In this article, Saksham Chhabra student of UPES (Dehradun) discusses how to set up a soap manufacturing plant.

INTRODUCTION

The Cosmetic industry is one of the fastest growing industries in the world with so many products and billions of consumers. Under which also comes the soap industry which is regarded as a fast moving consumer good (FMCG) and is one of the essential products in the daily uses of an individual. Soap is a product that is consumed by billions of people across the globe in different forms such as:

1. Personal usage,
2. Sanitary usage,
3. Laundry usage,

The soap industry comes under the cosmetics industry for which specific laws have been made in the form of drugs and cosmetic act, 1940. As soap is manufactured in different form, variants, colours and sizes under different brand names and logos as per the requirements and the needs of the people who will ultimately consume it, so that they are satisfied. If a firm want to start its manufacturing operations of a product, it has to adhere to certain guidelines and rules before setting up its unit. Many reports have showed that in the coming few years 2021, the contribution of the soap manufacturing industry to the world’s economy is expected to increase at an annual rate of 0.2% and even the the Gross Domestic Product is expected to increase at 2.3% annually.

WHAT DO YOU UNDERSTAND BY THE TERM COSMETICS?

The Literal meaning of the term “cosmetics” has been specifically defined under section 3(aaa) of the Drug and Cosmetics Act 1940 and Rules 1945 which states “Cosmetics are products that are intended to be rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applied to, the human body or any part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance” and includes any article intended for use as a component of cosmetic. For manufacturing, distribution and selling of cosmetic products license are mandatory. Thus, on the basis of which cosmetics have categorized as follows:

A)Face powder, cake makeup, compacts, face packs, masks, and rouges, Creams, lotions, emulsions, pastes, cleansing milk, shampoos, pomade, brilliantine, shaving creams and hair oils etc.

B)Nail Polishes and Nail Lacquers.

C)Lipsticks and Lip-gloss, etc.

D)Depilatories

E)Preparations used for Eyes

F)Aerosol

G)Alcoholic Fragrance Solutions.

H)Hair Dyes

I)Tooth powders and toothpaste, etc.:

J)Toilet Soaps

WHAT IS THE PROCEDURE FOR OBTAINING PERMISSION TO START MANUFACTURING OF A SOAP UNIT?

It is advisable for a soap manufacturing business to be set up as a Limited Liability Partnership (LLP) or Private Limited Company as the investment in plant and machinery and the turnover of the firm would be in excess of more than 25 lakhs. Further, an LLP or a Private limited company form of business would ensure that the unit can easily be granted loans by the banks and is transferable in the future. As per the Drugs and Cosmetic rules act of 1940, it provides that the rules and regulations in this regard are framed by both the central and the state government regarding the issuing of licenses to individuals for their business. Ultimately, it is the state drug authorities of the various states that have got the power to issue licenses. A person who wishes to get the license for manufacturing soap can get it in 7 Simple Steps under the drugs and cosmetic rules:

STEP 1-Firstly, a person applying for a manufacturing license for handmade soap needs to fill the Application Form 31 and the person is required to pay an amount of Rs 3,500 and Rs 2,500 as a government and inspection fee of 2500 respectively with the form and an inspection fee of Rs 1000 at every inspection.

STEP 2- Secondly, the cosmetics products for which the license is being acquired should be specified into classes of cosmetics, as has been mentioned under Schedule M-II, where the cosmetics have been classified into 10 categories so that proper analyzing can be done.

STEP 3- A person applying for the license of manufacturing handmade soap or any other cosmetics should have passed the intermediate exam with Chemistry as one of its subject or any examination which is recognized by the Licensing authority.

STEP 4-Apart from it to get a license it is required to hold a diploma in Pharmacy which should be certified and approved either under the Pharmacy Council of India under the Pharmacy Act, 1948 or under the Pharmacy Act, 1948.

STEP 5-At the time of applying for the license it is required to mention other information like the lists of equipment, manufacturing facility details with minimum area required for manufacturing, Technical Competent personnel details, etc. so that the licensing authorities have proper knowledge regarding the background of the person who will be manufacturing the product.

STEP6-Apart from those details the licensing authority also considers before approving the license that whether the cosmetic is misbranded or is a spurious cosmetic and an inspector goes to check on the premises to see that everything is followed in an appropriate manner and then make the report is made.

STEP 7– After that when the authority is satisfied with the report and the standards of your premises it grants the license and also for renewal the manufacturer is required to categories the cosmetics as per Schedule M-II.

It must be specifically noted that the licensed issued to the firm is valid for a term of a 5 years after which it is subjected to renewal. There are also certain other Documents that are to be attached with the Application at the time of getting the license issued which are as follows:

1. Affidavit of Applicant attested by the court,
2. List of machines installed for manufacturing the product for the complete knowledge of the licensing authorities,
3. List of laboratory equipment which will be utilized in the unit in the production process,
4. A Valid No Objection Certificate from Pollution Control Board in the name of the unit,
5. If the Manufacturing unit is on Rent/Lease, then the copy of the rentlease agreement is to be attached,
6. Lastly, the proper plan layout and structure of the premises of the producing unit.

WHAT ARE THE LAWS AND STANDARDS THAT A SOAP PRODUCING UNIT IS REQUIRED TO ADHERE TO?

There are certain laws that the government has made for the Manufacturing Industry to during its operations:

LABOUR LAWS

A) THE INDUSTRIAL DISPUTES ACT, 1947: The objective of the Industrial Disputes Act is to secure industrial peace and harmony by providing machinery and procedure for the investigation and settlement of industrial disputes by the process adjudication, arbitration and conciliation machinery which is provided under the statute. The main objective of this act is “Maintenance of Peaceful work culture in the Industry in India” which is clearly provided under the Statement of Objects & Reasons of the statute.

B) THE TRADE UNIONS ACT, 1926: Trade Union means any combination in the form of temporary or permanent, formed primarily for the purpose of regulating the relations between workmen and employers for imposing restrictive conditions on the process and conduct of and business or trade and includes any association of two or more trade unions.

C) THE EMPLOYEES’ COMPENSATION ACT, 1923: This act is there for the payment by certain classes of employers to their [mainly employees] of compensation for injury by accident. Whereas it is feasible to provide for the payment by certain classes of employers to their workmen of compensation for injury by accident.

D) THE EMPLOYEES’ PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952: The EPF & MP Act, 1952 is created for the purpose of social welfare and to safeguard the interests of an employee. Any factory or establishment which directly or through intermediaries like contractors have more than 20 employees are to be safeguarded under this act.

E) THE MINIMUM WAGES ACT, 1948: The Minimum Wages Act 1948 is an act made by the parliament concerning the Indian labor law that sets the minimum wages that must be paid to skilled and unskilled laborers. As per the Minimum Wages Act of 1948, State and Central Governments have the power to fix and revise minimum wages. The Act specifies that the “appropriate” government should fix the wages i.e. if the wages to be fixed are in context to any authority of the Central government or Railway administration then the Central government fixes it.

F) THE FACTORIES ACT, 1948: This act helps in assessing and formulating National Policies in India with respect to occupational safety and health in factories and docks in India. It deals with all the problems that are related to the safety,well-being, health, efficiency of the employees at the workplaces.

G) THE PAYMENT OF BONUS ACT, 1965: This act provides for the payment of bonus to persons employed in certain establishments, employing 20 or more persons, on the basis of profits or on the basis of production or productivity and matters connected therewith.

H) THE APPRENTICES ACT, 1961: The purpose of this act is to meet the increasing demand for skilled craftsmen. The facilities to be utilized that are available for training apprentices and also to ensure their training in accordance with plan programme. Also to promote new manpower skill and simultaneously training the old one to.

I) THE MATERNITY BENEFIT ACT, 1961: This act is basically established to govern and regulate the women employment and their interests across the country.The act provides 12 weeks as the maximum period for which any working woman shall be entitled to maternity benefit. She can avail this benefit as 6 weeks up to and including the day of her delivery and 6 weeks immediately following the day of her delivery.

J) THE PAYMENT OF GRATUITY ACT, 1972: In India gratuity is a type of retirement benefit. It is a payment made with the intention of helping an employee financially after his retirement. It was held by the Supreme Court of India in the case of Indian Hume Pipe Co Ltd v Its Workmen, that the general principle underlying gratuity scheme is that by service over a long period the employee is entitled to claim a certain amount as the retirement benefit. The Payment of Gratuity Act was passed by Indian Parliament on 21 August 1972.

K) THE CHILD LABOUR (PROHIBITION AND REGULATION) ACT, 1986: This act is one of the most important act and is also one the most debated acts regarding children in India. It outlines where and how children can work and where they can not. The provisions of the act are meant to be acted upon immediately after the publication of the act, except for part III that discusses the conditions in which a child may work and also Part III can only come into effect as per a date appointed by the Central Government. This act was formed so that so child below the age of 14 years is not put into employment for the protection of his interests.

LEGAL METROLOGY ACT, 2009

The legal metrology act which came in the year 2009 with the objective to establish basic essentials for the weight and measures of the goods which are sold in the terms of their weight in the regulation of the trade and commerce in the country. The section 2(g) of this act basically states in relation to the treatment of units with proper measurement in relation to the mandatory technical and legal requirements from the point of view of the public to ensure their safety and protection from the goods they intend to buy.

The manufacturers are required to keep a record of all the things they produce and their proper documents of the list of standards. Also if they manufacturing unit advertises their product then they should specify the necessary details on the product such as the content, quantity, weight and the retail price. Also, section 23 of the act clearly states that the license to make, sell and distribute such goods are to be issued by the controller for certain specific time period or any other things on the payment of the fees as prescribed at the time of registering for the license. Afterwards, proper verification and stamping by the government authorities is done.

The Act was basically passed to govern and see that no manufacturer or repairer of the goods does anything that could hurt the interests of the public at large and if any such act is done then the act provides for various penalties for various offences and illegal acts. Thus, the act works for the smooth working of the trade and commerce in the country and is a boon to the society.

ENVIRONMENTAL COMPLIANCES

The National Green Tribunal Act, had been setted up in the year 2010 for the protection of the environment and to see that their is proper follow up and implementation of the policies and procedures. Section 4 of the environment pollution and rules act states that, every individual carrying out an industry, process or operation that requires consent from the State Pollution Control Board (SPCB) as per Water (Prevention and Control of Pollution) Act, 1974 or the Air (Prevention and Control of pollution) Act, 1981 or authorization under Hazardous Wastes (Management and Handling) Rules, 1989 must submit an “Environmental Statement” for the financial year ending 31st March in the Form V to the concerned SPCB on or before the thirtieth (30th) day of September every year. EIA involves prediction of environmental consequences of any developmental project and is an indispensable asset. Diverse types of pollutions have emerged with the progress of man and his innovations. Industrial revolution all over the world has lead to the advancement of our technologies and lifestyle, however, the most severe adverse effect of this revolution is pollution. Almost all types of pollutants found on this planet are traceable to some industry or the other including the agriculture industry. Diverse forms of industrial wastes be it gases, liquids or solids are ultimately released into the environment either in the air, water bodies or into landfills. Air pollution is ranked as the most severe type of pollution of all, resulting in approximately 4.6 million deaths annually as per the world health organization.

There are certain environmental laws that the manufacturing unit is required to follow and adhere to while performing its operations such as:

1. Water Prevention and Control of Pollution,1974
2. Air Prevention and Control of Pollution Act,1981
3. Environment Protection Act,1981
4. Wild Life protection Act,1972
5. Biological Diversity Act,2002
6. Forest Act,1980
7. Public Liability Insurance Act, 1991

Thus, to protect and safeguard the interests of the people and the society at large the manufacturing units have to adhere to the following laws.

WHAT ARE THE RULES AND REGULATIONS THAT ARE APPLIED TO SOAP MANUFACTURING UNIT?

The rules and regulations that are in need to be followed by the soap manufacturing unit are as follows:

1. According to the Biomedical waste rule, proper arrangements have to be made for the disposal of the waste so that any kind of pollution is caused and any kind of problem or disease is not caused to anybody.
2. The Factory should have proper sanitation facilities, hygiene should be maintained in the manufacturing building, proper gloves and emergency facilities for the labors.
3. The production house or factory should not be established near residential areas as there is a risk of pollution and contamination which may cause distress and problems to the people living in the area nearby which might result in the death of the people.
4. If your premises or factory etc is not following the provision of Drugs and Cosmetics Rule then it can penalized with a fine of 5000/-.
5. The basic essential things where the soap manufacturing is to look after is the expenditure which is done upon raw material, salaries and wages, power cost and receivables. The Raw Material should be of Rs.2.5 lakhs on-stock to carry on its operations smoothly and also an additional capital of Rs.1 to 2 lakhs for other expenditures like salaries, power and receivable. Also having a good and adequate working capital only helps a firm unit to perform its goals in a good and better manner.
6. The Labourers and the workers working should be given proper training and orientation so that the chances of any mishappening or any problem are reduced and also proper and adequate quality of products are produced which should be in accordance with the standards set for that particular product. Below are the certain requirements while starting the operations of a soap manufacturing firm:

1. Although there appear to be no industry-specific regulatory issues affecting soap markers that they should be aware of the broader labor, occupational and environmental regulations. Big firms/unit generally have employees or the department is devoted to the following of the new regulatory developments and devising compliance procedures.
2. There should be proper labelling on the product with the brand name address of the manufacturing firm and place with the price, contents, expiry and also the directions for the use of the product as per the rules laid down by the drugs and cosmetic rules of 1945 under rule 148 and the product should be in accordance of the international cosmetic standards as if they are not as per the act then it is punishable offence and the repercussions are as follow: fine upto 1000 or 1 year of imprisonment or both and if repeated consequently fine may increase to 2000 or imprisonment upto 2 years or both.
3. If the person who is manufacturing the products is engaged in the process of importing and exporting goods then he has to fill the form 10 but only the government has the authority to grant permission in such matters if they are in the interest of the society.

CONCLUSION

Due to the growing population, the needs and the demands of the consumers are rising thus due to the establishment of such manufacturing units in the country it will benefit the people in fulfilling their needs and also it will also create thousands of employment opportunities for the people who are residing in the rural areas who don’t have a proper source of living for their family will benefit the most. The government has established specific norms under the Drug and Cosmetic Act 1940 and Rules 1945 which also makes the government (Centre and State) to be more powerful in making such decisions in taking important decisions for the benefits of the people. The procedures and the guidelines laid down for the registration and other legal work are quite safe and reliable which helps in the reduction of chances of the entrance of fake and other manufacturing units who produce imitated products which are of really poor quality and which may even harm the people thus the licensing process proves to very effective in this regard.

Also the government has also established many status which keep a check on these firms after they are licensed so that to keep a check upon these firms that they are performing their operations in the desired manner and there is no violation of the policies and also if there’s any problem there are redressal bodies made for the settlement of any kind of disputes and problems in the manufacturing units.

REFERENCES:

1. The Drugs and Cosmetic act 1940 and rules 1945(bare provision),
2. https://cliniexperts.com/india-regulatory-services/cosmetic/
3. http://www.cdsco.nic.in/writereaddata/Guidelines%20on%20Registration%20of%20Import%20of%20Cosmetics.pdf
4. https://mohfw.gov.in/fooddrugs/guidelines-registration-import-cosmetics
5. http://envfor.nic.in/legis/env/env1.html

This article is written by Harsh Jain. Along with holding degrees in LLB, and LLM, Harsh is NET, JRF qualified. Harsh has successfully cleared Rajasthan Judicial Services, Mains Examination, Gujarat Judicial Services pre, SBI specialist officer scale II online exam and many other competitive examinations. Many of his students are posted as ADJs, JMs, MMs, Lecturers, APPs etc. Also, Harsh is pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata. This article discusses on when borrowing by a company will be deemed as ultra-vires.

Introduction

Companies have to borrow funds from time to time for various projects in which they are engaged. Borrowing is an indispensable part of day to day transactions of a company, and no company can be imagined to run without borrowing from time to time. Balance sheets are released every year by the companies, and you will hardly find any balance sheet without borrowings in the liabilities clause of it. However, there are certain restrictions while making such borrowings. If companies go beyond their powers to borrow then such borrowings may be deemed as ultra-vires.

What is the doctrine of ultra-vires?

Ultra-vires

It is a Latin term made up of two words “ultra” which means beyond and “vires” meaning power or authority. So we can say that anything which is beyond the authority or power is called ultra-vires. In the context of the company, we can say that anything which is done by the company or its directors which is beyond their legal authority or which was outside the scope of the object of the company is ultra-vires.

Doctrine of Ultra-Vires

Memorandum of association is considered to be the constitution of the company. It sets out the internal and external scope and area of company’s operation along with its objectives, powers, scope. A company is authorized to do only that much which is within the scope of the powers provided to it by the memorandum. A company can also do anything which is incidental to the main objects provided by the memorandum. Anything which is beyond the objects authorized by the memorandum is an ultra-vires act.

Origin of the doctrine

The doctrine of ultra-vires first time originated in the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was decided by the House of Lords. In this case the company and M/s. Riche entered into a contract where the company agreed to finance construction of a railway line. Later on, directors repudiated the contract on the ground of its being ultra-vires of the memorandum of the company. Riche filed a suit demanding damages from the company. According to Riche, the words “general contracts” in the objects clause of the company meant any kind of contract. Thus, according to Riche, the company had all the powers and authority to enter and perform such kind of contracts. Later, the majority of the shareholders of the company ratified the contract.  However, directors of the company still refused to perform the contract as according to them the act was ultra-vires and the shareholders of the company cannot ratify any ultra-vires act.

When the matter went to the House of Lords, it was held that the contract was ultra-vires the memorandum of the company, and, thus, null and void. Term “general contracts” was interpreted in connection with preceding words mechanical engineers, and it was held that here this term only meant any such contracts as related to mechanical engineers and not to include every kind of contract. They also stated that even if every shareholder of the company would have ratified this act, then also it had been null and void as it was ultra-vires the memorandum of the company. Memorandum of the company cannot be amended retrospectively, and any ultra-vires act cannot be ratified.

What is the need or purpose of the doctrine of ultra-vires?

This doctrine assures the creditors and the shareholders of the company that the funds of the company will be utilized only for the purpose specified in the memorandum of the company. In this manner, investors of the company can get assured that their money will not be utilized for a purpose which is not specified at the time of investment. If the assets of the company are wrongfully applied, then it may result into the insolvency of the company, which in turn means that creditors of the company will not be paid. This doctrine helps to prevent such kind of situation. This doctrine draws a clear line beyond which directors of the company are not authorized to act. It puts a check on the activities of the directors and prevents them from departing from the objective of the company.

Difference between an Ultra-Vires and an Illegal act

An ultra-vires act is entirely different from an illegal act. People often mistakenly use them as a synonym to each other, while they are not. Anything which is beyond the objectives of the company as specified in the memorandum of the company is ultra-vires. However, anything which is an offense or draws civil liabilities or is prohibited by law is illegal. Anything which is ultra-vires, may or may not be illegal, but both of such acts are void-ab-initio.

The doctrine of ultra-vires in Companies Act, 2013

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for which incorporation of the company is proposed any other matter which is considered necessary in its furtherance should be stated in the memorandum of the company.

Whereas Section 245 (1) (b) of the Act provides to the members and depositors a right to file a application before the tribunal if they have reason to believe that the conduct of the affairs of the company is conducted in a manner which is prejudicial to the interest of the company or its members or depositors, to restrain the company from committing anything which can be considered as a breach of the provisions of the company’s memorandum or articles.

Basic principles regarding the doctrine

1. Shareholders cannot ratify an ultra-vires transaction or act even if they wish to do so.
2. Where one party has entirely performed his part of the contract, reliance on the defense of the ultra-vires was usually precluded in the doctrine of estoppel.
3. Where both the parties have entirely performed the contract, then it cannot be attacked on the basis of this doctrine.
4. Any of the parties can raise the defense of ultra-vires.
5. If a contract has been partially performed but the performance was insufficient to bring the doctrine of estoppel into the action, a suit can be brought for the recovery of the benefits conferred.
6. If an agent of the corporation commits any default or tort within the scope of his employment, the company cannot defend it from its consequences by saying that the act was ultra-vires.

Exceptions to the doctrine

1. Any act which is done irregularly, but otherwise it is intra-vires the company, can be validated by the shareholders of the company by giving their consent.
2. Any act which is outside the authority of the directors of the company but otherwise it is intra-vires the company can be ratified by the shareholder of the company.
3. If the company acquires property in a manner which is ultra-vires of the contract, the right of the company over such property will still be secured.
4. Any incidental or consequential effect of the ultra-vires act will not be invalid unless the Companies Act expressly prohibits it.
5. If any act is deemed to be within the authority of the company by the Company’s Act, then they will not be considered as ultra-vires even if they are not expressly stated in the memorandum.
6. Articles of association can be altered with retrospective effect to validate an act which is ultra-vires of articles.

Types of ultra-vires acts and when can an ultra-vires act be ratified?

Ultra-vires acts can be generally of four types:

1. Acts which are ultra-vires to the Companies Act.
2. Acts which are ultra-vires to the Memorandum of the company.
3. Acts which are ultra-vires to the Articles of the company but intra-vires the company.
4. Acts which are ultra-vires to the directors of the company but intra-vires the company.

Acts which are ultra-vires to the Companies Act

Any act or contract which is entered by the company which is ultra-vires the Companies Act, is void-ab-initio, even if memorandum or articles of the company authorized it. Such act cannot be ratified in any situation. Similarly, some acts are deemed to be intra-vires for the company even if they are not mentioned in the memorandum or articles because the Companies Act authorizes them.

Acts which are ultra-vires to the memorandum of the company

An act is called ultra-vires the memorandum of the company if, it is done beyond the powers provided by the memorandum to the company. If a part of the act or contract is within the authority provided by the memorandum and remaining part is beyond the authority, and both the parts can be separated. Then only that part which is beyond the powers is considered as ultra-vires, and the part which is within the authority is considered as intra-vires. However, if they cannot be separated then whole contract or act will be considered as ultra-vires and hence, void. Such acts cannot be ratified even by shareholders as they are void-ab-initio.

Acts which are ultra-vires to the Articles but intra-vires to the memorandum

All the acts or contracts which are made or done beyond the powers provided by the articles but are within the powers and authority given by the memorandum are called ultra-vires the articles but intra-vires the memorandum. Such acts and contracts can be ratified by the shareholders (even retrospectively) by making alterations in the articles to that effect.

Acts which are ultra-vires to the directors but intra-vires to the company

All the acts or contracts which are made by the directors beyond the powers provided to them are called acts ultra-vires the directors but intra-vires the company. The company can ratify such acts and then they will be binding.

Development of the doctrine

Eley v The Positive Government Security Life Assurance Company, Limited, (1875-76) L.R. 1 Ex. D. 88

It was held that the articles are not a matter between the company and the plaintiff. They may either bind the members or mandate the directors, but they do not create any contract between plaintiff and the company.

The Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche, (1874-75) L.R. 7 H.L. 653.

The objects of the company as per the memorandum of association were to supply and sell some material which is required in the construction of the railways. Here the contract was for construction of railways which was not in the memorandum of the company and thus, was contrary to them. As the contract was ultra-vires the memorandum, it was held that it could not be ratified even by the assent of all the shareholders. If the sanction had been granted by passing a resolution before entering into the contract, that would have been sufficient to make the contract intra-vires. However, in this situation, a sanction cannot be granted with a retrospective effect as the contract was ultra-vires the memorandum.

In Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2 K.B. 9

It was held that if a contract is subject to the statutory powers of alteration contained in the articles and such alteration is made in good faith and for the benefit of the company then it will not be considered as a breach of the contract and will be valid.

In Re New British Iron Company, [1898] 1 Ch. 324

It was held that in this particular case the directors will be ranked as ordinary creditors in respect of their remuneration at the time of the winding-up of the company. This was stated because generally articles are not considered as a contract between the company and the directors but only between shareholders. However, in this particular case, the directors were employed, and they had accepted office on the footing of the articles of association. So at the time of winding-up of the company they were considered as the creditors.

Rayfield v Hands and Others, [1957 R. No. 603.]

Field-Davis Ltd. was a private company carrying on business as builders and contractors,  The plaintiff, Frank Leslie Rayfield, was the registered holder of 725 of those shares, and the defendants, Gordon Wyndham Hands, Alfred William Scales and Donald Davies were at all material times the sole directors of the company. THere was a provision in the Articles of association of the company where it was required that if he wants to sell his shares, he will inform the directors, who will buy them equally at a fair valuation. However, when he informed the directors, they refused to buy them by saying that there is no such liability imposed by the articles upon them.

The plaintiff claimed that fair value of the shares must be determined and directors must be ordered to purchase them at a fair value. It was held that articles of the company required the directors to buy the shares at a fair price, but the relationship between them was not as a member and director but as a member and a member.

Effects of ultra vires Transactions – Doctrine of Ultra Vires

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts are not binding on the company. Neither the company can sue, nor it can be sued for such acts.[Ashbury Railway Carriage and Iron Company v. Riche ].                                     
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires act.
3. Injunction: when there is a possibility that company has taken or is about to undertake an ultra-vires act, the members can restrain it from doing so by getting an injunction from the court. [Attorney General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
4. Personal liability of Directors: The directors have a duty to ensure that all corporate capital of the company is used for a legitimate purpose only. If such funds are diverted for a purpose which is not authorized by the memorandum of the company, it will attract a personal liability for the directors. In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the Bombay High Court held, “A shareholder can maintain an action against the directors to compel them to restore to the company the funds of the company that have by them been employed in transactions that they have no authority to enter into, without making the company a party to the suit”.

Criminal action can also be taken in case of a deliberate misapplication or fraud. However, there is a small line between an act which is ultra-vires the directors and acts which are ultra-vires the memorandum. If the company has authority to do anything as per the memorandum of the company, then an act which is done by the directors beyond their powers can also be ratified by the shareholders, but not otherwise.

1. If any property is purchased with the money of the company, then the company will have full rights and authority over such property even if it is purchased in an ultra-vire manner.
2. Relationship of a debtor and creditor is not created in an ultra-vires borrowing. [In Re. Madras Native Permanent Fund Ltd., (1931) 1 Com Cases 256 (Mad.)].

Effects of an act which is Ultra Vires – on borrowings

Any borrowing which is made by an act which is ultra-vires will be void-ab-initio. It will not bind the company and company and outsiders cannot get them enforced in a court.

Members of the company have power and right to prevent the company from making such ultra-vires borrowings by bringing injunctions against the company.

If the borrowed funds of the company are used for any ultra-vires purpose, then directors of the company will be personally liable to make good such act. If the company acquires any property from such funds, the company will have full right to such property.

No estoppel or ratification can convert an ultra-vires borrowings into an intra-vires borrowings, as such acts are void from the very beginning. As no debtor and creditor relationship is created in ultra-vires borrowings only a remedy in rem and not in personam is available.

Doctrine likely to lose sanctity

It is proposed in the Companies Amendment Bill,2016 that instead of adopting a universal memorandum, business will be free to adopt a model memorandum of association. So now the new companies will be enjoying the benefit of having a single object clause which states that they will be engaged in any lawful act or business. In this situation, it would be challenging to trace out that which act is ultra-vires and which act is intra-vires. The only case where it will be possible will be when a company specifies the exact business instead of just a general clause.

Conclusion

No company can be imagined to run without borrowings. However, at the same time, it is necessary to protect the interest of the creditors and investors. Any irregular and irresponsible act may result in insolvency or winding up of the company. This may cause considerable losses to them. So to protect the interest of the investors and the creditors, specific provisions are made in the memorandum of the company which defines the objectives of the company.

Directors of the company can act only within the purview of the authority provided to them under these objectives. If any borrowing is made beyond the authority provided by these objective mentioned in the memorandum, it will be considered as ultra-vires. Any borrowing which is made through an ultra-vires act is void-ab-initio, and hence, directors are personally responsible for these acts. However, if such borrowings are ultra-vires only to the articles of the company or ultra-vires directors, then they can be ratified by the shareholders. Then after such ratification, they will be considered valid.

Thus, directors must be very cautious while borrowing funds, as it may not only make them personally liable for the consequences of such acts but also may result in considerable losses to investors and creditors.

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In this article, Utkarsh Trivedi, of The National Law University Odisha, Cuttack discusses White Label ATMs and gives the steps on how to go about opening it.

What are ATMs?

Automated teller machines or ATMs are machines installed by commercial banks that aid the user in withdrawals, checking balances, transferring money and paying utility bills. The banks, after a prescribed number of free transactions, charge the user a nominal fee to use an ATM. To use an ATM, the user needs an ATM card, i.e. , a debit card (Visa, MasterCard, Rupay, etc) and a pin, which is set up by the user himself, at the time of generating the ATM card. The user can then use the card and its pin to complete as many transactions as he/she demands to.  

White Label ATM

As the name suggests, White label, meaning that these ATMs are not owned by any bank but are the property of a non-banking entity. The Reserve Bank of India, in 2011, to promote financial inclusivity, permitted the non-bank entities incorporated in India under the Companies Act to open these ATMs. These non-banking companies would sign a Service Level Agreement with a sponsor bank and a network provider, which would ensure cash flow in the ATMs. These ATMs allow autonomy of operators on deciding locations and creating their own brand with fixed annual targets mandated by RBI. Customers of any bank can use such white-label ATMs, but they will have to pay a fee for using the service. All the transactions through these ATMs will be charged. White-label ATMs accepts only cards issued by banks and does not accept cash deposits.

FDI in White Label ATMs

The Central Government recently approved 100% Foreign Direct Investment on White Label ATMs, this means that any foreign company can sign a pact with a service provider and a commercial bank in India and open an ATM. White Label ATMs are not free to use. The first five transactions are free every month, but subsequently a transaction fee of Rs.15 and balance inquiry fee of Rs.5 which is the commission paid by your bank to the White label Company. As the White label company cannot directly charge money on you, doesn’t mean White label ATMs are totally free, because your bank will cut those charges from your account.

These Non-banking entities earn on a commission basis, for example, a fixed amount for the transaction, say Rs. 15 every transaction. They also earn through advertisement hoardings inside the ATM premise.

Idea behind White Label ATMs

The Reserve Bank of India, in 2012, allowed Companies registered under the Companies Act, 1956 to open ATMs (White Label ATMs), to ensure more geographical reach and financial inclusivity, keeping in mind the population of the country. This was done to keep the customer services in check throughout the entire banking process.

The method of filling up a form after queuing up at a branch of the bank you have your account in, was very time-consuming and hectic, therefore, these White Label ATMs have been brought up, to ease the pressure on the banks while giving the private companies a way to make profit out of the financial system, with the end goal being the betterment of the masses.

Status of ATMs in India

The ATM penetration in India hasn’t been the best. Given below is a table which gives compares India with some other countries, just to give you a fair idea where we stand:

The government, therefore, by inviting more and more private institutions to invest in building ATMs is catering to the needs of the masses, who are living in the age of digitalisation but still don’t have the basic necessity of an ATM around them. There is just 1 ATM for every 13000 people in the country, and if the rate of getting more ATMs is not increased, the alarming rate of population increase will lead to the dearth of the financial sector, in our country.

What is The PSS Act, 2007?

The Payment & Settlement Systems Act, 2007 provides for the regulation and supervision of payment systems held in India and designates the RBI as the authority for that purpose and all related matters.

It was, in 2011, by incorporating this act, that White Label ATMs were given the statutory allowance to be opened up. Non-bank entities are permitted to set up White Label ATMs in India, after obtaining authorisation from RBI under the Payment and Settlement Systems (PSS) Act 2007. It was in the Late 80s that the first ATM in India was opened. In 2012, RBI gave the authorization to open White label ATMs and in 2013, the RBI started giving licenses.

Procedure to open a White label ATM in India

According to the guidelines issued by the Reserve Bank, the step by step procedure to open a WLA is as follows:

1. Fill up the form available on the website of the RBI.
2. The entity applying for such payment system needs to have a minimum net worth of Rs. 100 crore. Any non-bank entity can apply to open a White Label ATM, and it is not just restricted to NBFC.
3. Non-bank entities intending to set up White Label ATMs under these guidelines may approach RBI for seeking specific authorisation, within four months from the date of issuance of these guidelines, beyond which the authorisation seeking window will be closed.
4. The net worth of at least Rs 100 crore has to be maintained at all times.
5. The authorised non-bank entity (henceforth referred to as WLA Operator or WLAO) would have the freedom to choose the location of the WLA.

Some other important provisions

The RBI mandate has that every Non-Banking entity that opens a WLA will have to adhere to the following schemes.

1. Scheme A

In the first year, the company shall open a minimum of 1000 White Label ATMs; In the second year, minimum of twice the number of WLAs should be installed, than those in the first year; Subsequently, a minimum of three times the number of WLAs installed in the second year.

The ratio of 3:1 would be applicable, i.e. for every 3 White Label ATMs installed in Tier III to VI cities(population less than 50000), 1 WLA can be installed in Tier I to II cities(Population more than 50000). Out of the 3 White Label ATMs installed in Tier III to VI Centers, a minimum of 10 % should be installed in Tier V & VI Centers.

1. Scheme B

A minimum of 5000 White Label ATMs should be opened every year for three years wherein the ratio of 2:1 would be applicable, i.e. for every 2 WLAs installed in Tier III to VI Centers, 1 WLA can be installed in Tier I to II Centers. Out of the WLAs installed in Tier III to VI Centers, a minimum of 10 % should be installed in Tier V & VI Centers.

1. Scheme C

A minimum of 25,000 White Label ATMs has to be opened in the first year then at least another 25,000 in the next two years.

The ratio of 1:1 would be applied under this scheme. Out of the White Label ATMs installed in Tier III to VI Centers, a minimum of 10 % should be installed in Tier V & VI Centers.

These schemes ensure that these companies don’t just look out for profit margins, but, also help the government in the betterment of the rural areas in providing inclusivity, financially.

Current Legal Status of White Label ATMs

Answering a question raised in the Parliament, on 26th Feb 2016, the Minister of State for Finance stated, “Three different schemes are available to WLAOs for setting of White Label ATMs which incentivize the setting up of White Label ATMs in Tier III to Tier VI Centers (population less than 50000). As of 31.12.2016, 11706 WLAs have been set up.”

Indicash is the leader in WLA, being owned by Tata Group, it has set up more than 60% of the White Label ATMs, i.e. 9,000 ATMs as on October 2016.

There are eight WLAOs in the country including Tata Communications Payment Solutions Ltd (9,060 ATMs), BTI Payments Pvt. Ltd. (4,096 ATMs), Hitachi Payment Services Pvt. Ltd. ( 652 ATMs) and Vakrangee Ltd. ( 328 ATMs). As at November-end 2016, WLAOs were collectively running 14,564 ATMs.

Conclusion

The decision to open more ATMs, in the form of privatised, non-banking entities has been a brilliant one. The schemes that regulate the opening of such White Label ATMs have ensured that these institutions don’t just keep in mind the incentives, but also cater to the needs of the rural masses in the country. Only after they open a given number of WLAs in rural centres, will they be allowed to open a WLA in an urban setting. Hence in my opinion, this is a masterstroke for financial inclusivity.

References

1. https://rbi.org.in/scripts/NotificationUser.aspx?Id=7286&Mode=0
2. https://rbi.org.in/scripts/NotificationUser.aspx?Id=7286
3. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/86706.pdf
4. http://pib.nic.in/newsite/PrintRelease.aspx?relid=136927
5. Reserve Bank of India – Notifications

In this article, Asim Ansari, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses buyback of shares by companies

Introduction

Under Section 68 of the Companies Act, 2013, read with Section 77A of the Companies Act, 1956, signifies that any company limited by shares or company limited by guarantee having a share capital can buy its own securities, whether it is a public company, private company or an unlisted company.

The Companies (Amendment) Ordinance (October 31, 1998, and January 7, 1999) have allowed companies to buy back their own shares subject to regulation laid down by SEBI. The ordinance lay down the provisions concerning buyback of shares. Section 77A of companies act empowers a company to purchase its own share or other specified securities in certain cases.

What is buyback of shares?

The buyback of shares is also known as ‘share repurchase’. Buyback of equity shares is a capital restructuring process. It is a financial strategy that enables a company to buy back its equity share and securities from the shareholders. Buyback of shares is the method of cancellation of share capital. It leads to a reduction in the share capital of a company as opposed to the issue of shares which results in an increase in the share capital.

A share repurchase is a strategy by which a company buyback its own shares from the market, usually because management thinks the shares are undervalued, reducing the number of outstanding shares. The company buys shares directly from the market or from its shareholders at a fixed price. Buyback of shares is reverse of the issue of shares by a company where it offers to take back its shares owned by the investors at a specified price. This offer can be binding or optional to the investors.

In a no-growth situation, buy-back option is expected to help to correct the positively twisted equity share capital in the existing capital structure of a lowly leveraged company that earns stable returns.

Provisions of Buyback under Section 68

If the company makes any default in the process as provided under section 68 or in case any listed company of any regulation made by SEBI:-

1. Such company shall be punishable with fine not less than 1 lakh rupees but may exceed up to 3 lakhs
2. Every such officer who is involved in the process who is in default shall be punished for a period which may extend to 3 years or fined not less than 1 lakh rupees.

Objectives of Buyback of Shares

1. Unused cash: If the company has a huge cash reserve with not many future projects to invest in and if the company thinks the market price of its shares is undervalued, they can buy back shares as a reward for their shareholders.
2. Tax Gains: The companies prefer buyback to reward their investors instead of distributing cash dividends because dividends are taxed at higher rate than capital gains. At present, short-term capital gains are taxed at 10% and long-term capital gains are not taxed.
3. Market Perception: By buying shares back from the shareholders at a higher price than the prevailing market price indicates the company shares valuation should be higher.
4. Exit Option: If a company wants to exit the market from a particular country or want to close the companies it can offer to buy back its shares that are trading in the market.
5. Escape monitoring of accounts and legal controls: If a company wants to avoid the regulations of the market regulator by delisting. They avoid any public scrutiny of its books of accounts.

Methods of buyback

A company can buy back its own shares from:

• From the existing shareholders on a proportionate basis
• From the open market
• From old lots
• By purchasing securities issued to employees of the company pursuant to a scheme of stock option or sweat equity

Conditions for Buyback

1. It shall be authorized by the articles of the company.
2. The ratio of debts owed by the company after the buyback shall be more than twice the paid-up capital and its free reserves.
3. All the shares or specified securities for buy-back are fully paid.
4. A company cannot withdraw the offer of buyback once it is declared.
5. The company cannot use any money borrowed from financial institution or banks for buyback of shares.
6. The company shall not utilize any proceeds of an earlier issue of same kinds of shares and securities for the purpose of the buyback.

Why is Buyback of shares beneficial for the company?

There are several reasons which are as follows:

Fair Market Value

When repurchase of shares is announced, In exchange for giving up an ownership stake in the company and dividends to the shareholders, they are paid the fair market value of the stock at the time of buyback of shares. The process of share repurchases helps a business reduces its cost of capital, consolidate ownership, and benefit from temporary undervaluation of the stock. Repurchase of shares also helps to free up profits to pay executive bonuses and inflate important financial metrics.

No burden of paying dividends

The process of share repurchase can be interpreted as the company is doing well in the market and it no longer needs any equity funding. The company refunds shareholders’ investment because it thinks of reducing its average cost of capital, instead of carrying the burden of paying dividends and unneeded equity. When a company voluntarily returns its equity capital, it indicates that the company has no viable projects in which to invest.

Reissue at higher prices

The buyback of shares seems beneficial for the company’s goodwill in the market as they are capable enough to buy back its own stock. It is not always that repurchase signify the issuing company has run out of uses for equity funding. Sometimes if the company feels their stocks are undervalued, they buyback from the shareholders at the deflated prices and later when the market prices inflate, the company reissue the number of shares at high prices. This step helps the company in increasing total equity capital while keeping the number of shares outstanding stable.

Limited number of ownerships

Buyback benefits in sharing the ownership to a lesser number of people. The process is also used as means of consolidating ownership. Each number of share represents a small stake in the ownership, so if the number of shareholders will be less, the ownership control will be shared with a lesser number of people. The company wants its control in hands of its core leadership rather than much in hands of the shareholders.

In addition, the shareholder\’s dividends are paid from company’s net profit, so if there will be less number of shareholders, the pie will be divided into few pieces. Buyback enables businesses to increase the compensation of the executive by making the company look more profitable.

What does a Buyback signify about a given company’s Financial health?

The common interpretation of buyback of stock is that the issuing company is booming financially. Buybacks often mean giving back a portion of the company’s profit to the shareholders to reward them for their investment in terms of dividend payments without the unwanted bonus of immediate taxation. After utilizing the equity capital for growth, the business generates enough revenue to fund its own continued expansion and return capital to its investors.

The process of stock buyback doesn’t mean that company no longer requires capital funding but it founds the cheaper way to raise it. The Debt financing comes at a lower cost than equity because of the lower risk to lenders.

If a company’s stock is undervalued it can take advantage of stock valuation by using a Buy low and sell high strategy as buyback enables the business to repurchase shares at low prices and sell it again when the price goes high. It helps business to keep the total number of shares outstanding stable while increasing their total equity.

The buyback may indicate the issuing company has become the target of a hostile takeover because when one company takes over the other one, the target company on hand is used to pay off its liabilities.

The EPS (earning per ratio) is one the most common metric used to indicate effective management, so an instant knock to the EPS ratio by executing a buyback can mean that larger portion of the company’s profit goes in the pockets of its executives.

While a buyback in the above scenario may not be a negative or positive reflection of a company’s financial health, it is more concerned when assessing a potential investment.

Advantages of buyback of shares

1. It might increase confidence in the investor’s on the company’s board of directors as they know directors are ever willing to return surplus cash if it’s not able to earn above the company’s cost of capital.
2. Buyback helps a company to reduce its excessive share capital that is not required for the time being and helps the company to utilize its large sum of free reserves.
3. Buyback of shares can increase returns on equity. It has a greater effect when more undervalued shares are repurchased. This is the most profitable course of action for the company.
4. Companies may buy back its own shares as protection against unfriendly takeovers from others companies.
5. The buyback is considered as the quickest method for reduction of share capital. It involves lower cost transaction.
6. It acts as an excellent tool for financial re-engineering. In case of profit-making, the companies having high dividend payments, buy back can boost their bottom lines since dividends attract taxes.

Disadvantages of buyback of shares

1. The biggest disadvantage of the buyback is that cash which is being used by the company to repurchase securities can be used for another productive purpose like installing the new manufacturing unit, hiring new staff, increasing the market expenditure to boost sales which in return can result in an increase in the profits of the company. But if the company goes for buyback it overlooks all the profitable alternatives which can be used.
2. The next drawback of the buyback is that sometimes it may give a wrong signal to them about the company so as to increase the price of the stock so that promoters can sell their stocks. Hence innocent investors get trapped when the news of buyback comes into the market domain as the prices of the stock rise.
3. It creates a negative image in the market that company is no more profitable as the company uses its excess cash for buyback of stocks. It creates a negative image in the mind of long-term investors who are looking for capital appreciation due to growth I the company.

Conclusion

A share buyback is an effective way for management to boost up the company’s undervalued share price and reduce dilution. The process requires management to show confidence in their business operations. It is not necessary that every buyback automatically benefits shareholders. It is important being an investor one should gauge the purpose and the timing of a buyback and also have a look at the overall financial situation of the company. A shareholder must reconsider all his views before purchasing shares of the company which is involved in the process of a buyback.

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This is written by Lokesh Vyas, of Institute of Law Nirma University. The article discusses the concept of plea bargaining in India and its origin in India and the intricate issues related to plea bargaining.

The famous saying “Justice delayed is justice denied” holds utmost significance when the concept of Plea bargaining is discussed. The number of cases pending in the courts is shocking but at the same time, it has been normalized by people. These astonishing figures are no more astonishing because people have started accepting this as their fate. The concept of plea bargaining was not there in criminal law since its inception. Considering this scenario, Indian Legal scholars and Jurists incorporated this concept in Indian Criminal Law. As the term itself suggests that it is an agreement between accused and the prosecutor. Many countries have accepted this concept in their Criminal Justice System (CJS).

Meaning of Plea Bargaining

Plea bargaining is a pretrial negotiation between the accused and the prosecution where the accused agrees to plead guilty in exchange for certain concessions by the prosecution. It is a bargain where a defendant pleads guilty to a lesser charge and the prosecutors in return drop more serious charges. It is not available for all types of crime e.g. a person cannot claim plea bargaining after committing heinous crimes or for the crimes which are punishable with death or life imprisonment.

History of Plea Bargaining

In the Jury System, the need for plea bargaining was not felt because there was no legal representation. Later on, in 1960 legal representation was allowed and the need for Plea Bargaining was felt. Although the traces of the origin of the concept of Plea Bargaining is in American legal history. This concept has been used since the 19th century. Judges used this bargaining to encourage confessions.

Plea Bargaining in India

Plea Bargaining is not an indigenous concept of Indian legal system. It is a part of the recent development of Indian Criminal Justice System (ICJS). It was inculcated in Indian Criminal Justice System after considering the burden of long-standing cases on the Judiciary.

Criminal Procedure Code and Plea Bargaining

Section 265A to 265L, Chapter XXIA of the Criminal Procedure Code deals with the concept of Plea Bargaining. It was inserted into the Criminal Law (Amendment) Act, 2005. It allows plea bargaining for cases:

1. Where the maximum punishment is imprisonment for 7 years;
2. Where the offenses don’t affect the socio-economic condition of the country;
3. When the offenses are not committed against a woman or a child below 14 are excluded

The 154th Report of the Law Commission was first to recommend the ‘plea bargaining’ in Indian Criminal Justice System. It defined Plea Bargaining as an alternative method which should be introduced to deal with huge arrears of criminal cases in Indian courts.

Then under the NDA government, a committee was constituted which was headed by the former Chief Justice of the Karnataka and Kerala High Courts, Justice V.S.Malimath to tackle the issue of escalating number of criminal cases. The Malimath Committee recommended for the plea bargaining system in India. The committee said that it would facilitate the expedite disposal of criminal cases and reduce the burden of the courts. Moreover, the Malimath Committee pointed out the success of plea bargaining system in the USA to show the importance of Plea Bargaining.

Accordingly, the draft Criminal Law (Amendment) Bill, 2003 was introduced in the parliament and finally it became an enforceable Indian law from enforceable from July 5, 2006. It sought to amend the Indian Penal Code 1860 (IPC), the Code of Criminal Procedure, 1973 (CrPC) and the Indian Evidence Act, 1892 to improve upon the existing Criminal Justice System in the country, which is inundate with a plethora of criminal cases and overabundant delay in their disposal on the one hand and very low rate of conviction in cases involving serious crimes on the other. The Criminal Law (Amendment) Bill, 2003 focused on following key issues of the criminal justice system:-

(i) Witnesses turning hostile

(ii) Plea-bargaining

(iii) Compounding the offense under Section 498A, IPC (Husband or relative of husband of a woman subjecting her to cruelty) and

(iv) Evidence of scientific experts in cases relating to fake currency notes.

Finally, it introduced Chapter XXIA Section 265A to 265L and brought the concept of plea bargaining in India. The following are provisions which it added:-

• Section 265-A (Application of Chapter) the plea bargaining shall be available to the accused who is charged with any offense other than offenses punishable with death or imprisonment or for life or of an imprisonment for a term exceeding to seven years. Section 265 A (2) of the Code gives the power to notify the offenses to the Central Government.

The Central Government issued Notification No. SO1042 (II) dated 11-7/2006 specifying the offenses affecting the socio-economic condition of the country.

• Section 265-B (Application for Plea Bargaining)

1. A person accused of an offense may file the application of plea bargaining in trails which are pending.
2. The application for plea bargaining is to be filed by the accused containing brief details about the case relating to which such application is filed. It includes the offences to which the case relates and shall be accompanied by an affidavit sworn by the accused stating therein that he has voluntarily preferred the application, the plea bargaining the nature and extent of the punishment provided under the law for the offence, the plea bargaining in his case that he has not previously been convicted by a court in a case in which he had been charged with the same offence.
3. The court will thereafter issue the notice to the public prosecutor concerned, investigating officer of the case, the victim of the case and the accused of the date fixed for the plea bargaining.
4. When the parties appear, the court shall examine the accused in-camera wherein the other parties in the case shall not be present, with the motive to satisfy itself that the accused has filed the application voluntarily.

• Section 265-C (Guidelines for Mutually satisfactory disposition) It lays down the procedure to be followed by the court in mutually satisfactory disposition. In a case instituted on a police report, the court shall issue the notice to the public prosecutor concerned, investigating officer of the case, and the victim of the case and the accused to participate in the meeting to work out a satisfactory disposition of the case. In a complaint case, the Court shall issue a notice to the accused and the victim of the case.
• Section 265-D (Report of the mutually satisfactory disposition) This provision talks about the preparation of the report of mutually satisfactory disposition and submission of the same. Two situations may arise here namely

1. If in a meeting under section 265-C, a satisfactory disposition of the case has been worked out, the report of such disposition is to be prepared by the court. It shall be signed by the presiding officer of the Courts and all other persons who participated in the meeting.
2. If no such disposition has been worked out, the Court shall record such observation and proceed further in accordance with the provisions of this Code from the stage the application under sub-section (1) of section 265-B has been filed in such case.

• • Section 265-E (Disposal of the case) prescribes the procedure to be followed in disposing of the cases when a satisfactory disposition of the case is worked out. After completion of proceedings under Section 265-D, by preparing a report signed by the presiding officer of the Court and parties in the meeting, the Court has to hear the parties on the quantum of the punishment or accused entitlement of release on probation of good conduct or after admonition. Court can either release the accused on probation under the provisions of Section 360 of the Code or under the Probation of Offenders Act, 1958 or under any other legal provisions in force or punish the accused, passing the sentence. While punishing the accused, the Court, at its discretion, can pass sentence of minimum punishment, if the law provides such minimum punishment for the offenses committed by the accused or if such minimum punishment is not provided, can pass a sentence of one-fourth of the punishment provided for such offense. ”
  • Section 265-F (Judgment of the Court) talks about the pronouncement of judgment in terms of mutually satisfactory disposition.
  • Section 265-G (Finality of Judgment) says that no appeal shall be against such judgment but Special Leave Petition (Article 136) or writ petition (under Article 226 or 227) can be filed.
  • Section 265-H (Power of the Court in Plea Bargaining) talks about the powers of the court in plea bargaining. These powers include powers in respect of bail, the trial of offenses and other matters relating to the disposal of a case in such court under Criminal Procedure Code.

• Section 265-I (Period of detention undergone by the accused to be set off against the sentence of imprisonment) says that Section 428 of CrPC is applicable for setting off the period of detention undergone by the accused against the sentence of imprisonment imposed under this chapter.

• 265-J (Savings) talks about the provisions of the chapter which shall have effect notwithstanding anything inconsistent therewith contained in any other provisions of the Code and nothing in such other provisions shall be construed to contain the meaning of any provision of chapter XXI-A

• Section 265-K (Statement of the accused to be used) specifies that the statements or facts stated by the accused in an application under section 265-B shall not be used for any other purpose except for the purpose as mentioned in the chapter.  
• Section 265-L (Non-application of the chapter) makes it clear that this chapter will not be applicable in case of any juvenile or child as defined in Section 2(k) of Juvenile Justice (Care and Protection of Children) Act, 2000.

Types of Plea Bargaining

Plea Bargaining is generally of three types namely:-

1. Sentence bargaining;
2. Charge bargaining;
3. Fact bargaining.

Plea Bargaining and Judicial Pronouncements

In Murlidhar Meghraj Loya vs State of Maharashtra (AIR 1976 SC 1929), The Hon’ble Supreme Court criticized the concept of Plea Bargaining and said that it intrudes upon the society’s interests. (see here)

In Kasambhai vs State of Gujarat (1980 AIR 854) & Kachhia Patel Shantilal Koderlal vs State of Gujarat and Anr, the Apex court said that the Plea Bargaining is against public policy. Moreover, it regretted the fact that the magistrate accepted the plea bargaining of accused. Furthermore, Hon’ble Court described this concept as a highly reprehensible practice. (see here)

The Court also held that practice of plea bargaining as illegal and unconstitutional and tends to encourage the corruption, collusion and pollute the pure fount of justice.

Thippaswamy vs State of Karnataka, [1983] 1 SCC 194, the Court said that inducing or leading an accused to plead guilty under a promise or assurance would be violative of Article 21 of the Constitution.

The Court also stated that “In such cases, the Court of appeal or revision should set aside the conviction and sentence of the accused and remand the case to the trial court so that the accused can, if he so wishes defend himself against the charge and if he is found guilty, proper sentence can be passed against him”. 

In State of Uttar Pradesh vs Chandrika 2000 Cr.L.J. 384(386), the Apex Court disparaged the concept of plea bargaining and held this practice as unconstitutional and illegal. Here the Hon’ble Court was of the view that on the plea bargaining Court cannot basis of disposing of criminal cases. The case has to be decided on the merit. In furtherance of the same, court said that if the accused confesses his guilt, he must be given the appropriate sentence as required by the law. (see here)

In the State Of Gujarat vs Natwar Harchandji Thakor (2005) 1 GLR 709, the Court acknowledged the importance of plea bargaining and said that every “plea of guilty” which is construed to be a part of the statutory process in the criminal trial, should not be understood as a “plea bargaining” ipso facto. It is a matter of matter and has to be decided on a case to case basis. Considering the dynamic nature of law and society, the court said that the very object of the law is to provide an easy, cheap and expeditious justice by resolving disputes.

Arguments against Plea Bargaining in India

Voluntarily adopted Mechanism

As per the legal provision dealing with Plea bargaining, it is a voluntary mechanism which is only entertained when accused opts it willingly. But the law is silent on the point that in case, the settlement reached is contrary to the purpose of the legal system.

Involvement of Police

The Involvement of the police in plea bargaining also attracts criticism. As India is infamous for the custodial torture by police. In such scenario, the concept of Plea Bargaining is more likely to aggravate the situation.

Corruption

The role of victims in plea bargaining process is also not appreciated. The role of victim in this process would attract corruption which is ultimately defeating the purpose which is sought to be achieved by such action.

Independent Judicial Authority

The provisions of Plea Bargaining do not provide for an independent judicial authority to evaluate plea-bargaining applications. This is one of the glaring reasons for its criticism.

The in camera examination of the accused by the court attract may lead to public cynicism and distrust for the plea-bargaining system. The failure to make confidential any order passed by the court rejecting an application could also create biases towards the accused.

Not the Final Solution

The reasons given for the introduction of plea-bargaining are the tremendous overcrowding of jails, high rates of acquittal, torture undergone by under trial prisoners etc. But the main factor behind all these reasons is a delay in the trial process. In India, the reason behind the delay in trials is many e.g. the operation of the investigative agencies as well as the judiciary, personal interest of lawyers etc. Therefore, the need of the hour is not a substitute for trial but an overhaul of the system which can be in terms of structure, composition and its work culture. All these measures would ensure reasonably fast trials.

Arguments for Plea Bargaining in India

Fast disposal of cases

The plea bargaining is beneficial for both the prosecution and the defense because there is no risk of complete loss at trial. It helps the attorneys to defend their clients in an easy way because both the parties possess bargaining power. This is how the long-standing disputes can be resolved and the court would also not need to face encumbrance of case files. Moreover, Plea bargaining helps the courts in preserving scarce resources for the cases that need them most.

Less serious offenses on one’s record

In a country like India, society plays a vital role. Once a person is stigmatized by society it becomes very difficult for that person to survive. Many a time stigmatization leads to ostracization. In such scenario, Plea Bargaining allows a person to plead guilty or no contest in exchange for a reduction in the number of charges or the seriousness of the offenses. This results in recording less serious offenses on the official court records of an accused. This can be good for the accused when he is convicted in the future.

A hassle-free approach

Indian is known for its long-standing case. Many cases proceedings go for 8-10 year thereby both the parties suffer. There have been instances where accused spent more time in jail than the maximum punishment for which he was accused. Such instances show a grave infringement of their human rights. Plea bargaining allows a person to plead guilty without hiring a lawyer. But If they waited to go to trial, they would have to find and hire a lawyer, and in that process, they have to spend at least some time working with the lawyer to prepare for trial and pay the lawyer. The concept of plea bargaining safeguards the interest of such persons by avoiding the hassles that they face when the case remains pending.

It avoids publicity

Moreover, Plea Bargaining is also a good mechanism to avoid publicity because the longer the case goes the more publicity the accuses gets. Therefore plea bargaining avoids such publicity by a fast settlement of the case. Famous and ordinary People who depend on their reputation in the community for their living, and those people who want to escape any unnecessary stigmatization. Although the news of the plea itself may be public yet it stays only for a short time when compared to news of a trial.

How to be a master at Plea Bargaining

There is no straight jacket formula or mathematical precision to gain expertise at Plea bargaining. Expertise comes with experience and to have an experience of something we need to step in that thing.

To become a master of plea bargaining one has to be good at negotiations and communication. At the end of the day, Plea Bargaining boils down to the bargaining. It is about how well you bargain for your client. The better you bargain the better results you bring to your client. To become a master of plea bargaining one need to be abreast of the facts and the relevant laws. Your convincing power is one thing which makes you different. In the legal arena, cases are unique in themselves, every case brings new opportunity to learn. The more plea bargaining you do, the more expertise you will have. Except for these skills, logical and analytical reasoning skills are very relevant for Plea Bargaining because it is very difficult to defy a statement backed by sound reasoning. Therefore, a conglomeration of all these skills makes you a master of plea bargaining.

Conclusion

The concept of plea bargaining is not entirely new in India. Indian has already recognized it when it got its constitution in 1950. Article 20(3) of Indian constitution prohibits self-incrimination. People accuse plea bargaining of violatory of the said article. But with the passage of time the considering the encumbrance on the courts, the Indian court has felt the need of Plea bargaining in Indian legal system. When a change is brought it is hard to accept it initially but society needs to grow so is our legal system. Everything has advantages and disadvantages and both have to be analyzed in order reach a sound conclusion. Rejecting something only on the basis of its disadvantages would not be justified in any case. The concept of plea bargaining is evolving in India and it is not appropriate to expect it to be perfect. It can only be improved by debate, discussions, and discourses.

Reference

1. https://www.nolo.com/legal-encyclopedia/the-benefits-plea-bargain.html
2. https://www.hg.org/article.asp?id=33881
3. https://vittana.org/11-advantages-and-disadvantages-of-plea-bargaining
4. http://www.mondaq.com/india/x/273094/trials+appeals+compensation/Plea+Bargaining+An+Overview
5. https://criminal.findlaw.com/criminal-procedure/plea-bargains-in-depth.html
6. http://www.legalserviceindia.com/articles/plea_bar.htm
7. http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=7f9180ab-d6b0-4c3c-9840-e89c8ef23087&txtsearch=Subject:%20Criminal
8. http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=10f20608-cdd3-416d-be42-9e692a5baad6&txtsearch=Subject:%20Criminal
9. https://www.britannica.com/topic/plea-bargaining#ref338191
10. https://www.nrilegalservices.com/plea-bargaining-in-india/

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In this article, Himani Singh discusses how to Implement ESOP for Startups.

ESOP Guide for Startups

Many companies which are young and newly established ones, especially startups and do not know how to manage and administer their capital amount and end up getting engulfed in problems related to money. Startups start losing workforce when they become unable to provide lucrative offers to retain and boost up their employees. Solution to this problem could be solved by implementing ESOP in the company which does not only play a major role in liquidating capital but also motivates employees to perform better and helps in the growth of the company.

Definition and meaning of ESOP

ESOPs are Employee Stock Option Plans – few call them Employee Stock Ownership Plans in India. At the point when an employee gets ESOPs from the organization where he/she works, he/she gets the privilege to buy a specific number of shares in the organization at a foreordained cost after a foreordained period or periods. It is given as a reward for tenure or performance with the company. It additionally works in as a motivational instrument as once you own stock, you really possess some portion of the company and if the company does well the stock value rises. ESOPs additionally help in holding employees.

The companies give ESOPs in parts and they have a vesting plan. So today an employee may get 3000 shares which would be given in sets of 1000 over the time. Usually, employees need to sit tight for a specific term to practice their entitlement to purchase shares. This period is called vesting period. If in the case that the employee does not practice the option of purchasing the shares within the vesting time frame, the options slip by and the employee does not get any rights. IT firms had begun this pattern however now numerous organizations in various parts offer ESOPs to employees even the new companies are relying upon ESOP to draw inability.

When to create ESOP

Create an employee equity allotment and implement ESOP somewhere in between of the Pre-seed stage and early venture capital stage.

How to implement ESOP for startups

ESOP is given to employees of a company which avails employees of the company with the option to buy company’s stocks at a certain price. The objective of an ESOP is to motivate employees to participate in affairs or matter of the company. The price on which the stocks are given to employees of the company can be of three types:

1. a) Market price i.e. the price at which the stocks of the company are mentioned on the stock exchange,
2. b) The Preferential price that is lower compared to the market price given to the employees,
3. c) the management could set the price at whatsoever it wants to but only if the company isn’t listed on the stock exchange.

These all are governed by the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

ESOP holds great importance for the following reasons

• A start-up requires funds and so, the capital requirement of the company can be increased by offering stocks of the company to employees, keeping them within the business.
• ESOP turns out to be a perfect alternative for appealing, encouraging and retaining employees instead.
• It is similar to a profit-sharing plan. Employees being aware of that they are shareholders and owners are bound to work with more enthusiasm and feel responsible for the growth of the company.
• Provided with the limited marketability, it is better to utilize the scheme rather than listing shares on a stock exchange.

Eligibility

The person who is eligible to be a part of the Plan are as follows:

1. Employees, other than:

(A) any Employee who belongs to the Promoter Group or holds/have 2% or more of the outstanding Shares, or

(B) except with the prior approval of the Reserve Bank of India, employees who are the nationalist of Pakistan, Sri Lanka or Bangladesh.

2. Directors of any company, except

(a) any Independent Directors or

(b) Director/s who either themselves or through any body corporate, by direct means or indirect means, hold more than 10% of the shares

Rights granted by companies to employees in ESOP

• Right to buy a specific amount of shares in the company at a predetermined price after a predetermined period.
• It helps the employer in retaining the company and provide assurance of a good level of performance in the work.

Purpose played by ESOP for Companies and Employees

ESOPs are basically given for tenure or performance of the employee in the company thus, it serves the purpose of both the employees and the company.

1. It serves as motivation for the employees for this basic reason that once they will own stock they feel responsible for the performance of the company, as it helps determines the value of the stocks of the company. When the company performs well, the value of the stocks rises and when it does not then stocks fall down.
2. If an employee is willing to take no risk then he can exercise his shares when company’s share is trading at a premium. If the employee sells the shares at the right time, he/she can easily make a profit

For instance, when an employee gets 300 shares at Rs. 100 per share and the vesting period is 12 months, an employee could exercise the option of purchasing the shares after 12 months. It is beneficial only if the employee exercises this option when the market value is greater than Rs.100 during that time.

If the market value is Rs.150 during that time, the employee can get the shares at Rs. 30000 and can sell it at Rs. 45000, (Rs.150 x 300). He/she will make a profit of Rs. 15000. ( tax involved in this – 30% perquisite tax & 15% capital gain which is approximately 4500 + 2250 and still to reach the net gain of Rs 8250) Employees do not involve in any risk as they pay money when they exercise the option. When the market price of the shares is high, employees could take the shares and sell it on receiving high profits. They have the open option to not take the ESOPs as it is not compulsory.

1. It helps the employer to get assured of the good level of performance in the work.
2. The company can dilute ownership and preserve cash only when it is required. The company gives an advantage by offering ESOPs to its employees. Employees can avail from the increase in the share price and hence, employees will focus and pay attention to working towards establishing the successful position of a company.

ESOPs deliver advantages like

• Place the interest of the managers with those of the owners.
• It is a no-cash compensation equipment to compete for the best human resources.
• It grants an opportunity to the company to pay without a reduction in accounting advantage.
• To have felt a sense of belongingness and ownership amongst the Employees.
• Lower in the attrition rates.
• Encourage the morale of employees.
• More efforts and hard work are done on the part of employees.
• Equitable Distribution of the achieved profit.

Taxation in ESOP

When the options/equity are offered by the company then there is no tax.

– When the option is vested then also there is no tax.

– When the employee uses his option of purchasing the number of shares then the difference between the exercise value and the market value is treated as perquisite and is taxable as according to the tax slab that the employees are in.

– When the employee sells their shares, the profit is considered as a capital gain. If in case the shares get sold within one year then 15% capital gains tax has to be paid just like in the usual purchase and sale of shares. If the stock is sold after 12 months, there is no tax as it is considered as long-term.

– If the employee has ESOPs of a company that is abroad and sells the shares, short-term capital gains get included to income and the person has to pay tax as according to the tax bracket that he or she falls into.

– If the capital gains are long-term and not short-term then 10% tax is implied to be paid excluding indexation benefit or else 20% tax has to be paid including indexation benefit.

How are ESOPs not similar to ESPS and RSUs?

Employee Stock Purchase Scheme permits employees to purchase shares at certain discount decided by the company as compared to the market price. Shares could be purchased by employees through monthly deductions from their salary.

Restricted Stock Units (RSUs) – When the employer offer RSUs, the employee acquires the shares free cost provided with certain conditions are supposed to be met like a vesting period. RSUs are attaining popularity in current times.

Legal framework in India

Sweat Equity Shares is defined in Companies Act 1956 under Section 79, which states –

• Shares of the company get listed on the stock exchange according to the guidelines of the SEBI.
• No less than 12 months should have been passed since the day on which the company was entitled to start the business.
• It specifies that the current market price, consideration, the number of shares and the class of the employees, or the directors to whom such equity shares are to be given.
• a special resolution passed by the company in the general meeting to issue the Sweat Equity Shares.

There are conditions to be followed for issuing sweat equity shares and the conditions are given in the Companies Act, 2013 under Section 54

• 3/4ths of the majority is required to be present at the general meeting to pass the special resolution.
• The company will not be able to get sweat equity shares for more than 15% of existing paid up equity share capital in one year or shares. Further, the Company should not exceed 25% of paid-up equity capital of the company at any time.
• Copy of the share is supposed to be delivered to the shareholder with the information of the general meeting.
• The consideration for the shares could be in both cash and non-cash form
• The company has registration of the Sweat Equity in the Form no. 4.3 and should record the shares issued under Sec 54.
• Lock-In period of 3 years is implied and this should be mentioned boldly in the share certificate.

Guidelines provided by SEBI for ESOP in 1999

• It gives disclosure rules for the financial statement and Director’s Report
• It needs compulsory disclosure of an impact of disclosure on profit for not obeying the fair value approach.
• Guidelines provided by SEBI is necessary to be followed by all stock exchange schemes which came into existence on June 1999 or after it and hence it has no control over the schemes established before June 1999.

In the year 2013 SEBI confined the scope of the application of ESOPs by constraining listed Companies from acquiring their own particular offers from the secondary market.

The worry was that the construction and organization of such schemes through fake practices prompted inflation, changes, or depression in the price of the securities.

Consequently, the same year in November, SEBI issued an exchange paper to survey the ESOP Guidelines. There was a proposal to re-substitute the ESOP Guidelines with some rules and regulation in order to guarantee better enforceability, to give legal framework for all the stock exchange schemes, including securities of the organization to address the worries raised with reference to creation of representative welfare trust, disclosure, and so on and to empower secondary market exchanges with adequate protections.

ESOP in Indian startups

ESOPs are a really good equipment for startups to attract and hire talent, but at the same time it’s a bet for the employees and comes with the risk. Employees must get convinced regarding the growth of the company and must check if proper documentation is in place. As everything has two sides one good and other bad, same is in the case of ESOP, if it has benefits then it has another fold of disadvantage and both are explained below-

Benefits to employers

Recruit good talent

Start-up companies use Esops to recruit good talent because they cannot

pay very high salaries

Feeling of Ownership

The employees have the feeling that they are a partner in Company and are motivated to work harder as companies growth is linked to their growth

Benefits to employees

Opportunity of becoming a millionaire

Tales of how Infosys which is one of the very few companies to offer Esops initially in the 90s, has created a lot of millionaires employees such as drivers, plumbers, etc. Hence, ESOPs are beneficial only for high growth companies

Disadvantages

Dilution

When the ESOPs are exercised the founders shareholding gets diluted.

ESOPs come with a risk

Only one among 20 startups are really successful. Tales of drivers, plumbers becoming millionaires happen only in very few cases. In fact, in the case of start-ups, it is safer for employees to go only for the salary and keep Esops as an added bonus.

In the following case, the founder of startup Roy and Joy establish a company with 1 lakh share capital i.e. having 50% holding with each

To scale up in the market they need to have talented employees who’s current CTC is nearly 15 lakhs. As a startup Alpha cannot afford these high salaries, it proposes 10 lakh per annum plus 500 shares each with a vestin period of 4 years.

Founders share get diluted when ESOPs are exercised as it is explained above.

Walmart-Flipkart deal brings back ESOP in the spotlight

Trust in stock option plans, which once had lost their sheen and bright execution about a few years ago, is restored. “Flipkart has come out to be a very fine story from ESOPs vista. There are only few instances where professionals have created such wealth. Faith will improve further, people will be more receptive to buy the ESOP  again

Walmart’s acquisition of Flipkart at a valuation of 21 billion dollars has created the largest pools of wealth for employees in the history of Indian corporate. The deal of Flipkart and Walmart has made the total worth of Flipkart’s ESOP, adding unvested shares, to $2 billion which almost equal to Rs 13,455 crore and the retailer based in the U.S is planning to give a 100 % buyback of vested shares by employees of Flipkart.

In the year 2017, a company based in Bengaluru had completed its fourth ESOP plan of dollar 100 million which was the largest buyback by any private company in India. In this, more than 3500 employees of Flipkart and its other acquisitions of fashion i.e. Myntra and JABONG and payment arms PhonePe participated. Wealth created by the employee through privately held homegrown organizations in our country ‘s digital ecosystem is approximately $4-5 billions and out of this Flipkart alone accounts for more than 20 percent.

Walmart India claimed that it will generate employment by developing supply chain and opportunities in the commercial world along with the investment which creates new direct employment.

Acquisitions usually create fear in the head of the employees and lead layoff bt in case of Walmart – Flipkart it seems to be giving the employees with good news.

LIST of Companies in India which have ESOP when they Startup

INFOSYS

• Infosys has led the concept and idea of ESOP in the Indian territory in the year of 1994
• Infosys had awarded numerous electrician, plumbers, peons, drivers of its company with the Infosys stock.
• There is a record that with the development and growth of company many of the shareholders have become millionaires now.

BPO

• BPO offered shares to 550 staffs of the office
• The idea and motive of BPO was to share the price and profit with the people who helped in establishing the company

BHARTI

• Started in the year 2001
• In 2006 every employee of the company was covered and ESOP was related to employees performance
• In 2008 they observed that the policy of 2005 isn’t working because the new and junior staff preferred bonus or cash over equity
• And so the company has now limited its plan to middle managers and above posts.

AXIS BANK

• The management of the Axis bank had passed the burden of FBT on employees considering the benefit given in the tax law
• In April 2001 more than one million options were brought to execution
• In April 2004 more than three million options were exercised
• And the amount of money gained was more than 100 crores in April 2004.
• In the year 2005, they observed a fall in the plan of last 4 years and in the year 2007 less than 3 lakh options were exercised and the amount fell down to 10 crore rupees.
• In the year 2008, they drifted to the plan where they restrict the plan to only middle management and above.

Conclusion

ESOPs are beneficial for the startups and the growing companies as it plays a vital role in enhancing the growth. The company by offering rewards, retain appeals talent, giving a sense of ownership and retirement benefit schemes and thus, it enhances the performance of the corporation as a whole.

This was all on ESOP Guide for Startups. What are your views on the Indian laws relating to ESOP Guide for Startups? Share with us in the comment box below.

Reference

https://www.quora.com/How-does-ESOP-in-Indian-startups-work-Are-they-of-any-value

https://www.tflguide.com/esops-in-india-benefits-tips-taxation-calculator/

https://www.indexventures.com/sites/default/files/pdf/index_ventures_hand_book_2_digital_1600x1200-2018-01-05.pdf

This article is written by Kashish Khattar, Amity Law School, Delhi [IPU], currently enrolled in the Ace your Internship course at Lawsikho.

Introduction

What is a hashtag?

Hashtag is a word or phrase preceded by a hash sign (#), used on social media websites and applications to identify messages on a specific topic. The initiator of a hashtag has an intention to maximize the reach of the topic to the people and it also serves as a common platform for a topic. The content becomes viral and results in the generation of a #tag, which then garners the attention of a wider audience. The companies then try to en-cash upon these moments of publicity and promote their product while increasing their association with the consumers. Social media platforms have become indispensable marketing channels for brand owners. And in the 10 years since the #hashtag emerged as an online marketing tool, interest in registering #hashtag trademarks has taken off.

Recent research shows that while just seven companies submitted applications for trademark-specific hashtags in 2010, the number of these applications has been rising steadily, spiking in 2016 with a 64 percent annual increase and some 2,200 applications to register trademark-specific hashtags filed globally.

Position of USPTO

The United States Patent and Trademark Office (“USPTO”) reports that they have no problems with hashtag trademarks, and have accepted applications going in hundreds. The USPTO applies similar rules as to what it applies to trademarks that have .com or a domain name.

A hashtag trade mark is only registrable if the word that’s added to # or “hashtag” is ‘distinctive’. The USPTO has recognized a hashtag as a trademark only if the term “it functions as an identifier of the source of the applicant’s goods or services”.

In its Trademark Manual of Examining Procedure (“TMEP”), the USPTO says that a mark consisting of the hash symbol (#) or uses the word HASHTAG can receive trademark protection, and be registered, or if it serves as a source-identifier.

The USPTO particularly says that hashtag trademarks that do not qualify as source-identifiers, hence as trademarks. They were typically made for searching for topics within the social media domain. The USPTO does not take a concrete position whether hashtags are protected or not. The USPTO has accepted a number of hashtag marks for registration but has also rejected a lot of applications. They consider it on a case by case basis.  

The USPTO’s treatment of hashtag marks is similar to its treatment of domain names, which it generally regards as addresses on the Internet but which can sometimes serve a source-identifying function.  A domain name will be registered only if the “mark, as depicted on the specimen, [is] presented in a manner that will be perceived by potential purchasers to indicate the source and not as merely an informational indication of the domain name address used to access a website.”

While the PTO holds that hashtags can sometimes qualify as protectable trademarks, at least one court has suggested that hashtags may never be protectable as trademarks.

In Eksouzian v Albanese, the issue was whether the use by one of the parties of the hashtags #CLOUDPEN and #CLOUDPENZ on Instagram breached the terms of a trademark settlement agreement. In this agreement, the party which using these hashtags had agreed to refrain from any trademark style use of the word “cloud” in conjunction with the words  “pen” or “penz” (the word “pen” is apparently used as a descriptive term for e-cigarettes).

This understanding had seemingly been given because the other party to the agreement had US trade mark registrations or applications for Cloud Penz and Cloud Pen. The court, in this case, held that there was no breach of the agreement.  It justified its decision by saying that “hashtags are merely descriptive devices, not trademarks, unitary or otherwise, in and of themselves”. The court went on to say that the use of #CLOUDPEN was merely “a functional tool to direct the location of the plaintiff’s promotion so that it is viewed by a group of consumers, not an actual trademark.” Basically, according to the court’s ruling, a hashtag is a “descriptive device” and not a “source identifier”.

Hashtags under the Indian Trademark Law

The question is, whether a hashtag can be registered as a trademark under the Indian Trademark Act, 1999?

The definition of a mark is provided under Section 2 (m) of the Indian Trademark Act, 1999 which states that

“Mark includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging or combination of colours or any combination thereof”

Then a hashtag can qualify as a mark under a combination of words and numeral but in order to qualify as a trademark, the same has to qualify the definition of a trademark provided under the Indian Trademark Act, 1999 under Section 2 (zb) which states as below:

“Trademark means a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include the shape of goods or their packaging and combination of colours”

The two conditions mentioned under the Act for a mark to be qualified as trademarks are as mentioned below:

1. Capable of being represented graphically;
2. Capable of distinguishing goods and services of one person from another person.

We can see that first condition is fulfilled instantly as hashtag is a combination of words and numerals which is represented graphically.

The problem arises with the second condition, which is the ultimate test for a hashtag to qualify as a trademark.

Typically, hashtags have a limited shelf life because topics which trends for a brief period before they die their own death in a short span of time and some other topic and hashtag takes over. Under the Trademark Law, it is not easy to achieve the essential or basically, the second condition. The trademarks are a “source identifier” and the hashtags which can fulfill this criterion can qualify for registration under the Act.

Under Section 9 of Indian Trademark Act, 1999, the absolute grounds of refusals are given and under sub-section (1) of section 9 states that:

“The trademarks -which are devoid of any distinctive character, that is to say, not capable of distinguishing goods or services of one person from those of another -shall not be registered”

Analysing the section, it can be said that hashtags which are distinctive in nature can be registered as a trademark under the Indian Trademarks Act, 1999. So, hashtags which can fully satisfy the two essentials. That hashtags which are distinctive in nature or have become distinctive within a period of time can be said to be qualified to be protected under the Law.

The distinctiveness mentioned under the Act may be classified in two:

1. Inherent; and
2. Acquired.

A hashtag can easily fall under any of above mentioned two categories, it may either be inherently distinctive in nature due to it being an invented word or it may be something which trends for a longer period of time such that the people start to identify the particular source through hash tag only. Further, it shall also be kept into the mind that applying a hashtag to a common word or generic word would not make it a trademark as putting a hashtag will not make it distinctive. The trademark needs to pass the test of distinctiveness of trademark provided under the Act.

Infringement of Trademarks

What is infringement?

Infringement of trademarks as per Section 29 of the Trademarks Act, 1999 is defined as a use of a mark, by an unauthorised or an authorised person or a person who is not the registered proprietor, which is identical or deceptively similar to the trademark in relation to the goods or services in respect of which the trademark is registered.

Simply, it is a violation of the exclusive rights given to the registered trademark holder without their permission of the owner or the licensees. Courts have from time and again held that the similarity of two marks causes the confusion in the minds of the people. For example, The lesser known brand may take an advantage of the hard-earned reputation of the mark’s original holder, the famous brand.

It is not an easy task to prove infringement of a trademark. The mark is said to be infringed in the following cases which are discussed below:

1. If the mark in dispute is identical with or deceptively similar to the registered trademark and is in relation to the same or similar goods or services;
2. If the identical or similar mark can cause confusion in the minds of the general public to have an association with the registered trademark
3. If the registered trademark is used as a part of a trade name or business concern for goods and services in respect of which the trademark is registered
4. If the trademark is advertised and as a result, it takes unfair advantage or is contrary to the honest practices or is detrimental to the distinctive character and reputation of the registered trademark.
5. If the registered trademark is used in the material meant for packaging or labelling of other goods or as a business paper without due authorization of the registered user.

For a further read on infringement, click here.

Remedies

1. Injunction against the use of the trademark;
2. Damages;
3. Handing over of Accounts and Profits;
4. Appointment of a commissioner by the resp. Court for custody or sealing of infringing material and accounts.; and
5. An application under Order 39 Rule 1 and 2 of CPC for grant of an injunction or an ad interim ex parte injunction.

Conclusion

While these tools have become a normal feature of the digital landscape, the sharing culture on which they depend can present some intellectual property-related challenges. Even though the registration of hashtags as trademarks are still not very popular in India but the craze of social media is catching up with the mass due to the availability of cheap data because of the entry of Reliance Jio in the market. The internet market has suddenly grown beyond anyone’s imagination and everyone has an easy access to the same. In my opinion, This will lead to the emergence of hashtags as trademarks in the near future as a hot topic in the IP market.

In this article, Anith Johnson, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com and Shreya Mazumdar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses sweat equity shares.

Introduction

When an investor invests in the market, he tends to get certain ‘securities’ of the company in return for his investment. The investors can subscribe to equity shares, preferential shares or debentures that is issued by the company. Equity is like an ownership in a business. For instance, if A holds 90 shares of Mango Co. out of 9000 shares floated by the company then A is 1% owner of Mango Company. Hence if Mango makes a profit then A will get shares from the dividends and price appreciation but if Mango makes losses then A’s capital will go down which will reflect in the stock price.  

In its very general term ‘Sweat Equity’ is an input to a project or enterprise in the form of effort and labour.  Sweat Equity is as valuable as a cash equity. In case of a start-up of a company, sweat equity is typically rewarded through distributing stock or other types of equity in a new business. Sweat equity can be given to the employees as rewards as well as in the context of sweat equity in real estate which refers to a value-enhancing improvement made by homeowners to their properties.

The new era is keen to keep their best employees who bring in their expert knowledge, know-how as well as technical expertise that adds to the business value of the company. Therefore, in order to keep them involved and motivated towards the company, the companies go an extra mile to reward them by giving them sweat equity/ESOPs.

Sweat Equity Shares

According to Sweat Equity Shares under Companies Act, 2013 it means that such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash for providing them know how or making available rights in the nature of intellectual property rights or values addition, by whatever name called.

Definition of an ‘employee’

Companies (Shares Capital and Debenture) Rules, 2014 defines the term ‘Employee’ as an employee who has become permanent and who has been working in India or outside India for at least one year or a director of the company who may be a whole-time director or part, or an employee or a director mentioned before in India or outside India or of a holding company or subsidiary.

Legal Framework governing Sweat Equity Shares

Section 2(88) of Companies Act, 2013 defines sweat equity share as the equity shares issued by a company to its directors or employees at a discount or for consideration other than cash, for providing their know-how or in the nature of Intellectual property or value addition to the company.

Rule 8 of the Companies (Share Capital and Debenture) Rules, 2014 define employee as:

1. A permanent employee of the company who has been working in or outside India for a period of at least one year;
2. A director of the company, it can be a whole time director or any other director;
3. An employee or director working in the holding company or subsidiary of a company.

Section 54 of the Companies Act, 2013 provides for the issue of sweat equity shares subject to fulfillment of following conditions:

1. Sweat Equity issues should be authorized by a special resolution.
2. The resolution should contain information about the number of shares, current market value of the shares, consideration and to the class of employees or directors to whom the shares are being issued.
3. The special resolution has to act within 12 months of passing otherwise it will be rendered invalid and a fresh resolution has to be passed again.
4. Sweat Equity shares shall be issued in accordance with the SEBI regulations.
5. The rights, limitations, restrictions and provisions which are applicable to equity shares shall also be applicable to sweat equity shares. 
6. The sweat equity shares which are issued to directors and employees shall be locked in and is non-transferable for a period of three years. The non-transferability of the shares shall be mentioned in bold on the share certificate.

Value Addition

‘Value Addition’ means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such a person to whom sweat equity is issued. 

Quantum of Sweat Equity Shares

Rule 8 of Companies (Share Capital and Debenture) Rules, 2014 provides that a company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital or shares of the value of 5 crores, whichever is higher and it cannot exceed 25% of the paid-up equity capital of the company. Startups may issue sweat equity shares upto 50% of its paid-up share capital upto 5 years from the date of incorporation.

Valuation of Sweat Equity Shares

The sweat equity shares to be issued shall be valued at a price determined by the registered valuer as a fair price. The registered valuer is also required to give justification for determining the fair price. A registered valuer has to be appointed for the valuation of intellectual property rights or of know-how or value additions for issuing sweat equity shares. A report will be submitted by the valuer to the board of directors along with justification for such valuation. The gist of the critical elements of the report will also be sent to the shareholders.

Procedure to Issue Sweat Equity Shares

Rule 8 of Companies (Share Capital and Debenture) Rules, 2014 provides for the procedure of issuing of sweat equity shares.

Directors’ Disclosure Report

A directors’ report is the financial report which is required to be filed at the end of the financial year. A true and correct representation of the issue of sweat equity shares shall be given to the shareholders. It will contain the following details in the report:

1. The class of Director or employee to whom sweat equity shares were issued; 
2. The class of shares issued as sweat equity;
3. Number of sweat equity shares issued to the Directors, KMP or other employees showing separately the number of such shares  issued to them for consideration other than cash and the individual names of the allottees holding one percent or more of the issued share capital;
4. Proper Justification for the issue;
5. The terms and conditions for the issue of sweat equity shares, including price formula;
6. The total number of sweat equity shares arising as a result of the issue;
7. The total percentage of sweat equity shares of the total post issued and paid-up share capital;
8. Benefit received by the company after the issue of Sweat Equity;
9. The diluted Earnings per Share (EPS) pursuant to the issue of sweat equity shares.

Accounting Treatment of Sweat Equity

• When the sweat equity is issued for non-cash consideration based on the valuation report by the registered valuer then such it shall be treated in the following manner:

1. Where the non-cash consideration takes the form of depreciable or amortizable asset, then it will be treated in the balance sheet of the company in accordance with the applicable accounting standards; or
2. Where clause (1) is not applicable then it shall be treated as expense as per the relevant accounting standards.

•  The sweat equity shares issued will be treated as part of managerial remuneration if the following conditions are satisfied:

1. Sweat equity shares are issued to any directors or managers;
2. If the sweat equity shares are issued for consideration other than cash and are not in the form of assets which can be carried to the balance sheet then it shall be treated by applicable accounting standards.

• If the sweat equity shares issued during an accounting period, then the value of the sweat shares shall be calculated as a form of compensation to the employee in the financial statements, if the equity shares are not purchased pursuant to the acquisition of an asset.
• If the sweat equity shares are issued after the acquisition of an asset then the value of the asset will calculated as per the valuation report, shall be carried it in the balance sheet as per the accounting standards and amount of the accounting value of the sweat equity that are in the excess value of the asset as per the valuation report, shall be treated as compensation to the employee or director of the company.

Why Startups offer Sweat Equity Shares?

Startups in their initial stages do not have adequate resources or capital to compensate employees for their hard work. At the same time it is very important for startups to retain very high-quality human resources.  Startups can benefit a lot by issuing sweat equity shares to the employees to compensate for the contribution towards the growth of the company. This type of business model is vital for the long term development of startups. 

Startups can issue shares up to 50% of its paid-up share capital within 5 years from its incorporation and this can be utilized in the most efficient manner by the employers by formulating a mechanism which can be beneficial to both employees and employers.

Reasons to issue sweat equity

1. Incentive for employees- It is very important to incentivize the employees in an appropriate manner for the long term growth of the company. Sweat equity acts as an incentive for their contribution and it motivates them to perform better. Startups usually do not have high capital and won’t be able to monetarily compensate the employees which might lead to unsatisfied employees. This might be a problem for the development and sustenance of the company. So it is very important to keep the employees content and issuing of sweat equity shares is one of the best business models which a company can adopt. If the company is doing well then the employee receives higher dividends. This is also a motivating factor for the employees and directors to perform better.
2. Retain best talents- When the sweat equity shares are issued to the employees it is locked for a period of three years. This will make the employee stay in the company for a longer duration and work in an efficient and effective manner. In most of the companies attrition rate is very high and it is very difficult to retain employees for a long period of time as employees tend to leave for better opportunities.
3. Cost-efficient method for companies- Sweat equity shares reduce the expenditure of the company as the employees who are supposed to be compensated monetarily are now getting compensated through equity shares. This reduces the expenditure of the company to a large extent. 
4. Participation by employees in the Company’s management- After receiving sweat equity shares, the employees will also become the owners of the company. The employees can voice their concerns to the top management and will be able to represent the operating part of the company. This will lead to informed decisions by the top management regarding operations and help in the long term growth of the company.
5. Tax Benefits- As per Income tax act, 1961 the employee is required to pay tax on the shares allotted to him. To determine whether sweat equity shares are taxable in the hands of employees it has to satisfy certain conditions and they are following:

• The security has to be a specified security or sweat equity as defined in section 2(h) of the Securities Contract (Regulation) Act, 1956;
• Shares should be allotted or transferred after 1st April 2009;
• It should be allotted by the employer or former employer;
• It should be allotted to an employee or former employee.

Conditions for issue of Sweat Equity Shares

Sweat Equity Shares are issued only when the following conditions are fulfilled namely:

1. A special resolution has to be passed by the company to issue sweat equity shares
2. The resolution has to specify the number of shares, the current market price and the class or classes of directors or employees to whom these equity shares are issued.
3. The sweat equity shares that are authorised by the special resolution shall be valid for making the allotment within a period which is not more than 12 months from the date of passing of the special resolution.
4. The company should at least be incorporated for one year.
5. In the case where the equity share of the company is listed in a stock exchange, the sweat equity shares are issued as per the Securities and Exchange Board and if it is not listed then the sweat equity shares are issued in as per the rules prescribed.
6. The sweat equity that is issued to directors or employees shall be locked in for a period of three years from the date of allotment of the shares and the share certificate is under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned prominently on the share certificate.  

Pricing of Sweat Equity Shares

The price of sweat equity shall be valued at a price determined by a registered valuer as for the fair price and providing justification for the valuation. The registered valuer shall be carried out the valuation of the know-how or the intellectual property rights or value addition for the sweat equity that has to be issued and he shall provide a proper report addressed to the board of directors with justification for the valuation. The gist along with critical elements of the valuation report that is obtained has to be sent to the shareholders with the notice of the general meeting.     

Sweat Equity for Employees

There are companies who issue sweat equity as an incentive or a bonus to their employees to keep up the hard work as well as add to the business value of the company. This gives an entrepreneurial vibe to the employee as they get rewarded multiple times once the company scales higher and the valuation of it increases.  

From the Employer’s point of view, providing sweat equity is not only an effective but it is also an effort made by the employer to keep the employee faithful to the company as the sweat equity shares allotted as sweat equity gets locked in for a period of three years from the allotment. Although Sweat Equity is taxable as perquisites in the hand of employees under Income Tax Act, 1961. When it comes to an unlisted company valuation of shares will depend on the closing and opening market price on the date and in case of an unlisted company, that value of the share is by SEBI Registered (Cat-I) Merchant Banker.

As mentioned before a company is allowed to issue sweat equity only up to 15% of the existing paid up equity share capital in a year or shares of issue value of Rs. 5 crores whichever is higher. It should not exceed 25% of the paid-up equity capital of the company at any point in time. There is an exception provided to the start-up company at any time where the sweat equity issued shall not exceed 50% of their paid-up capital up to 5 years from the date of its incorporation.

Sweat Equity in Startup Companies

Start-Up companies are mushrooming everywhere and at their nascent and uncertain state, their major concerns are of employee retention levels. Therefore, employers come up with ways to create attractive compensation packages structured to target highly dexterous workforce. Sweat Equity is one of the methods of attracting and motivating as well as pay high salaries the employees.

Employee stock options (ESOP) and sweat equity have been ways for incentives and bonuses which is very much popular among start-up companies and firms. It is profitable for employees as stock options permit to gain ownership in the company’s business which will also involve the employees to be more responsible towards their actions for the rise and fall of its financial condition.

Whereas for founders as well as for institutional investors consider stock options or sweat equity as dilution of their shareholding pattern. Other than the stock option with a crucial funding event or reaching a key milestone when it comes to revenue, it is essential. The employers formulate this mechanism by offering to employee or directors at a discounted rate instead of cash based on their work, value additions provided and intellectual strides made.

Although such allocations are negotiable but are it possible to entirely pay the salary in form of sweat equity? This has raised a question in the minds of several start-up companies.

As mentioned before that the limit of sweat equity for start-up could be raised 50% of the paid-up capital. As per Income Tax Act, 1961, the value of sweat equity shares are taxable in the hands of the employee in the year in which the shares are allotted or transferred to the employee. In order for it to come under Income Tax Act, 1961 tax allotment of the sweat equity shares can be evaluated by:

1. The securities of shares that are involved are of Specified Securities or Shares that is defined under Section 2(h) of the Securities Contract(Regulation) Act, 1956
2. Sweat Equity shares that are allotted or transferred on or after April 1, 2009
3. Sweat Equity Shares are allotted by the employer or former employer to the employee.
4. Sweat Equity may be transferred to the employee or former employee, directly or indirectly.  

If the above conditions are satisfied then perquisites will be taxable as “Salary” in the hands of an employee in the assessment year relevant to the previous year in which shares or securities are allotted or transferred to the employee. These valuations can be done on Fair Market Value of securities at the date of exercise of the option by the employee.

Key Concepts to keep in mind while granting Sweat Equity Shares to employees by Startups

• Granting of sweat equity shares- While deciding the granting of sweat equity to employees the directors and founders of the firm should select the right employees. The company should reward only those employees who have long term goals with the company and are firmly dedicated for the development and welfare of the company. 
• Right skills and expertise- Employees who cannot be compensated monetarily for their contribution to the company should be selected for sweat equity shares. It is very important for the company to identify the employees who possess valuable skills and expertise that will benefit the company. 
• Valuation of sweat equity shares- Most of the startups are a private limited company and the valuation of the sweat equity share is done by a registered valuer. It is very difficult to ascertain the value of shares in numerical terms and also it is important to understand the contribution of employees for the expansion of the company. Proper justification and valuation should be taken into account before granting sweat equity shares. 

Conclusion

Thus, there are limitations that have to be kept in the mind when a salary is given in terms of sweat equity, that is the limit of sweat equity for a startup could only be up till 50% of the paid-up capital. Thus, practically speaking, if the number of employees is more and all of them are paid only through sweat equity then there are chances that it might exceed 50% of the paid-up capital. But considering if the situation arises where the employees can be entirely paid through sweat equity and the limit does not exceed 50% then it is acceptable if the employees accept such condition. Sweat Equity is considered to be a “Salary” and it is also taxable under Income Tax Act, 1961. Therefore, if the employer wants to pay its employees only through sweat equity then such deals are acceptable if the restricted limits are followed.  

Another threat that has been haunting the founders of losing their ownership in the company or imagining that retaining the percentage of shareholding and also raising third-party funding and sharing at the same time is a difficult task, was the question that needed an answer. As the position currently stands to limit of an issue of sweat equity at 50% of the paid-up capital which has liberalised the issue of the sweat equity shares. This provides a way to the founders to better structure their cap and have control over the shareholdings in the Company.  

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In this article, Shilpa Nagral, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on who takes charge on the death of a promoter in the case of an OPC

Introduction

Famous educator B.T. Washington rightly remarked – “It’s better to be alone, than in wrong company”. Companies Act, 2013 reinforced the saying by introducing the concept of One Person Company (OPC). Earlier in India, minimum two people were required to start a company, but now one single person can start a company and he can be the sole shareholder as well as director of the Company. The concept of one person company though new to India, has been in existence in various countries like United Kingdom, China, United States of America, Singapore, etc.. The United Kingdom was the country which paved way for One Person Company through the precedent laid down in the famous case of Saloman v. Saloman and Company.

What is One Person Company?

Section 2(62) of Companies Act, 2013 defines OPC as “a company which has only one person as a member.” As per Companies Act, 2013 OPC can be incorporated only as a private company with the requirement that the person forming the OPC should be a natural person who is resident (i.e have stayed in India for at least 182 days during the immediately preceding financial year) as well as a citizen of India. Introduction of OPC helps a single person, sole proprietor, entrepreneurs to enjoy full control over the company with benefits of limited liability. As OPC has separate legal identity than that of its promoter it has perpetual succession. A single person in India can incorporate a company in India from April 1, 2014.

Features of One Person Company

Features of One Person Company are as follows:

1. It is type of Company formed on the basis of number of members;
2. One Person Company can be incorporated as private company only;
3. Minimum paid up share capital of One Person Company should be one lakh rupees but should not exceed 50 lakh rupees;
4. It can be a Company “limited by shares” or “limited by guarantee”;
5. One Person Company has separate legal identity than that of the promoter incorporating it;
6. The promoter incorporating One Person Company has limited liability;
7. The words “One Person Company” should be mentioned in brackets below the name of the One Person Company;
8. Member/ Shareholder act as the first director, until the company appoints director(s);
9. Rates of taxation as applicable to private companies shall be applied to One Person Company;
10. One Person company cannot be incorporated as or converted into Section 8 company under the Companies Act, 2013;
11. OPC cannot be voluntarily converted into any other type of company till 2 years from date of its incorporation;
12. If the paid-up capital of the OPC exceeds 50 lakh rupees or the average annual turnover in three immediate preceding financial years exceeds 2 crore rupees, the company loses its status as OPC;
13. No minor can become member of OPC or hold beneficial interest in OPC;
14. OPC cannot carry out Non Banking Financial Investor activities including investments in security of body corporate;
15. Any company other than a company registered under section 8 company under the Companies act 2013 which has paid up capital of 50 lakh rupees or less or average turnover during immediate last three financial years is 2 crore or less can convert into One Person Company by passing special resolution in its general meeting;
16. One Person Company need not hold any annual general meeting each year;
17. Cash flow statement may not be included in the financial statements of One Person Company;
18. Only one director of OPC is sufficient to sign the financial report/ directors report;
19. The company should maintain in its minutes of board meeting and also inform the Registrar of Companies of every contract into by the company within 15 days of board meeting.

Incorporation of One Person Company

One Person Company – Perpetual Succession

As per the Companies Act, 2013, companies have “perpetual succession”. Perpetual succession of a company means longevity of a company is not determined by death, transfer of shares, bankruptcy, resignation or lunacy of its members, shareholders, directors, etc.. In other words, members may come and go, but the company goes on forever. The company comes into existence through operation of law and can be wound up (can be brought to an end) only through the operation of law. Since One Person Company is also a type of company under the Companies Act, 2013, the concept of perpetual succession also applies to it.  

In Saloman v Saloman and Company, the honorable judge clearly laid down that a company has a distinct legal identity and it survives beyond the lives of its members.

Also, in case of Abdul Aziz Bin Atan v Ladang Rengo Malay Estate SDN BHD, the learned court held that the company from the date of its incorporation has a distinct legal entity from that of its members. Even though the entire shareholding of the company changed, this would not change the nature or life of the company.

Who takes over when the promoter of One Person Company dies?

The promoter while forming the Company has to mention one person as his nominee during the incorporation of the Company. The nominee, in event of the death of the promoter or due to his incapacity to contract for any other reason, will:

1. become a member of OPC;
2. be entitled to all shares, same dividends and other rights of the OPC;
3. bear all liabilities of the OPC.

On becoming the member, the nominee has to appoint another person as his nominee who will take over the Company in event of his death or due to his incapacity to contract. The nominee has to be appointed within 15 days of becoming a member of the Company with the prior written consent of the person in Form INC-3.

Who can be a nominee?

The nominee should be a natural person who is resident as well as a citizen of India. Prior written consent of the nominee has to be obtained and the same along with name and details of the nominee has to be filed with the Registrar in Form INC-3, at the time of incorporation of the company along with Memorandum of Association and Articles of Association.

A person can become promoter or nominee in only one OPC at given point in time. If the person becomes promoter/nominee in more than one OPC, within 6 months he has to decide the OPC that he wants to be part of and withdraw his membership/ nomination from the other Company.

Change of Nominee

Change of nominee can take place in the following instances:

A.  Change of nominee by promoter

The promoter can change the nominee any time for any reason or in event of his death or his incapacity to contract. The promoter has to intimate the Company of such change and nominate another person after obtaining his prior written consent in Form INC-3. The Company within 30 days of receipt of such intimation, shall file with the Registrar:

1. notice of change of nominee in Form INC-4 along with fees as per Companies (Registration offices and fees) Rules, 2014;
2. written consent of the nominee in Form INC-3’

B. Withdrawal by nominee

Change of nominee can also happen when the nominee withdraws his consent. Nominee, by giving written notice of his withdrawal to the promoter and the Company, can withdraw his consent to act as nominee. The promoter, within 15 days of receipt of such notice of withdrawal, has to appoint a new nominee. Further, the Company within 30 days has to file with the Registrar:

1. notice of withdrawal of consent;
2. name and details of the new person nominated in Form INC-4 along with fees as per Companies (Registration offices and fees) Rules, 2014;
3. written consent of the new person in Form INC-3.

Conclusion

The concept of One Person Company will not only help in corporatization but also pave way for various small-scale traders and mid-level entrepreneurs to start their own Company without unnecessary hassles of various lengthy and unwanted compliances. This will also help in providing legal protection to unorganized Indian businesses. It gives small businessmen the security of limited liability and benefit of secure loans from venture capitalists, foreign investors, banks, etc. Though a noble thought and idea, the government should take care that there are no regulatory mess ups. The government should also take steps to educate and create awareness about One Person Company as even after 4 years of its introduction it is fairly an unfamiliar concept for Indian entrepreneurs.