Perpetual injunction

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January 20, 2024

This article has been written by Namrata M K, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Table of Contents

Introduction

An employment contract is an agreement between the employer and an employee that specifies the length of employment, remuneration, rights and responsibilities, termination of the contract, etc. It helps both parties come to a settlement in the event of a future dispute. This is one of the most important contracts because it delineates the rights and duties of the employer and employee. There are various clauses in an employment contract, and some of them are as follows:

Appointment
Terms and conditions
Rights and duties
Salary and benefits
Compensation
Notice
Confidentiality and non-disclosure clauses
Restrictive clauses
Termination

The clauses in an employment agreement change with the agreement itself. Each contract will demand a different set of clauses. A non-solicitation clause comes under restrictive clauses, i.e., it seeks to restrict former employees of a company from soliciting their previous colleagues or customers or any ideas that they gained from such employment to benefit themselves after their termination from such a company.

What are employment contracts

Employment contracts are entered into by employers and employees before they join the company. An employment contract lays down the most important matters concerning the employment of the employee. This lays down rules and obligations to be followed by the employee and also lays down the consequences of not doing so. So in a way, this contract acts as the foundation on which the employee works for the employer. Employment contracts can be written or oral. There are various employment contracts, and some of them are:

Full-time employment- This is an employment contract wherein the employee is supposed to work a minimum number of hours a week, and it is usually given to permanent employees.
Part-time employment- In this type of contract, employment is usually given to temporary employees or workers who work fewer hours compared to permanent members.
Fixed employment- In this type, the period of employment is fixed. The starting date and an ending date are mentioned in the employment contract.
Zero-hour employment- In this type of employment, the employer calls the employee in hours of need and is paid on that basis.
At will contract- As the name suggests, employment can be terminated by either party without notice or cause.

An employment contract usually discusses matters such as terms and conditions of employment, salary, specific tasks, benefits, compensation, probation, termination, etc. Apart from these matters, it may also contain certain other clauses, such as non-compete clauses, non-solicitation clauses, and confidentiality clauses. Non-solicitation clauses are taken into consideration when an employee is terminated. What non-solicitation clauses are and how they are enforced are discussed below.

Meaning and definition of non-solicitation clause

The word “solicit” means to make a petition. A non-solicitation clause in an employment contract is a clause that restricts a former employee of the company after his termination from poaching any previous clients, other colleagues, or any other ideas of the employer to benefit his own needs. So basically, what this clause does is protect the employer from any act of the former employees that seeks to extort its other employees or customers. Non-solicitation clauses are those that come into effect after the termination of an employee. A non-solicitation clause is similar to a rule in a contract that prohibits you from trying to take clients, associates, or business prospects from your present company if you quit.

A non-solicitation clause is a contractual condition that prohibits workers from actively pursuing specific companies or individuals from their previous workplace for a predetermined amount of time and within predetermined geographic boundaries following their departure from the company. The purpose of the non-solicitation clause is to safeguard the employer’s stability, business relations, and confidential information by prohibiting outgoing employees from attracting clients, customers, or coworkers to a rival company. These clauses are designed to address certain specific concerns and challenges that may arise when an employee is terminated from employment.

For example, let’s say Mr. A, who has been working for the company ABC for the past 15 years, has been terminated. After his termination, he started his own company and started to solicit the employees of his previous employment. Now that the employment agreement entered into by Mr. A and the company ABC contains a non-solicitation clause that prohibits such solicitation by Mr. A, the company can proceed against Mr. A for going against the employment contract.

Need for non-solicitation clause in employment contracts

The need for non-solicitation clauses can be studied with an example.

Suppose Mr. A, an employee of company ABC, is terminated, and after the termination, he starts his own company that is more or less concerned with the same business. He started soliciting his former employees to quit their jobs and join his company. Under these circumstances, without a non-solicitation clause, it is difficult for the company to take any action against Mr. A. Whereas if the employment contract had a clause that prohibited the former employees from soliciting, then it would have been easier for the company to take action against Mr. A.

Therefore, one of the needs for a non-solicitation clause in an employment contract is that it makes it easier for the company or employer to take action against such former employees who try to lure their present employees or their clients or customers.

A non-solicitation clause also ensures that once an employee is terminated, he will not be able to disclose the confidential information that he had with him while he was part of the company. It prevents former employees from disclosing any information related to the company to any third party after their termination.
This clause indirectly brings stability to the company. It prevents other employees from quitting their jobs because of the influence of the former employee.
It also provides for compensation or other reliefs to be provided to the company or third party in case of a violation of this clause. If the terminated employee discloses the confidential information concerned to any third party, then the clause must contain terms and reliefs to be sorted out for the company as well as the third party concerned.
In highly competitive industries, having staff that is not easily accessible to competitors can provide an advantage. Non-solicitation agreements help to preserve this benefit in part.

Non-solicitation clauses in an employment contract provide the company with a lot of benefits when there is a termination of an employee. It protects the relationship between companies and other employees, clients, or customers.

Advantages and disadvantages of non-solicitation clause in employment contracts

As discussed earlier, non-solicitation clauses are much needed in today’s time and age. To be clear, these are the most important advantages of a non-solicitation clause in an employment contract.

It protects the relationship that the employer has with the employees, customers, or clients.
In a competitive world, this clause gives an edge to the employer by preventing other employees from joining other companies that compete.
It also helps in preserving confidential information from being leaked by terminated employees.
It gives clarity regarding what the former employees can or can’t do when they are terminated.
It brings about stability as well as enhances the smooth functioning of the company even after the termination.

Some of the disadvantages of the non-solicitation clause that can be argued are:

The non-solicitation clause indirectly restricts the freedom of the employee to continue to choose to carry on the business that he wants to. It puts restrictions on the former employee’s ability to pursue job opportunities.
These restrictions, in the bigger picture, will have an impact on competition and innovation.
Non-solicitation clauses without any valid reasons create much greater problems to the extent that they may affect hiring new employees for the company.
At the end of the day, the non-solicitation clause will not hold up if the employees choose to leave the company at their own will.

Enforceability of employment contracts

When it comes to the enforceability of a non-solicitation clause, it differs across the globe and is subject to the specific laws and regulations of each state. However, universally speaking, there are some common grounds for the enforceability of such agreements, one of which is to see if such clauses are reasonable. The reason for placing such a clause must be clear, and if there are no sufficient reasons behind it, then such a clause will be invalid. Another one would be that it must protect legitimate business interests, i.e., relationships between clients, customers, and employees. However, in India, we see that courts tend to lean towards the employee side, as these types of agreements are considered to be restrictive in nature. Section 27 of the Indian Contract Act, 1872, makes its position clear by saying that agreements that are in restraint of trade, occupation, or profession are void. Courts have held the opinion that these agreements will be valid up to the date of employment but will lose their validity once the employee is terminated, i.e., once the worker is no longer an employee of the company, they cannot put restrictions on his employment opportunities for the future. Non-solicitation agreements are accepted in India; however, each one’s enforceability varies according to the particulars of each case. In Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd. (1967), the Supreme Court laid down a certain foundation for understanding how the courts may assess the scope of non-solicitation clauses. The Court held that such clauses must be reasonable in scope and duration and must not be used to prevent a former employee from pursuing their livelihood.

The Court found that the non-solicitation clause in the case at hand was unreasonable because it was overly broad and would have prevented the former employee from working in his field of expertise. The Court also found that the clause was for an unreasonable duration, as it would have prevented the former employee from working for a period of two years.

The Court’s decision in Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd. provides important guidance for employers and employees on the enforceability of non-solicitation clauses. Employers should carefully review their non-solicitation clauses to ensure that they are reasonable in scope and duration. Employees should be aware of their rights under non-solicitation clauses and should not hesitate to challenge unreasonable clauses.

In addition to the factors considered by the Supreme Court in Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Co. Ltd., courts may also consider the following factors when assessing the scope of a non-solicitation clause:

The nature of the business and the relationship between the employer and employee.
The geographic area covered by the clause.
The duration of the clause.
The reasonableness of the clause in light of the employee’s position and responsibilities.

If a non-solicitation clause is found to be unreasonable, it may be unenforceable. This means that the former employee may be free to solicit the employer’s customers or employees.

Non-solicitation clauses can be a valuable tool for employers to protect their confidential information and customer relationships. However, it is important to ensure that such clauses are reasonable in scope and duration. By carefully drafting non-solicitation clauses, employers can protect their interests without unduly restricting the rights of their employees.

Further in the U.K., Mason and Another vs. Provident Clothing and Supply Co. Ltd. (1913) held that the purpose of a non-solicitation clause is only up to the extent of providing adequate protection to employers legitimate business interests. The United Kingdom House of Lords found that the clause in question was unreasonable and therefore unenforceable because it was too broad and would prevent the employee from pursuing his livelihood. The court stated that the clause should only be upheld if it is necessary to protect the employer’s legitimate business interests and that it should not be used to prevent the employee from competing with the employer after the termination of his employment.

The Court’s decision in Mason and Another vs. Provident Clothing and Supply Co. Ltd. is significant because it provides guidance on the enforceability of non-solicitation clauses in the U.K. The decision makes it clear that such clauses must be reasonable and narrowly tailored to protect the employer’s legitimate business interests. This decision is helpful for employers and employees alike, as it provides clarity on the scope of non-solicitation clauses and helps to prevent disputes from arising. Indian employment laws and judicial interpretations are evolving day by day, and these will have an impact on the enforceability of these agreements as well.

Conclusion

Non-solicitation clauses in an employment contract are designed to protect the company from unfair competition and the loss of confidential information. These clauses typically prohibit an employee from soliciting the company’s customers, clients, or employees for a certain period of time after termination of employment.

There are a number of benefits to having a non-solicitation clause in an employment contract. First, it can help to protect the company’s goodwill and reputation. When an employee leaves a company, they may be tempted to take their customers or clients with them. A non-solicitation clause can help to prevent this by prohibiting the employee from soliciting the company’s customers or clients for a certain period of time.

Second, a non-solicitation clause can help to protect the company’s confidential information. When an employee leaves a company, they may have access to confidential information that could be used to compete with the company. A non-solicitation clause can help to prevent this by prohibiting the employee from using or disclosing the company’s confidential information for a certain period of time.

It is important to note that non-solicitation clauses are not enforceable in all cases. In order for a non-solicitation clause to be enforceable, it must be reasonable in scope and duration. For example, a non-solicitation clause that prohibits an employee from soliciting the company’s customers for a period of one year would be considered reasonable. However, a non-solicitation clause that prohibits an employee from soliciting the company’s customers for a period of ten years would be considered unreasonable.

References

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Criminal negligence under IPC

By

Mariya Paliwala

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January 19, 2024

This article is written by Pujari Dharani. The article exhaustively talks about the offence of criminal negligence which is embodied in Section 304A of the offence and how it is different from culpable homicide amounting to murder. The rashness or recklessness act and negligent act are in detail.

It has been published by Rachit Garg.

Table of Contents

Introduction

Many people die because of negligence of someone such as motor vehicle accidents which occur due to rash driving, medical negligence by doctors, negligence of bus drivers and conductors. The victim not only can claim damages, as per the law of torts, in civil courts but also can initiate criminal action against the person or charge him/her under Section 304A of the Indian Penal Code, 1860 by lodging an FIR or complaint, if his negligence is gross.

What is criminal negligence?

The expression “criminal negligence” is not explained in the Indian Penal Code, 1860 (hereinafter mentioned as IPC). According to Justice Straight, criminal negligence is grave and culpable neglect, as defined in the case of Empress of India v. Idu Beg (1881), as the wrongdoer fails to perform a duty with reasonable and proper care and caution to avoid any kind of injury, either to the public at large or to a specific person. He further stated that the criminality of the wrong for negligence depends upon the factors like risk of doing such an act and its result. The Supreme Court also came forward to define this word, criminal negligence, in Mahadev Prasad Kaushik v. State of Uttar Pradesh & Anr. (2008), as an act of commission or omission, where a reasonable and prudent person, who follows the ordinary conduct of behaviour that was formulated by the state to guide us in a civilised society, would not commit such an act or mandatorily perform it respectively. That means the commission of an act is said to be negligence when a prudent person will never do it in such similar circumstances. Also, if a person omits to do something, which a reasonable man will do no matter what, such omission by him/her will constitute negligence. Besides this, negligence, as an essential ingredient of criminal negligence, has to be established by the prosecution and such negligence must be gross; only then, it amounts to criminal negligence. Mere error of judgment is not treated to be “negligence” in criminal law. Negligence should be high to make the accused punishable under criminal law, unlike a simple breach of duty amounting to civil liability.

Criminal negligence under the IPC

Section 304A deals with offences “causing death by negligence”, and, thus, indicates the offence of criminal negligence. This section was added to the draft of the IPC after 10 years of its enforcement i.e., in the year 1870 through the IPC (Amendment) Act, 1870 to include such acts, which caused someone’s death, committed by a person with no intention and knowledge of such a consequence. Those acts which do not fall under the purview of Sections 299 and 300, come under Section 304A of the IPC as it categorically states “not amounting to culpable homicide”.

Essential ingredients of Section 304A of the IPC

The following are the essential ingredients to be fulfilled to make a person punished under Section 304A of the IPC:

Death of an individual

Section 304A of the IPC comes into play only when the victim has died, unlike civil negligence where the plaintiff, who sustained injuries, can claim damages in civil courts. For inflicting criminal liability, the proof of death of the victim must be produced by the prosecution.

Such death was due to the result of a rash or negligent act by the accused

The death of an individual should be the direct and proximate result of a rash or negligent act of the accused. Here, such rash and negligent act of the accused is causa causans i.e., immediate cause. Whether it is causa sine qua non i.e., inevitable cause is not enough to be clarified as an immediate cause. There should not be any intervention of another person’s negligence.

The word “act” includes an illegal omission. Thus, illegal omission also amounts to an offence, if such omission is rash or negligent, as noted by the Calcutta High Court in the case of Captain D’Souza v. Pashupati Nath Sarkar (1967).

The act of the accused shall not amount to culpable homicide

The act of the accused does not fall under the category of culpable homicide i.e., Section 299 of the IPC and murder i.e., Section 300. Thus, the rash and negligent act should not have the element of intention and knowledge of causing the death of a person, as held by the Supreme Court in the case of Shankar Narayan Bhadolkar v. State of Maharashtra (2004).

In the case of Shankar Narayan, the accused used a loaded gun from close range. The intention or knowledge of the death of the victim is evident from the act of the accused. Hence, Section 304A was not attracted.

In Abdul Ise Suleman v. State of Gujarat (1994), the accused took a plea that his act of shooting at a fleeing person and hitting another person causing his death was an act of rashness or negligence. However, because of the presence of intention, the Court convicted the accused under Section 302 read with Section 301. Therefore, the presence of intention on the part of the accused will attract greater punishments under various other sections of the IPC, but not under Section 304A.

Mens rea

Mens rea or guilty mind is the state of mind which is required to invoke criminal liability on a person and, therefore, constitutes one of the essential elements of the crime. We know that the criminal negligence embodied in Section 304A does not include an element of intention. However, in the IPC, words like “intentionally”, “voluntarily”, “dishonestly”, “fraudulently”, “rashly”, and “negligently, among other words, indicate mens rea i.e., the state of mind of the accused. Every offence defined in the IPC has the element of mens rea in some or other form and the offence does not always contain the element of intention, which is the gravest form of mens rea; any other forms like negligence or recklessness can also be considered as mens rea. Hence, in the case of Section 304A, negligence, recklessness, indifference or any other callous attitude arising from a negligent and rash act in dispute is mens rea. Thus, the guilty mind, in case of culpable rash and negligent act, means rash or negligent mind, not intentional mind.

Coming to criminal negligence, the doctrine of mens rea applies. The Supreme Court decided in the case of P.B. Desai v. State of Maharashtra & Anr. (2013) that mens rea is deemed an essential ingredient to invoke the criminal liability of negligence on a person because the question in criminal law is whether the accused deserves to be punished with imprisonment or not. To answer this question, the court shall consider the existence of mens rea of any form, not only as the intention on the part of the accused. Additionally, the Court held that the act of subjecting another person to risk should exist in the mind of the accused person to make him punishable with criminal negligence, unlike, in the case of civil law and law of torts, no mens rea is necessary to constitute negligence. However, mens rea, in the case of criminal negligence, is not to kill another person, rather it is a deliberate willingness to subject a person to the risk of injury or death.

Illustrations

A woman was standing on the footboard of a bus, instead of sitting in any of the seats. The bus driver knows about the fact that she was standing on the footboard. The driver informed her that there would be a sharp turn. That woman fell and died because the driver took a very sharp turn off the bus without slowing down. The bus driver will be punished under Section 304A of the IPC because he was negligent by not slowing down the bus when he was taking such a sharp turn.
A passenger entered a bus, which was unaware to both the driver and conductor of that bus. The conductor whistled and the driver started to drive the bus at high speed because of which the passenger fell off and died as the rear wheel crushed her. In this case, the conductor and the driver have the duty to check whether any person entered the bus or not, which was not followed by them. Thus, their act is a rash and negligent act.

Nature of Section 304A of the IPC

The provision of Section 304A defines and prescribes punishment for homicide by negligence. The death of the deceased shall be caused by rash or negligent act of an offender, without negligence by any other person, and such cause may either be direct or in proximate, as observed by the Supreme Court in the case of Kurban Hussein Mohammedali Rangwalla v. State of Maharashtra (1964).

Types of acts covered within criminal negligence under IPC

Section 304A of the IPC consists of two acts, namely, rash act and negligent act. These acts consist of various offences under the IPC, viz., Section 279, 280, 283–289, 336, 337 and 338, apart from Section 304A. On the face, these two words may look similar. But, the words “rash” and “negligent are different from one another. Because one is exclusive of the other, the Code uses two distinct words. In this regard, the Supreme Court observed, in the State of Himachal Pradesh v. Shri Manohar Singh Thakur (1998), that one particular act cannot be both rash and negligent.

Rash acts

An act which has the element of rashness is called a “rash act”. An act contains an element of rashness or recklessness when such an act is said to be done hurriedly and quickly.

A rash or reckless act consists of two aspects, viz., subjective and objective. In the subjective aspect, the offender does an act deliberately, that is associated with some kind of risk and he/she could also foresee the possibility of happening of such a risk as well as its consequence. Thus, the offender consciously takes the risk without any reason. In the objective aspect, the offender genuinely does not foresee the consequence of his/her act, even if he/she is obliged to have known such fact as a prudent and reasonable person. The objective aspect of a rash act is almost similar to negligence and, hence, recklessness is considered to be genus and negligence is species. In addition to this, rash acts are not deliberate acts, but over-hasty acts. However, if a part of a rash act is done deliberately, it should be done without care and caution to be called a rash act.

An offender while committing a culpable rash act consciously aware of its illegal and mischievous consequences, but, at the same time, genuinely hopes and believes that such a result may not happen as the accused believes that he has taken all-sufficient care and precautions in avoiding such a consequence. The accused acting rashly believes that he did the act with care, but, in reality, care and caution are lacking when he does that act because he is indifferent as to whether any harmful result happens or not. A person is said to do something rashly when he does it with a desire to achieve a legal consequence without realising that such an act has a probability of causing some other act, which causes the death of a person. Such indifference towards the consequences, which involve the rights of some person or persons, will present in rash acts.

Besides this, because of the phrase “not amounting to culpable homicide”, the consequence of the rash act shall not be caused intentionally, although the consequence of such an act is known by the accused. The same applies in the case of negligent acts.

Negligent act

A negligent act is an act where the prudent and reasonable man will never do it by applying reasonable care and precaution. An ‘act’ also includes ‘omission’ as well. In the culpable negligent act, the offender does an act without proper care and caution and is not aware of or has no reason to believe the illegal consequence of his act. Thus, the accused person shall not possess the intention to do such an act.

The Supreme Court, in Ravi Kapur v. State of Rajasthan (2012), stated that “it is difficult to state with precision any mathematically exact formula by which negligence or lack of it can be infallibly measured in a given case.” It depends upon the facts and circumstances of each case, as held by the Court

However, in a given situation, it is not possible to give any exact formula to assess that an act is a negligent one. An act should be negligent in one case may not be negligent in another case. Thus, there is no hard and fast rule. The court should take the facts and circumstances of a case to determine whether the course of conduct of the accused is negligent in that particular situation or not. Hence, the expression “negligence” is not an absolute term, but a relative and comparative term. In Ravi Kapur v, State of Rajasthan (2012), the Supreme Court stated that “in a given case, even not doing what one ought to do can constitute negligence.”

Presence of a legal duty

There should be a legal duty or obligation on the part of the accused and the absence of the same will not amount to a negligent act. Legal duty means the imposition of a duty on a person by law. For instance, a driver of a vehicle has a legal duty to drive the same on the public way carefully in such a way that the passengers, following vehicular users as well as pedestrians on the road are not harmed or injured due to driver’s act. The same duty will be more when the pedestrians or passengers are children. The drivers are not under legal obligation to protect the mentioned people, but ensure that their life is not endangered due to their negligent act. Therefore, a person while exercising his right should take sufficient care to prevent any danger to others.

The doctrine of reasonable care comes into the picture which is an important parameter to determine whether there is any negligence by the accused. This doctrine also applies to assess whether there is a presence of contributory negligence.

Breach of such duty

Breach of a legal duty imposed by law amounts to negligence in criminal law. Lack of care and precautions by a person where a reasonable and prudent man will take all due steps. Therefore, a person breaching a duty which he ought to do is one of the essential ingredients to constitute his act a negligent one.

Such breach is characterised as gross negligence and causes death

In Malay Kumar Ganguly v. Sukumar Mukherjee & Ors. (2009), the Supreme Court said that the negligence of the accused shall be high and intense to make him/her liable under Section 304A of the IPC. A mere lack of care and attention or error in judgment may be civil negligence, but it is no offence in criminal law because the act of the accused should contain gross negligence.

For example, in Akbar Ali v. State (1936) 12 Luck 336, a lorry driver ran over a woman which caused her death. In such cases, the way the driver used the road and how he drove does not contain any element of negligence or rashness and the act of the driver is the remote cause of the death of the deceased. Although the lorry brakes were not in good condition and had no horns, the Court acquitted the accused because of the lack of gross negligence.

The distinction between rash and negligent act

Basis of differentiation	Rash act	Negligent act
Meaning	Doing something with indifference as to its consequences.	Omission to perform the legal duty imposed by the law, or a commission of an act or omission of a duty which a reasonable and prudent person would not do or do respectively.
Knowledge of the consequences of the act	The person committing a rash act has knowledge or reason to believe the consequence of what he or she is doing.	The person committing a negligent act does not have full knowledge about its consequences while doing it.
Relationship	All rash acts cannot be negligent acts. In other words, the rash act is a genus and includes negligent acts as well.	All negligent acts can be rash acts. In other words, the negligent act is a species.
Nature of the act	A rash act is a wrong which is grave in nature.	A negligent act is comparatively less grave.

Medical negligence under Section 304A of the IPC

A medical practitioner by profession has a greater duty to take all reasonable care and cautions than an ordinary and prudent man takes. Because of the very nature of the medical profession, such doctors have much responsibility when compared to any other service provider. On the other side, the negligence should not be of minor one, rather it should be of a higher degree to invoke criminal liability on the doctor. In Bolam v. Friern Hospital Management Committee (1957), the test for determining medical negligence was laid down by the Queen’s Bench Division, England. This test is accepted and applied in many cases; one among them is Jacob Mathew v. State of Punjab & Anr. (2005).

Negligence must be gross to attract criminal liability

In India, mere negligence, lack of caution or error of judgment does not fasten criminal liability on the doctors. The Supreme Court, in the case of Dr. Suresh Gupta v. Govt. of NCT of Delhi & Anr. (2004), for the first time, ruled that doctors would be held guilty under Section 304A of the IPC only in case of gross negligence. Hence, every minor negligence on the part of a medical professional does not attract criminal liability, rather the negligence in question should be such gross that the death is the most probable consequence. Only then the case will fall under Section 304A and the doctor concerned will be punished accordingly. This principle was confirmed in the Jacob Mathew case (2005), stating that negligence other than gross or high-degree negligence where death is most likely to happen will fall under the law of Torts and furnish a ground for civil action, but not prosecution. The Supreme Court observed that the following negligent act by the medical professionals comes under the category of gross negligence:

The medical professional is not skilled at all for that particular treatment, which a medical professional deemed to be skilled, and, still, he continues to perform such treatment.
The medical professional is skilled for a particular treatment but he does a manifestly wrong treatment without reasonable skill which no doctor of a prudent mind would have performed such a thing. For example, performing surgery without anaesthesia.

Furthermore, the Supreme Court, in the Jacob Mathew case (2005), made a distinction between occupational negligence and professional negligence. If the treatment or surgical operation performed by the doctor is accepted practice on the day he has performed it, no criminal liability for the negligence would arise just because the prosecution protested that there is still much better treatment or operation. Thus, the test is whether a normal and skilled doctor using normal and reasonable skills does such treatment or operation or any act in the medical profession because the law cannot expect the expertise of a higher level from each doctor.

To know more about medical negligence, the test to determine it and its punishment under Section 304A of the IPC, click here and here.

Power of the police to arrest the accused doctor

The police officer or any other personnel, who is authorised to investigate, are not allowed to arrest the accused doctor in a regular manner solely on registered FIR because the doctor is a profession filled with reputation and faith from the public. However, the investigating officer, as held in the case of Jacob Mathew, has the power to arrest the medical practitioner, for any of the following legitimate reasons where the arrest is required:

To proceed with the investigation.
To gather evidence.
If the investigating officer has reason to believe that the accused doctor will not appear before the court for the trial proceedings unless he or she is arrested.

Private complaint

In the case of Jacob Mathew, the Court stated that the complainant cannot lodge a private complaint; however, he or she can submit prima facie evidence, along with reliable expert opinion given by a competent doctor, to prove that the accused doctor doing something rashly or negligently, such private complaint by the person is allowed. If no reliable expert opinion is placed, a criminal prosecution against the accused doctor, as ruled in the case of Sudesh v. State of Uttar Pradesh (2012) Cr LJ 1460 (All), will not be maintainable.

Liability of the doctor who delegates the duty

Sometimes, Section 304A of the IPC may attract even in cases where the doctor delegated his responsibility to another person. In M/s. Spring Meadows Hospital & Anr v. Harjol Ahluwalia through K.S. Ahluwalia & Anr. (1998), where the senior paediatrician delegated his duty to a junior and the senior doctor is aware that the junior has no capacity and sufficient skill to perform such duty properly, the senior doctor is said to be negligent by delegating his work to an incompetent person.

Harassing doctors with criminal cases

Many medical professionals are being harassed in criminal cases by patients and their relatives in order to get compensation from such doctors or hospitals in return for withdrawing malicious complaints. This causes a lot of damage to the reputation of a doctor or hospital which gains respect for successful practice. The Supreme Court, in the case of Kusum Sharma & Ors. v. Batra Hospital & Medical Research Centre & Ors. (2010), recognised such frivolous complaints and malicious proceedings and said that those complaints deserve to be discarded or dismissed.

The doctrine of res ipsa loquitur

The literal meaning of res ipsa loquitur is “the thing speaks for itself”. To understand the doctrine of res ipsa loquitur, we need to know a rule of evidence regarding the burden of proof of negligence, whether it is in civil or criminal court. The rule is that, at the beginning stage, the prosecution should prove the case of criminal negligence, or at least the prime facie of it, on the part of the accused person. Once the prosecution is proved as required by the law, the burden of disproving the criminal negligence or proving any defences is on the accused.

The doctrine of res ipsa loquitur provides an exception to the general rule. The doctrine does not mandate the prosecution to prove the existence of the negligence on the part of the accused and, indeed, the burden of proof shifts from the prosecution to the accused. In cases where the event itself provides the existence of the criminal negligence of the accused and the happening of such circumstances is completely under his or her control, the doctrine of res ipsa loquitur applies and the accused is allowed to disprove the same.

The object of the doctrine of res ipsa loquitur

The objects of the doctrine of res ipsa loquitur are:

To make proof of occurrence of the disputed event is prima facie evidence of criminal negligence.
To remove difficulties whether the prosecution could prove the death of the victim, but not how that death is caused.

Essential elements of the doctrine

The essential elements of the doctrine of res ipsa loquitur are as follows:

The disputed event would not have occurred if there had been no negligence or recklessness on the part of the offender as such happening of the event is exclusively under his control or management.
The evidence adduced by the prosecution to the court confirms that the event is not due to the victim or third party’s acts.
The offender owes a duty of care towards the victim and, hence, was negligent or rash while committing the offence.

Application of the doctrine in criminal law

The doctrine of res ipsa loquitur applies mostly in civil cases, especially in the law of torts. This doctrine has limited application in criminal cases, as held by the Supreme Court in the case of Jacob Mathew v. State of Punjab & Anr. (2005). In this case, the Court also stated, in its view, that merely because it appears on the fact of the circumstances that there is criminal negligence on the part of the accused does not make him or her punishable under Section 304A of the IPC by applying the doctrine of res ipsa loquitur.

Examples

In Thakur Singh v. State of Punjab (2003), where 41 passengers of a bus died due to the driver’s rash and negligent driving because of which the vehicle fell into the nearby canal, the doctrine of res ipsa loquitur was applied.
In State of Madhya Pradesh v. Jagdish s/o Jogilal Baloi (1991), the deceased, Jasodabai, was walking on the left side of the road and died from the rash and negligent driving of the accused who was driving at high speed. It was ruled that the doctrine of res ipsa loquitur is applicable.

Punishment for criminal negligence under IPC

The punishment prescribed under Section 304A of the IPC, if a person is declared to be dead, is either imprisonment for a period of up to two years or a fine or both. Even if there is no intention on the part of the offender, the court of justice will not show sympathy for them and will punish the offenders as a deterrence to the potential offenders that the negligence or recklessness, which are also forms of mens rea, of the convicts will not be excused; otherwise, it would be miscarriage of justice and reduces the confidence and faith of the general public in the justice delivery system of India. Also, the court ensures that the punishment will be directly proportional to the intensity of the crime committed by the accused person so that he or she is appropriately punished.

Community service and compensation to victims as punishment in criminal law

For the first time, in the case of State through P.S. Lodhi Colony, New Delhi v. Sanjeev Nanda, which is also known as the “BMW case”, the Supreme Court took a new method of punishing the convict by requiring him to serve the community which will beneficial for the society rather than sentencing them for imprisonment, as felt necessary by the court. Community service may not be a punishment in the true sense. However, the convict giving something to the society will be appreciated by the society. The convict will also come out of his guilt or regret by doing the same.

In the BMW case, the orders given by the court against the accused are:

Rs. 50 lakhs have to be paid by him to the central government within the period of six months. Such an amount is used by government agencies to compensate the victims of motor vehicle accidents, especially in hit-and-run cases where the offenders are not caught by the investigating officers. If the convict fails to pay the amount, he shall undergo the imprisonment of one year.
He has to do community service for a period of two years under the supervision of the Ministry of Social Justice and Empowerment and this has to be done within two months of this order. On default, the convict should be jailed for a simple imprisonment of two years.

Weak defences for criminal negligence

Mechanical failure is not a good defence

In the case of Guru Basavaraj @ Benne Settappa v. State of Karnataka (2012), the accused took the plea of mechanical defect, i.e., namely, due to non-functioning of the hydraulic system in a proper manner, as the cause of the accident and not due to his rash and negligent driving. The plea was rejected by the subordinate court as well as the Supreme Court, by careful examination of the evidence on record which conveys that the accused drove the tractor rashly and negligently at high speed.

In another case, Binoda Bihari Sharma v. State of Orissa (2011), the Orissa High Court rejected the defence taken by the accused that the accident was caused by mechanical failure i.e., bursting of the scooter’s tyre. The Court rejected the defence on the ground that such mechanical failure happened due to the poor maintenance of the scooter from which the accused’s negligence was established.

Slow speed is not a good defence

Whether the driver drove the vehicle at high speed or low speed is not the sole determining factor in deciding the presence of culpable rashness or negligence. Just because the evidence shows that the vehicle drove at high speed, the act does not constitute a negligent act. In Pradeep Kumar v. State of Haryana (2000), where the petitioner drove the tempo at a high speed, the Punjab-Haryana High Court stated that “mere driving at a high speed cannot be said to be negligent.” The same applies in the case of low speed. Just because the accused drove the vehicle at a low speed, it is not conclusive proof of the non-existence of negligence. In this regard, Ravi Kapur v. State of Rajasthan (2012) is one of the leading cases. In this case, the Court noted that even if a person rashly and negligently drives at a slow speed, it would still fall under the category of “rash and negligent act”. Furthermore, the Court held that the driver has a duty to drive safely and, if not done, he or she will be liable for his act. Regarding the speed of the vehicle, the Court stated that “It may not be always possible to determine with reference to the speed of a vehicle whether a person was driving rashly and negligently.” Therefore, the speed of the vehicle is not at all a criteria to prove the fact of rash and negligent act of the driver that caused injuries to the complainant.

Difference between negligence in tort and criminal negligence

Basis of differentiation	Negligence in tort	Criminal negligence
Existence of *mens rea*	The mental element or mens rea or intention is immaterial.	There should be an existence of mens rea on the part of the person who committed such an act or offence.
The intensity of the offence	Even if the wrong of negligence is, comparatively, lesser in degree or intensity, it can still stand as a ground for civil action.	The negligence in question shall be of a higher degree. Only then does it amount to criminal negligence, otherwise, there will be no case for prosecution.
Proving the extent of the negligence	The plaintiff should prove that the defendant owes a duty towards him and the same was breached due to his negligence. Simple negligence can also make the defendant liable to pay damages.	The negligence to be punishable in criminal law shall be more than what is required in a civil case. The negligence must be gross.
Determining the extent of liability	It depends upon how much injury or harm is caused to the plaintiff.	It depends upon the degree and amount of negligence.
Contributory negligence	It is a Common Law tort rule which prevents plaintiffs from claiming damages for the negligence of the defendant if they too were negligent, which is also one of the reasons for causing that harm.	It does not act as a defence to the criminal negligence of the accused. Hence, whether the deceased contributed to his death is immaterial.

Difference between Section 304 and Section 304A of the IPC

Basis of differentiation	Section 304	Section 304A
Deals with	Section 304 deals with punishment for culpable homicide not amounting to murder.	Section 304A deals with an offence of causing death by negligence.
Offence	Culpable homicide is altogether a new offence.	The offence is homicidal death by rash or negligent act. It is no new offence.
Nature of offence	More graver and more serious offence, when compared with Section 304A.	Less serious offence.
Cause of death of the victim	Acts of the offender that contain the element of intention or knowledge or both.	Rash or negligent acts of the offender.
Connection with Sections 299 and 300 of the IPC	Section 299 defines culpable homicide and Section 300 explains when culpable homicide does not amount to murder, for which the punishment is mentioned under this section.	There is no overlapping between Section 304A and Sections 299 and 300 of the IPC, where the former excludes the cases where the accused has intention or knowledge that was already covered under the latter sections.
Intention	Intention or knowledge is required to invoke punishment under Section 304 of the IPC.	The phrase “not amounting to culpable homicide” in Section 304A means that there is no element of intention as well as knowledge.
Extent of knowledge	In culpable homicide not amounting to murder, the offender knows about the result of his or her act.	In a culpable rash act, the offender knows the results of his or her act but hopes that the same will not happen.
Punishment	If the offender has the intention, the punishment is, along with the fine, life imprisonment or imprisonment, simple or rigorous, up to 10 years. If the offender has knowledge without intention, the punishment is imprisonment, simple or rigorous, for up to 10 years, or fine, or both.	The punishment is imprisonment, simple or rigorous, up to 2 years, or fine, or both.

Conclusion

In the end, there are a lot of differences between civil and criminal negligence, in terms of definitions, ingredients, liability, punishment and other intricacies. The prosecution should be in all the aspects involved in the criminal negligence as embodied under Section 304A of the IPC to prove the rash or negligent act on the part of the accused, which is the direct cause of death of the victim, and inflict criminal liability.

Frequently Asked Questions (FAQs)

What is the extent of the degree of care required by any person?

If a person took all reasonable care that an ordinary and prudent man takes in similar circumstances, then it is deemed that the person took care and caution while performing the disputed act. Regarding the degree of care, the Supreme Court, in Sushil Ansal v. State through CBI (2014), stated that “nature and degree of care are expected to be such as would ensure the safety of the visitors against all foreseeable dangers and harm. That is the essence of the duty that an occupier owes to the invitees whether contractual or otherwise. The nature of care that the occupier must, therefore, take would depend upon the fact of the situation in which duty to care arises.” The Court further observed that the duty to take care is not a one-time obligation, rather it is continuous.

How to make out whether negligence is civil or criminal in nature?

The main test is whether the negligence is simple or gross. In both civil as well as criminal negligence, there is a breach of duty and a lack of care. If the negligence is simple, it is civil negligence; if it is gross, then the accused will be liable for the criminal negligence. However, the parties alleging the wrong of civil negligence or offence of criminal negligence have an onus to prove and establish the negligence, whether civil or criminal, on the part of the defendant or the accused.

Whether contributory negligence is a valid defence for the accused charged with criminal negligence?

No, the contributory negligence of the deceased or victim is not considered a valid defence for the accused who is charged with criminal negligence. Even if the victim died partly due to the negligence of the deceased and partly by the accused’s negligence, the doctrine of contributory negligence cannot be invoked to escape criminal liability.

References

“The Indian Penal Code” authored by Ratanlal and Dhirajlal.
“Indian Penal Code” authored by R.N.Saxena.

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HR enters the metaverse : all you need to know

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January 19, 2024

This article has been written by Rashmi Mahalwar, pursuing a Diploma in Labour, Employment and Industrial Laws for HR Managers from LawSikho and edited by Shashwat Kaushik.

Table of Contents

Introduction

Recently, Bill Gates stated that “within two or three years, most of the virtual meetings will move from 2D camera image to the metaverse, in our 3D digital avatars.”

Sounds interesting? Wanna know more? Let’s first understand what the metaverse is. Definitely, it’s going to be a game changer in the tech world and soon everywhere in the world. Your whole experience of video calling is going to be converted into meeting that person sitting far away from your location with your digital avatar, and that’s going to give you the feeling of meeting them in person. We all remember watching sci-fi movies a few years ago, where people using technology (mostly in space) projected their reality on the other side. The metaverse is exactly like this, where individuals are replaced by their digital selves, irrespective of their geographical location.

We all know how AI and automation are growing and taking us ahead of the time. Organisations are adapting to AI and automation on a vast scale, and no one wants to be left behind. The metaverse is going to change the way we interact with technology. What piqued my curiosity about the metaverse is that it’s part of the creation of a new version of the World Wide Web – Web 3.0. That’s revolutionary!

What is metaverse

Metaverse is an emerging technology, and it will change the Web experience. Where people may come to the space of the organisation (permanent footprint) and experience the company culture, services, products and environment in a whole new way. This will change your experience of the Web into a 3D experience. I’m sure it’s going to change the world sooner than we can expect. Something big is on the horizon, and it’s going to broaden the way we think. We can communicate with or meet someone or people altogether. It’s going to make our communication with someone online more interactive. It may consist of AR (augmented reality), which includes facets of physical and digital reality and VR (virtual reality), which still remains in the absence of the person. It sounds breathtaking, yet it promises an exciting future to come.

When you’re wearing your headset, your mind is convinced that you’re in a different space. Soon, there will be a shift towards attending online meetings. We used to go to the breakout rooms in Zoom meetings to interact with other participants and separate from the larger group. Imagine using Metaverse, if someone were to meet someone, he would be shaking their hands and they would be interacting with the environment around them in a spatial way. HR is going to feel the immense change in the entire HR function it plays.

For example, in the past, when an employee wanted to apply for a job, they would have to submit their resume and cover letter to the company. However, with Metaverse, employees can now create a virtual avatar of themselves and interact with potential employers in a more immersive way. This could lead to a more personalised and engaging hiring process for both employers and employees.

In addition, Metaverse could also be used for training and development purposes. For example, employees could participate in virtual simulations of real-world scenarios, which could help them learn new skills and improve their performance. The metaverse could also be used for onboarding new employees, as it could provide a more immersive and interactive experience than traditional onboarding methods.

Overall, the metaverse has the potential to revolutionise the HR function by making it more personalised, engaging, and efficient. As the metaverse continues to develop, it is likely that we will see even more innovative ways for HR to use this technology to improve the workplace.

How is the metaverse going to affect HR

Change in hiring procedures

There’s no doubt that it’s going to change the way we look at the world somehow, and HR is not an exception. Most of us assume Metaverse is more associated with premium gaming VR sets and has been adapted rapidly by tech giants such as Google, Amazon, Microsoft and Apple, but it’s changing the expectations of HR leaders to hire people with wide experience in gaming and mix augmented and virtual reality, no matter where they are located or what other barriers are there to hiring talent from different time zones. The interview experience is going to be amazing because it’s not about having zoom/meet calls but meeting each other’s 3D avatars, and I believe it’s going to feel like meeting someone in person. It will impact the whole recruiting and onboarding experience in the HR function. The metaverse will impact HR in a more positive way. Many companies are already using Metaverse for hiring, for instance, Samsung and Hyundai for onboarding. The UK’s PwC used Metaverse in recruitment, and they literally created a virtual park, a metaverse podium, to interview the candidates for jobs. HR would be able to use Metaverse for hiring and onboarding processes and make the recruitment process one of the most remarkable experiences for employees.

It’s going to change the entire game of remote work

Remote work is evolving all around the world due to its flexibility and cost-effective criterion. Metaverse has the capacity to change our workplaces, and it’s not just about the expensive VR sets; it can be accessed through any other technology like laptops or mobile phones. For instance, Meta’s Horizon Workrooms allow people to work in the same virtual room. Imagine the feeling of working in the same virtual room—more approachable, more collaborative and more real-time communication with teammates—unlike working from home, where you yourself are your confidence booster and we all know it gets boring at some point. Those employees 3D avatars can emerge in training. The metaverse will transform work settings to be more interactive and collaborative by inspiring people to use more hands-free devices and communicate with their avatars rather than using their laptops or mobile phones. It’s fascinating, isn’t it.

Ensuring workplace safety and diversity inclusion

HR’s role cannot be replaced when it comes to human interaction and getting the pulse of employees. At present, HR also looks at the behavioural aspects of the organisation. When it comes to diversity and inclusion, HR plays a vital role. HR ensures that employees feel a sense of belonging to the organisation. In the age of the metaverse, people will be interacting with each other in their digital avatars, but they will still interact in a work setting or work-related environment. HR will need to make sure to look over the virtual environment and how everyone feels safe in such scenarios. For example, how to make sure bullying, hostile behaviour, and abuse don’t take place. Of course, HR plays an important role here, and HR needs to look for ways to monitor or look over the employees from time to time. The best way is to educate the employees regarding unacceptable behaviours in the metaverse and amend the policies. Metaverse gives a virtual space for employers and employees to come together on a platform to share ideas, collaborate, connect and exchange knowledge. It provides various tools and features that capacitate employees to encourage a sense of belonging to the organisation.

For example, Metaverse can be used for:

Remote meetings and presentations: The metaverse can be used to create a virtual meeting space where employees can meet and collaborate from anywhere in the world. This can be a great way to save time and money on travel, and it can also help to create a more inclusive workplace for employees who may not be able to travel easily.
Team building activities: The metaverse can be used to create virtual team building activities that can help employees get to know each other better and build stronger relationships. This can be a great way to improve morale and productivity in the workplace.
On-boarding and training: Metaverse can be used to create virtual on-boarding and training experiences for new employees. This can be a great way to help new employees get up to speed quickly and feel more confident in their roles.
Support for remote workers: The metaverse can be used to provide support for remote workers. This can include providing access to resources and tools, as well as opportunities for remote workers to connect with each other and collaborate.

The metaverse can be a valuable tool for employers and employees alike. It can help to improve communication, collaboration, and productivity, and it can also help to create a more inclusive and engaging workplace.

More creative and cooperative work environment

Imagine you’re working from the office or, let’s say, you work in hybrid mode. Sometimes, getting the discussion done regarding a project narration remains pending due to the unavailability or time clash with the concerned person. I believe it will bring a tremendous change in work-related emergencies. Employees would be able to drop the projects/meeting timings/fix a meeting as soon as possible via chat/dropping the link, while using the rest of the time productively. The environment of the office, creative walls, round tables, cabins, etc., make a workplace more collaborative. The metaverse breaks the gap between hybrid and work from home settings. The virtual design of the metaverse allows employees to go beyond everyday boring boardrooms; in fact, they would be able to change the settings of a meeting room, round table or have a group discussion with their teammates at a coffee table. Employees will have the potential to work in more creative, collaborative and authentic interactions with teammates or have meetings worldwide. HR will need to use the metaverse at the workplace, which makes the team work in an efficient manner, boosts productivity and makes the work environment conducive, creative, fun and entertaining for all. HR would need to educate the leaders, teams, and management on how to work best with technology.

Fast paced learning

Employees will need to learn how to use Metaverse and perform tasks. HR will see an increase in learning and training demand. This means organisations will need to invest in new emerging technologies, and soon, there will be no place left untouched by them. In the metaverse, HR can create new and creative methodologies to make employees learn to work in a new environment with fun. Training material can be created in the metaverse, and employees can simply enter and complete the training or ask for assistance whenever needed. Employers will now need to make employees learn in real-time scenarios to perform specific tasks, and this is how they make them ready for the upcoming change. A huge change is coming and so many aspects are going to be impacted. This will make the training more adaptive and simple. For example, real-time skill development would be easy and it would reduce the time of training as well.

Entertaining and fun environment

Creating an innovative and synergetic environment is crucial for any organisation to increase productivity. It’s always been a challenge for HR to create such an environment, as one idea doesn’t fit everyone. The metaverse breaks with this old idea of productivity and achieving goals.

In the traditional workplace, productivity is often measured by how many hours an employee works. This approach is flawed, as it doesn’t take into account the quality of the work that is being done. In the metaverse, productivity is measured by the impact that an employee has on the organization. This is a more holistic approach that takes into account all of the factors that contribute to productivity, such as creativity, collaboration, and innovation.

The metaverse also allows for a more synergetic work environment. In the traditional workplace, employees are often siloed into their own departments. This can create a lack of communication and collaboration, which can stifle innovation. In the metaverse, employees from all departments can work together in a shared virtual space. This allows for greater collaboration and innovation, which can lead to increased productivity.

The metaverse is still in its early stages of development, but it has the potential to revolutionise the way we work. By creating more innovative and synergetic work environments, the metaverse can help organisations increase productivity and achieve their goals.

With the rise of remote work, organisations are seeking a way to maintain a balance between remote and real physical teams. HR in the metaverse is really going to promote a high performing work environment. Metaverse is a safe platform that allows employees to collaborate on a project or task. It does have special features such as 3D avatars, 3D spatial audio, video chat, voice commands, etc. Users can create whatever is suitable for them to communicate.

Conclusion

HR in the metaverse is still in progress, and no one can say how soon organisations will adapt to it worldwide as it is developing. It consists of huge costs for the companies to implement. Companies will eventually need to provide the VR sets to their employees, and there’s a cost to it. Apart from this, remotely working employees would need to increase the bandwidth, which will be borne by the company itself, and companies will have to spend a hefty amount on training. That’s an enormous amount of money in today’s time when technology is changing fast. Most of the tech giants are already spending a lot on HR systems and using 10 to 15 systems at the same time; they would need thoughtful consideration before adding another.

The changes come slowly but steadily and employees will be introduced to the metaverse. As market leaders are already experimenting with emerging technologies like VR and augmented reality,. Here comes the key role of an HR to understand whether the organisation needs improvement in terms of adding new technology or updating some existing learning practices. The metaverse is not without its challenges to adapt, including raising a question about data protection and its high costs. It advocates for the new age revolution, and it will bring an imminent change to our workplaces, not only because world tech leaders are using it, but it will also bring value. Metaverse allows more people to work remotely and allows employees to participate in real time scenarios. HR will need to navigate the direction of the metaverse in an organisation.

References

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Capital markets and its regulation in India : all you need to know

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January 18, 2024

This article has been written by Rohit Chakraborty, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Table of Contents

Introduction

Capital markets refer to the financial system facilitating the buying and selling of long-term financial assets such as stocks, bonds and other securities on a platform where individuals, companies and governments can raise money by issuing securities and where investors can buy and sell these securities. Capital markets play a critical role in the economy by providing a way for investors to put their money to work and for businesses to access the capital they need to grow and expand.

Background and overview of the capital market in India

Capital markets ensure efficient capital allocation, facilitating economic growth. It is necessary to understand how capital markets work. Capital markets provide a platform to facilitate trade and provide investors with the insights needed to make informed decisions about where and when to invest their money.

Securities markets offer a means of dividing savings and investing into distinct categories. Financial markets play a vital role in the economy by channelling funds from savers to investors.

The Bombay Stock Exchange Limited (BSE) and the National Stock Exchange Limited (NSE) are India’s two main stock exchanges. The BSE was founded in 1875. It is the oldest stock exchange in Asia. Under the Securities Contracts (Regulation) Act of 1956 (SCRA), the BSE is the first stock exchange to receive permanent recognition from the Indian government. The company is a demutualized entity. The most frequently followed stock market benchmark index in India is the BSE’s equity index, or S&P BSE SENSEX (SENSEX).

1992 saw the establishment of NSE. It is the first electronic trading platform in India with a screen. Several banks and financial institutions founded the NSE to offer:

Market makers can trade using screen-based, satellite-linked, nationwide online facilities.
Securities, including debentures, public sector bonds, units, and government securities, are cleared and settled electronically.

The laws, rules, regulations and guidelines applicable to the listing on both of these exchanges are administered by the Securities and Exchange Board of India (SEBI), India’s securities market regulator. The rules and regulations applied to these exchanges are substantially identical.

Classification of capital market

The components of capital markets are:

Commodity market- This segment of the capital market deals with primary products. There are soft commodities, like agricultural products such as coffee, wheat, sugar, cocoa, etc. Hard commodities are mined, such as oil, gold, silver, rubber, etc.

Capital markets- These are the places where debt and equity instruments are bought and sold. Capital markets serve as a conduit for savings and investments between capital providers, such as governments, corporations, and individuals, and capital users, such as retail and institutional investors.

Money market- The money market is for short-term liquidity.

Insurance market- Insurance transfers the risk of loss from one entity to another equitably in exchange for payment in the insurance market. It is a form of risk management primarily used to hedge against the risk of contingent, uncertain losses.

Foreign exchange market- This is a global decentralised market where the main participants are the larger international banks.

Trading on both the exchanges, BSE and NSE, takes place in:

Equity shares – capital markets;
Futures and options – derivatives markets;
Debt securities – debt markets;
Currency derivatives.

Regulatory framework and legislation

The demand for long-term capital comes predominantly from private sector manufacturers, agriculture, trade, and government agencies. The supply side consists of individuals, corporate savings, insurance savings, banks, specialised financing agencies and the surplus of governments. Regulating this affair, therefore, becomes important to ensure transparency and investor confidence both domestically and internationally.

India’s capital markets are regulated and monitored primarily by:

Securities & Exchange Board of India (SEBI);
Department of Economic Affairs, Ministry of Finance, Government of India;
Ministry of Corporate Affairs, Government of India; and
Reserve Bank of India.

The regulators draft legislation, issue circulars, notifications, guidelines and regulations from time to time to regulate the securities market in India. They also have the power of oversight over various market participants. The stock exchanges also frame their own rules, regulations and byelaws to regulate the securities market.

The key statutes and regulations governing the securities market are:

The Companies Act of 2013

All the companies listed on a recognised stock exchange must comply with the provisions laid out by this Act, including corporate governance norms. Corporate governance norms include shareholder decision-making processes, auditing standards, etc. These norms ensure transparency for investors in their operations.

The statute deals with issues, allotments, transfers of securities, and various other aspects relating to company management. The statute contains standard disclosures about the public offering of capital, mainly concerning projects and management of the company, information about other listed companies managed by the same management, and risk factors perceived by the management.

The Companies Act also regulates underwriting, use of premiums and discounts on issues, rights and bonus issues, payment of interests and dividends, supply of annual reports, and other information. The statute also provides for insolvency and NCLT/NCLAT provisions.

Securities Contracts (Regulation) Act of 1956 (SCRA)

This statute virtually controls all aspects of securities trading and the running of stock exchanges, directly or indirectly. The aim of the SCRA is to prevent undesirable transactions in securities. The stock exchanges determine their own listing regulations in conformity with the minimum listing criteria set out in the Securities Contract (Regulation) Rules, 1957. The Act gives the Central Government and SEBI regulatory jurisdiction over:

stock exchanges through a process of recognition and continued supervision,
contracts in securities, and
listing of securities on stock exchanges.

A stock exchange is to be recognised only if the conditions prescribed by the Central Government are fully adhered to. Organised trading activity in securities takes place on a specified recognised stock exchange.

Securities & Exchange Board of India Act of 1992 (SEBI Act)

SEBI is provided with statutory powers for:

protecting the interests of investors in the securities market;
promoting the development of the securities market;
regulating the securities market, such as issue and transfer of securities, insider trading, futures and options trading, etc. to protect investors’ interests;
promote awareness among investors;
training of intermediaries about the safety of the market;

and all matters connected to the parameters above. The objectives of SEBI have been laid down in the preamble of the SEBI Act.

The Reserve Bank of India Act of 1934 (RBI Act)

The RBI Act exercises concurrent authority over contracts pertaining to the sale and purchase of securities, gold-related securities, money market securities and securities derived from the same, and ready-forward contracts in debt securities.

The RBI Act defines a security as a “bond, debenture, debenture stock, deposit receipt, certificate of deposit, security receipt, unit of a mutual fund or any other instrument of a similar nature, issued by a body corporate or by any other person.” A gold-related security is a security that is linked to the price of gold. A money market security is a security that is issued with a maturity of less than one year. A security derived from a money market security is a security that is created by combining two or more money market securities. A ready-forward contract for a debt security is a contract to buy or sell a debt security at a future date at a predetermined price.

The RBI Act gives the RBI the power to regulate and supervise the trading of securities, gold-related securities, money market securities and securities derived from the same, and ready-forward contracts in debt securities. The RBI can impose requirements on the participants in these markets, such as requirements for capital adequacy, margin requirements, and reporting requirements. The RBI can also take action against market participants who violate the law.

The RBI Act also gives the RBI the power to investigate and prosecute violations of the law. The RBI can impose penalties on market participants who violate the law, such as fines, imprisonment, or both.

The Depositories Act of 1996

This statute provides for the dematerialization of shares, eliminating the risks associated with physical certificates. It allows the electronic transfer of shares from one depository member to another without changing ownership rights over them. The primary objective of the Depositories Act is:

making securities freely transferable, subject to certain exceptions; all securities are transferable freely in the depositories mode, restricting the company’s right to use its discretion in effecting the transfer of securities;
dematerialization of the securities in the depository mode; and
providing for maintenance of ownership records in a book entry form.

The Banking Regulation Act of 1949

This legislation establishes control over banking infrastructure in India. The Act also aims at protecting the interests of the depositors through provisions like the opening/closing of accounts, deposits and withdrawals, among other things.

The Act was enacted in 1949 in the wake of the banking crisis of the 1930s. The crisis had led to a loss of confidence in the banking system, and the government felt the need to enact legislation to regulate the banking industry and protect the interests of depositors.

The Act establishes a regulatory framework for banks in India. It defines a bank as “any company which transacts the business of banking.” The Act also sets out the powers and functions of the Reserve Bank of India (RBI), which is the central bank of India. The RBI is responsible for regulating the banking system and ensuring the safety and soundness of banks.

The Act also provides for the establishment of a Deposit Insurance Corporation (DIC). The DIC is responsible for providing deposit insurance to depositors at banks. Deposit insurance protects depositors against the loss of their deposits in the event of a bank failure. The Act has been amended several times since its enactment. The most recent amendment was made in 2017. The amendment introduced a number of changes to the Act, including changes to the definition of a bank, the powers of the RBI, and the deposit insurance scheme.

The Banking Regulation Act of 1949 is a vital piece of legislation that plays a key role in regulating the banking industry in India. The Act helps to ensure the safety and soundness of banks, and it protects the interests of depositors.

Prevention of Money Laundering Act of 2002 (PMLA)

It is legislation by parliament to prevent money laundering. The Act contains provisions for confiscation of property derived from money laundering. Anti-money laundering is a set of procedures, laws, or regulations designed to stop/curb the practice of generating income through illegitimate activities or criminal activities such as drug trafficking, terrorist funding or indulging in processes that make the transaction look legitimate.

Know Your Customer Guidelines (KYC Guidelines) have been introduced in the capital market based on this Act. PMLA requires all market participants, intermediaries and other institutions connected to the capital market to maintain a record of transactions done through them, monitor and report suspicious transactions to the Financial Intelligence Unit (FIU), Government of India.

Power and responsibilities of SEBI

SEBI brings out circulars, including master circulars, regulations, rules, etc., from time to time. A few of such regulations are:

The regulatory jurisdiction of SEBI extends to corporations in matters related to the issuance of capital, the transfer of securities and all intermediaries associated with the market. SEBI can conduct inquiries, audits, and inspections of all concerns and adjudicate offences under the Act. The Board has the power to register and regulate all market intermediaries and penalise them in cases of violations of the provisions of the SEBI Act and the rules and regulations of SEBI. SEBI has been given full autonomy and authority to regulate and develop an orderly securities market.

SEBI is a quasi-judicial body. The orders of SEBI are appealable before the Securities Appellate Tribunal (SAT) and then to the Supreme Court. SEBI has concurrent powers under the SCRA, along with the Department of Economic Affairs (DEA) under the Ministry of Finance.

Capital markets in India have two interdependent segments, the primary market for issuers and the secondary market known as the stock market. An active secondary market promotes the growth of the primary market and capital formation since investors in the primary market are assured of a continuous market where they have the option to liquidate their investments.

The primary market is used by the issuers to raise fresh capital from investors through initial public offerings (IPOs), rights issues or offers for sale (OFS) for the sale of equity or debt. An issuer undertaking an IPO has to apply to one or more stock exchanges, seek in-principle approval for listing its securities, and select one as the “designated stock exchange.” The issuers have to enter into an agreement with a depository for dematerialization before filing the offer document. In India, there are two depositories: Central Depository Services (India) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL).

Trading in equity shares of the issuer begins only after the stock exchanges issue a trading notice in relation to those shares. A listed company can raise additional equity share capital. The method for the same is mentioned under the ICDR Regulations and the Companies Act. There are other necessary requirements but those are beyond the scope of this article.

Secondary markets provide liquidity to the instruments used by unlisted companies to raise money through trading and settlement on stock exchanges. The players in the primary market are merchant bankers, mutual funds, financial institutions, foreign portfolio investors (FPIs), domestic institutional investors (DIIs) and individual investors. The conditions of a secondary market are:

transfers real assets into financial assets,
buying and selling of securities as a method to attract new capital by means of issuing new securities,
investing money for short and long term periods to derive profit, and
price determination as means to determine the balance between demand and supply.

Registrars and transfer agents, custodians and depositories are other capital market intermediaries that provide important infrastructural services to both markets.

Continuing obligations- Pre and Post-Listing Compliances are listed in the SEBI (LODR) Regulations. The LODR Regulations are applicable to listed entities for equity shares, convertible securities, non-convertible debt securities, non-convertible redeemable preference shares, etc. on a recognised stock exchange. The LODR Regulations are based on a broad set of principles, namely the International Organisation of Securities Commission (IOSCO) principles for periodic disclosures. The principles of corporate governance are in line with the principles laid out in the Organisation for Economic Cooperation and Development (OECD).

Market abuse- The FUTP Regulations prohibit any person from using any manipulative or deceptive device for the procurement or sale of any securities of a company. Fraud in the FUTP Regulations is comprehensively defined as:

an act or omission,
expression or concealment,
whether in a deceitful manner or otherwise,
that persuades any other person to deal in securities,
whether there is gain or loss, and
such activities result in market abuse.

Insider trading- Insider dealing in India is governed by the PIT Regulations. The PIT Regulations lay down the framework within which insiders can communicate information and deal in securities. An insider is prohibited from communicating, providing, or allowing access to any unpublished price sensitive information (UPSI) relating to the company or its securities to any person, including other insiders. An insider is also prohibited from communicating such information to any other person to enable trading in the securities of the company. “Insider” has been defined as a person under Reg 2(g) as

connected person; or
in possession of or having access to UPSI.

Reg 2(d)(i) defines “connected person” as

one who, previously for 6 months, was associated, directly or indirectly, with the company in any capacity;
it includes frequent communication with its officers;
contractual, fiduciary or employment relationship; or
by virtue of being a director, officer or employee of the company, or holds any position, including a temporary or permanent professional or business relationship between himself and the company, that allows such persons directly or indirectly to access UPSI or can be reasonably expected to allow such access.

Conclusion

Over time, India’s capital market has seen a rapid increase, becoming one of Asia’s most important financial markets. The Indian stock market is among the world’s largest and is significant in determining economic activity, savings and investments. India’s trading systems provide various features, such as real-time pricing feeds, risk management tools, automated order execution, and portfolio management services, that make it easier for investors to trade in them.

Several steps have been taken by the Government of India to increase investor confidence and improve the ease of doing business in India. Efforts to reform the equity capital markets in India commenced with the 2018 overhaul of the ICDR Regulations. Several measures have been taken by SEBI to strengthen corporate governance in listed companies through the LODR Regulations and subsequent amendments.

In the case of Harshad Mehta vs. Central Bureau of Investigation (1992), there were instances of how funds were channelled illegally and the stock market was manipulated by those in the money market. The same is the story in Ketan Parekh vs. SEBI (2006). The recent SEBI order in the Baap of Charts case is an example of a lack of awareness among the public about the regulatory issues surrounding the market.

PMLA has been enacted to prevent the channelling of illegal funds for legitimate activities. Several regulations have been brought about by SEBI to plug the loopholes, prevent embezzlement of funds, defraud, prevent unfair trade practices, etc. The IA Regulations are a step in the right direction as far as advisory activities are concerned.

As with capitalization, the concentration of wealth is a point of concern. Concentration of wealth causes imbalances in society. Investors are earning more and more to increase their profits, so money gets accumulated only in the hands of a few. The regional stock exchanges are affected by the major stock exchanges, as there is a much greater preference to invest in the latter due to its greater liquidity. There is a necessity to regulate the pool of funds with banks as financial scams take place due to private dealings with the banks.

References

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Tamil Nadu Labour Welfare Fund Act 1972

By

-

January 18, 2024

This article is written by Shefali Chitkara. This article gives a detailed analysis of the “Tamil Nadu Labour Welfare Act, 1972” , its essential features, scope, and purpose, along with the case laws on the same. It also seeks to highlight the important provisions covered in the Act and the penalties given for obstruction in the compliance of the provisions.

Table of Contents

Introduction

Since the very beginning, labourers have been subjected to mental and physical harm or harassment, along with long working hours and low salaries, which could not even support their families. India, being a welfare state, is duty bound to promote the welfare of its people and labour. Being a larger part of the general public, it has a right to be protected against such harassment and deserves social security. The formation of the International Labour Organisation in 1919 has been one of the noteworthy milestones to promote welfare of the labour. There are numerous laws on the protection of labour, like Factories Act, 1948, the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Workmen’s Compensation Act, 1923 and many more. Similarly, we specifically have the Tamil Nadu Labour Welfare Fund Act, 1972 which was enacted by the Legislature of the State of Tamil Nadu and applicable in that state only. As labour is the subject of the concurrent list, the state government is also empowered to make legislation on the same. The article mentions the rules made in this respect in 1973 under Section 41(1) of the Act. Further, it tries to clarify the scope and purpose of this Act by highlighting the need for creating the labour welfare fund and the benefits of the same. The article seeks to explain the powers and functions of the board, which is constituted to administer the fund.

Scope and purpose of the Act

The Act is applicable and extendable to the whole of the state of Tamil Nadu. The main objective behind such legislation has always been to encourage and provide social security to labourers so as to maintain themselves and their families. The benefits are dual in nature, i.e., beneficial for employees as well as employers by increasing profitability and viability. The Act has provided for the constitution of a fund in order to promote the welfare of labour in the State of Tamil Nadu. The Act has aimed to determine the amount of contributions in the fund to be made by the employer and employee through boards established for this purpose. Such contributions are used to provide financial aid to the labourers in order to raise their standard of living and provide social security. The funds can be utilised by the labourers for the education of children, medical facilities, transportation, loans, food requirements, etc.

Definitions to look out for

There are various definitions mentioned under Section 2 of the Act. The definitions have been provided for board, employee, employer, establishment, fund, government, inspector, secretary, unpaid accumulation, and wages. The most important and exhaustive definitions have been discussed below:

Employee

An employee has been defined under Section 2(b) of the Act. An employee is a person who is employed for hire or reward to do any skilled, unskilled, manual, supervisory, clerical, or technical work in any establishment as defined below. Further, it clarifies that a person should have worked for a period of thirty days during the preceding twelve months. It also includes those who are declared to be employees by the government by notification for the purposes of this Act. The terms of employment could be expressed or implied.

The definition expressly mentions those who are not included under this definition of an employee. Any person employed in a managerial capacity or supervisory capacity drawing wages exceeding fifteen thousand per men-sem or exercises functions of a managerial nature, or someone who is employed as an apprentice or on a part-time basis.

Employer

According to Section 2(c) of the Act, any person who is having the ultimate control over the affairs of the establishment or if such affairs are entrusted to any person then such other person is known as an employer whether called a manager, managing director, or superintendent.

Establishment

An establishment, as per Section 2(d) of the Act, means any of the following:

Any factory or a place deemed to be a factory as mentioned in Section 2(m) and Section 85(2) of the Factories Act, 1948,
Any motor transport undertaking as defined under Section 2(g) of the Motor Transport Workers Act, 1961,
Plantation, as defined under Section 2(f) of the Plantations Labour Act, 1951,
A catering establishment, as defined under Section 2(1) of the Tamil Nadu Catering Establishments Act, 1958 which has employed or have five or more than five employees on any working day during the preceding twelve months,
A society registered or deemed to be registered under the Tamil Nadu Societies Registration Act, 1975 and charitable or other trust whether registered or not which has employed or have five or more than five employees on any working day during the preceding twelve months. But it does not include an establishment of the Central or State Government which is not a factory,
Lastly, any other establishment which the government may declare through the notification as such for this Act.

In a case where an establishment has different branches at different places or the same place, such branches shall be treated as parts of the same establishment only.

Unpaid accumulation

Unpaid accumulation is defined under Section 2(i) of the Act. It means all the payments that are payable to an employee other than gratuity and they are not paid to him within a period of three years from the date when the payments became due. It includes the gratuity, which is accrued after the commencement of this Act and not paid within three years from the date of accrual. However, the definition also states that the amount of contribution made by the employer to a provident fund is not included in unpaid accumulation.

Wages

Wages, as defined under Section 2(j) of the Act, means all remuneration which is capable of being expressed in terms of money and payable to an employee if the terms of the contract of employment are fulfilled. However, wages do not include the following:

Gratuity, which is payable at the time of termination of employment,
Value of house accommodation or of supply of light, water, medical or any other amenity which is excluded from the computation of wages by the government’s special or general order,
Contribution made by the employer to any pension scheme, provident fund, any social insurance scheme,
Travelling allowance paid or travelling concession given,
Amount paid to defray special expenses which entailed on an employee by the nature of his employment.

Labour Welfare Fund

The Labour Welfare Fund can be defined as a fund created by the government for statutory contributions in order to improve the economic conditions of employees in the unorganised sector. According to Section 3 of the Act, there shall be a labour welfare fund which will be constituted by the government. The board will be responsible for crediting all the unpaid accumulations to the fund, and it will maintain a separate account until claims have been decided as per Section 13. The fund will be credited with the following items:

Unpaid accumulations paid to the board under Section 13(2) of the Act,
All fines and also the amount realised under Standing Order 20 of the Model Standing Orders issued under the Tamil Nadu Industrial Employment Rules, 1947, from the employees,
Deductions made under proviso of Section 9(2) of the Payment of Wages Act, 1936 and proviso of Section 36(2) of the Tamil Nadu Shops and Establishments Act, 1947,
Contributions made by the employers and employees,
Interest as a penalty under Section 14,
Voluntary donations made by any party,
Amount if raised by the board from any source to augment the resources of the board,
Funds transferred under Section 17(5) of the Act,
Amount borrowed under Section 18,
The unclaimed amount that is credited to the government as per the rules under Payment of Wages Act, 1936, and the Minimum Wages Act, 1948,
Grants or advances by the government,
Fines realised from employers by courts for violation of labour laws, excluding the deductions made by the court for administrative expenses,

All the funds as specified above have to be paid to such agencies, and accounts have to be maintained and audited in the manner as has been prescribed.

Contribution by employee and employer

In order to fulfil the aim of establishment of the fund, contributions have to be made by both the employer and the employees. Section 15 of the Act talks about the contribution to the fund by employer, employee and the government as well. The amount keeps on updating from time to time and it can be interpreted that the amount expected to be paid by the employer is always more than that by the employee. The employee contribution is fixed at ₹20 per year, the employer’s contribution is ₹40 per year and the government has to contribute ₹20 per year in respect of each such employee as per the notification dated 02.12.2022.

Benefits for the employee

With the establishment of a labour welfare fund, the employees are expected to become more committed to their work and feel more secure with their jobs. A few of the benefits or implications for the employees are:

The increased contributions in the fund would be able to provide better medical facilities for such people and their dependents.
It will help in enhancing social security, which will promote the growth of workers and their performance.
It will improve the working conditions of the workers in terms of transportation, training, and recreational activities.
It will give them special privileges and concessions for availing house loans, etc.
The contribution in the fund is used only for the employees and their dependents in activities like training, community necessities, recreation purposes, nutritious food for children of employees, part-time employment for housewives, etc.

Benefits for the employer

With the employees getting benefits from such a fund, the employers also get additional benefits since the fund acts as a morale booster for the employees. This will automatically increase efficiency and production and will be beneficial for the employer.

Apart from that, it will lead to refinement in the relationship between employer and employee and better understanding between the two.

Establishment and constitution of the board

The State Government of Tamil Nadu shall establish a board by the name of the Tamil Nadu Labour Welfare Board under Section 4 of the Act. It is a body corporate, has a perpetual succession and common seal, and has the power to sue and be sued.

Further, Section 5 provides for the constitution of the board. It will consist of a chairman and various other members to be appointed by the government. A chairman will be the minister-in-charge of labour, and in addition, there will be a prescribed equal number of representatives of employees and employers, members of state legislature, and such other prescribed numbers of officials and non-officials.

Members: Their appointment and disqualification

Section 6 lays down that the appointment of chairman and the members, as mentioned above, will be notified in the Tamil Nadu Government Gazette. The members of the board other than the official members will be appointed for a period of three years and can be re-appointed as well. However, they are required to continue as members until the successors are appointed. The proviso to Section 7 also clarifies that a member of state legislature will cease to be a member of the board when he ceases to be a member of the state Legislature.

Further, Sections 8 and 9 of the Act talks about disqualifications, removal by the government and resignation by members. A person will be disqualified from being a member of the board if any of the following happens:

He is or becomes an officer or servant of the board or
He is or becomes an undischarged insolvent or
He is or becomes of an unsound mind
Convicted by a criminal court for an offence involving moral turpitude, unless the conviction is set aside or
He is or becomes in arrears of any sum due to the board.

Further, Section 8(2) states that the government may also remove any member from the office if he has become subject to any disqualifications as mentioned above or gets absent without the board’s consent from three consecutive board’s meetings.

Furthermore, Section 9 talks about the process through which a member can resign from office. Any representative, any member of the State Legislature, or any non-official member appointed as a member of the board may resign by giving notice in writing to the government. His position will be deemed to be vacated when such a resignation is accepted by the government. Any casual vacancy for a member has to be filled as soon as possible, and such an appointed person will hold office for the remaining period.

Functions of the board

The Board, which is constituted under this Act, has to perform the major function of administering the labour welfare fund that is constituted under this Act. Apart from this, it has to perform various other functions as well, as has been mentioned below. The same is given under Section 12 of the Act.

As per Section 13, the board also has to exhibit the notice inviting claims by employees, their heirs, or any legal representatives for any payment that is due to them on the notice board of the establishment in which it was earned and in the Tamil Nadu Government Gazette after receiving any unpaid accumulation from the employer. The fund amount that has been received has to be deposited in the Reserve Bank of India or State Bank of India or any corresponding new bank and those accounts have to be operated by the board as per Section 19.

Further, as per Section 18, the board can borrow any amount as required for the purposes under this Act based on the previous sanction by the government and subject to such conditions.

Any act which is done by the board under this Act will not be invalidated merely because of any vacancy or defect in the constitution of the board, in the appointment of any member of the board, in any act or proceeding that is not affecting the merits of the case. The same is given under Section 11 of the Act.

Power of government under the Act

Section 2(f) of the Act states that the word “government” in the Act means the State Government of Tamil Nadu. There are various provisions mentioning the powers and duties of the government under this Act. Few of these are:

Firstly, the government was responsible for constituting the Labour Welfare Fund, which was the sole purpose of this Act.
The government, along with the employer and employees is also responsible for contributing to the fund.
The government has to appoint the members of the board and has the power to remove any member as well.
As per Section 16, the government may make grants and advance loans to the board when deemed necessary under this Act.
The application of the fund by the board has to be specified by the government in order to promote the welfare of the workers.
The government has to sanction the borrowing of the money by the board.
As per Section 19, the government has to place the accounts of the board and the audit report before the State Legislature and cause the accounts to be published and copies to be available on sale at reasonable prices.
As per Section 20, the government has the power to give directions to the board in connection with the expenditure from the fund.
The government also has to approve the appointment of the Secretary who will be the Chief Executive Officer of the Board.
The government can also appoint inspectors and define the local limits within which they can exercise their powers according to Section 22.
As per Section 25, the government has to credit the leave salary and pensionary contribution in the account of the board.
The government may also call for records of the board for inspection and can also supervise the working of the board according to Section 27.
As per Section 36, the government may also supersede the board for a period not exceeding six months if it is of the opinion that the board is unable to perform, has made default in performing the duties, or has exceeded or abused its powers.
The government may also extend the period of this supersession or reconstitute the board.
As per Section 37, the government may even delegate its powers, except to make rules under Section 41.
The government may exempt any establishment from all or any of the provisions of this Act by notification on this behalf.
The government has the power to make rules under Section 41 of the Act and as a result of which we have the Tamil Nadu Labour Welfare Fund Rules, 1973.

Offences and Penalties

Section 29 talks about the penalty for obstructing the inspection that is being done by the inspector or failure to produce the documents, records or register. The penalty for the first such offence is imprisonment, which may extend to three months, or a fine, which may extend to five hundred rupees or both and in case of such subsequent offence, with an imprisonment which may extend to six months or fine which may extend to one thousand rupees or both. If the offender is sentenced to fine only, then it should not be less than fifty rupees. The court should take cognizance of such offences under this Act only after the sanction in writing by the Secretary. Cognizance has to be taken by the court only when the complaint is made within six months from the date on which such offence has been committed, as per Section 32.

Further, a penalty has also been prescribed for non-compliance of the directions of the board under Section 34. If any person wilfully fails to produce a document or furnish any information as required by the board, he will be punishable in case of the first offence with imprisonment, which may extend to three months or a fine, which may extend to five hundred rupees or both, and in the case of the subsequent offence with imprisonment, which may extend to six months or a fine, which may extend to one thousand rupees or both. Furthermore, as per Section 39, no legal proceedings will lie against anyone if an act is done in good faith.

Overview of the Tamil Nadu Labour Welfare Fund Rules, 1973

The Tamil Nadu Labour Welfare Fund Rules, 1973 deals with the procedure that has to be followed or enlists the guidelines that must be taken into account while applying the Act. It deals with the rules regarding:

Payments made by employers for unpaid accumulations and other fines,
Mode of such payments,
Rate of contributions made by the employer and employee and the government,
Quorum and meetings of the board,
Powers of the Secretary,
Budget of the board,
Audit of accounts and publication of the annual report,
Remission of penalty,
Methods of voting,
Duties and functions of the committee,
Powers of the inspectors,
Maintenance of registers by the employers

Relevant judgements

General Manager, India Cements v. Subramanian N.S., 1997

Facts of the case

In this case, the petitioner was a public utility service and the respondents were members of the worker’s union. They issued a strike notice to the petitioner. Conciliation proceedings were initiated, wherein it was contended that the union had no representative capacity. The petitioners also issued a notice and pointed out that the strike was illegal and unjustified, and they proposed to deduct eight days of wages. To this end, the workmen cleared that the absence was not for an unreasonable cause. The appellate authority confirmed the order of authority and held that the strike was illegal. In response to this, a revision petition has been filed before the Hon’ble Madras High Court.

Issue raised

Was the strike legal, and whether the deducted amount, which is credited by the management in the fund, is enough to say that there is no unjust enrichment on the part of management.

Judgment

The court ordered that the workmen should be reimbursed with the seven days wage cut and directed the management to refund the same to them. The management is now at liberty to withdraw the amount from the fund and refund the same to the workmen within two months.

The Railway Employees v. The Joint Commissioner of Labour, 2010

Facts of the case

In this case, a writ petition was filed for the writ of certiorari in which a communication sent by the Labour Department was challenged by the workers for stalling the application of a certified standing order to the workers. It was contended that since the petitioner society was a multi-state co-operative society registered under the Multi-State Cooperative Societies Act, 1984, provisions of the Standing Orders Act will not apply.

Issue raised

Whether the communication was legally valid and the petitioners society was obliged to have certified the standing orders for their establishment?

Judgement

The court held that the contentions raised by the petitioner society cannot be accepted and, hence, dismissed the writ petition on non-joinder of parties as well as on merits. It was dismissed with a cost of ₹5000. Since the petitioners were not present before the court, the court directed them to credit the said amount to the Tamil Nadu Labour Welfare Fund created under the Tamil Nadu Labour Welfare Fund Act, 1972, within a period of four weeks.

Conclusion

The Act, being welfare legislation, has helped streamline the labour laws in India. It has proved to be an effective legislation by providing financial support for the labourers and their dependents and it has efficiently worked for the betterment and welfare of the labourers. There is a need in every state to come forward and constitute such funds and boards by drafting such legislation. To make it more meaningful, committees should be set up in all the states to look after the workforce and implement these acts to advance help and security for them.

Frequently Asked Questions (FAQs)

Where is this Act applicable?

This Act is applicable only in the State of Tamil Nadu, as per Section 1(2) of the Act.

What is the purpose of creation of this fund?

The fund was created in order to promote the welfare of the labour force and assure social security for them.

Who all can contribute to this fund?

As per Section 15 of the Act, contributions have to be made by the employee, employer, and the government.

Who will be responsible for maintaining the fund?

The board that is constituted under Section 5 of the Act will be responsible for the administration of the fund.

Is the contribution useful only for an employee?

The contributions in the fund can be used for the welfare of the employees and their dependents.

Labour welfare is a part of which list in the constitution?

It is a part of List III, i.e., concurrent list under Schedule 7 of the Constitution which enables both the central and state government to make laws on the subject matter.

Who is known to be the pioneer in the field of Indian labour welfare?

Dr. BR Ambedkar is known to be a pioneer for the welfare of Indian labour.

When was the Tamil Nadu Labour Welfare Board constituted?

It was constituted by the government of Tamil Nadu in 1971.

What is the main purpose of constituting the board?

The main function of the labour welfare board is to administer the labour welfare fund constituted under this Act.

Under which section the Tamil Nadu Labour Welfare Rules, 1973 were made?

Section 41 of the Act gives powers to the state government to make rules for carrying into effect the provisions of the Act.

What is the role of inspectors under the Act?

The provision for inspectors is given under Section 22 of the Act. They are appointed to examine and inquire for ascertaining that the provisions of the Act are complied with by the employers and employees.

References

https://www.mondaq.com/india/employee-benefits–compensation/1261644/revision-in-the-rate-of-contribution-under-tamil-nadu-labour-welfare-fund-act-and-rules

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Standing order in Labour Law

By

Diva Rai

-

January 18, 2024

Registration-of-Trade-Unions-in-India-750x500 — Image source - https://bit.ly/30LTC8y

This article is written by Kruti Brahmbhatt. This article deals with the meaning, importance and implementation of the standing order in labour law. This article also provides the meaning and functions of certifying officers and the process of getting a certified standing order.

It has been published by Rachit Garg.

Table of Contents

Introduction

For many years, the concept of bonded labourers was prevalent in India. The exploitation of workers or employees was not a new problem in India. The employees had to face many problems such as unnecessary salary deductions, non-payment of wages, and lack of uniform rules for recruitment or dismissals. The employees regularly had to face such ill-treatment and misbehaviour.

The Industrial Employment (Standing Orders) Act, 1946 (hereinafter referred to as “Act”) was brought to encounter the problems above-mentioned. The Act makes it necessary for the employer in the industrial establishment to define employment terms and conditions well in advance. It establishes a uniform set of rules and regulations for the potential agreements to be faced regularly. In furtherance of this Act, the Industrial Employment (Standing Orders) Central Rules, 1946 (hereinafter referred to as “standing order Rules”) was also formulated by the Indian Government to provide model standing order and additional rules related to standing order.

What is a standing order

A standing order in the Indian labour laws provides clear rules and regulations in terms of the employment. It makes the communication between the employer and employee crystal clear. It covers all the subjects of employment whether it is regarding leaves, payment of wages or termination. Under S ection 2(g) of the Industrial Employment (Standing Orders) Act,1946 the standing orders are interpreted as rules relating to matters set out in the Schedule .

In the case of Union Of India vs K.Suri Babu on 29 November (2023), the Supreme Court held that the standing order being the special laws overruled all other laws. The service conditions are regulated by the Standing Order as far as disciplinary actions are concerned.

Nature of standing order in Labour Law

The nature of the Standing Order has been a debatable topic, with several different arguments and conflicting judgments. It is difficult to decide the category of the standing order. The debate is whether the standing order is “award” or is “contract”. The nature of standing order can be claimed as under:

Statutory nature

The standing orders are binding on the workmen, employees, trade unions and the employer of the industrial establishment. The entire process of certifying a standing order is rule-making process. The standing orders operate more as a statutory nature.

In the case of Bagalkot Cement Co. Ltd vs R. K. Pathan & Ors (1962), the Supreme Court of India has held that standing order deals with the terms of employment and making the terms precise and definite. These standing orders when certified become statutory in nature. This was followed in many subsequent judgments.

Contractual nature

The standing orders are implied contracts between the employer and the workmen. They are bound to follow them when certified. However, the standing orders specify the rights and liabilities of the employer and employees, raising arguments over its contractual nature.

In the case of The Buckingham And Carnatic Co. vs Venkatiah (1963), the Supreme Court held that the certified standing orders are binding on the employer and employees as private contracts. After the certification of the standing order, they must be followed as terms and conditions of the contract.

Apart from this, there have been arguments in favour of terming standing order as “awards”. However , describing standing orders as statutory, contractual or an award is difficult in itself. The nature of standing order may be interpreted depending upon the matter in dispute.

Matter to be provided in standing order

The Schedule of the Act provides for matters to be set out in standing order for all the industrial establishments. The Schedule includes matters such as the classification of workmen’s, tickets, working hours, terms for leaves, etc. This makes uniform terms of employment. However, it should be noted that matters for standing order will not be limited to those given in Schedule, rather any additional matter can be prescribed.

The matters mentioned in the Schedule are as follows:

Classification of workmen

The standing order of an industrial establishment must specify whether the workmen are temporary workers or permanent workers. Further, it must specify the nature i.e. probation, apprentice or badlis workers. This particular specification helps in determining the rules and wages applicable to those categorised workmen.

Manner of intimation

The changes in the wages, working period or hours, any kind of new rules applicable or any change in pay rates how the intimation must be specified in standing orders. For example: the circular would be stuck at the general assembly point where it comes to employees’ notice easily, or notice can be provided individually, these are certain ways that can be used for intimation.

Working shifts, attendance and leave provisions

The standing orders must also include the rules regarding the working shifts, and latecomers, set procedures for entering the workplace and applying for leaves. Conditions, in regard to the same, must also be prescribed.

Rights and liabilities

In case any industrial unit or section has been closed or is temporarily closed or stopped in use, then in such a case the rights and liability of the workers and employer must be mentioned in the standing order.

Termination, suspension, or dismissal

The standing order must mention the acts or omission which is misconduct resulting in dismissal or suspension; the notice by the employer for these matters must be mentioned in standing order.

Redressal mechanism

In case of any kind of unfair treatment or wrongful act by the employer to the workmen, the redressal mechanisms for the benefit of the workers must be specified in the standing orders.

Model standing order in Labour Law

Model standing orders are the guidelines provided by the government, which may be used by the employers for drafting standing orders for their respective industrial establishments. The provisions regarding model standing order is provided in Rule 3 of the Industrial Employment (standing order) Central Rules,1946 –

Rule 3(1) of the Industrial Employment (standing order) Central Rules,1946 mentions that Schedule provides the Model standing Order for all the industrial establishments, other than the industrial establishments relating to the coal mines.
Rule 3(2) of the Industrial Employment (Standing Order) Central Rules,1946 specifies that Model Standing orders for the industrial establishments relating to the coal mines are provided in Schedule 1A of the Industrial Employment (Standing Order) Central Rules, 1946.

To know more about model standing order, click here.

Model standing order under Schedule of the rules

The Schedule of the Industrial Employment (Standing Orders) Central Rules, 1946 provides for the model standing orders for the industrial establishments, other than the industrial establishments relating to the coal mines. It covers the following matters:

It specifies the classification of workmen.
The Schedule provides the rules for publication of notices regarding the wages, shifts, working days, holidays, and wage rates.
The Schedule specifies the provisions relating to leaves, casual leaves, payment of wages and for stoppage of wages.
The rules for termination of employment are prescribed in the Schedule.
The Schedule provides the fines for the misconducts; the misconducts which are specified in the Standing orders.
The Schedule prescribes the liabilities of the employer in case the employer does not follow the provisions mentioned in the Industrial Employment (Standing Orders) Act, 1946.

Additional matters set out for coal mines under Schedule 1A of the rules

Rule 2A of the Industrial Employment (Standing Order) Central Rules, 1946 prescribes certain matters which must be specified in the standing orders of industrial establishments relating to the coal mines. The matters given in Schedule 1A of the rules will apply to coal mines. These matters are as follows:

Medical aids to be provided in case of any accidents.
The travel facilities via railway.
Methods of filling vacancies and matters regarding transfers.
Liability of the manager in the coal mine.
Provisions for service certificates.
Matters regarding exhibition and supply of the Standing order.

Additional matters for all the industrial establishments under Schedule 1B of the rules

There are certain matters which must be specified in the standing orders of all the industrial establishments regardless of whether they are related to coal mines or not. Under Schedule 1B of the Industrial employment (Standing Order) Central Rules, 1946 such matters have been provided which are as follows:

Service records which includes the service cards, certificates, records of the residential address and age of the workmen
Issuing letter of confirmation
Specifying age of retirement
Provisions regarding the transfer of the workman
Medical aid in accident and medical examination
Employee’s secrecy and exclusive service towards the industrial establishment.

The Industrial Employment (Standing Orders) Act, 1946

The Industrial Employment (Standing Orders) Act, 1946 received its assent on 23rd April 1946. The object of the act was to have uniform standing orders addressing various matters in the course of employment.

Applicability of the Act

The Industrial Employment (Standing Order) Act,1946 applies to the whole of India under Section 1(2) of the Act. As per Section 1(3) of the Act, It applies to every industrial establishment wherein one hundred or more workmen are employed or were employed on any day of the preceding 12 months. In addition to this, the appropriate government may apply this Act to such establishments who have less than a hundred workmen by giving notice (for not less than two months) of its intention to apply the Act.

In the case of New Delhi Municipal Corporation v, Mohd. Shamim, (2003) the department raised an objection that Mohd. Shamim is working in the electricity department, which does not come under the purview of the Industrial Employment (Standing Order) Act,1946. The Delhi High Court has held that, under Section 2(e) of the Act, the industrial establishment may include such employers who generate, transmit and distribute electricity.

When the Act does not apply

There are certain exceptions under the applicability of the Industrial Employment (Standing Order) Act,1946. Those exceptions are as follows:

Under Section 1(4) of the Act, it is stated that the industries where Bombay Industrial Relation Act,1946 applies, on such industries, standing order Act will not be applicable.
Further, in any such industries where the Madhya Pradesh Industrial Employment (Standing Order) Act,1961 is applicable in such industries the Industrial Employment (Standing Order) Act,1946 shall not apply. However, if such industries are governed and are controlled by the Central Government then the Industrial Employment (Standing Order) Act,1946 becomes applicable.
Section 13B of the Act states that the Act does not apply to any industrial establishment and workmen employed in those industries if following Rules applicable to them:

The Fundamental and Supplementary Rules;
Civil Services (Classification, Control, and Appeal) Rules;
Civil Services (Temporary Services) Rules;
Revised Leave Rules;
Civil Service Regulations;
Civilians in Defence Service (Classification, Control, and Appeal) Rules; or
Indian Railway Establishment Code; or
Under any other rules and regulations prescribed by the appropriate government in the official gazette.

The objective of the Industrial Employment (Standing Order) Act,1946

The objectives of the Industrial Employment (Standing Order) Act, of 1946 are as follows:

It provides the established rules for certifying the standing orders under the Act.
It recognizes the terms of employment, resulting in fewer chances of exploitation of the workmen.
It leads to fewer disagreements and disputes between the administration of the industry and the trade unions or workers.
The rights and obligations of the employer and the workmen are well-defined.
The act does prevent the unnecessary demands of the workmen and trade unions.
Most disputes are settled by arbitration or conciliation.

Penalties provided under the Act

The Act provides for the penalties resulting from failure to comply with the provisions given in the Act. Under Section 13 of the Act, the penalties and procedure is specified as under:

Penalties

In case of violation of Section 3 which deals with submission of draft standing order and Section 10 of the Act which specifies the duration and modification of the standing orders, a penalty of above Rupees 5000 will be imposed. In continuance of the offence, a fine of Rupees 200 on an everyday basis till the offence is committed.

If the employer or his establishment does not comply with the certified order under this Act, then he shall be punishable by Rupees 100 and, in continuance of the offence, Rupees 25 on an everyday basis till the offence is committed.

Procedure

It should be noted that no prosecution for an offence under this Act shall be instituted except the prior sanction of the appropriate government. Once a prosecution is initiated with approval of appropriate government, then the offence underlined shall be triable by the competent court. For the offence under this Act, the Metropolitan Magistrate or Judicial Magistrate Second Class can try offences.

Powers of appropriate government

The Industrial Employment (Standing Order) Act,1946 defines the term “Appropriate Government” under Section 2(b). It states that in respect of the industrial establishments under the control of the Central Government or the railway administration or located at any major port, mine or oil field, the term “Appropriate Government” means the Central Government. In all the other cases, the term “Appropriate Government” means the State government. It is also stated that if any question arises as to whether any industrial establishment is under the control of the Central Government or not, then in such case the government is authorized to decide this question upon giving a reasonable opportunity of hearing to both the parties. The question of whether the Central Government is an Appropriate Government or not may be referred to the government by the employer or the workman or a trade union or other representative body of the workmen, or the government can take up the question on its own motion.

Further, the Appropriate Government is vested with certain powers under this Act which are listed below-

Power to exempt – Section 14

Under Section 14 of the Act, the Appropriate Government can exempt any class of Industrial establishment or any industrial establishment from the application of this Act. For such an exemption, the Appropriate Government has to issue a notification in the official Gazette in that regard. Further, the Appropriate Government can either grant such an exception unconditionally or put some condition upon fulfilment of which, such exemption will be granted.

Power to make rules- Section 15

Under Section 15, rule-making power of the Appropriate Government is being highlighted. It states that the Appropriate Government may make rules on the following subjects to carry out the purpose specified in this Act. Rules made afterward must be notified in the official gazette. Appropriate Government can make Rules to-

Prescribe additional matters to be set out in the Schedule and procedure for modification of Certified standing order in accordance with the addition made to Schedule of the Act. However, it is a precondition to setting additional matters in Schedule that representatives of both employers and workmen shall be consulted by the Appropriate Government.
Set out a model standing order to carry out the purpose of this Act;
Prescribe procedure for certifying officer and appellate authority;
Prescribe fees which can be changed for registration of certified standing order
In any other matter which is to be or is prescribed.

Procedure of making rules

Every rule made by the Central Government under this Section shall be laid before each of the House of Parliament while it is in session for a total period of thirty days, which may be in one session or in two or more successive sessions. The proposed rule is to be presented before Parliament soon after it is made. Such a Rule comes into effect when both the House passes the agrees to it and passes it according to established procedure.

Delegation of powers of Appropriate Government – Section 14A

The Appropriate Government under this Act is allowed to delegate its power under Section 14A of the Act. The government may by notification in the official gazette delegate the powers given to it under this Act or Rule made thereunder. An Appropriate Government, while delegating powers under this Act, might put conditions which shall be followed by the authority in whose favour such delegation is made.

To whom such delegation be made

The authority in whose favour the delegation of powers is to be made is specified in Section 14A(a) and Section 14A(b).

In cases where the Appropriate Government is the Central Government, the Appropriate Government may delegate its power-

To officers or authority which is subordinate to Central government;
To officers or authority which is subordinate to State Government or
To state government;
In cases where the State Government is the appropriate government, it may delegate its power to such of the officer or authority which is subordinate to the State Government. The details about the delegation shall be mentioned in the notification in the official gazette.

Who is the certifying officer

According to Section 2(c) of the Industrial Employment (Standing Orders) Act, 1946 the certifying officer means:

Labour Commissioner or a Regional Labour Commissioner; and
Any officer appointed by the appropriate government to perform the functions of certifying officer under this Act.

Note- For a certifying officer, who is not a Labour Commissioner or a Regional Labour Commissioner, the appropriate government has to issue a notification in the official Gazette for the appointment of ‘any other officer’ as certifying officer under this Act.

The certified officer has been vested with important functions and responsibilities in the Act, which will be discussed in the letter part of this heading.

Role of certifying officer

The certifying officer has a role of responsibility under the Industrial Employment (Standing Order) Act, of 1946. There are various functions specifically given to the certifying officer, some of those are:

As per Section 3 of the Act, the certifying officer has to receive the five copies of draft standing orders proposed by the employer, for adoption in his industrial establishment.
As per Section 4 of the Act, it shall be the function of the certifying officer to adjudicate upon the fairness or reasonableness of the provisions mentioned in the standing orders. He has to ascertain that the terms of the draft standing order are in conformity with the provisions of the Act.
As per Section 5 of the Act, the certifying officer shall forward a copy of the draft standing order to the trade unions, once he receives the receipt of the draft standing order submitted by the employer of the industrial establishment. It should be noted that by way of such forwarding, the trade unions are given a chance to raise objections to the draft standing order submitted by the employer. Further, the role of the certifying officer extends to deciding whether to accept the modification presented by trade unions or not. That means, the decision to modify or amend the same is the discretion of the certifying officer.
The certifying officer has also a role to certify the draft standing orders, with or without modification.
As per Section 8 of the Act, the registration of the final certified copy shall be done by the certifying officer in the register. Further, he shall furnish an approved copy of Standing Orders to any person applying for it upon payment of the prescribed fee.
As per Section 11 of the Act, the certifying officer shall receive evidence, administer oaths, enforce the attendance of witnesses, may compel the discovery and production of documents, and have all the powers of the civil court.

In the case of Muthoot Pappachan Consultancy vs Labour Commissioner (2007) the certifying officer following the prescribed procedure under Section 5 of the Industrial Employment (Standing Order) Act,1946 had certified the Draft Standing Order. No parties had raised any objections and had accepted the Certified Standing Orders. After one and a half years, the certified officer had issued a show cause notice asking for reasons why the certified standing orders should not be revoked or rescinded by the certifying officer. This was challenged in the High Court of Kerala. The court held that a certifying officer has no such jurisdiction under which he cancels his given order. It means that the originally certified standing order would stand.

In this case, the issue raised was whether the Central Civil Services (classifications, control, and appeal) Rules, 1965 (CCA rules) or the certified standing order of the company would prevail. The Supreme Court held that the CCA rules were the general rules and hence herein the special rules i.e. the certified standing order. Would prevail for the disciplinary actions for the workmen.

Submission of draft of standing orders in Labour Law

The draft of Standing order is the proposal made by the employer for adoption of Standing orders in that particular industrial establishment. This draft standing order must include all the matters set out in the 1st Schedule of the Act. Further, if Model standing orders have been prescribed for that industrial establishment, then the draft standing order shall be in conformity with such model, so far as practicable.

Under Section 3 of the Act, the employer must submit such a draft of a standing order within the period of six months from the date on which the Act becomes applicable to an industrial establishment. The employer has the obligation to submit 5 copies of draft standing orders to the certifying officer which is proposed by him for adoption in that particular industrial establishment.

Draft to be accompanied by particulars of the workmen

The draft standing orders submitted to the certifying officer shall be accompanied by a statement giving prescribed particulars of the workmen employed in the industrial establishment. Among all other particulars, such as name, address etc. it shall also include the name of the trade union to which those employees belong.

The particulars of workmen mean the details regarding the workmen in the industrial establishment. Rule 5 of the Industrial Establishment (standing order) Central Rules, 1946 provides the list of particulars of the workmen they are as follows:

Details regarding total number of people employed.
Number of permanent workmen, temporary workmen and casual workmen
Number of badlis or substitutes;
Number of probationers and no. of apprentices.
Name of the trade union or trade unions to which the workmen belong. It is not mandatory, that means if the workman does not belong to any trade union then this particular information could be avoided.
Remarks

The draft standing order must be accompanied with the particulars of workmen prescribed above. It should be noted that for similar industrial establishments, more than one employer of such a similar industry may submit a joint draft of standing orders to the certifying officer.

Conditions for certifying standing orders in Labour Law

Before the certification of a standing order, there are certain conditions, upon fulfilment of which, a certification may be granted to a standing order proposed by an employer of that industrial establishment. The conditions for certifying a standing order are provided under Section 4 of the Act. The two requisite conditions are:

The matters mentioned in the draft standing order mention provisions related to every matter set out in 1st Schedule. Here, ‘every matter’ means whatever matter is applicable to that particular industrial establishment.
The second condition is that the matters in the draft standing order should be in conformity with the provisions mentioned in the Industrial Employment (Standing Order) Act, 1946.

Upon the fulfilment of above-mentioned twin conditions, the draft standing order may be certified by the certifying officer. However, it shall be the duty of the certifying officer to adjudicate upon the fairness or reasonableness of the provisions of any standing orders which are submitted for certification. Prior to 1956, the certifying officer had no such power to check fairness or reasonableness of draft standing order. It was in 1956, Parliament amended the standing order Act to widen the scope of powers given to the certifying officer and gave them authority to adjudicate upon the fairness or reasonableness of the provisions of any standing orders.

Certifications of standing orders in Labour Law

After the fulfilment of the requisite conditions set out under Section 4 of the Act, the draft standing order is processed for certification under Section 5 of the Act. The steps for the certification are as follows:

Application for certification of standing order

Rule 4 of the standing order Rules, states that application for certification of standing orders shall be made in Form I. Such an application for certification of draft standing order shall be addressed to the certifying officer, and it shall include the following particulars-

Date and place of employer;
Postal address of the employer along with his signature at the end of application;
A declaration by employer that he has enclosed five copies of the draft Standing Orders proposed by me for adoption in his industrial establishment;
Address of industrial establishment to that proposed standing order, it to be made applicable; and
A declaration that required particulars of workmen is also attached with application.

Opportunity of raising objection

Section 5(1) of Industrial Employment (Standing Order) Act,1946 contains provisions for raising objections. Until this stage, the draft standing order was a proposal by an employer for adoption in his industrial establishment. For a balanced set of terms and conditions of employment, employees, or workmen should also have a say in formulating provisions of the standing order. Therefore, the employees are given an opportunity for raising objections, when a draft standing order is submitted for certification before the certifying officer. They may raise objections to any of the arbitrary terms and conditions incorporated in the draft standing order, which might act against their interest. Along with objections to existing clauses of the draft standing order, they may also propose to add some clauses in the draft.

The draft standing order and the notice will be provided to the trade union or to the workmen (in case there is no such trade union) for them to raise objections in any of the terms and conditions incorporated by the industrial establishment against their interest.
At this stage, the employees may raise objections for incorporation of certain clauses or even for removal or amendment of the existing proposed clauses in the draft.
The objections are to be given to the certifying officer within 15 days from the date of notice receipt.

Evaluation of the raised objection

After receiving the objections and giving the opportunity of being heard, the certifying officer shall evaluate the objections as per Section 5(2) of the Industrial Employment (Standing Order) Act,1946.

Upon receiving any objections, the certifying officer may decide whether to approve the objections or deny the objections raised by workmen.
The certifying officer will also decide if any further modification of or addition to the draft standing order is necessary to render the draft standing orders certifiable under this Act.
If in case the certifying officer finds the same necessary, he may order in writing regarding the modifications to be made.

Certification of the draft standing order

Section 5(3) of the Industrial Employment (Standing Order) Act,1946 specifies the matter regarding certification of the draft standing order. After modifying the draft standing orders, the certifying officer shall within seven days certify the standing orders. Then after shall send the authenticated certified copies to the concerned parties. This is the process of certification of standing order in accordance with the Industrial Employment (Standing Orders) Act, 1946.

As per the Rule 7 of the Industrial Employment (Standing Orders) Central Rules,1946 the certified copies of standing order must be officially stamped and sealed by the office seal of the Certifying Officer. If the terms of the standing order are appealed before appellate authority and appellate authority modifies the standing order, then in such case the standing order would bear the stamp and seal of appellate authority. The stamped and sealed standing order shall be sent to the employer, employees or authorized representative of workmen and to the trade union by the certifying officer within a week of the certification of the Standing orders. They shall be sent by the registered post.

Implementation of standing orders in Labour Law

The mode of implementation of the certified standing order as per Industrial Employment (Standing Order) Act,1946 is as follows:

Date of operation

The date of operation of standing order depends on whether any appeal is done or not. Under Section 7 of the Act, the provisions for the date of operation of standing order is given as under:

If the appeal is made, the standing orders shall come into operation on expiry of 30 days from the date on which certified/ authenticated copies are sent to the parties.
When appeal is made against the order of the certifying officer, the standing order shall come into operation upon expiry of 7 days from the date on which the appellate authority sent copies of the order passed while adjudicating the appeal.

Register of standing order

The certifying officer shall register the final certified copy of all standing orders in a register in the prescribed form. Under Section 8 of the Act, a certifying officer shall furnish a copy to any person applying and paying the prescribed fees for the same. As per Rule 8 of the Standing Order Rules, the fee payable for a copy of the standing order shall be calculated at the following rates-

75 paisa, for the 200 words or less;
77 paisa, for every additional 100 words or fractions of words; and
When a standing order exceeds 5 pages, then the approximate number of words per page shall be taken as the basis for calculating the total number of words to the nearest hundred

Language in which standing order will be posted

The language of standing order holds utmost value, as standing orders must be in such language in which the workman does not only read it but can also interpret it for own benefit. This makes the communication of standing order, convenient, and the chances are less that a workman is misguided by the trade union or others.

Under Section 9 of the Act, before posting the standing order these matter must be taken into consideration:

Standing orders shall be posted in English and the language understood by the workmen.
It shall be posted on special boards which are at or near the entrance through which the workmen enter.

Temporary application of model standing order

The model standing order shall be applicable to the industrial establishment from the day on which the Act became applicable to the industrial establishment till the establishment gets its certified standing order. As per Section 12A of the Act, the model standing order which is prescribed for that industrial establishment shall be applicable to the establishment until they get their certified standing order. However, prescribed model standing order shall not be applicable to the industrial establishment to which appropriate government is Gujarat or Maharashtra state government.

In the case M.C. Raju v. Executive Director (1984) the Karnataka High Court held that the language of Section 12A makes it clear that until the industrial establishment gets their own certified standing order, model standing order will be applicable. If the industrial establishment makes any changes in the Model Standing Order, then the changes will not automatically get applied. They must be in accordance with the procedure for amendments.

Note- Where there are two categories of workmen- (i) the daily wages workers; and (ii) monthly wages workers. If there are certified standing orders in respect of the daily rated workers only, the prescribed model standing orders should be deemed to have been adopted for those who are employed on the monthly basis until such categories have their own certified standing orders

Modification of standing order in Labour Law

The modification of standing order can be done in case of any challenges faced during the application or interpretation of the certified standing order. Section 10 of the standing order Act states the procedure for modification of a standing order after it has been approved. It states that standing order shall be modified:

After 6 months from the date on which the standing orders or the last modifications thereof came in to operation; or
Before 6 months, if there has been an express agreement between following persons for such proposed modification.

Between the employer and the workmen, or
Between the employer and other representative body of the workmen, or
Between the employer and trade union.

Application for modification of standing order

Once an employer or workman or a trade union or other representative body of the workmen fulfils the conditions mentioned for modification of a standing order, then they may apply before the certifying officer for such modification. The application for modification of standing order shall be accompanied by five copies of the modifications proposed to be made. It should be noted that if the modification in standing order is proposed with a common agreement between employer or workman or his representative then, a copy of such agreement shall also be attached with the application for modification.

Whatever provisions of the Act were applicable in the process of certification of draft standing order, shall also be applicable in process of modification of certified standing order.

This procedure of application for modification in certified standing order shall not be applicable to industrial establishments where the appropriate government is the Government of Gujarat or Maharashtra.

Interpretation of standing order in Labour Law

Under Section 13A of the Act, the employer, workmen, or trade union may refer questions related to interpretation or application of standing order to the labour court, which is constituted under the Industrial Dispute Act,1947. The labour court, upon hearing both the parties, shall decide the question and the decision of the court would be final and binding on both the parties.

In the case of Kishore Jaikishandas Icchaporia vs M.R. Bhope, Presiding Officer (1987), the Bombay High Court held that Section 13A gives a right to the employer or workmen, authorized representative of workmen or trade union to approach labour court and raise any question regarding the application or interpretation of the standing order, model standing order or amendment in certified order as per the standing order Act. In this case, the appeal was filed against the order of the labour court which rejected the application filed by the employee to interpret the conflict in model standing order and certified standing order. The application for interpretation was rejected on the ground that the labour court has no jurisdiction to decide such conflict, however, the High Court by allowing the appeal under Article 226 of the Indian Constitution held otherwise.

Admissibility of oral evidence contradictory to standing orders

If any case arises wherein the oral evidence contradicts standing orders, then such oral evidence, which has the effect of adding to or contradicting certified standing orders, shall not be admissible in any courts. Section 12 of the Act clearly provides that such oral evidence would not be admitted by any court which is in contradiction with the standing orders.

Appeals under the Industrial Employment (Standing Orders) Act, 1946

The draft standing order, which is sent for certification under Section 5 of the Act, may be approved or rejected by the certifying officer. In case of such approval or rejection, the aggrieved party has the chance to challenge the decision of the certifying officer and appeal that in appellate authority. The provision for appeals against the approval or rejection of the objections to the draft standing order is given under Section 6 of this Act. The procedure for appeal is as follows:

Who may appeal

Under Section 6, it is provided that any employer, workmen, trade union or other prescribed representatives of the workmen may appeal against the order of the certifying officer to grant or reject the certification to standing order. However, such employers, workmen, representatives of the workmen or trade union, must be aggrieved by the order or approval or rejection for certification of standing order.

Employer- Employer may appeal if the certifying officer rejected the draft standing order on seemingly unreasonable grounds. He may also appeal if the certifying officer approved the standing order but with certain modification which is unreasonable and not in the interest of the employer.

Workman, representative of workman or trade union- Workman, representative of workman or trade union may appeal if they are aggrieved by non-acceptance of the objection raised by them on the draft submitted by the employer.

When to appeal

An appeal by the employer, trade union or workmen shall lie against the order of the certifying officer if they are aggrieved by such order. The appeal to the appellant authority shall be made within 30 days from the date on which the five authenticated copies were sent for certification under Section 5(3) of the Act.

Procedure for appeal

Rule 7A of the standing order Rules, 1946 states the process of appeal against certifying officer’s order to approve/reject the standing order. It states that any person desiring to prefer an appeal shall draw up a memorandum of appeal setting out the grounds of appeal. Five copies of such a memorandum shall be forwarded to the appellate authority accompanied by a certified copy of the standing orders, amendments or modifications, as the case may be. It should be noted that it is mandatory to serve a memorandum of appeal to each respondent.

The appellate authority shall give the appellant an opportunity of being heard, after which it may pass the following orders-

confirm the standing orders, amendments, or modifications as certified by the Certifying Officer; or
shall amend the standing order by making modifications whatsoever it may think necessary. While doing so, it will give the respondent an opportunity of hearing (if it appears reasonable) before a final decision is made in the appeal. In this case, the authority shall fix a date for the hearing of the appeal and direct notice thereof to be given—

To trade union, if the appeal is filed by the employer or a workman; or
To the employer, where there is no trade union or representative of workmen
To the employer, if the appeal is extended by the trade union. In this case, along with employer, notice shall also be given to all other trade unions of the workmen of the industrial establishment
Again, to the employer, if the appeal is filed by the representatives of the workmen. In this case, notice shall also be given to workmen whom the appellate authority joins as a party to the appeal.

The appellate authority may call for any evidence at any stage of hearing. The evidence so called must be considered necessary for the disposal of the appeal.

Order of the appellate authority

After following all procedures, the appellate authority shall make an order which can either confirm the standing order certified by the certifying officer or it may modify the standing order. It shall be noted that the appellate authorities’ decision shall be final. Within seven days of its order, the copies of the standing order shall be sent to-

the certifying officer;
the employer;
trade union; or
other prescribed representatives of the workmen.

In case the authority agrees upon the decision of the certifying officer, no other documents must be accompanied by it. However, if the amendments are made in the certified standing order then in such a case, the amended certified standing order and its authenticated copies in the prescribed manner must be accompanied.

Powers of the certifying officer and appellate authority

The certifying officer and the appellate authority have been vested with power on deciding on the matters arising in course of certification and afterwards. Under Section 11 of the Act. the certifying officer and appellate authority shall have all powers of the civil court within the meaning of Section 345 and Section 346 of the Code of Criminal Procedure, 1973 (“CrPC”). While exercising powers of civil court, appellate authority may-

receive evidences;
administer oaths;
enforce the attendance of witnesses; and
Compel the discovery and production of documents.

If the order of appellate authority or certifying officer has some clerical or arithmetical mistakes, then it can be corrected by respective officers or their offices. Further, errors arising from any accidental slip or omission in the slip may also be corrected.

When can any order be challenged under Article 226 of the Indian Constitution?

Article 226 of the Constitution of India empowers the High Courts for issuing writs. However, under certain circumstances, the appeal against the order of the certifying authority or the appellant authority may be entertained under the Article 226 of the Constitution of India.

In the case of Narendra Pal Gahlot v. State of Uttar Pradesh, (1994) LLR 21 (All) the employees were terminated from service which was challenged in this case. The employee’s claim that a specific clause of Certified Standing Order of the establishment was violative of Article 14 and Article 16 of the Indian Constitution, as orders are interpreted to terminate employees without serving any chargesheet, without enquiry and without giving any opportunity of hearing.

The way of termination of their employment violated the principles of natural justice. The Allahabad High Court held that in such cases where the orders are violative of the principles of natural justices and their rights, then such orders can be questioned under Article 226 of the Constitution of India.

Judicial pronouncements

Bharatiya Kamgar Karmachari Mahasangh v. Jet Airways Ltd. (2023)

Facts of the case

In this case, the respondent owned and operated aviation companies. He entered into a contract with 169 temporary workmen. In the model standing orders under the Bombay Industrial Employment (Standing Orders) Rules, 1959, it was specified that the employees upon completion of 240 days of their employment must be considered as permanent employees. Despite this, the employees upon completion of 240 days of employment were still treated as temporary.

The trade union decided to take action against the practices of the employer. On 2nd May 2002, the employer and the trade union entered into settlement to resolve the dispute. As per this settlement, the employees were given numerous benefits as an award if the employees give up their demand of getting permanent employment. On this basis, the employer didn’t grant permanent employment to the employees.

The Industrial Tribunal and Bombay High Court held that mere completion of 240 days does not give the employees the right to claim permanency. The model standing order is not a statutory provision. Thereafter, it was the after was appealed to the Supreme Court.

Issues raised

Which is the Appropriate Authority empowered to issue the Standing Order(s) under the Industrial Employment (Standing Orders) Act, 1946 (hereinafter referred to as ‘The Act’)?
Whether private agreement/settlement between the parties would override the Standing Order?

Judgment of the Court

The Supreme Court held that since the company was not under the Central government’s control, the “Appropriate Authority” in this matter would be the state government. The Supreme Court held that any such contract cannot take place which overrides the statutorily provided Certified Standing Order. The Supreme Court quashed the orders from the lower courts and gave a decision in favour of the trade union.

R.P. Sawant And Ors. v. Bajaj Auto Ltd. And Anr (2001)

Facts of the case

In this case, the Company had a factory in Pune dealing with the manufacturing of two-wheelers and three-wheelers. Initially, the company used to hire employees on probation and then were made permanent employees after some time. In the year 1981, about 8000 were permanent workmen in the Akurdi Plant of the Company. From 1984, the company changed its practice and started hiring employees on a temporary basis for a term of seven months with a break of different time periods. Due to these breaks, no employees could complete 240 days in twelve months. This practice continued for several years.

They were not made permanent as according to the Model Standing Orders, non-completion of 240 days of service in a year does not make workmen permanent. There was a record of recruiting the employees and then discontinuing the services. Against this unfair and unjust labour practises, the workmen had filed a complaint.

Following this, many workmen had filed a complaint in different batches. The employer, out of these employees, had fired 301 employees from the service. Regardless of many complaints and the court’s stay in the matter, the employer continued with his practices. He continued hiring more employees and replaced many.

The final status before the court was that 401 temporary workmen were continuing the services and 301 were out of the service. They claimed that the employer is engaged in unfair labour practices and their termination is also not valid.

Issue raised

Whether the employer has engaged himself in unfair labour law practices?
Whether the company proves the claims are maintainable?
Whether relief should be granted?

Judgment of the case

All these matter was heard by the Bombay High Court, wherein the court held that:

The Industrial court was justified in holding the unfair practices of the employer. However, the court did not have jurisdiction to grant relief to the terminated employees.
The petition filed by the workmen was allowed, and the employer’s petition was dismissed.
Further, the employer was liable to pay Rupees 50,000 as cost and shall carry out the directions of the Industrial court within three months from the judgment.

Standing orders under Industrial Relations Code, 2020

The Industrial Relations Code, 2020 amends and consolidates various current laws in relation to industrial disputes, trade unions, employment terms, etc. It is considered to be a huge reform with respect to the labour laws. The Industrial Relations Code, 2020 have revised and introduced definitions and concepts. The Industrial Relations Code, 2020 have made changes in the following:

Trade unions
Strikes and lockouts
Standing orders
Layout and retrenchment
Re-skilling Funds
Power of government and dispute mechanism

Major provisions with respect to the standing orders are as follows:

The new laws bring change in the applicability of the Act, which says that standing orders shall be applicable to such establishments, which shall have 300 hundred or more employees on a day preceding twelve months.
These establishments have to prepare the draft standing orders in accordance with the model standing order within 6 months of commencement of the Code with consultation of the negotiating unions and its members.
Majority of the provisions in relation to standing orders in the Code have taken reference from the old statute itself.

Conclusion

The labour sector in India is one of those sectors which are mostly exploited. The malpractices of the employers bring the labourers to workless or foodless days. The establishment of proper procedure of the standing order ensures a protective sphere in between the workmen and the unfair, malpractices of the employers.

This labour law empowers the workmen with their rights to work with dignity and freedom. This Act makes the employer answerable and under pressure to abide by the given laws. However, its strict implementation is also essential for safeguarding the rights of the workmen.

Frequently Asked Questions (FAQs)

What is the Model Standing Order?

These are the set of rules, regulations, and obligations drafted by the Central Government. This model standing order covers various terms of employment including the working hours, holidays, terminations, etc. It is even applied to the industries until they receive their certified standing order. Mostly, the certified standing orders must be in accordance with the model standing order prescribed by the government.

When can the CSO be modified?

The CSO can be modified as per Section 10 of the Industrial Employment (Standing Orders) Act, 1946. The standing order can be modified only when there is an agreement between the employer and the workmen or trade unions, etc. before the expiry period of six months from the last modification came into operation.

Terms and conditions of the contract of employees differ from the CSO. Which would prevail?

There are various judicial pronouncements over this manner, the certified standing orders are like statutory contracts and hence the contracts of employment must not be inconsistent with it. However, some courts have given such pronouncements that any inconsistency until and unless is by mutual consent of the employer and employee can be held valid.

References

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All you need to know about environmental, social, and governance (ESG) disclosures

By

-

January 17, 2024

This article has been written by Piyush Mahanta, pursuing a Diploma in US Corporate Law and Paralegal Studies from LawSikho and edited by Shashwat Kaushik.

Introduction

The rising demand for a sustainable future for the world is the result of increasingly growing apprehension about environmental and social issues. Due to such a prominent force of demand, it is being recognised by organisations that it is crucial for every business to showcase transparency in their activities involving any possible risk associated with the environment, society, and governance. Environmental, Social, and Governance (ESG) disclosure has come up as a key tool for numerous regulatory bodies, stock exchanges, and government authorities to facilitate this transparency.

ESG reporting, purpose-led performance reporting, or sustainability reporting are some of the other names by which ESG disclosure can be referred to. The disclosure is an amalgamation of the data about a company or an organisation’s impact on the environment, society, and governance. As mentioned earlier, these reports serve the purpose of facilitating the details regarding all the possible risks and opportunities that the organisation may face or is facing, inducing transparency between the organisation and its stakeholders, i.e., investors, creditors, policymakers, members, employees, existing as well as potential customers, the government, and society at large, for better understanding about an organisation’s ESG management.

Significance of ESG disclosures

As the name suggests, the three prime ingredients in determining the feasibility and influence of an investment in a company or business organisation are what comprise the ESG Disclosures. In order to amplify one’s company’s environmental operations and drives, it is essential to formulate effective ESG reports. Opportunities of major significance for a company, such as growing a positive perception of the public towards the company, being investor-friendly or pioneering the field of innovation, can be attained by putting efforts into the company’s ESG disclosures. Being one of the most crucial corporate sustainability strategies, disclosing ESG data helps companies accurately point out their own sustainability performance in order to efficiently communicate it to stakeholders.

Purpose of the disclosures

When investing in a company or engaging with it at any given level, it can become essential to evaluate all the key aspects of that company. And whilst undertaking any evaluation of a company, one cannot overlook the possibility of risks and opportunities with which the company can be tied. Similarly, another facet that is something not to be taken lightly is the long-term impact of the activities that the company is undertaking at present. Now the question arises, how can someone not working within the company come to know about these crucial aspects before engaging with the company?

While it is pretty obvious that it is not possible to know about every possible risk or opportunity that a company may have, especially for an outsider, ESG disclosure paves the way to at least know about those risks and opportunities that matter the most after the financial ones, i.e., environmental, societal, and governance.

Understanding how the disclosures serve the environment, society, and governance is vital to fully grasping the purpose of disclosing corporate information.

Environment

How a company utilises its energy resources and handles the impact of its activities on the environment as a responsible entity towards the betterment of our planet is what the ‘environmental’ factor deals with in the disclosure document. Energy utilisation, global warming, carbon emissions, flora and fauna, water treatment, depleting forest covers, etc. are some of those aspects where companies may have an impact and this is what the reports disclose to the larger public. Monetary losses, loss of investment and lower public confidence in the company can happen as a consequence of not taking adequate steps to counter any of the mentioned impacts responsibly.

Society

The scope of activities and initiatives that a company undertakes in order to cherish the value of people and society at large is something that is analysed in this factor of the report. The report may include anything of a positive or negative outcome in relation to a number of important societal issues, such as gender sensitivity, the working environment of the workforce, customer engagement, data security and safety, privacy issues, etc.

Governance

How a company manages its internal issues and in what manner it deals with possible legal violations is what the ‘Governance’ factor addresses. It also focuses on the practices and procedures that a company follows as a part of its internal management. By disclosing these vital internal approaches, it is demonstrated that a company is safe and reliable, making it transparent and investor friendly.

Outcome of the work

The work of creating an exhaustive ESG is a tedious task and has to be done by being mindful of the outcomes that are expected by disclosing such a report. The key determinants of an effective ESG report are:

Why report ESG information?
For whom should ESG information be reported?
Where should ESG information be reported?
What ESG information should be reported?
How should ESG information be presented?

By addressing these questions, a company can formulate an effective ESG report that can meet the company’s expected outcomes. For further insights regarding these determinants and their role in an ESG report, it is recommended to go through the ESG Disclosure Handbook issued by the World Business Council for Sustainable Development.

The outcome of creating an ESG report heavily depends on what the company is looking to achieve by disclosing the report simply because it will contain the information that the company is willing to share in order to achieve certain objectives. While there can be several outcomes of an ESG disclosure, ranging from due compliance with government policy or statutory guidelines, growing positive public perception, gaining investors’ confidence, aligning with industry practice, etc., it is inextricably crucial for a company to accurately define and decide on what outcomes it is expecting from the disclosure while drafting an ESG report.

Takeaways for a company

While it has been made clear by now that ESG disclosures are beneficial for the holistic improvement of corporate practices because of their influence over the various stakeholders of companies, it is also vital for corporate houses to know that ESG is not only beneficial for external stakeholders; rather, it can be used in a number of ways that can prove to be highly rewarding for the companies.

There are a number of rewards that a company can attract by efficiently utilising the opportunity to invest in ESG. Below are some of the few possibilities over which companies may want to capitalise.

Onboarding with the competitive environment

With every passing year, the planet’s ecosystem is taking a hit. This has compelled a number of big and small corporations to start adopting sustainable practices. “Companies’ awareness and engagement with climate and environmental issues also seem to be increasing rapidly,” said Mr. Richard Mattison, CEO of Trustcore, which is a part of S&P Global Market Intelligence. This makes it important for other companies to take ESG seriously, as it can make a difference for them by turning them into well-performing companies.

Catering to the changing consumer choice

According to a report by PwC published in 2021, around 76% of consumers are willing to discontinue their relationship with companies that treat the environment, workers, or society to which they cater poorly. Another study shows that nearly 71% of consumers in India alone have reimagined their consumer choices based on the values that the companies stick with. This trend shows that just shifting to ESG-friendly practices and disclosing them to the public can help attract a prospective consumer base that is more than willing to shift to companies abiding by ESG principles.

Attracting investment

The world of investors is majorly emphasising prioritising ESG compliant ventures and it is only going to grow. Studies show that despite the recent economic and political turmoil, 81% of asset managers from major economies are jacking their priorities in ESG investment. This paves the way for companies to become the target of such investors and this can be done by disclosing ESG reports to investors or associations of investors globally.

The list of benefits can go on, but to truly reap the benefits and take away the rewards, it is essential to report ESG data using a standard and framework that is accepted globally. There are a number of options from which a company can choose. Following a standard becomes important because it makes it easier for investors, consumers and other stakeholders to understand the quality of a company’s sustainability practices.

ESG landscape in India

When major economies are rapidly adopting ESG principles and norms as a basic standard for their market players, India has not been so active in the reform. Global players and regulatory authorities are increasingly turning towards ESG practices and their mandatory adoption, which is also having a major impact on businesses operating in the Indian consumer market. Not only the businesses are being influenced but the larger consumer base present in India also has mixed feelings about the traditional corporate practices that the companies in the country generally follow.

Legal infrastructure dealing with ESG reporting

Unfortunately, there are no definite substantive laws or regulations in place in India that authoritatively direct the trends of ESG reporting or practices in the country but there are numerous legislations that partially have a say on such issues. Below are the laws and regulations that have ties to ESG practices in India.

These are some of the key legal instruments that somewhat regulate the ESG practices in the country and their disclosure. While there are other environmental laws in place that specifically address issues related to the environment but are not exclusively applicable to ESG reporting practices,.

It has to be noted that it is the Companies Act, 2013 that has the most say and authority over whatever limited regulation there is on sustainable practices in India. Section 134(3)(m), Section 166, and Section 135, read in sync with the Companies (Corporate Social Responsibility Policy) Rules of 2014, are some of the key provisions that are present in the Companies Act with regard to the subject matter.

Apart from the Companies Act, the Securities and Exchange Board of India (SEBI) is a prime authority on the subject matter. SEBI, the capital market regulator of the country, recently replaced the previous mandate of BRR (Business Responsibility Report) from 2012 with BRSR (Business Responsibility and Sustainability Report), effective from the 2022-23 fiscal year. The replacement was made through SEBI’s Regulation 34(2)(f) of the Listing Regulations and its circular. Now, the top 1,000 listed entities in the Indian capital market are mandated to include a BRSR in their respective annual reports, addressing the steps taken by the listed entities towards ESG principles.

At present, there is no robust legal infrastructure in India that can deal with ESG reporting and disclosures. While this is the case, SEBI in May 2022 formed an advisory committee to develop a robust system of ESG indicators, disclosures, rating and other regulations for ESG investment. Similarly, the Reserve Bank of India (RBI) is undertaking several studies and initiatives to develop a holistic legal and regulatory framework to promote ESG endeavours in the country.

Government’s take on ESG

The Ministry of Corporate Affairs (MCA) formed a committee on the above-mentioned business responsibility reporting to finalise the report formats going to be applicable to the listed as well as unlisted companies. This is going to be based on the performance as per the nine principles laid out in the National Guidelines on Responsible Business Conduct (NGRBC), released by the MCA. The report of the said committee proposed the extension of the number of BRSR-mandated companies to unlisted companies having turnover or paid-up capital above a certain figure. It is also recommended that the unlisted companies of small scale adopt BRSR Lite.

While it is evident from the recent developments that the Government of India is taking ESG and its related issues seriously, there remains a gap that needs to be bridged soon. It is yet to be seen what further steps the government will take to further strengthen the legal framework related to ESG disclosure in the forthcoming years.

Initiatives in the business environment

Corporate giants in India are driving the ESG tide and it is only going to grow more. The importance of ESG and its disclosures has been realised by a number of businesses in the country and they are adopting practices that are compliant with ESG principles. This can be seen by the fact that giants like TCS and Reliance Industries have announced their roadmaps to reduce their carbon emissions to zero. Another prominent case is the affiliation of tech giants like Tech Mahindra, Infosys and Wipro with the Dow Jones Sustainability Index (DJSI), a benchmark for assessing the ESG performance of companies throughout the globe.

There are a number of other examples where companies are willingly taking initiatives towards the betterment of the people. In India, the trend of companies taking part in ESG initiatives is constantly on the rise and with such things happening, it is quite obvious to witness the sudden surge of the need to disclose the same thing to the relevant audience.

A glance at global ESG standards

For a long time, there was a lack of a common standard on which companies could frame their ESG disclosures. The global ESG standard varied a lot and had a lack of uniformity. This is going to change very soon, as the International Financial Reporting Standards (IFRS) Foundation has recently formed the International Sustainability Standards Board (ISSB) with the objective of formulating international standards of sustainability disclosure. According to the IFRS Foundation, the ISSB’s standards will have international support from the G7, the G20, the International Organisation of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions.

The International Sustainability Standards Board (ISSB) issued its first two standards, namely IFRS S1 and IFRS S2, on June 26, 2023. While the IFRS S1 creates an international baseline for general sustainability disclosures, the IFRS S2 specifically deals with the standard for climate-related disclosures.

ESG standards in the US

The case for ESG disclosure standards in the United States of America until sometime ago was very similar to that of the case in India, where the disclosures were mainly driven by voluntary initiatives from the companies. However, it has changed rapidly over the last few months, as the U.S. Securities and Exchange Commission (SEC) has introduced new ESG initiatives and proposals.

Now, the SEC requires every publicly traded company to disclose all the material information that can be crucial for investors, including ESG-related risks. There are a number of other proposals that the SEC has introduced to the Biden administration in the US. Along with these, the SEC is also looking to align its standards and norms with the recently released standards of disclosure by the ISSB. By this, it can be said that in the upcoming months, some major changes and amendments to the existing regulations for ESG disclosures can be expected in the US.

ESG disclosures in the EU

Unlike its US counterpart, the European Union (EU) recently adopted the Corporate Sustainability Reporting Directive (CSRD), which has made it mandatory for all EU and non-EU companies having their business operations running in the EU to file annual reports on sustainability and the reports have to adhere with the European Sustainability Reporting Standards (ESRS). As of 31^st July 2023, the European Commission has adopted ESRS.

ESRS will standardise the manner in which companies in the EU report their ESG actions to the European Commission. Now all the 27 member countries have to include the ESRS in their legal framework by early 2024.

The ESRS has 12 sections, divided into four categories of reporting:

General;
Environmental;
Social;
Governance.

While the ESRS has been developed by the European Commission, one has to understand that the ESRS has been formulated in such a way that it corresponds to the ISSB developed by the IFRS as well. To increase the coordination between the two sets of standards, the European Commission has announced that it is closely working with ISSB to achieve the same.

ESG standards in other major economies

Another major economy that has a robust legal framework regulating the standards of ESG disclosures is China. ESG disclosure regulations in mainland China were introduced way back in 2008. The companies listed in the Shenzhen 100 Index were required to disclose their social responsibility reports to the Shenzhen Stock Exchange. The Shanghai Stock Exchange has mandated its Corporate Governance Index listed companies, be they domestic or international, to disclose their social responsibility reports, which have been further transformed into ESG reports. China formally established its framework for ESG disclosures when the China Securities Regulatory Commission (CSRC) released the Code of Corporate Governance Guidelines for Listed Companies in 2018.

Similarly, Singapore has also adopted clearly outlined ESG standards for their jurisdiction’s ESG disclosures. The Singapore Exchange has come up with a list of 27 core ESG metrics for companies to use as a starting point for ESG disclosure. While the Singapore Exchange has recommended the standard, it is not a mandatory standard that companies are bound to follow; rather, it is a suggestive approach when formulating an ESG report. This means that companies in Singapore are free to follow any standard of ESG reporting.

India’s spot in the rising ESG standards globally

It is a long-standing trait of Indian lawmakers to keep a slow pace when legislating on developing areas of public interest. This has been the same case in forming a standard for ESG disclosures in the country. However, it is true that India was the very first country to make law-making CSR mandatory when it introduced the statutory provision for CSR in Section 135 of the Companies Act in 2014. The Government of India and its financial regulatory wings have been taking a slow approach towards developing a standard framework to consolidate the ways in which ESG disclosures are made today or are not made at all.

While the world is moving towards an internationally accepted standard of ESG reports and disclosure, India has yet to come up with some substantial regulations in its domestic markets. As mentioned previously, the IFRS’s ISSB has already issued its set of international standards, and to comply with the same standards, the US government and EU’s regulatory space are working tediously. And as it is very well known that the G20 is one of the key supporters of the ISSB, it brings up the question of why India is not working to align itself with the ISSB’s proposed framework despite being one of the key members of the G20 group.

It is high time that India takes the ISSB’s proposals and the growing need for some substantial ESG regulation seriously, prioritising bringing a robust mechanism to regulate ESG practices and disclosure in the Indian market because limiting the regulations to a handful of companies from the capital market is not going to do much good, which is in itself a concerning issue in the light of a collective push for global sustainable practices.

Way forward with ESG disclosures

ESG has been taking an important spot in the to-do list of businesses and organisations globally. It is a positive trend that needs to grow even more because it will play a pivotal role in attaining the sustainable goals of our planet in the future. While it is true that ESG practices and disclosures have shown significant growth in the past few years, there is a massive need to increase the same even further, and that too at an exponential rate. To meet the future needs of the planet, it is necessary to pace up the adoption of CSR activities and their disclosures through ESG reports.

Rising importance of ESG compliance in India

India has been witnessing a rise in new businesses and foreign investment in its domestic market in the past few years. This has made sure that the Indian economy grows to become one of the biggest economies in the world. With more and more people setting up their businesses in India, it becomes even more important to monitor the quality of practices that these new businesses follow and ensure that no business practices in a manner that has a destructive effect on nature, the people or the national interest of the country.

The Ministry of Corporate Affairs (MCA), Reserve Bank of India (RBI), and Securities and Exchange Board of India (SEBI), along with some other key government institutions, play a key role in the business affairs of the country and it is up to them to ensure fair and safe practices to be the topmost priority of all the organisations participating in commercial activities in the Indian jurisdiction. It is more than evident that ESG disclosures are important for a lot of stakeholders and therefore, providing a definite standard of ESG reports becomes a necessary step towards meeting the country’s Sustainable Development Goals.

With only a limited number of regulations on ESG disclosure, India needs to introduce new and more effective policies, guidelines, standards and frameworks that can bridge the gap. The new developments have to also comply with the ISSB’s proposed global standard in order to make it easier for global investors and trade partners to operate in the Indian financial market.

Globally evolving ESG standards

The world is witnessing substantial development in the standards of ESG disclosure at international and global stages. This proves the fact that governments and international bodies all over the world are coming to a consensus on the importance of regulating ESG reporting. The establishment of the ISSB is a key milestone towards regulating global ESG standards. This positive development and the ISSB’s importance have been accepted by several global leaders, international forums and UN member states.

The joint statement by the UN entities states, “The standards being developed by the ISSB provide a unique opportunity. They can support global convergence of sustainability-related disclosure, create a common reporting baseline, and help mainstream sustainability-related issues into regular business strategy and management.”

The newly formed ISSB is going to play a major role on a global level in maintaining and regulating the standards of ESG reporting that the nations and companies operating in those nations will follow. The first set of standards has already been released by the ISSB, with many more to be released in the near future.

Conclusion

We are going through a period of transition where the world is changing its attitude towards the planet and the life on it. This junction of transformation brings its own challenges, which need to be resolved by a joint effort from all the stakeholders. The primary face of this change has been governments all around the world but it is high time that private players also take on the burden of moving forward with sustainable development goals.

To ensure that the interests of everyone, including businesses, investors, governments, the public, society and nature, are met while advancing, ESG reporting has become a unique and effective medium. But this medium has to be standardised at a global level in order to make it useful for everyone and fulfil its purpose.

Understanding the standards of ESG disclosures in India and its global counterparts is strategically crucial for all businesses, investors, government bodies, and consumers in India in order to align themselves with such norms seamlessly.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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L&T Infotech and Mindtree merger : an analysis

By

Sneha Mahawar

-

January 16, 2024

This article has been written by Syed Muheeb and Aditi Aagya pursuing Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Laursen & Turbo’s (“L&T”) subsidiary – Laursen & Toubro Infotech (“LTI”), has merged with MindTree, which are two independently listed companies, in one of the biggest deals in India. The merged entity will be called as LTI-MindTree (“LTI-MT”) becoming the 5th largest IT service company in terms of market capitalization.The scheme of amalgamation is approved by both benches of the Mumbai and Bengaluru National Company Law Tribunal (“NCLT”) between the creditors and shareholders of both entities under Sections 230–232 of the Companies Act of 2013. The reasoning behind this move is to consolidate their position in banking, financial services and insurance (“BFSI”) while also entering other new verticals. The merged entity will be led by MindTree’s Debashis Chatterjee, who will be the CEO and MD. This article analyses key aspects involving and affecting the merger and internal conditions which prompted

About L&T Infotech

LTI was incorporated in 1997 as a subsidiary of L&T. It provides an edge to its clients by leveraging business-to-IT solutions. It has a global presence with operations in 50 countries and a manufacturing footprint extending up to 8 countries apart from India; they have over 485 clients around the world, including 23 software development centres and 44 sales offices. LTI has also acquired eight key competitors since its inception, including GDA Technologies Inc. in 2006 for USD 27 million. They have also acquired AugmentIQ Data Sciences, a Pune based company. Because of this acquisition, they will service one of the world’s largest credit bureaus. Leading up to the merger, LTI became an Elite Services Partner of Snowflake, the data cloud company.

About Mindtree

MindTree (“MT”) is an Indian company incorporated in 1999 as MindTree Consulting Private Limited, with its registered office address in Bangalore and its structure in four industry verticals. BFSI, RCM, TMS and TH. It currently has a global presence in over 20 countries, including India. It has acquired over seven key competitors, such as Aztecsoft for 467 million dollars and Magnet 360 for 50 million dollars, which was also their last acquisition before being merged with LTI. In June 2019, L&T became the majority stakeholder in Mindtree by acquiring a 60% stake. L&T executed a Share Purchase Agreement (“SPA”) to the tune of Rs. 32,690 million at a price of Rs. 980 per share, after which, in 2021, MT acquired the NxT business of L&T.

Swap ratio and deal consideration

As part of the consideration, 73 full paid up equity shares of Rs. 1/- each of the new entity LTI MindTree will be issued and allotted for every 100 fully paid equity shares of Rs. 10/- shares held in MT. After the LTI – MindTree merger, the parent company, L&T, which is the promoter of both independent entities, will have a combined stake of 68.73%. In total, the multinational conglomerate L&T has paid close to Rs. 11,000 crore for the takeover, which includes a Rs. 4,988.82 crore payout for buying a 31% stake at a leveraged share price of Rs. 980 a share. Combined entity pro-forma revenue is also expected to remain at $3,513 million, enabling tier status upgrades and bids on large deals. Besides, the EBIT margins of both entities combined stand at 17.8%, which is lower compared to the competitor’s rate of 20%.

Furthermore, the merged entity will have a combined client base of over 700 and a headcount of 90,000 employees, taking its overall employee base of software businesses, which includes L&T Technology Services (“LTTS”), to a sprawling 1.2 lakh employees spread across 30 countries and 5 continents. The cash and investments of both Mindtree and LTI stand at an amazing $991 million.

SWOT analysis

The SWOT analysis, which is the aspects such as strengths, weaknesses, opportunities and threats of the merged entity LTI MindTree Ltd, is highlighted below:

Strengths of LTI-MT

LTI-MT has numerous strengths that allow it to thrive in the current marketplace. The strengths are:

Financial position: The entity has been effectively using its huge capital to generate profit, due to which the return on capital employed (“RoCE”) has been steadily improving. It is also efficient in managing assets to generate profits, thereby improving the return on assets (“ROA”). The company also has low debt coupled with increasing revenue every quarter.
Long term: The merged entity will be a force to reckon with in the long term, and a purchase at current valuation may yield suboptimal long-term returns. The entity can scale, resulting in winning market share, winning large deals vs. large players and cross sell to Fortune 500 clients because of its higher cash flow, complementary verticals and access to a talent pool across the globe.
Complementary services: The two companies have complementary service offerings, with LTI’s strengths in IT consulting, application development, and maintenance and MindTree’s expertise in digital transformation, cloud services, and data analytics.
LTI individually: LTI has a strong employee and client base of 40,000 and 475, respectively and a diversified revenue stream within the IT related sectors such as consulting, IMS, and MS. This results in diversity in the revenue stream. Lastly, the financial growth of LTI individually has gone up to 336.7% returns on Nifty 500 in the past 5.5 years, with proven high levels of client satisfaction and reputation.
MT Individually: MT has 7 acquisitions, which include the acquisition of Bluefin Solutions, which strengthens its European presence. MT is also a leader in providing services for digital technologies. 40% of workforce has digital competencies and with its presence across different industry verticals such as travel and hospitality, retail – CPG and manufacturing), and BFSI, with not a single vertical taking up more than 40% of revenue, it has resulted in de – risked business model.

Weaknesses of LTI-MT

There are certain aspects of LTI-MT that are currently in decline that can be worked upon; they are:

Short term: The company has a decline in net profit with falling profit margin quarter on quarter which is of particular concern in the short term. As per ICICI Swot analysis, ‘the company is also trading at premium valuations; however, the earnings outlook is weak. Coupled with roadblocks on corporate governance issues, adverse governmental policies are areas that need fresh consideration and focus.^’
Overdependence and efficiency: Both LTI and MindTree have a significant portion of their revenue coming from a few key clients, which poses a risk of overdependence and volatility. It has also been highlighted that the entity has been inefficient in using shareholder funds due to lack of transparency and trust with customers.
Integration and regulatory challenges: There are also integration risks from two sources, as pointed out by Kotak Institutional Equities – attrition among rank and file in delivery and sales teams. Any attempt by the regulatory body to impose hostile visa norms could significantly affect employee expenses.
Low margins and lack of growth: MT’s EBIDTA margins are at a lower level, standing close to 15% while its peers stood at 20%, showing it is less efficient and LTI, despite being in industry for a considerable amount of time, has failed at its growth rate when compared with its competitors like TCS and Infosys.

Opportunities of LTI-MT

There is optimism and goals heading into the merger, with a few potential areas for the entity to focus on. They are:

Net Margin Gap: With both revenue and cost synergies between LTI and MT, there is potential for a net margin gap between LTI – MT and Tata Consultancy Service (the main competitor), which is currently at 300-500 bps. This could potentially lead to faster peer set earnings growth coupled with higher margins, which is its current weakness.
Consolidate position: Both LTI and MT, with their complementary services, have an opportunity to consolidate their positions in the BFSI vertical and also rapidly scale high tech, retail,and consumer packaged goods, which are some of the high growth verticals.
New services: The combination of LTI and MT expertise and capabilities will enable the merged entity to offer new services and solutions to their clients, which could cause new revenue streams. This potential relies on R&D investment, which was a weakness of LTI individually. But, with the combined capital, the potential of LTI-MT is immense.

Threats of LTI-MT

There are certain environmental factors that can potentially be harmful to the new entity’s growth if not addressed. They are:

Economic uncertainty: The fundamental concern with the current economic situation is the Covid-19 pandemic. One year after the violent outbreak, it still has its effects on the market and a potential new wave concern in China is a cause for concern for both companies with their ideal target price.
Intense competition: The IT services market is a highly competitive market with established players like TCS, Wipro, Accenture and IBM. Client retention is key to warding off the threat of competition, and the merger uncertainty could be a potential window for poaching clients. Which needs to be addressed and dealt with by the LTI-MT.
Management resignation: There are growing concerns about the resignation of top management. The CEO and MD Jalona of LTI were instrumental in growth of LTI over the past 7 years and his departure is of particular concern.

Impact on stakeholders

With a swap ratio of 73:100 the LTI-MT is issuing 12 crore new LTI shares to MT’s existing shareholders, coupled with a 31% dilution for LTI’s existing shareholders. The key individuals of both companies and credit agencies believe that the potential of this merger will bring in higher value for each of its stakeholders, with clients benefiting from diversified end-to-end offerings and high value bids against big players, which will potentially improve win rates.

Partners of LTI-MT on the other hand, will gain wider access to a multitude of opportunities, such as collaborations, augmented intellectual capital and implementation abilities. Investors in the long term will have a strong consolidated financial position and profitability improvements. Moreover, the Chairman of L&T Group, Mr. Naik, also forecasts the attrition rate of the tech industry to come down by 4-5% within the next 12 months of the merger, which is currently standing at 23-24% because of various geopolitical issues.

Conclusion

The merged entity of LTI MindTree has the potential to outpace the Tier-1 set growth rate over the next 10 years, as per Girish Pai, Head of Equity Research at Nirmal Bang Institutional Equities (NBIE), while during this initial phase of integration there is volatility. Based on the SWOT analysis, there is tremendous growth for the LTI-MT in the long term with its diversified presence and complimentary services. It, however, needs to ensure investment in R&D/ Innovation and client retention for a period of 12 months in order to curb the gap between its competitors, more specifically TCS. This is one of the biggest M&A deals in India, has a high impact on the entire industry of IT services and indeed has the potential to become the next behemoth.

References

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