody or control of virtual currency on behalf of another person shall at all times hold virtual currency of the same type and amount owed or obligated to such other person.”
• Delaware enacted Senate Bill 69 in July 2017. This enables corporations in Delaware to use blockchain database platforms for company records. The law expressly allows corporations to trade stock on blockchain platform on ensuring that three conditions are fulfilled, namely that the company prepares a list of stockholders, records information and every transfer of stock.
• Hawaiian Senate has a pending Bill 1481 on blockchain technology.
• Besides issuing guidance, the state of Illinois has no laws pending or currently in order. Any company engaged in exchange shall not need a license under Transmitters of Money Act. Virtual currency is not considered currency in the state of Illinois.
• Virtual currency is not authorized or adopted in any state legislation of the state of Kansas. It is not considered currency under the Kansas Money Transmitter Act.
• While other states are drafting and executing legislation to prevent money laundering and tax evasion, the state of Nevada is the first state to ban the local government from taxing blockchain applications and virtual currency tokens according to Senate Bill 398 in June 2017. The Bill has defined blockchain as an electronic record merely which is redundantly processed by computers. N.R.S. SB 398 § 1 prevents the government from levying any tax on the use of blockchain.
• State of New Jersey has issued guidelines that virtual currency will be treated as an intangible property and will be subject to sales tax.
• The state of Ohio has no regulatory framework on virtual currency or block chains but it has banned the trade of virtual currency for the purchase of alcohol.
• Oregon also has not clearly defined or given regulations for blockchain and virtual currency industry, however, it charges additional transmitter charges for virtual currency corporations. Michigan Department of Treasury has issued a notice on how sales tax will be levied for use of virtual currency but there is no consistent or detailed regulation on blockchain and its applications.
• Washington also has a heavy regulatory structure in place. The state includes virtual currency within its definition of money transmission in its Uniform Money Services Act. H.B. 1327, 63rd Leg., Reg. Sess. The regulations have become more exhaustive and comprehensive in terms of including applications of blockchains post-Senate Bill 5031. S.B. 5031, 65th Leg. Reg. Sess. There are mandatory license issuing requirements. Furthermore, the exhaustive and comprehensive regulatory structure has pushed out Kraken and other popular exchange sites.[15]

Policy suggestions

There is a need for regulating this space of blockchains for various reasons besides the ones mentioned over the course of this article.

• Securities Exchange Commission may be the central authority governing virtual currencies and other applications such as securities trading and commodities trading in the state of New York, however, there are no central authorities in other states in a country such as the United States which has accepted and recognized blockchain and its application. The Commission itself relies on other sources for compliance on information so it is not a full proof system as of now and may trigger technical lapses or mismanagement.
• There should be an independent cybersecurity auditing structure.
• There needs to be a minimum set of universally accepted and recognized data protection and data privacy norms.
• In case of failure to comply, there should be a heavy penalty and punishment otherwise who will ensure the safety of citizens in cyberspace.
• Liability needs to be clearly defined.
• Just like the General data protection regulations drafted and enacted by the European Union, there should be regulations in all countries for the same purpose.
• Virtual currencies can be accessed, bought, traded and sold from anywhere on the globe to anywhere else which by effect will be untraceable.
• All information about the public or private blockchain enterprise needs to be informed to the person conducting any sort of business on the platform. Not being able to trace transactions makes this system susceptible to a regulatory structure as it makes the economy of various nations from where large capital is flowing vulnerable to the blockchain based application.
• The Securities Exchange Commission, which has so far been able to come up with the most stringent regulation in this domain has indicated that it is getting information on transactions and people conducting those transactions from cross-border agreements and other sources for providing information. This is very vague, risky and unclear in terms of its legitimacy. If the Securities Exchange Commission is receiving all this information why is it not sharing with other governing authorities and how is the Securities Exchange Commission using this information has not been answered.
• The Securities Exchange Commission has also not shared what security parameters it is fixing for data protection and privacy. Law enforcement agencies in case of a scenario of criminal activity such as fraud or misrepresentation may find it difficult to lay a freeze on the virtual currency or blockchain assets owing to its nature of cross-border accessibility, high liquidity, anonymity, and highly encrypted nature.
• Virtual currency wallets connect and provide instant peer to peer transactions without the necessity of a third party intermediary so this parallel financial system can completely bypass any security measure out in place to safeguard against or prevent criminal activities.
• Virtual currency and other blockchain applications need to be issued a license in every state, that is currently regulating it, in which is it conducting business. It also needs to maintain compliance with the legal framework of the country in which it is conducting business.
• A more efficient system could be developed by having a single registration system for corporations conducting business over the globe in different countries but that would again not be feasible as different countries have a different legal framework, which is not in sync in terms of data protection and compliance.

Conclusion

As one can clearly observe from the facts scenario mentioned above case study, there is the major flaw in the regulatory structure implemented by a few states so far. In the given circumstances, it is possible that companies and ICO will opt for jurisdiction with lesser regulations or tax benefits and may set up the business in such a manner so as to completely circumvent the regulatory circumference. This issue is further broadened by the encrypted anonymous nature of the decentralized ledger system of blockchain and its applications. So based on the above case study all it would take to evade taxes altogether is to have a registered main office in Nevada. Since the state legislature is banned from levying any taxes on any business of virtual currencies and other applications. Similarly, they can do away with the mandatory requirement of having a license for trading and exchange businesses by incorporating a business in places that do not have any mandatory federal policy. A combination of favorable jurisdictions for different phases of business operations would completely escape any liability and bring jeopardy to the enormous amount of transactions that are being conducted off accounts containing private information. Even the interpretation of blockchain as an asset or a currency invokes a different percentage of tax liability. So, in that case, why wouldn’t a person prefer routing his purchase and sale of virtual currencies through such a jurisdiction? Now wouldn’t this count as a criminal activity because essentially the person is conducting wire fraud. This invokes the imperative need for a uniform code of regulations governing the dynamically evolving applications blockchain and virtual currencies. A rigorous, comprehensive but most important a universal policy. While drafting this universal policy, it is essential to categorize block and its applications stepwise. Firstly, is the virtual currency token meant to be considered an asset or a currency. That will formulate a uniform taxation system. Second would be the different services that these blockchain applications are providing from the exchange, transfer, purchase, storage of contracts, transactions, music, healthcare industry databases, trading securities and commodities, state functions etc. The third is whether such a service should be exempted from tax and even if so whether the blockchain service is conducting business in accordance with mandatory data protection, due diligence, compliance and other laws of the country.

Understanding Blockchain

Blockchain technology lets many people access the same information, but not copy it: meaning that the same file exists with everyone, and all the holders of the file continuously validate its contents (as a peer-to-peer network). Thus, there is no true centre of this information, creating no one true file, but all the files being true. The crypto-application of blockchain technology is virtual currencies like bitcoin, ripple or ethereum, but to be able to understand the scope of its other applications, it is imperative to understand in detail what a blockchain system is and how does it work. The blockchain is a decentralized ledger system that stores and processes transaction without any intermediary. Due to its decentralized structure, it enjoys the benefit of evading any technical lapses, data breach, malfunctioning or system failure. Applications of blockchain are not backed by legal tenders posing a constant risk in investment. They enable people to exchange data, process calculations and record it on the ledger system. This coupled with the lack of regulatory regime and any intermediary including the government along with anonymity for people transacting on the ledger system.

The blockchain is secure because it is in encrypted form, hence the transactions are safeguarded from fraud and technical complication. As it is distributed and shared over a decentralized ledger system, this makes it theoretically impossible to penetrate the system or to hinder the functioning of storing data and executing transactions. Every transaction is recorded onto the ledger and cannot be changed afterwards. This helps the system to gain efficiency, speed and simplifies the operations, the expenditure and time. Furthermore, the new concept of initial coin offerings supports the growth of new business and research by providing substantial revenue. The way it works differs in its various applications but the raising of revenue can be compared to the practice of an initial public offering of equity of a company.

There are two different types of blockchain, a public blockchain and a private enterprise blockchain. A public blockchain like bitcoin is an open source ledger. This means that various anonymous people over the network can read and write on the ledger, making the processes conducted on the ledger foolproof. This is different from when a private enterprise wants to raise capital or initiate an application in the finance or any other sector. In the case of a private enterprise blockchain, the participating people are known entities and organizations thereby introducing liability and accountability. Since it is not an open ledger to alterations, it can be altered only with a combined effort of certain participants but can be read by everyone, thereby increasing transparency but restricting control of any changes only to known entities. Changes, which are made by a consensus of participants, are based on multiple algorithms, thereby making the structure more secure and safe.

Virtual Currencies

A virtual currency is a decentralized peer-to-peer currency, that is not issued, controlled or regulated by any single government or central bank. Virtual currencies can be traded as a commodity or security, but is valued as a currency. They are not backed by government fiat, which is the most crucial reason for their exponentially dynamic price fluctuations. They are primarily mined, bought, sold and traded for goods and services. As they can be traded for securities or commodities, their role as a currency is further strengthened. However, they have received a mixed response in terms of their definition and legality under different regulatory authorities.

As for how they work, pending verification, all transactions of a ledger are indexed. Any transaction occurring over the virtual currency network is verified by the distributed ledger system and is entered into the blockchain after verification.

Various applications of blockchain

Blockchain technologies have infinite potential to better our lives. Some of the applications of blockchain technologies are as follows:

• Banking (unique wallet address)
• Parallel processing in scientific procedure (quantum mechanics)
• Quantum computers (replicating entire networks) eg. Boston Dynamics
• Voting systems
• National virtual currencies
• Financial services like
  • Asset management
  • Cross-border transactions
  • Insurance
  • Money Lending
  • Trading assets
• Smart contracts
• Government transactions, tenders and ledgers
• Passports, certificates and other personal identification technology, for example, a national DNA and fingerprint database
• Revolutionizing the processes in the healthcare industry, music applications, and supply chain services [1]
• Cloud storage services
• Ethereum, a cryptocurrency, can also be used for incorporating smart contracts which essentially are contingent agreements written on software which can execute a transaction in accordance with the conditions of the agreement

Major developments have already started happening with respect to blockchain technologies in the following areas:

• Tunisia and Senegal have issued national digital currency on blockchain platform (e-Dinar, eCFA).
• Companies like Oracle and IBM are working on an open source ledger for cloud storage services
• Platforms are coming up for securities and commodities exchange based on a blockchain operating system.

• Swiss stock exchange is working on an over-the-counter prototype for asset trading based on the ethereal technology[2]
• Polymath is another example of a security trading platform coming up.

• The Commodity Future Trading Commission is studying the prospects of the blockchain tech and its applicability in future and derivatives market
• Travelflex cards enable direct secure superfast transactions worldwide. These cards can be used as ATMs or credit cards. They enable escrow services over the network. They also have a direct peer to peer wallet transaction on its digital platform which altogether bypasses the circumference of regulations and institutional banking systems.

References

[1] https://blockgeeks.com/guides/blockchain-applications/

[2] http://www.nasdaq.com/article/blockchain-regulation-in-finance-recent-developments-and-prospects-cm845843

[3] https://www.theguardian.com/money/2016/aug/22/bitcoin-investments-cryptocurrency-traded-digital-money

[4] http://www.coindesk.com/japan-bitcoin-law-effect-tomorrow/

[5] [1981] 128 ITR 315/5 Taxman 7

[6] http://www.investopedia.com/news/senate-antiterror-bill-1241-threat-bitcoin-declare-cryptocurrency-money-laundering/#ixzz4lH2MfpC8

[7] https://legiscan.com/NY/text/A08780/2017

[8] https://legiscan.com/NY/bill/A08792/2017

[9] https://legiscan.com/NY/bill/A08793/2017

[10] https://legiscan.com/NY/bill/A08783/2017

[11] http://bitlegal.io/2017/08/02/us-rules-icos-and-token-sales-are-sales-of-securities/

[12] https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings

[13] http://bitlegal.io/2016/07/24/eu-commission-to-propose-central-database-of-virtual-currency-users/

[14] http://bitlegal.io/2017/09/19/australian-government-begins-regulation-of-cryptocurrency-exchanges/

[15]http://www.mondaq.com/unitedstates/x/645308/fin+tech/State+Regulations+On+Virtual+Currency+And+Blockchain+Technologies

This article is written by Akshay Anurag of NUSRL Ranchi.

Abstract

Interpretation of statues is of prime importance to the daily work of the judges. But in the guise of this proposition, the conflict always germinates that whether the will of judges or the will of the legislature should be given prime importance. The courts can’t frame laws. Their function is only to ensure that the executive is acting in accordance with laws, and policy enacted by the government is not arbitrary. The fundamental rule of Interpretation states that the Judiciary must expound the law but not to legislate. In order to secure the independence of every pillar of democracy, the courts must be urged to impose appropriate self- restraint and to avoid intrusions into the domain of the other branches. But in 21st Century, the Parliament and State Legislatures cannot give the quality and quantity of laws which could be sufficient to serve the changing needs of the modern society despite being engaged throughout the year. When legislative bodies fail to make the necessary legislation that would best suit the present circumstances it may lead to an erosion of the confidence of the citizens in the constitutional values and also might result in injustice.

This paper will mainly be focussing on far-reaching consequences of imposing self-restraint by judicial authority which might lead to injustice more often. This paper also attempts to analyse the situations of Judicial Overreach.

Introduction

• There is a presumption that the enacted laws, rules, regulations etc. are drafted by the legislature followed by huge debate and discussions so, there can’t be any void in the provision that might call for interpretation. However, recent trend witness contrary practice. The agency who shares the task of application of law have bitter experience. In every legislation there is the potential for words and phrases to create uncertainty or ambiguity which can only be resolved by judicial interpretation.[1]
• Difficulties also arise due to incoherence between ‘meaning’ and the ‘intention’ of any enactment. The drafters are often criticized for the shortcomings in the statue or ambiguity in the statue. The legislation may have been drafted in detail but it is not possible for draftsman to foresee every contingency that might arise in future course of time. Such lacuna or ambiguity will render injustice.
• The ideas of numerous drafters and other legal and technical terminology might result in incoherence, ambiguous and vague language. As the statues are drafted with the aim to solve and address problems and fulfill needs in a given society. Justice is the ideal that any legislation sought to achieve. But the ambiguities in the legislation might defeat this proposition. So in such circumstances, Judiciary is called for rescue.
• The prime function of judiciary is to promote justice. The courts should apply its judicial mind and endeavour to interpret the phraseology broadly in order to serve the need of society.
• When legislature fails to discharge its functions it might lead to collapse of the concept of responsible government which is the emblem of the constitutionalism, the judiciary acts as the engine of social welfare by fulfilling the legislative vacuum. It is true that judiciary do not make the law but however there is no law until it is interpreted by the judicial body.
• Courts often treat ambiguity as a kind of gateway consideration when they interpret a statute. But no where permissible limits have been defined. In present scenario, the role of judiciary has marked a significant change from its traditional role of mere adjudication in order to serve the dynamic society. Courts have now become the final interpreter of our organic documents as well the protector of fundamental rights of our citizens.

But in this process, judiciary has itself defined its own freedom and excited the executive and the legislature to act in the passive command of Judiciary. Further there are some instances which evidenced the judiciary encroaching upon the sphere of other state organs. It should always bear in mind that the constitution is not a panacea for every bolt on the public welfare, nor should the court be as a judicial body a general heaven for reform movements. Therefore, at times it is advisable to put self- restraint upon the functions of judiciary. However, such restraint must not be as such that results in injustice or absurd results. This paper will mainly focus on the adverse impact of Judicial restraint in the changing society.

Juxtaposition Between Judicial Activism & Judicial Restraint

• The courts are not only for dispute settlement. From the inception, it has been seen that the courts have been an ‘interstitial’ law maker. Courts responsibility has been much more increased now it is obligated to solve problem in the nebulous areas. It has now become the responsibility of courts to apply existing law in a form of more conducive to the independence of the judiciary.[2]
• The concept of judicial Activism vests some discretionary power in the judges to depart from the strict adherence of the provisions. Judicial activism is the presumption of an active role played by the judiciary, which is endowed with the responsibility of adjudication and evolution of policies.[3]With the development of the idea of constitutionalism, judicial activism is proved to be sine qua noe of democracy.
• Law being dynamic in nature welcomes new social policies which are not always consistent with the prevalent legislation. The judges are called for social engineering which might obstruct the way of legislature and executive.[4]
• Judges should act in the view of social demand for active judicial role which he is required to fulfil.[5]Law as a creative response must be applied to meet the particular fact. While judging apart from relying upon text only judges should apply own perception of constitutional ideas.[6] It is advisable to fulfil the lacuna or gap the judges are allowed to interpret any enactment in the context of changing social needs and values in order to achieve social goal or public good.[7]
• It is advisable to the judges that where a prevailing law is not capable of remedy the present social circumstance then judges should evolve with a new law.[8]As social norms and values change, law too have to be reinterpreted and recast regularly to make it consistent with the current social order. Whenever any societal condition, as well as factual situations, makes it a sine qua non for the judges to speak, they without professing the tradition of Judicial lock-jaw, must speak out.[9]
• Law is a dynamic instrument fashioned by society for the purposes of achieving harmonious adjustment of human relations by elimination of social tensions and conflicts.[10] Judges are allowed to supply the decencies and fill the gaps if an existing structure found to be deficient in any way, however, a caution must be taken in order to stop building a new edifice in case of absence of it.[11]
• Judges work is not only to interpret the constitution but also to articulate the constitutional norms to serve public reform in the area wherein pressing need is felt.[12] It is contended that the law must be responsive to serve the needs of changing social order. Judicial Activism emphasises that the judges are free to mould its ideal path in order to promote justice in a particular situation. Courts today cannot remain passive with the negative attitude, merely striking down a law or preventing something being done rather it has developed new attitude is to initiate positive affirmative actions.[13]
• This type of creativity on the part of judicial authority has made it possible to realize the socio economic justice. Right to legal aid, Public Interest litigation, right to privacy etc. are the outcome of this phenomena only.At present Judicial activism has become the part of judicial process.[14]

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In contrast, it is contended that the judges of High Court should maintain judicial restraint. This discipline is necessary for the orderly administration of justice. The duty of restraint and humility must be the constant theme of the judge in order to respect the intent of the legislature.[15] Judicial restraint is a pervasive feature of judicial decision making. It refers to apply the existing law in a conservative way, refraining from pursuing the more innovative route. Judicial restraint is a matter of self- restraint. It is for the judges to prescribe their limit in constitutional adjudication. So the question of restraint is not about the legal authority rather it is the appropriateness of judges by not exercising the powers.[16]To invoke judicial activism is to set at nought the legislative judgement is subversive of the constitutional harmony and comity of Instrumentalities.[17]Courts should only advise and point out the lacuna in the legislation and should exercise self- restraint. It is suggested that judge-made amendments to provisions above the available legislation should normally be avoided. An activist court is not fully equipped to cope with the details and intricacies of the legislative subject. It can only be allowed to advise and focus attention on the state polity on the problem and shake it from slumber, goading it to awaken, march and reach the goal. But at times the courts compulsorily need to apply brakes to its self-motion somewhere which is described judicially as self-restraint.[18]In case, a particular statue is well prevalent for several decades and the subjects of that particular are adjusted then the courts should exercise self-restraint.[19]So, it could be concluded that judicial activism and the Judicial restraint are the two side of the same coin and must go side by side in order to ensure harmonious functioning of all three organs of the state.

Rule of Interpretations & Dilemma of Self Restraint

Fundamental Rule of Interpretation

Fundamental rule of Interpretation emphasises that the ‘Judiciary must expound the law and not to legislate the law’. It is the legislature which is endowed with the responsibility of law making. In that particular, if the legislature fails to address any contingency then also courts have to abide by the provision itself. The primary duty of courts is to adjudicate the law not to legislate the law. Adjudication must be done by considering the literal aspect only. This is the elementary principle of interpretation. Judges cannot proclaim that they are playing the role of law maker for exhibiting judicial valour rather it must not be ignored that there lies a razor-thin line between adjudication and legislation.[20] The judiciary must not transgress such demarcation. This rule concludes that the statue is the master and not the servant. This rule appeal judges to impose self- restraint in the course of Interpretation. However, this theoretical concept is surrounded by the clouds of the limitations. The true sense of legislature can be derived from the words used in the enactment but words do not have scientific meaning it and it changes with time. So, restricting itself from interpreting and merely acting based on text might render gross injustice.

Literal Rule of Interpretation

This rule states that when the language of the statue is plan, certain and unambiguous, it must be given effect irrespective of its consequences. This rule states that the effect must be given to the statue even though it be absurd or results in starling consequences.[21]The words of a statute must prima facie be given their ordinary meaning. It is argued that the true legislative intent can be ascertained by the way of Literal construction. Plain meaning must be given effect even if it is unjust. The rule is explained in the case of Sussex Peerage[22], wherein it was held that:

“The only rule for construction of Acts of Parliament is that they should be construed according to the intent of the Parliament which passed the Act. If the words of the Statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in that natural and ordinary sense. The word themselves alone do, in such a case, best declare the intention of the law giver.”

It would be wrong to discard the plain meaning of words used merely to meet a probable injustice.[23]A probability of future injustice should not induce judges to do violence to well-settled rules of construction.[24]The mere fact that the results of the statue may prove to be unjust or cause hardships does not entitle a court to refuse to give it effect.[25] The literal rule of interpretations means there should be no creative interpretation. The statue must be applied without distorting or twisting its language. This is the foremost rules of Interpretation. Where the intention is reflected clearly and in an expressive way then words cannot be interpolated. If any manipulation is done with words, then the statue would more likely fail to carry out the legislative intent.

After enactment legislature becomes ex –officio. So the true meaning can only be fetched by analysing the intention of the legislature and it is contended the intention is well reflected from words itself. It is presumed that there is no defect or omission in the words used by the legislature. Legislature inserts every part for the purpose.

The courts are precluded from amending law or legislate in the guise of Interpretation.[26]Any creative interpretation would lead to destruction of judicial discipline. Hence self–restraint is to be promoted. The temptation to do judicial legislation should be eschewed by the courts.[27]This rule advocates the concept of self-restraint. But, it is required to be noticed that imposing self-restraint often renders injustice and inconvenience. This rule is based on the erroneous assumption that the words have a rigid and same meaning in all circumstances. This rule of interpretation is ill- suited for the modern social legislation. As in the case of London North & East Railway v. Berriman[28], the word ‘relaying or repairing’ was called for interpretation. As compensation was only paid in case of death while ‘relaying and repairing’ but in this plaintiff case plaintiff’s husband died while he was oiling. By applying the present rule of interpretation, court concluded that the ambit of relaying and repairing does not extended to include oiling, so plaintiff was denied. But if the purpose of the act is to examined, it could be concluded that the very objective of the act is to provide monetary compensation for the subsistence of its near one, since the bread earner of the family is no more. Applying self-restraint can sometimes defeat the very object of enactment.

Even if plain meaning give rise to unjust results which legislature never intended, still it has to be given effect. Curbing judicial creativity in some circumstances may be a hurdle in the road to serve the changing needs of developing society. Preventing courts from interpretative invasions would deviate from the objective of the statue. By combining the knowledge, wisdom and experience great judges develop the instinct of finding out that solution which harmonizes the words with the policy or object behind them that may be left away by the vice of self-restraint. Judges are the artists properly equipped to draw the canvass of justice. He shouldn’t be asked handbooks to guide himself. Judges must be left to rely in his instinctive sense then only proper demarcation can be made between the words and the purpose behind it. Exercising self –restraint will lead to continuing public evil which could have addressed by the creative interpretation. Imposing self-restraint will defeat the spirit of the enactment.

Golden Rule of Interpretation

In order to avoid blaming the legislative intent that tend to produce an unreasonable result, the judges are allowed to divert from taking the way of ordinary meaning of any enactment and liberated to adopt some other possible meaning which will avoid such result.[29]This rule gives due regards to the consequence arising from the usage of such enactment. This rule allows the courts to interpret any enactment in such a way that it will fetch results of social welfare. It may involve diverting from the plain meaning by indulging in creative interpretation. This rule comes into play when there is a manifest contradiction of the outcome with the purpose of the enactment or where literal rule fails to comply with the object of the act. In the cases where the obvious intention of the legislature is defeated and render unreasonable result then the courts are allowed to do violence to the words in order to produce some rational construction.[30] As in the case of Adler v. George[31], for the purpose of avoiding absurdity and extraordinary and vague results, where the Official Secret Act, 1920 used the phrase “ in the vicinity of”, the Court read the same as “in or in the vicinity of” so as to effectuate the remedy. If the language of a statute, in its literal interpretation, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, injustice, presumably not intended, interpretation may be put upon it which modifies the meaning of the words, and even the structure of the sentence.[32]

It provides the dynamism in the meaning so as to make it workable for time immemorial. The statutory interpretation of a provision can never be static but always dynamic. Many legal process thinkers like Hart and sacks rejected Intentionalism and offered Purposivism as the grand strategy for statutory interpretation.[33]The statue cannot be looked with a coloured glass, every provision has to be construed in the light of its consequences.

This adventure expands the court’s discretion as to interpretation.[34]Judges are allowed to attach that meaning which server “purpose” behind such a provision. By interpretative process, courts are supposed to realise the goal of the enactment.[35]

As analysed above, ‘literal rule’ prevents directs judges to impose self-restraint limiting the ambit of interpretation irrespective of the fact that it such prohibition over Interpretative invasions renders injustice or absurd results defeating the very object of the act.

Unlike ‘literal rule’ golden rule promotes the idea of Judicial activism. As in the case of Mohd. Ahmad Khan v. Shah Bano Begum[36], supplied wide meaning to the term ‘within the iddat period’ appearing in S.3(a) of Protection of Rights Divorce Act, 1986, as the maintenance not only limited to iddat period but also beyond that. As the purpose of the act to address the plight of the divorced Muslim women. Literally interpreting would have defeated the very object of the Act. The judges should play the role of reformer as it is beyond the endurance of sensitive minds to allow injustice to be suffered when it is so palpable.[37]

To promote and advance the object and purpose of the enactment, to avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the judges should always indulge in creative interpretations.[38]

Summing Up

Justice is the ultimate aim of law. Promotion of justice primarily the outcome of the application of particular legal principle into a particular case. It could be concluded that the court should not be restricted only to literal interpretation rather the judges should apply their judicial creativity so that the purpose and object of the legislature should be well served. But, wider Interpretation is the essential aspect of dynamics of constitution. It checks and balances the unfettered power of legislature in the domain of law making. Judicial Interpretations are the tools for bringing social revolution through judiciary. It can’t be ignored that the judicial self- restraint blocked the regulation in terms of social order. Applying self-restraint will make the constitution a strict jacket and not perpetual vehicle. So, freedom of judicial interpretation should be expanded to promote the moral foundations of the society. When judges are called to apply their judicial mind, it is left to their discretion up to which extent it should be extended or restricted. However, judges are not left to innovate at pleasure, judges are not the knight-errant roaming at the will

[1]Brock v DPP, [1997] 161 JP 412.

[2] K. Veeraswamy v. Union of India, (1991) 3 SCC 655.

[3]SusantaChatterji, For Public Administration: Is Judicial Activism Really Legislative Anarchy And Executive Tyranny, The Administrator, Vol.42 (2), 1997, p.9.

[4]Brayan A.Garner(ed.), Black‘s Dictionary 850 (1999).

[5] C. RavichandranIyer v. Justice A.M Bhattacharjee, (1995) 5 SCC 457.

[6]KihotoHollohan v. Zachillhu, AIR 1993 SC 412.

[7] Rattan Chandra Hira Chandra v. AskarNawax Jung, (1991) 3 SCC 67.

[8] M.C. Mehta v. Union of India, (1987) 1 SCC 395.

[9]IndraSawhney v. Union of India, 1992 SCC (L&S) Supp 1.

[10] B.P AchalaAnand v. Appi Reddy, (2005) 3 SCC 313.

[11] K. Veeraswamy v. Union of India, (1991) 3 SCC 655.

[12]IndraSawhney v. Union of India, 1992 Supp (3) SCC 217.

[13] ITC Ltd. v.  State of Karnataka, 1985 Supp SCC 476.

[14]Bachan Singh v. State of Punjab, (1982) 3 SCC 24.

[15] State of U.P v. Anil Kumar Sharma, (2015) 6 SCC 716.

[16]John Daley, ‘Definingjudicial Restraint’ in Tom Campbell 8c Jeffrey Goldsworthy, Judicial Power, Democracy and Legal Positivism (Aldershot, UK: Ashgate, 2000).

[17] Union of India v. DeokiNandan Aggarwal, 1998 SCC (L&S) 248.

[18]MadhuKishwar v. State of Bihar, (1996) 5 SCC 125.

[19]ThammaVenkataSubbamma v. ThammaRattamma, (1987) 3 SCC 294.

[20] Institute of Chartered Accountants of India v. Price Waterhouse, (1997) 6 SCC 312.

[21]Babu Ram v. State of U.P., (1995) 2 SCC 689.

[22]1844 1Cl&Fin 85.

[23] CIT v. T.V. SundramIyengar (P) Ltd., (1976) 1 SCC 77.

[24] Delhi Airtech services Ltd. v. State of U.P., (2011) 9 SCC 354.

[25]Nasiruddin v. STAT, (1975) 2 SCC 671.

[26]Sarah Mathew v. Institute of Cardio vascular Diseases, (2014) 2 SCC 62.

[27]Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230.

[28][1946] AC 278.

[29]Luke v. IRC, 1966 AC pp. 557.

[30]Ibid.

[31] 1964 (2) QBD 7.

[32]AIR 1955 SC 830.

[33]ShaileshDhairyawan v. Mohan BalkrishnaLulla, (2016) 3 SCC 619.

[34]Kehar Singh v. State, (1988) 3 SCC 609.

[35]Supra note 32.

[36] (1985) 2 SCC 556.

[37]SamimAra v. State of UP, (2002) 7 SCC 518.

[38]M/s. Girdharilal& Sons v. Balbir Nath Mathur, AIR 1986 SC 1499

In this article, Siddharth Kumar analyses the new regime of the Reserve Bank of India aimed at conquering the overwhelming stress of Non Performing Assets on the Indian Economy while charting the trajectory of its implementation. 

The Reserve Bank of India (“RBI) has in the past, undertaken various ambitious endeavours to combat the overwhelming peril of Non-Performing Assets including the Joint Lenders Forum, Corporate Debt Restructuring, Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets, etc. But, in the wake of the enactment of the Insolvency and Bankruptcy Code, 2016 (“Code”) which comprehends of an efficacious and holistic insolvency regime, the RBI has furthered its fight for the effective resolution of stressed assets by employing the Code along with a reformed regime imbued with a targeted and harmonised approach.

In view of the substantial overhaul of RBI’s NPA regime and its far-reaching implications, it is pertinent to chart its trajectory.

RBI and IBC – The first step

Sections 35AB of the Banking Regulation Act, 1949 introduced in 2017 amendment has empowered RBI to direct banks and financial institutions to initiate insolvency resolution proceedings under the Code for the resolution of their stressed assets and to form internal committees in order to effectuate this power.

In 2017, RBI had (vide press release dated 13th June, 2017) directed banks to initiate insolvency proceedings against 12 of the largest defaulters whose exposure amounted to 25% of the aggregate NPAs in the economy. The criterion for such determination was to identify those accounts with fund and non-fund based outstanding amount greater than Rs. 5,000 crores of which 60% or more have been classified as non-performing by banks. These accounts stand at different stages of resolution but there is solace in the fact that sound resolution processes have been set in motion for them. The biggest success story among these 12 has been Tata Steel’s buy-out of Bhushan Steel for a consideration of Rs. 35,200 crores against a total debt of more than Rs. 44,000 crores. Recently, the resolution plan of Monnet Ispat and Energy Ltd. (one of the abovementioned 12 identified companies) has been completed.

The Constitutionality of the aforementioned press release along with RBI’s statutory power under Section 35 AB had been challenged by Essar Steel Limited before the High Court of Gujrat, which ultimately affirmed the exercise of RBI’s statutory power to be just and upheld the its validity. The same just power is exercised under the new regime brought forth by the Notification dated 12th February 2018 (“Notification”).

The current position of the resolution of the above mentioned 12 companies is as follows:

1. Bhushan Steel Ltd: Bhushan Steel, the largest manufacturer of auto-grade steel in India had an astounding loan default of Rs. 44,478 crores. Tata Steel has acquired a stake of 72.65% in Bhushan Steel in pursuance of its resolution plan for a consideration of Rs. 35,200 crores, the single largest yield in any resolution under the Code, till date.
2. Lanco Infratech Ltd: A company that was one of the highest growing infrastructure companies in the entire world, had a loan default of Rs. 44,364 crores. The Committee of Creditors have moved for the liquidation of the Company before the Hyderabad bench of the NCLT.
3. Essar Steel Ltd: Essar Steel, one of the largest steel manufacturers in India and abroad, had a loan default of Rs. 37,284 crores. Currently, it is undergoing Corporate Insolvency Resolution Process (“CIRP”). It was the only company that had challenged its position among the 12, all to no avail.
4. Bhushan Power & Steel Ltd: A sister concern of Bhushan Steel Ltd., it had accumulated a debt of Rs. 45,000 crores. The Company has gone into CIRP and another steel manufacturer, JSW Steel, has submitted a ₹ 19,700 crore resolution plan to the former’s Committee of Creditors.
5. Alok industries: The Mumbai based textile manufacturer had defaulted on loans of Rs. 22,075 crores. The Mumbai Bench of the NCLT has admitted the application for insolvency against it. Further, Reliance and JM Financial have placed a joint bid of Rs. 5050 crores for it.
6. Amtek Auto Ltd: Amtek Auto, one of the largest integrated component manufacturers in India, had a loan default of Rs 14,074 crore. The Chandigarh bench of the NCLT has approved the bid by Liberty House bid to take-over Amtek for a consideration of Rs. 4,400 crores.
7. Monnet Ispat and Energy Limited: Monnet Ispat and Energy had defaulted on debt of Rs. 12,115 crores. A consortium of investors including Aion Investments and JSW Steel have acquired a stake of 88% in the company in pursuance of the insolvency proceedings.
8. Electrosteel Steels Limited: Electrosteel Steels is an Indian water infrastructure company based in Kolkata. The loan default by the company stands at Rs 10,273 crore. Vedanta Ltd. has acquired Electrosteel for a consideration of Rs. 3500 crores.
9. Era Infra Engineering Ltd: Era Infra Engineering Ltd, one of India’s leading infrastructure companies, had defaulted on loans of Rs. 10,065 crores. NCLT has since admitted the insolvency petition against it, filed by the Union Bank of India.
10. Jaypee Infratech Limited: Being a subsidiary of the Indian conglomerate Jaypee Group, it had defaulted on loans of Rs. 9,635 crores. Though the NCLT had admitted an insolvency application filed by IDBI bank, in an unconventional move, the Supreme Court of India intervened and stayed the order after home buyers filed petitions against the order. In the culmination of the proceedings in the case of Chitra Sharma and Ors. Vs. Union of India and Ors. the Apex Court had ordered re-commencement of resolution process against Jaypee Infratech and barred the firm, its holding company and their promoters from participating in the fresh bidding process. The Petitioners in this matter, being apartment buyers had contended that their interests found no representation in the Committee of Creditors. To remedy the situation, the Code had been amended clarifying allottees in a real estate project to be Financial Creditors, though the NCLAT had held to the same effect previously in Nikhil Mehta and Sons (HUF) & Ors. Vs. M/s AMR Infrastructures Ltd. decided on 21st July 2017.
11. ABG Shipyard Ltd: ABG Shipyard Ltd, an Ahmedabad based ship-building company, had defaulted on loans of Rs. 7,000 crores. With insolvency proceedings being initiated against it, UK’s Liberty House has bid a sum of Rs. 5200 crores to take over the debt-ridden entity.
12. Jyoti Structures Ltd: Jyoti Structures, a power transmission and distribution company, had a loan default of Rs 5,165 crore. The company became the first among the 12 companies to face the bankruptcy proceedings. NCLAT has since stayed NCLT’s order for liquidation for the company.

Overview of RBI’s new regime

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The new regime of the RBI brought forth by way of a Notification dated 12th of February 2018 operates on two fronts. Firstly, immediately upon default by the borrower, the lender bank or financial institution must label the account as a Stressed Account and therefrom report this information to the Central Repository of Information of Large Credits (“CRILC”) on all borrowing entities having an aggregate exposure of Rs. 5 crores or more, on a weekly and monthly basis. With respect to the same accounts, a Board approved Resolution Plan must be implemented by the borrowers to cure the default.

Secondly, in the case of large accounts having aggregate exposure of Rs. 2000 crore or more, a Resolution Plan is to be implemented by the lenders within 180 days from the date of default, failing which the lender(s) would be mandatorily directed to initiate insolvency proceedings against the Corporate Debtor, singly or jointly. The cause would arise immediately upon lapse of the 180-day period for resolution parting from the cavalier practices of the past that have led to the current predicament.

A Resolution Plan as stipulated in the Notification is meant to be of a wide and varying amplitude that comprehends of any actions/ plans/ reorganization to regularize the account by payment of all the overdue by the borrower, sale of the exposures, and change in the ownership or restructuring. This definition would even comprise the tools of the previous regime molded in a standardized and simplified form.

The new regime further lays out the prudential norms applicable to the Resolution Plans implemented by the lenders whether stipulated under the Notification or the Code which are needed to guide procedural intricacies. These norms relate to aspects like asset classification, conditions for upgrade of account, provisioning norms, additional finance, etc.

RBI’s new wave for insolvency

As the 180-day deadline on the pre-Code resolution of stressed assets by the banks has passed on 27th August 2018, a new batch of companies with an aggregate exposure of Rs. 2000 crore and above (individually) face insolvency proceedings under the Code in relation to whom there has been a failure to implement a Resolution Plan as stipulated under the Notification. These accounts represent a lion’s share of India’s NPAs amounting to Rs. 3,00,000 crores. The energy sector has been the most affected by this impending development as its defaults form a substantial part of the abovementioned NPAs.

The High Court of Allahabad has already dismissed a petition that had sought to stay the Notification of the RBI but various other companies, especially from the energy sector are seeking a stay on the insolvency proceedings incumbent upon them by approaching various judicial fora.

Conclusion

The standardised and targeted approach of the RBI in implementing the new framework for the resolution of stressed assets has been objectively successful but the same is under judicial challenge both from debtors as well as bankers because of its hard and fast approach of directing companies for insolvency upon failure of the implementation of a Resolution Plan within 180 days of default. Though stern action is a substantial tool to combat the drain of NPAs faced by the economy, it is essential to strike a balance between macro and micro interests. This exercise of the RBI in strengthening and overhauling its NPA regime with help of the Insolvency and Code, 2016 must be seen through without failure of execution that had marred the previous regime in order to effectively conquer the burden of NPAs in India.

– Siddharth Kumar

This article is written by Utkarsh Nigam of New Law College, Bharti Vidyapeeth University, Pune. The author through this article discusses the Leniency Programme of The Competition Commission of India. This article was written by the author while pursuing M.A in Business laws from NUJS.

Leniency Programme of Competition Commission of India

The Competition Commission of India has been set up by the Government under an Act of Parliament known as the Competition Act to promote competition in the market across various industries and also to prevent practises which would have adverse effects on competition. The main aim includes the protection of interest of consumers, to prevent practices having adverse effect on competition, to promote and sustain competition in market and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.

Cartel formation is a grave offence under the Competition Act. The Competition Commission of India has been authorized to enquire into any cartel and has the power to impose a penalty, on a person or an enterprise included in that cartel up to three times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of continuance of such agreement, whichever is higher. Also the Competition Commission has the power to pass the following orders-

1. A direct the parties to a cartel agreement to discontinue and not to re-enter such agreement
2. A direct the enterprises concerned to modify the agreement
3. Direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any
4. Pass such other order or issue such directions as it may deem fit.

Leniency Programme of the Competition Commission is inscribed under Article 46 of the Act. It is a type of an incentive to the cartel members who are ready to share information with the Commission. Also legally it can be said that it is a type of whistle-blower protection to a cartel member who is ready to share the information relating to the cartels. The Commission has framed various programmes to encourage the members, willing to provide information that are connected with the cartels or are in the process of infringing the competition laws, to come forward and disclose such anti-competitive agreements and assist the competition authorities in lieu of immunity or lenient treatment. The leniency programme is a sort of protection provided to the persons who come forward and disclose all the information about the cartel who would otherwise face stringent actions by the Commission if the cartel is detected by the Commission on its own.

Conditions for Availing the Leniency Programme

The conditions which should be fulfilled by an applicant for availing the benefits of lesser penalty regulations under Section 46 are-

1. The applicant should cease to have further participation in the cartel from the time of its disclosure unless otherwise directed by the Commission.
2. The applicant should provide all the vital disclosures in respect of violation of section 3(3).
3. The applicant should provide all the relevant information, documents and evidence as may be required by the competition commission from time to time for further investigation.
4. The applicant should also cooperate genuinely, continuously and expeditiously throughout the investigation and also in the proceedings before the Competition Commission.
5. The applicant should not conceal, destroy, manipulate or destroy or remove any relevant documents in any matter which could contribute to the establishment of a cartel or which would hinder any investigation process carried out by the Competition Commission.

The Competition Commission may subject the applicant to further restrictions and conditions in the matters of reduction of monetary penalty after due regard to-

1. The stage at which the applicant comes with the application of disclosure
2. The evidence already in possession of the government
3. The quality and the vitality of the information provided by the applicant.
4. The facts and circumstances of the case

Clikc here

The Commission under Section 46 has the power to provide a lesser penalty than what is mentioned under the Act if it is satisfied that any person related with the cartel has provided the Commission with the full disclosure as needed. The Section also states that if a disclosure is made after the report has been submitted, directed under Section 26 then no provision of lesser penalty shall apply to the case. Also the leniency programme or the lesser penalty shall be imposed only on the producer, seller, distributor, trader or service provider who has made true and vital disclosures and that the lesser penalty shall only be imposed if the person making the disclosure continues to cooperate with the commission until the proceedings of the commission has been completed. If in between the proceedings if a cartel member who had agreed to share the information in lieu of lesser penalty does not complies with the conditions on which the lesser penalty was imposed or has given false evidence or has not made any vital disclosures then in such cases the abovementioned persons may be tried for the offence with respect to the lesser penalty but shall also be liable to be tried to the imposition of penalty to which such person was made liable in the first place, had the lesser penalty not been imposed.

The content of the application for lesser penalty has been mentioned under Section 5(1) and 5(2) of the Act. This would include the following-

1. Name and address of the applicant or of the authorized representative or of the enterprise or enterprises in the cartel.
2. In case the applicant is based outside the country, then the address of communication in India including the phone number and the email address.
3. A description of the cartel arrangement including the aim and objective of the cartel
4. The details of the activities and the functions carried out for securing such aim.
5. The nature of goods and services involved.
6. The geographic market coverage of the cartel
7. The commencement and duration of the cartel
8. The estimated volume of business that would be done by the cartel
9. The names, positions, office locations and, wherever necessary, home addresses of all individuals who, in the knowledge of the applicant, are or have been associated with the alleged cartel, including those individuals which have been involved on behalf of the applicant.
10. Details regarding the competition authorities, forum or courts to which the applicant has approached or intends to approach in relation to the cartel.
11. A list of evidence regarding its nature and content which is provided in support of the application for lesser penalty
12. Any other information as may be directed or asked by the commission

Recent Amendments

The Leniency programme is available to those persons or enterprises that disclose the Commission about their role in the cartel and are ready to cooperate in the investigations carried out subsequently by the Commission in lieu of lesser penalty or in some cases immunity from the penalty. For the same purpose the Commission has made the Competition Commission of India (Lesser Penalty) Regulations, 2009 as the leniency programme has emerged to be a successful weapon to combat the cartels. The Regulations for the lesser penalty have been amended in the year 2017.  The amendments relating to the Regulations are-

1. The definition of applicant was amended in the new regulations. Before the amendment according to Section 2(1)(b) an applicant meant an enterprise that is or was a member of a cartel and submits an application for lesser penalty. But according to the new definition an applicant means an enterprise as defined earlier but will now also include an individual acting on behalf of an enterprise and submits and application for lesser penalty.

A new definition of party has also been included which encompasses an enterprise or an individual defined under section 2 of the Act and against whom the inquiry is instituted and shall also include the central and the state government.

2. The words and expressions used but not defined in the regulations shall have the same meaning as assigned to them in the Act, rules, and regulations or in the Companies Act, 2013 which was earlier being referred to the Companies Act. 1956.
3. The conditions for availing the benefit of lesser penalty have also been amended. Earlier vital disclosures had to be made in respect of violation of Section 3(3) but now the vital disclosures have to be made in respect of contravention of the Act. Also a new section regarding the enterprise has been inserted in which it states that if the applicant is an enterprise it is the responsibility of the enterprise to provide the name of the individuals who have been involved in the activities related to the cartel and for whom the leniency is sought by the enterprise.
4. Prior to the amendment to the regulations, the leniency programme allowed reduction in penalty or lesser penalty to a maximum of three leniency applications on a first come first served basis which were subjected to factors like quality of information and the nature of information. The amendment has changed this scenario and now has brought up provisions which will allow additional applicants to avail the benefits of this programme. Now the first applicant may be granted up to 100% reduction in penalty and the second applicant up to 50% and the third applicant or any further applicant may be granted up to 30% reduction. With this notification it will not only help the people who are willing to provide vital information on cartels after the first three applicants have already availed the benefits of the programme for disclosing evidence, but will also help the Competition Commission of India to bust the cartels more effectively in future.
5. There were no provisions in the earlier version of the regulations regarding the disclosure of confidential information submitted as part of the application by the Director General during the investigation process. But after the amendment was brought it has now been clarified that certain confidential information can be disclosed to any party by the Director General without the prior approval of the applicant for the purposes of investigation, only if the Director General thinks that such information is necessary to be disclosed. But in such cases where the Director General discloses any confidential information he may do so subject to the recording of the reasons for the same in writing along with the approval of the Competition Commission of India.
6. In regular course an inspection of the documents can be done during the investigation process without waiting for the report of the Director General. The amendment has now specified that the inspection of non confidential documents in the matters related to leniency will be allowed for inspection only after the Competition Commission has forwarded a copy of the Director General to the concerned parties.
7. The amendment of the regulation has also clarified specifically that the information in the leniency application submitted by the applicant should be in relation to the volume of business in India only.
8. The Regulations requires an applicant under Section 5(1) to apply before the Competition Commission for a marker. This provides for an overview of the conduct. Then once the Commission assesses the application it communicates the marker to the applicant. After this the applicant is required to file a detailed application, containing all information and evidence in its possession. The original Lesser Penalties Regulations required this detailed application to be made within 15 days from the date of requesting the marker under Section 5(2). But after the amendment, there has been some reprieve to the timeline. The detailed application should now be made within 15 days from the date on which the marker status is communicated to the applicant by the competition commission, failing which the applicant could lose its marker. Therefore it is suggested that while applying for a marker the applicant should have collected the information to the meet the deadline.
9. The procedure for grant of lesser penalty has also been amended in regards to the previous version of the regulations. Earlier for the same purpose the applicant or its representative could make the application containing all the information or can also contact orally or through e-mail for furnishing the relevant information to the designated authority. The authority thereafter within three days should have put up the matter before the commission. This time limit of three days has now been changed to five days.

The Competition Commission has framed the leniency programme so as to encourage the various elements connected with the acts of competition infringements such as formation of cartels to come forward and disclose such anti-competitive agreements so as to assist the competition commission in establishing a fair competition regime and also help in investigation of these anti-competitive agreements in lieu of lesser punishment or complete immunity.

The amendments done to the previous regulations are in line with the policies of the Competition Commission of India, which it ought to have been applying over the time. With a steady increase in the leniency applications, the amendments are a reflection of Competition Commission’s experience and learning from such matters. The amendments done to the regulations is likely to encourage more and more individuals or enterprises to come forward and disclose the information regarding the anti-competitive practises undertaken by players in lieu of immunities and lesser penalties which will result in the benefit of both the parties.

Leniency programme acts as a protection to those individuals or enterprises that are ready to disclose the true and honest facts about the anti-competitive agreements they are the part of in lieu of lesser punishment or immunity which in regular course have been more stringent if these agreement had been identified by the Competition Commission of India. The Commission in the present period has opened or has enlarged its views towards the leniency programme. The recent amendments done such as the inclusion of individual in the definition of applicant has given the option to many individuals to come forward and avail the benefit of the provisions of the leniency programme which could help the Competition Commission to eradicate the chances of anti-competitive agreements regulating in the market. The inclusion of provision regarding the extension of number of applications in case of leniency programme has been a major step towards the eradication of the cartels.  The acceptance of applications beyond the previous prescribed number has resulted in many numbers of applications coming to the door of the Competition Commission in lieu of immunity, which results in more disclosure of vital information regarding the cartels. This would directly help the Competition Commission to investigate these arrangements in a systematic manner with plethora of information.

Conclusion

The Competition Commission has to see that the confidentiality of the application and the applicant is maintained and is not leaked out to the outsiders which can result in threat to the applicant as well as to the investigation procedure conducted by the Commission. Regarding the confidentiality provision the amendment done to the regulation is such that only that information which is required by the Commission for investigation procedure can only be told to third parties only after the approval of the commission. The confidentiality of the application will not be done except in cases where the disclosure is required by law or where the applicant has agreed to such disclosure in writing without any objection to the same and where the disclosure has been made publicly by the applicant.

The leniency programme is a good and a correct option undertaken by the Commission so as to fight the cartelisation in the market which affects the equilibrium of the market. But it is also important to keep in mind that a leniency programme is ineffective until the cartels are punished. If there are not stringent laws regarding the same then such programmes are deemed to fail.

The role of the Commission is vital in every aspect of the programme starting from when the application regarding these arrangements comes to its doors till the proceedings have been completed. The Commission should take the application seriously and should take appropriate actions within the given time frame. It should check that utmost care is taken so as to maintain confidentiality. The commission should also check and review that the information provided by the applicant is relevant or is vital or not in regards to the application. It should cooperate with the applicant at every stage and conduct the investigation accordingly. The Commission also has the duty to see that the applicant must cooperate with them at every stage of the investigation as much possible and then only the leniency provisions be applied to the case of the applicant. If the applicant fails to do so the commission must make sure that the applicant be held liable and be tried according to the penalty provisions, if he did not had made the disclosures to the commission. The Commission also has the duty to check and investigate the market about the new methods and new ideas which should be incorporated in the leniency provisions so as to compel the individuals or enterprises to come forward to disclose relevant information regarding the arrangements which harms the equilibrium of the market.

Introduction of Cartels and anti-competitive arrangements in an economy is a like a venom introduced in an economy. To fight the same the Commissions or bodies related to the Competition laws or the anti-trust laws in a country have to include not only a robust regime so as to fight these arrangements directly but also have to devise a plan like Leniency programmes to hit these arrangements at a point where their existence comes in a place of danger. The introduction of leniency programme in India has been a major advantage to the competition policy of the country which has an aim of fair competition in the market. Provisions like this will help the country to eradicate these arrangements which results in major economic problems such as inflation, poverty etc. The major role is of the apex body regulating the competition laws which should be vigilant every time regarding these activities and should be approachable by persons who are willing to avail the benefit of these provisions which have been inscribed in the Act.[1][2][3][4][5][6]

[1] Referred http://unctad.org/en/Docs/tdrbpconf7d4_en.pdf

[2]Referred http://www.cci.gov.in/sites/default/files/advocacy_booklet_document/Leniency.pdf

[3] Referred https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=517

[4] Referred http://www.cci.gov.in/sites/default/files/regulation_pdf/regu_lesser.pdf

[5] Referred http://www.cci.gov.in/sites/default/files/whats_newdocument/178210.pdf

[6] Referred https://yoginakochar.wordpress.com/2017/08/23/amendments-in-cci-lesser-penalty-regulations/

This article is written by Utkarsh Nigam of New Law College, Bharti Vidyapeeth University, Pune. In this article, the author discusses the consequences of failure to get the shares listed in stock exchange named in the prospectus of a Public Company with regard to Relevant Laws. This article was written by the author while pursuing M.A in Business laws from NUJS.

Introduction

A prospectus of a company is a legal document issued by the company in case the company is issuing its securities by way of a public offer. Under Section 23 of the Companies Act, 2013 a public company can offer its securities in three following ways-

1. To the general public through way of prospectus.
2. Through private placement
3. Through an issue of right issue or bonus issue, in accordance with the provisions of the Companies Act and also the Securities Board of India Act, 1992 and the rules and regulations made thereby.

A prospectus thus is a document which is in the public domain for the potential investors, so that they can get the information about the company and make the investments accordingly. A prospectus acts like a link between the company and its potential investors and thus any misstatement in the prospectus by the company or by the officers of the company is treated with utmost strict actions under the Companies Act and the regulatory bodies like the Securities and Exchange Board of India.

Consequences of Failure with regards to Companies Act

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The Companies Act has provided for provisions which will get triggered in case there is a failure to do a particular act which has been mentioned in the prospectus issued by the company, these are-

1. According to Section 27 of the Companies Act the company cannot at any given time vary the terms of a contract specified in the prospectus of the company or for the object for which the company issued the prospectus, except subject to the prior approval and authority given by the company by way of a special resolution in a general meeting of the company.
   • Thus failure to get the shares listed by the company is a type of variation from the terms of the contract as the prospectus mentioned that the shares will get listed on a recognised stock exchange by the company.
2. The failure to get the shares listed on a stock exchange is a serious misstatement by the company which has been stated in the prospectus of the company. According to Section 34 of the Companies Act criminal liability is imposed on the company and its officers by way of lifting of corporate veil if there are any misstatements in the prospectus. It explains that where a prospectus is issued, circulated or distributed under the relevant chapter which includes any statement which is untrue or which misleads in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead the potential investors or the general public to invest in the company, every person who has authorized the issue of the prospectus will be liable under Section 447 of the Companies Act, which is a serious offence in its nature.
3. Section 447 clearly states that without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force a person who is found to be guilty of fraud shall be punishable with an imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. It is also provided that where the fraud in question involves a public interest the term of imprisonment shall not be less than three years. For the purpose of these provisions the term fraud has been defined under Section 447 which states that fraud is an act in relation to the affairs of the company or any body corporate which includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. This is directly linked with the issue of failure to get the shares listed as the shareholders were cheated by the company and were induced by the company to invest in their securities in lieu of the statements written or mentioned in the prospectus which talked about the recognised stock exchange on which the company was to get its shares listed for the purpose of trading.
4. Similarly, Section 448 also provides punishment for false statement. The section provides that if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder if any person makes a statement which is false in its materiality, knowing it to be false or if the statement made by him omits any material fact, knowing its material importance shall be held liable under Section 447 of the Companies Act.
5. Section 34 provides or imposes for criminal liability on the company and the persons involved but on the other hand Section 35 imposes a civil liability for any misstatements in the prospectus. The Section states that when a person has subscribed for securities of a company acting on any statement or statements which includes or omits any matter stated in the prospectus of the company which is misleading and if the person sustains any loss or damage as result of the misstatement given in the prospectus, the company and every person who is a director of the company at the time when the prospectus was issued by the company or the person who has authorized himself to be named in the prospectus or who has been named in the prospectus as a director of the company or has agreed to become the director of the company either immediately or after an interval of time or is a promoter of the company or who has authorized the issue of such prospectus and also includes the expert mentioned in sub section (5) of Section 26 of the Companies Act shall be held liable under Section 36 of the Companies Act. Every person held liable according to the abovementioned provisions is liable to pay compensation to every person who has suffered any such loss or damage as a consequence of such misstatement. The Section also provides that if it is proved that a prospectus has been issued with an intent to defraud the applicants for the securities of the company or any other person for any fraudulent purpose then as a result every person mentioned above shall be personally responsible without any limitation of liability for any loss or damage that has been incurred by the persons who subscribed to the securities of the company on the basis of such prospectus.
6. Section 36 provides that any person who either knowingly or carelessly makes any statement, promise or forecast which is false, misleading, deceptive or conceals any material facts so as to induce any other person to enter into any agreement for the purposes of acquiring, disposing, subscribing or underwriting any securities or by way of agreement secure any undue profit from the yielding of securities or the feign act of which is to secure undue profits to any other person from yielding of such securities or the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities or with a view to obtain credit facility from any bank or financial institution shall be held liable under Section 447 of the Companies Act. Thus Section 36 has a direct connection with the issue of not getting the shares listed by the Public company as the company has induced the public into investing money into their shares or securities very carelessly or in a manner which is false or is for a fraudulent purpose.

As the company is required to make an application and obtain approval from a stock exchange before the public offer is made or in simple words prospectus is issued after the approval is granted by the stock exchange for dealing of securities, therefore the act of listing and dealing the securities on the recognized stock exchange is mentioned in the prospectus. Thus not complying with what is mentioned in the prospectus would violate Section 27 of the Companies Act. Also as the statements were mentioned in the prospectus related to the listing and trading of the securities, relying on which the general public invested their money in the securities of the company, the failure to get the shares listed would trigger the liability of the Company and its officers under Sections 34, 35, 36, 447 and 448 as this is major misstatement in the prospectus. Due to the fact that the shares will not be listed on the stock exchange the general public will suffer huge losses and damage. The major consequence of failure to get the shares listed is that the security holders of the company, if they have the shares of the company will not be able to trade their shares in the open market and as a result would block their shares without any right of trading. The liabilities mentioned in the abovementioned sections are the consequences of failure to get the shares listed as due to the fact that shares will not be listed, which was earlier mentioned in the prospectus is a basis for triggering the liabilities on the person or persons involved in the issue of such prospectus or who has induced any other person to buy the securities of such a company who has not got its shares listed on the stock exchange. Being a material fact, this would also open the gates for enforcing Section 447 which has a criminal as well as civil nature. The definition of fraud is interpreted under the Companies Act in such a way that it covers every aspect of any illegal activity or any activity which will injure the interest of a person thus making it a serious offence under the Companies Act.

The provisions related to the securities which are to be dealt with in stock exchanges are mentioned under Section 40 of the Companies Act. The section also states under the relevant clause that if the company fails to comply the provisions of this Section or a default has been made in the compliance of this section then the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with an imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may exceed to three lakh rupees or both. As the matter of failure to get the shares listed involves the interest of quite a large number of people or the general public it is safe to assume that the penalties will be high and the provisions of the sections applied will be stringent as there is public money involved. The regulatory authorities such as SEBI and the relevant stock exchange also can take actions against the defaulting company.

Consequences of Failure in regards to other Laws

In case where the company fails to get its shares listed then under Section 22 of the Securities Contract and Regulation Act, 1956 where a recognised stock exchange acting in pursuance to the bye laws made by it, refuses to list the securities of any public company, the company within a specified time ( that is 15 days from the date where such reasons of refusal were given ) can appeal to the Central Government and if the Central Government sets aside the such refusal, the stock exchange will have to comply with the directions given by the Central Government. Also according to Section 22A of the Securities Contract and Regulation Act, 1956 if the recognised stock exchange acting in pursuance to the bye laws made by it, refuses to list the securities of any public company, the company shall be given appropriate reasons for the refusal and has an option to appeal to the Securities Appellate Tribunal within 15 days from the date of such refusal. The decision if sets aside the order of the Stock exchange then the recognised stock exchange will have to act in conformation with the order of the Securities Appellate Tribunal. The company is also having an option to file an appeal to the Supreme Court of India under Section 22F if the company is not satisfied with the orders of the Securities Appellate Tribunal within sixty days from the date of such order given by the Tribunal.

As the failure to get the shares listed is a misstatement involving public interest the Central Government, if thinks that it is necessary to investigate into the affairs of the company, may on receipt of the report of Registrar order an investigation on the company under Section 201 of the Companies Act. The Central Government can also if it thinks that it is necessary to investigate on the affairs of the company by the Serious Fraud Investigation Office then upon the recipe of the report of the Registrar or in Public interest may by order assign the investigation to the Serious Fraud Investigation office. The Serious Fraud Investigation Office shall appoint as many inspectors and the appointed persons shall have the power of Inspector mentioned under Section 217 of the Companies Act. The offence committed under Section 34, 36 and 447 are the grounds where the investigation can go to the Serious Fraud Investigation Office. The investigation going into the hands of the Serious Fraud Investigation Office is not a good sign for the company as the laws pertaining to the provisions of Serious Fraud Investigation Office are very stringent and the consequences of the investigation if found guilty are severe.

Also, failure to get the shares listed is bad for the image of the company as well as the company loses its trustability in the market. The creditability, the future plans etc. are also hampered as the investors will not be interested to invest their money in such an organisation which has acted in contravention to the provisions of the relevant laws applicable in the country related to the Securities Laws. The consequence of the failure of getting the securities listed to affect the public at large the most. The shareholders who subscribed for the shares mentioned in the prospectus of the company, after the allotment would not be able to trade the shares on any platform as the same has not been listed on any recognized stock exchange and thus the liquidity of the investors would get hampered. Thus shareholders are empowered with rights for the redressal of their grievances of any kind which includes the failure to get the shares listed. Firstly the shareholders or any person concerned with the same can make a complaint about the website SCORES which is the website of the SEBI complaint redressal system.

Conclusion

An investor or the general public who invest their money into the shares of a public company sometimes put their lifetime earnings in the securities in lieu of the profits which would be yielded by trading the securities of the company and if the shares fail to get listed then the small investors are heavily affected as there is no appreciable value that they can get through those purchased securities or shares. Thus the Public companies should make sure that all the formalities are completed and all the approvals are taken by the relevant regulatory authorities before the prospectus is issued to the general public. The matters stated in the prospectus should be true and fair and should reflect the true image of the company and should contain statements which are relevant to the issue of the securities and on the other hand should not contain matters which could induce the public to invest their hard earned money for a wrong purpose or for a purpose which they will not be interested in. A compliance officer should be mandatorily appointed by the company who is a company secretary whose responsibility is to check with the listing requirements given by the Securities and Exchange Board of India and the recognised stock exchange where the company wishes to lists its shares for trading. Thus it can be concluded and safely said that failure in getting the shares listed would have very severe consequences for the company as well as the officers of the company who have been mentioned in the prospectus of the company and thus the step for the same should be properly followed.

In this blog article Atreya Mathur & Varshini Ramesh discuss the legal framework for regulating E-Commerce in India.

The Need for Regulation of E-Commerce in India

The Indian e-commerce industry has been on an upward growth trajectory and is expected to surpass the US to become the second largest e-commerce market in the world by 2034 [1]. The industry is all set to record the third highest growth rate in the Asia-Pacific region this year and has more than tripled since 2015, however, it still has a long way to go. With the revolution in e-commerce and the fact that this is only the beginning of the technology sector in India bracing itself for a new era of e-commerce warfare, there is no doubt that India is in need of a regulatory framework that would bridge the various arms of the government. With the ever increasing pace at which e-commerce is growing in the country, a dire need can be felt for a proper framework.

The concept of Common Ownership

The fact that the e-commerce industry in India has grown in size and scale cannot be denied. This has attracted investments from foreign players in the industry. The widespread occurrence of common ownership of firms that compete in the product market, or horizontal shareholding, in this form, is relatively new and has not yet attracted a policy or enforcement action from the agencies. In order to reduce their risk, foreign investors diversify their portfolio by investing in competing firms to maximize returns, thus leading to consolidating tendencies. Their de facto control over the management of the company could weaken the competitiveness of the company against other target companies under their control.

Given how contemporary the issue at hand is, there has been no legislative or executive intervention, or any policy measures taken for the same. However, due to its dynamism, it has been dealt with in recent case laws by the courts in India.

Paradigm Shift in India

This issue has been loosely dealt with, in a recent judgment by the Competition Commission of India, in the case of Meru Travel Solutions Ltd v. ANI Technologies. The petitioners in the case raised concerns over the rise in common investors through foreign investment among the responding firms, which could potentially lead to a decline in their incentives to compete, as opposed to when two competing firms are owned by separate persons. The Court referred to the ‘Theory of Harm’ which puts belief in the fact that common ownership could lead to unilateral price increases which would benefit the investors, rather than the firms, and more importantly, try and orchestrate collusions, to earn collusive profits. The Commission noted that the company “SoftBank” seems to be an active investor, and has the ability to exert material influence on both Ola and Uber. The Commission’s view was that the said theory plainly states that such a control could have potential adverse effects on competition, and the ‘material influence’ exerted by “SoftBank” ranks lowest in the hierarchy of control, as recognized under Competition Law. The Commission conceded that there could be a potential effect on competition because of common investors affecting horizontal incentives to compete, but it could not go ahead with investigations on mere speculation. It was stated that trigger point in the Competition Act, 2002 is strictly, contravention of either Section 3 or 4, both of which had not taken place at that point in time. Moreover, the Indian market has witnessed a paradigm shift from the time when a monopoly was considered per se, bad, under the MRTP Act, 1969 to the current position, wherein ‘abuse of dominant position’ is considered bad under the Competition Act, 2002. Therefore, in order to investigate against a company, existence of alleged abusive conduct is a sine qua non.

The Draft E-Commerce Policy, 2018

The much awaited policy for e-commerce has been delayed by a period of 3 years only for the released draft to cause great agitation amongst investors, vendors and retailers who have for the first time come together, united, to go against the draft. A framework is definitely needed for standardization as well as to ensure necessities concerning digital transactions in India including fair price in the country’s digital marketplace are met with.

The draft E-Commerce Policy, 2018 seems to be a positive development in the sector which is a result of suggestions that have been received from industrial players and various industrial bodies. This is an indicator that the government is interested in consulting with other players in the sector to ensure that there is a policy that contemporarily meets the needs of the market and is dynamic enough to adapt to the vibrant economy of India. That being said, this draft policy has its own set of boons and banes.

The draft policy states that deep discounting has affected offline sales in a negative manner and that unregulated discounts must be brought to an end. It also states that direct or indirect influence on the price or sale of products and service of an online retailer may not be allowed to any group company investing in the online retailer. This move can lead to complete restriction on e-tailers from giving deep discounts. Business decisions should not be micromanaged this way.

To tax or not to tax?

It seems as though Flipkart and Amazon are facing heat from the IT Department as well. In a ruling regarding the treatment of “discounts” or marketing expenses by Flipkart, the Commissioner of Income Tax had ruled that they are to be regarded as capital expenditures, as they are used to establish their brand in the market. This means that it cannot be deducted from revenue and must be amortized over 4-7 years in their books. Prior to this ruling, many e-commerce firms that engage in deep discounts have been treating their promotional expenses as “revenue expenditure”, which would ultimately result in losses, thus exempting them from the 30% tax bracket. However, experts are of the view that the ruled reclassification will be a step forward to turn these firms profitable.

But in a huge turn of events, the Income Tax Appellate Tribunal, Bangalore Branch in the case M/S Flipkart India Private Ltd. v, Assistant Comissioner of Income overturned the reclassification and allowed them to be classified as revenue expenditure as these marketing expenses are quintessential to retain market share.

Even though the decision can be appealed, it may have added fuel to the already ravenous fire, that seeks to enforce a sunset clause on deep discounting.

Contrasting Position in the United States of America

It is pertinent to note that the threshold limits in USA are somewhat different. Pre-merger notification requirements as elaborated in the Clayton Act, with specific reference to Section 7, can be analysed under three facets [2] :

1. The provision is triggered when an acquisition takes place, through shares or assets.
2. The illegality of the acquisition must be proved based on the effect it can have on competition, but remains silent on the actual mechanism through which competition is actually dampened. Thus, it matters more that a structural analysis proves that an ill-effect on competition is likely to occur. [3]
3. It applies to both complete and partial acquisitions.

Section 7 grants an exemption to acquisitions made “solely for investment purposes” to preclude investments made by passive investors who do not control the company, from antitrust analysis. However, Courts have interpreted the provision to mean that, the degree of control is not the real test, but the ability to influence firm behaviour. Thus, “passive investors” are capable of raising concerns despite their lack of control. The US Courts have also recognized the possibility for such acquisitions to turn unlawful, even if they were initially “solely for investment purposes” and lawful [4].

Further, in another case, the Courts clarified their position that the ambit of “control” and stated that a lack of control in a partial-acquisition does not exempt the acquirer from penal action as under Section 7. Thus, the US antitrust regulators have received a license to probe cross-shareholding, even when the controlling stakes are low [5].

It thus becomes clearer that the passive investment exemption is untenable for institutional investors, as they are likely to demand corporate governance and voting rights in their target companies, in order to safeguard their investments [6].

Unlike in the case of India, the U.S only contemplates a potential decrease in competition which is a much more liberal approach and is thus more accommodative of a new age problem like that of common ownership.

Click here

The Way Forward

As stated earlier, a policy that phases out discounts will not be fruitful for the Indian economy. Such unregulated restrictions would do more harm than good.

India has a free market model, i.e. a free economy and free trade. The government instructing how a company should be run would be against the basic structure of a free market. The market in India must operate with minimum governmental intervention to maintain the free economy model. The government’s role is to ensure that there is a balance in the economy, so that the global investor community is not deterred.

On the other hand, the Indian economy is also centred on promoting Indian entrepreneurship. The draft e-commerce policy in this sense, could be extremely fruitful potentially having a positive impact on protecting entrepreneurs in India. In order to sustain the height of the economy as it is today, ensuring that there is no deterrence of foreign investors is must, as it has had tremendous impact on India’s growth. Such balance is needed now, more than ever.

The concept of differential voting rights can also be brought into picture via the e-commerce policy for foreign investors. This could potentially bring about the balance that is needed. As per Section 43(a)(ii) of the Companies Act, 2013, a company incorporated under the laws of India and limited by shares is permitted to have equity shares with differential voting rights as part of its share capital. In order to protect Indian entrepreneurs, differential voting rights can be given, restricting the amount of control that could be exercised by foreign investors, so that it does not exceed the control of the Indian investors. And as the Companies Act, 2013 allows the same, this would not be a new concept that is brought into play but a measure that has been in place and worked for years. This would be an effective and efficient means to regulate the control of foreign investors as it only has to be applied now.

The e-commerce policy as of now, does not focus on the issue of common ownership. It is safe to say that foreign investment would help the Indian economy as results of positive growth can be traced to the same. To ensure that there is regulation, a Non-Compete Clause should be made mandatory in Investor Agreements ensuring that an investor does not invest in more than two competitors in the same industry, to an extent where material control could be exercised over the companies and thus, checking the possibilities of collusive profits through unwarranted mergers.

Conclusion

E-commerce is still new, regardless of its growth. The imposition of any restrictions at this stage would be restrictive and inhibit the sector from reaching its possible potential. To facilitate the same and ensure efficiency, regulatory mechanisms are needed.

Having differential voting rights for foreign investors and recognizing the concept of common ownership, which has historically showcased the tendency to obtain collusive profits, could be a step forward to ensure such regulation along with the inclusion of a non-compete clause in investor agreements.

References

[1] https://www.ibef.org/industry/ecommerce.aspx?cv=1

[2] Fiona M. Scott Morton, Herbert J. Hovenkamp, “Horizontal Shareholding and Antitrust Policy”, The Yale Law Journal, 2018.

[3] Herbert Hovenkamp & Carl Shapiro, “Horizontal Mergers, Market Structure, and Burdens of Proof”, 127 YALE L.J. 1996 (2018).

[4] FTC v. E.I. Du Pont de Nemours & Co., 729 F.2d 128

[5] Wilkinson & White, Private Equity; Antitrust concerns with partial acquisitions, https://heinonline.org/HOL/LandingPage?handle=hein.journals/antitruma20&div=31&id=&page=

[6] Elhauge, 2016

Update: we have shared these details with bangalore police already and waiting for them to get back. We will also file a complaint in writing after consulting cyber law experts.

Do you use online dating sites like Tinder, Woo, OKcupid, Coffee and Bagel, Hinge etc? Have you ever considered that you can be a victim of blackmail on these websites?

This story starts several years back. It was an evening in Delhi, I was talking to one of my good friends. While exchanging funny Tinder stories, I told him about the panicky calls we get on our helpline. He was shocked to hear about this. Then something interesting happened. He agreed to volunteer for an experiment.

If you are regular on online dating websites, you must have come across some profiles of women that seem strange. These women offer their phone numbers right on their profile. Why would someone do that?

They are actually baiting you.

They want you to fall in their trap, and they are making it easy.

What happens when you actually contact them? Here are a few variations I have seen:

They will invite you for a sex chat. Then they will make a video of you. Then they will threaten to send it to your facebook contacts.

Else they will meet you. Call you to a hotel or a house. Then they will threaten to frame you into a fake rape case or molestation case. Or maybe a marijuana case! There may even be policemen, real or fake, difficult to say, involved in such a racket at times.

Many a times young boys are asked to share nudes, or come online and do certain acts. What happens as a result is age old black mail.

My friend Saransh offered to volunteer. A few months back as we were discussing something and I reminded Saransh about his promise. I have started a cyber crime defence alliance, and the knowledge will be very useful.

I didn’t think he will get back to me. But today he did, and with some amazing material!

Let’s deep dive into his story!

—

I was checking out profiles on Hinge when I saw it. I knew something is strange about the profile. It had a phone number on it, so I directly contacted it.

Then here is the conversation that happened.

Note that I was quite sure that this is not the real person whose picture is being shared.

Still, I continued talking. Lets see where this goes.

She gives me her phone number, asks me to paytm the money.

Isn’t this too quick? Well. Let’s see.

I try to elongate the conversation. However, she is fixated on the payment.

The person even asks me for a picture. I get a little worried, but got to go through this, I was intrigued.

I offer to do a video chat on whatsapp after some thinking knowing that whatsapp is encrypted and it will be hard to record it with an app.

She says apparently she just wants to find out if I a broker. As if. If I am a broker I can send the picture of any random dude. But I do not want to share a random person’s picture. That will be totally unethical.

As I don’t respond for a minute, she begins to intimidate me.

Just see the change in attitude.

I guess she looks up my number on trucaller. Finds out some details and tell me where I work. It’s no magic. I know very well that my trucaller shows my work email. She can also google my name and find out where I work from linkedin.

I act surprised. I send 200 rupees to the paytm she mentioned. Lets see what happens.

This is where the game should begin if she is not a girl, because she can’t do a video chat with me if she is actually a dude!

Lo and behold.

The person, who I am now sure is a dude, starts talking strange. The scammer starts claiming that he doesn’t want the money. This is how he begins to take moral high ground. He actually returns my 200. Obviously, he wants to earn a lot more. So he lets the small money go.

Right after this I get this message on my SMS!

Now I really got scared! I begin to get a call. I am little out of depth here.

Honestly speaking, I was beginning to be very worried. I totally experienced the threat. If I was feeling this, then imagine what a victim may feel. What am I getting myself into? What if he sends this to people who love me and care for me? As the person begins to call me repeatedly, I call Ramanuj. What should I do next? He tells me to play along a little while more. 

He also warns me repeatedly to act dumb, guilty and very scared. 

He also asks me to start recording the calls.

Now things get really interesting. I get another message from another number.

And then we talk and things escalate. Ramanuj told me to act scared and confused, so I do that.

The scamster starts off by introducing himself as this person from this social organization in Bangalore which has partnered with the government to do such sting operations.

Our first call is all about morality. He tells me how poor women are framed because of animals like me. Apparently he will report me to CBI in 10 minutes. He demands to confirm that I have received my money back on my Paytm. Apparently that conclusively proves that I am engaging in cyber prostitution.

I am laughing my guts out because Ramanuj already told me for prostitution case to exist there must be a woman involved. This is a guy blackmailing me, and telling me how he is from an NGO trying to expose people who are paying online for cyber sex.

I get on a call with Ramanuj to plan the next step. Ramanuj is not at all perturbed by the claim and moral lecture of the person. I was considering that this may be actually from a genuine NGO. Am I getting myself into trouble? I was quite nervous at this point. I don’t want to get screwed trying to volunteer into an experiment for Ramanuj. After all, the person is claiming he just unmasked a minister in the same way. Also he is claiming that he is from Karnataka Rakshana Vedike, which when i google turn out to be a real organization.

Ramanuj laughs.  He says to not worry at all, as the person is just trying to scare the hell out of me at the moment. Apparently this is all a part of an well thought out scheme. The person will soon ask for money, so I should act very worried and scared till then. I should in fact beg to let myself go, so that the person quickly moves on to the next stage instead of focussing on scaring me.

At this stage it’s all about fear and making the victim feel bad.

Stage 2

The chap finally comes to the point as I repeatedly ask what do you want from me. He tries to figure out how much I can give.

As I say nothing, and keep asking him for a figure, he finally gives me one. Rupees 67,000, and he will never call me again, I will never hear from him, and I can peacefully live my life.

He even gives me a phone number to transfer money through Google Tez.

I call Ramanuj again, armed with this information. Ramanuj tells me to ask for an account number. Surprisingly, the person is very confident now. He even gives me the account id.

Ramanuj tells me to send Rupees 100 to the account to find out if it is real. Is he even giving us his real account or just testing us? I add him as beneficiary. It works. Yes, it is real account. 

Here is the screenshot.

Our experiment is complete Ramanuj says. So I spare my rupees 100.  We just got to hand this over to police now for investigation. We will also publish this case study to make people aware of what exactly is going on. Will Tinder or Hinge take responsibility?

You might very well know about the boy who got kidnapped and killed by his tinder date. The dating apps are extremely unsafe.

I was very surprised that a thing like this could be so well thought through. I could only imagine the state of a person who has no idea of what is happening to him and no one to talk to.

I am very grateful to Ramanuj for actually taking up such an issue which will surely impact a lot of vulnerable people.

Over to Ramanuj.

——

I am sure you are really shocked and scared after reading this story unless it already happened to you.

How do you deal with these situations?

First of all, do not be scared. Using a dating app is not a crime, not is sex chat. Of course, the threat that a person may leak your personal photos or nudes or videos on the internet or send them to your colleagues or to your family is extremely scary.

The simple solution to this is that do not share such videos and photos with anyone. Read about revenge porn here. And here is guide to how to handle sexual blackmail over nude pictures.

Please, please, please report these incidents to police. If you have the means, get help from a trustworthy lawyer who can help you to file the right complaint and guide through the process.

How do you handle someone who is trying to extort money from you

They are soon going to ask for money. Or they will ask you to do something you do not want to do.

Number one rule is that do not start doing what they want you to do. It will not help. It will only put you into a bigger trouble.

Stop. Talk to your family. Talk to your trusted friends and ask for advice. Call a helpline. Call a lawyer. Never handle a blackmailing case alone. This will help you to create evidence and your people will stop you from making big mistakes.

Then do this step by step:

1. Get some identifiable details. Phone number is good to start from. But usually getting a fake phone number is easy by using someone elses id. The best thing to get is an account number. PayTM may be harder to track as there are many paytm accounts which have no KYC. Google Tez can be tracked, but account number is best.
2. Act dumb, scared, and confused so they trust you. The scamsters are scared that they may be exposed all the time. If they feel you are smart, brave, not getting scared, they will leave you alone, but may share your post your personal details online and open you up to harassment. The first step should be to file a police complaint before you confront so that they don’t try any tricks.
3. Write a police complaint with all evidence and get it checked by a lawyer. Then give it to police.
4. Then share the picture of police complaint on your Facebook. This will insulate you from any social stigma as people come to know your side of story. Now even they will be very afraid to share your pictures or video, because it is already under police investigation. They will get themselves in more trouble and more serious offence if videos are leaked. So they will probably destroy all videos and pictured to destroy evidence. If other people have access to the same, even they will be scared to circulate them because the matter is under police investigation and they would not want to get in troubles.
5. Police complaint usually nukes the situation in your favour. But you need to tell your parents and friends. You can’t hide the situation from them.
6. For women who find themselves blackmailed, I advice that you can tell your parents that the video is doctored. Why? Because we may have even seen alleged sex tapes of Aishwarya Rai of Priyanka Chopra which are obviously morphed. Why should you admit that your nudes are real and not morphed? The punishment is anyway the same for the person who will then get arrested.

Things to keep in mind while filing police complaint

1. Take two copies of complaint. One is to be made a “received” copy and returned to you by police. This copy is your proof of complaint and must remain with you.
2. If police refuses to lodge your complaint, do not argue with them. Come back, we will then send it by registered post, acknowledgement due to SP/commissioner of the district. We will also send the same by email. Then you can go and meet that senior official and request to register FIR. At this stage, almost all such complaints will get registered.
3. If they still don’t, you need to definitely talk to a lawyer. We have to go to the magistrate and get a direction to register FIR. This is rarely required, in maybe less than 5% of cases especially when such obvious cases of crime are involved.
4. Remember to give all the evidence you have, such as screenshots, copy of audio recording (in a pen drive) or soundcloud link etc to the police along with your complaint.
5. Never argue with police. If they are uncooperative, come home and consult your family, friends and a lawyer. You can even post on social media. Contrary to what you may think, most people on social media will support you and help you out.
6. Remember, you are not the criminal. Online dating or sex is not the crime. Blackmail, extortion, sharing private images over internet and even threatening to do so is. We are on your side, and we will pin down the criminal.

Some things to keep in mind while facing online bullies –

1. They will try to be your friend. They will try to even appeal to you emotionally. They will try to be nice to you and then suddenly rough.
2. They might act as an activist initially or someone who is doing this to protect the girls in their community.
3. Your biggest weakness is your fear. Don’t be scared.

Always Remember – In this ever consuming online world, try to step out and form genuine relationships instead 🙂 You will be surprised what the world has to offer.

Here are the calls Saransh had with the scamster/cyber criminal. Listen to them, understand how to bait the criminals and then expose them.

Call 1 – https://vocaroo.com/i/s0kQhSPjOep6

Call 2 – https://vocaroo.com/i/s17FM2PtAZUn

Call 3 – https://vocaroo.com/i/s0MVSeqhmGHG (Contains sensitive bank information)

Call 4 – https://vocaroo.com/i/s0dX1J6gECbV (Contains sensitive bank information)

Let’s take the fight to cyber criminals. Let’s trap them. Why should they have all the fun?

If you want to volunteer for this activity to exposing cyber criminals, reach out to [email protected] for guidance.