This article has been jointly written by Harsh Vardhan Tiwari & Animesh Jha. The authors are currently mentoring CLAT aspirants.

Common Law Admission Test (CLAT 2018) took place on 13th May 2018. The CLAT Answer Key released by the CLAT Committee seems to have wrong answered marked. Few of the questions were erroneous due to faulty framing.

We have identified three possible errors in Legal Aptitude Section, one in the GK section and two in Logical Reasoning Section making the total tally of 6. (Undergraduate). There are 8 possible errors in CLAT 2018 (PG) answer Keys.

CLAT Committee of 2017 accepted 9 errors after the grievances were raised. The potential errors in CLAT 2018 (UG) are:

Question 167

Legal Principle: Negligence is the absence of care by one party which results in some damage to another. Damage is an essential ingredient to constitute a tort of negligence.

Fact Situation: Mistry left his ladder on the public road while unloading it from a truck when he went to open the shutters of his shop. Saini who was riding his motorcycle had to swerve hard to avoid hitting the ladder as he came with speed on the road. Saini fell down but was miraculously not injured.

Which of the following statements is the most appropriate in relation to the legal principle stated above?

1)Mistry is not liable for the tort of negligence since Saini was not injured though he fell down.

2) Mistry is liable for the tort of negligence since Saini fell down due to the presence of the ladder.

3) Mistry is not liable for the tort of negligence since Saini was speeding on the road.

4) Mistry is liable for the tort of negligence since he was careless in leaving the ladder on the road.

Here the correct answer should be A, instead of the marked answer B for the simple reason that the principle is specifically stressing on Damage, which is some tangible or actual harm to a person and different from injury which is a violation of legal rights.

By adding the last line, the framer of the question clearly identified that there was clearly a miracle due to which the plaintiff was not hurt. Here it is tough to comprehend that how a person will not be hurt when falling from motorcycle but still this is what a miracle means. Maybe there was a bed of roses alongside but since the person was not hurt, there can be no damage.

Here understanding the difference between Torts actionable per se and not actionable per se. Torts like trespass are actionable per se where the proof of any specific damage is not required to be given but as in instant case, there is tort of negligence, some damage is required which means any harm for which one should be compensated.

We expect CLAT committee to correct this question and appeal students to raise grievances.

Question 162

Legal Principle: It is an offence to obstruct a public servant in the due discharge of his duty. Right of private defence is available to protect one’s person and property.

Fact Situation: Sidhu comes to the rescue of his uncle who is sought to be taken into a car by some men. In the process, he causes injury to some of them. Later, it turns out that the men were police persons in plain clothes trying to enforce a warrant against his uncle.

Which of the following statements is the most appropriate in relation to the legal principle stated above?

Options:

1) Sidhu has committed the offence of obstructing a public servant in due discharge of his duty.

2) Sidhu has not committed an offence since he did not know that the men were from the police.

3) Sidhu’s uncle has resisted arrest and should be proceeded against.

4) Sidhu should not have tried to help his uncle without ascertaining the fact.

Here the correct answer should be A, instead of the marked answer B for the simple reason that the Cardinal rule of Legal Aptitude is simply to blindly follow the principle and presume nothing but the principle. Here the Principle clearly states that obstructing the public servant is an offence.

Here there are two logics which make the given answer incorrect.

1.  Firstly the Principle of Private defence given is available for defending ONE’s person and property, which indicates that the same cannot be exercised for person and property of others. Here the actual law is different but we have to stick the principle given. So, here the act of Sidhu of defending the Uncle was not covered under the principle of private defence.
2. Secondly, it is nowhere mentioned in the principle that the obstruction should be intentional and since the requirement of intention cannot be presumed hence strictly following the principle, the answer should be different.  

Question Number 154

A Panchayat Samiti at the block level in India is only a/an:

Options:

1) Administrative authority

2) Co-ordinating and Supervisory authority

3) Consultative Committee

4) Advisory body

Here the correct answer should be A, instead of the marked answer B because in Panchayti Raj, the Panchayat Samiti is an executive/ administrative authority whereas the Zila Parishad is the Coordinating and Supervisory Authority. To Support my claim, Book of Mr.  M. Laxmikanth on Indian Polity Published by Tata Mc Graw Hill Publication can be sighted. This book is considered as an authority for civil services examination. Page no. 699.

To Quote

“4. The panchayat samiti should be the executive body while the zila parishad should be the advisory, coordinating and supervisory body.”

We expect CLAT Committee to correct this question.

Question 153

How many languages are there in the Eighth Schedule of the Constitution of India?

Options:

1) 21

2) 22

3) 19

4) 18

Here the correct answer should be B, instead of the marked answer A because it is clearly the case as it is clear from a bare perusal of the constitution. No need of explanation.

Question Number 5

Directions: Identify the incorrect sentence/sentences.

1. A) The college has organized a science fare
2. B) This is to notify that a leather wallet has been lost
3. C) Shortly blood donation will begin a camp
4. D) The agenda of the meeting is available on the website.

Code

Options:

1) B

2) C

3) D

4) A

The answer provided by CLAT committee is (2) C. Although, it prima facie appears to us that Statement A should be also the correct answer as in the spelling of “Fare” is wrong. It makes two options as the probable answer.

We expect CLAT Committee to accept both as correct answers.

Question 105

Directions: Read the statement and on the basis of that, choose the most appropriate course of action(s) given below the statement.

Statement: Most of those who study in premier Medical colleges in India migrate to developed nations for better prospects in their professional pursuits.

Courses of Action:

1. All the students joining these colleges should be asked to sign a bond at the time of admission to the effect that they will remain in India at least for ten years after they complete their medical education.
2. All those students who desire to settle in the developed nations should be asked to pay the entire cost of their education which the government subsidised.

Options:

1) Only I follows

2) Only II follows

3) Both I and II follow

4) Neither I nor II follows

The answer provided by CLAT Committee is (2) that is Only II follows. The correct answer should be (4) neither I nor II follows. The reason behind being Second course of action is extreme and impractical.  

We expect the answer to be changed from (2) to (4).

…………

Now, Coming on to CLAT 2018(PG) part. There are possibly 8 errors in the answer Key.

Question 430

Which among the following is not a feature of federalism?

Options:

1) Supremacy of the Constitution.

2) Distribution of Powers.

3) Supremacy of the Judiciary.

4) Separation of powers.

The answer provided by CLAT Committee is (4)   Separation of powers. Whereas the answer should be (3).

Question 443

Which one of the following statements is incorrect?

Options:

1) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

2) The tax collected by the Union under Clause (1) of Article 246A shall not be distributed between the Union and the States.

3) The Goods and Services Tax Council has power to establish a mechanism to adjudicate any dispute between the Government of India and one or more States.

4) Article 279-A is an entrenched provision under Article 368 of the Constitution of India.

The answer provided by CLAT Committee is 2)The tax collected by the Union under Clause (1) of Article 246A shall not be distributed between the Union and the States.

Option 4 is an equally correct answer. Vide 101st amendment article 368 has been amended to the effect that in proviso(a) of 368(2), in place of” article 162 or 241″, the words” article 162 , 241 and 279a” were substituted….as we can see, it being a proviso to cl(2) and requiring a special procedure for amendment (I.e ratification by states) can be regarded as an entrenched provision under Article 368.

Question 457

The concept of Dialectical Materialism is a concept commonly associated with which of the following Schools of Thought?

Options:

1) Marxism

2) Liberal Theory

3) Post Modernism

4) Utilitarianism

The answer provided by CLAT Committee is 2) Liberal Theory. The correct answer is 1) Marxism.

Question 489

Which of the following is not correct in the context of valid usage?

Options:

1) Usage must be so well established as notorious.

2) In case of conflict between usage and law, law prevails.

3) In case of conflict between express provision of a contract and usage, contract prevails.

4) Usage shall be a reasonable one.

The answer provided by CLAT Committee is 3)   In case of conflict between express provision of a contract and usage, contract prevails. Custom, even more so usage must not be in conflict with express provisions of statute law… (Ref- VD Mahajan- Jurisprudence 5th edition Pg 240 point 9) . Noteworthy – Section 1 of Indian Contract Act- doesn’t suggest anything to the contrary. Hence correct answer cannot be option 3.

There are few questions in which none of the options given is the correct answer like Question numbers 491, 504, 523.

Question 515

When a person dies intestate                                        

Options:

1) He dies in his home in his estate.

2) He dies without leaving any property.

3) He dies without leaving a will.

4) He dies by committing suicide.

The answer provided by CLAT Committee is 1) He dies in his home in his estate. The correct answer should be (3) He dies without leaving a will.

In this article, Jitika, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on whether a private company can make a public issue or resort to any activities related to the same.

Introduction

What is a private company?

A private company is a company whose shares cannot be traded publicly and which works under legal requirements less stringent than those for a public company. According to the Companies Act 2013, a private company works under the following provisions–

• The rights to transfer its shares is restricted
• Limitations on the number of its members to two hundred(except in One Person Company)

(If two or more people jointly hold a share, for the purpose of this clause, they will be considered as a single member)

• Any invitation is prohibited to the public to subscribe for any securities of the company

According to the Companies (Amendment) Act, 2017, the amendment done in the Section 366 sub-section (2) of Companies Act 2013, a company with less than seven members shall register as a private company.

(After the Companies (Amendment) Act, 2015, the requirement of minimum paid up share capital, which was 100,000 rupees, was omitted from the definition of ‘private company’ in sub clause iii of Section 2(68) of the Companies Act, 2013.)

Kinds of share capital

Share Capital is mainly all the funds a company raises in exchange for either preferred or the common shares of stock. Unlike the 1956 Act, where private companies were able to issue only equity shares with differential voting rights without having to conform to certain rules and restrictions that otherwise affected the public companies, in Section 43 of the 2013 Act a company can have only two kinds of share capital –

1. Equity shares (with or without differential rights to dividend, voting or otherwise)
2. Preference share capital.

The share capital is the money invested by the shareholders. It is basically a long-term source of finance for the company, In return of which, shareholders gain a share of the ownership of the company for their investment.

Restriction on inviting investments from public

As mentioned in the definition of Private Company in Companies Act 2013, Section 2[68] –

”(iii) prohibits any invitation to the public to subscribe for any securities of the company”

In term of this Section of the Act, the private company is prohibited to make any call to the public to subscribe for its securities. It also prohibits the company any invitation or acceptance of deposits from anyone other than its members, directors or their relatives.

Restriction On Transfer Of Shares under Companies Act, 2013

According to the provisions of the Companies Act 2013, a private company must restrict the transfer of its shares by its Articles of Association (‘AoA’). Therefore, any restriction on transfer of shares as agreed under the agreement of shareholders or consensual arrangement are duly included in its ‘AoA’ shall be valid and binding on the private company and shall be enforced against the shareholders of the private company.

However, if a private company does not register the transfer of the securities or interest of a member, whether in pursuance of any power of the company under its AoA or otherwise, it is required to intimate the transferor and transferee within the stipulated time period as mentioned in Section 58 of Companies Act 2013. Further as said by the Supreme Court had in the case V. B. Rangaraj vs. V.B. Gopalakrishnan and Ors, as reported in CDJ 1991 SC 464 that the only restrictions which were imposed under the Articles of Association against transfer of shares shall be enforced and any other which was not mentioned in the AoA cannot be imposed to prevent a valid buyer of shares from taking possession of the company securities.

Exceptions

(i) Not be valid in a case where a member is to transfer his/her shares to his/her representative(s).

(ii) As legal representatives may require the registration of share in the names of heirs(on whom the shares have been devolved) in the event of the death of a shareholder.

(Restriction cannot be in the form of ‘Prohibition’. It can only be imposed by the Articles of Association ‘AoA’).

So how can a Private Company raise finance?

There are several ways by which a private company can continue to have investments and issue its securities. The provisions laid down in the Companies Act provides the following ways of investment –

Rights Issue of Shares  

The fundamental idea of the rights issue is to raise additional capital. Rather than going to the public, the company gives specific the right to subscribe to freshly issued. Ideally, such an issue takes place when a company needs funds for a business expansion or a large takeover.

Rights Issue of shares is mentioned in Section 62 of the Companies Act 2013. Such shares could be offered –

• To existing members

It means to offer shares to present members in proportion to their existing shareholding. The aim is to ensure equitable allocation of Shares and the fraction of voting rights is not disturbed by the issue of Fresh shares.

• To employees

A company can issue shares to employees under a scheme of employees’ stock option, bound to a special resolution passed by the company.

• To any person

A company can issue shares to any persons, if authorized by a special resolution passed by the company, excluding the people referred to in clause (a) or clause (b), either for cash or for a consideration other than cash.

Conversion of loans and Debentures into Shares  

A company can issue debentures with an option to convert these debentures into shares, either wholly or partly at the time of maturity. A private company can convert loans raised or debentures issued by the company into shares by passing a special resolution if there is such condition attached to the debentures issued or loan raised so as to convert the said debentures or loans into equity shares in the company as given under Section 62(3).

Issue of Sweat Equity Shares  

Sweat equity shares are given to the deserving employees at zero cost by passing a special resolution. This means that the employee does not have to pay for the shares at all. The shares are simply allotted. This kind of shares cannot be allotted to the people who already have shares. According to the Section 54 of Companies Act 2013, an employee could be given these shares after ONE year of the incorporation of the business but Under The Companies (Amendment) Act, 2017 Sweat equity shares can be issued at any time after registration of the company without taking into consideration the termination of the time period of one year from the date of the commencement of business.

Bonus Issue

Bonus shares are added shares given to the existing shareholders without any additional cost, based upon the number of shares that a shareholder already has. These are company’s accumulated profit which is not given out in the form of dividends but are transformed into free shares. These are issued under following conditions –

1. Must be authorized by the articles
2. Must be authorized in general meeting on the recommendation of the board.
3. There is no default regarding the payment of interest or principal in fixed deposits or debt securities issued by it
4. Every share must be fully paid up before allotting the bonus issue
5. Bonus issue can be issued out of:       

• Free reserves
• Securities premium Account
• Capital Redemption Reserve

Note:

1. The bonus shares cannot be issued in place of a dividend.
2. A bonus issue cannot be withdrawn after its announcement.

Private Placement

A private placement can be made to a specific group of people who have been identified by the Board of the Company not exceeding fifty in number. It excludes the qualified institutional buyers and the employees of the company being offered securities under the scheme of employees’ stock option in terms of sub-section (1) of section 62 of the companies act 2013], in one financial year.

A private placement is an offer for the subscriptions to the securities of a company to a specific group of people (not exceeding 50 persons) in a financial year. A company issuing shares on private placement basis must comply with several requirements under the Companies Act, 2013

Issue of Shares on Preferential Basis – means an issue of the shares or other securities, by the company to any specific person or a select group of persons on a preferential basis and it does not include shares or other securities which are offered through a rights issue, public issue, employee stock option scheme, employee stock purchase scheme or the issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or the foreign securities.

Such issue on preferential basis is also required to comply with the term laid down in section 42 of the Companies Act, 2013 (private placement)

Contravention of Section 42 of the Act will result in a penalty which can extend upto the amount of the offer or invitation or twenty million rupees, whichever is the higher one, and the company will also refund all monies to subscribers within the period of 30 days from the order as mentioned in Section 42(10)

Conclusion

It is important for a private company to impose certain restrictions on the transferability of shares and the advertisement of the shares. A private limited company is distinct in that it has to restrict the transfer of shares in its Articles of Association. It is the fundamental idea behind the conception of private limited companies, which is generally started by families or friends or people who share common goals and ideas.

The restrictions that are placed on the sale or the transfer of shares or its advertisement can either be considered an advantage or disadvantage. It is an advantage to some shareholders as shareholders who want to sell shares cannot sell them to any outside buyers. Shareholders must agree to the sale or transfer of the shares; so, the risk of any hostile takeovers is relatively low. But on the other hand, it can also be a disadvantage because shareholders are left with limited options for liquidating their shares. In the end, it is one of the distinctive features of a private company.

Not all legal briefs have the same fate. Some go right into the shredding machine, while some are stuck to the first page of the case file for comprehensive understanding. Sarang Khanna, Marketing Researcher and Analyst at iPleaders, gives a few inside tips about what the Judges like to read, and how to change the fate of your case by drafting the winning brief. 

Of all the things that lawyers do, two of them count the most in establishing them professionally. The first is to speak persuasively, and the other is to write persuasively. Compelling command over the language can go a long way in making your case unbeatable. Shriya Maini, who is a scholarship and BCL holder from the coveted Oxford University, and a young and renowned practitioner of law in the Supreme Court of India, stresses extensively over the importance of crisp drafting, during her interview on the popular webcast series “An Hour With LawSikho”.

Persuasive briefing is an art, that helps the judge quickly comprehend your case, and the arguments that you rely on in furtherance of the relief that you seek. If there is one thing we know about the judges in Indian courts, it is that they are busy. Extremely busy! And with the paucity of time, comes the steadfast efficiency that helps them understand all apparent and latent fundamentals of any case. A lawyer’s job is to win, and win within the 5-10 minutes that the judge takes to comprehensively understand the case. That’s exactly where the winning brief stands out!

From nailing the choice of words, arguments, tone, and even presentation, the winning brief makes it concise and crystal clear to the judge as to what the nucleus of the case is (even electrons and protons!). While you as a lawyer in your lifetime will draft many more specific documents than just a brief, and you can always rely on popular online materials to build your A-game at all kinds of contract and agreement drafting, but drafting a case brief in particular is massively important for any lawyer who wishes to step inside a courtroom only to shine.

From my past experience of litigating in various courts, and then closely working with a High Court Justice, I might know a thing or two about how to draft and what seems most appealing to a judge when going through a case brief. Let us look at a few pointers that will help you immensely in putting forth your case in a coherent and confident manner.

Compose in an orderly and sensible way

The worst legal drafts that exist are the long-winded, unnecessarily complicated, jargon-full letters that we have all seen and maybe even written ourselves. Can you think of a reason why a brief is called a brief? Tada! You guessed it right. Because it’s brief.

Structuring your case brief in a hard-to-read and harder-to-comprehend manner can even take the most straightforward case out of your grip. When you earnestly start to write and fully understand your own case, is when you will start to treat your daft as sacred and the winning brief will take shape.

Be critical, not creative. Your case brief in not your colouring book where you need to paint a picture out of what suits your imagination. Analyze the need of this brief, realize what you must essentially convey through it, and know your audience and what moves them. Repeatedly edit and sharpen your sentences, and never write a sentence that you can’t easily speak at one go. When you have a serious and robust structure in mind and a flowing order to present your case, you have successfully completed Step 1 of drafting the invincible case brief.

Use Good Grammar – Punctuate for Clarity and Impact

If there is one thing I have learned during my time at the court, is that good grammar makes you trustworthy. Eloquent speaking can suddenly turn the case in your favor and make you appear as a credible source of information to rely on. The same holds true for your writing.

Good grammar is a tool to communicate clearly and effectively. It is not enough just to be understandable, but you also want to be credible and proper punctuation can do wonders to the impact that your brief makes. Especially in Indian courts where most lawyers fail to pay adequate attention to grammatical details in both speaking and writing, a neat and crisply written draft will be picked up by the judge to gain understanding of the case, over the other average draft from your opposition.

Using separate sentences for every issue, breaking up long sentences, highlighting reasons to form conclusions, minimizing the use of passive voice and subject-verb separation, avoiding overworked terms like ‘pursuant to’, ‘in consequence of’ etc., and correctly using dashes, colons and semi colons are some good tips to write a draft that catches the eye.

Persuasive Issue Framing and Oral Arguments

As a lawyer, reading and writing can completely suffice the whole gamut of skills that you need to cultivate. Words are your only tools, and using them effectively is a lesser known art. Personally, during my later years of college and early years in litigation, I had a tough time drafting but I soon realized that it is ONE of the most important skills to learn for a lawyer, if not THE most important.

Being in Criminal Law practice, I knew that the choice of my words could prove either vital or fatal for someone’s life. I couldn’t risk writing a mediocre brief and put my client’s life on the line. I also knew that there is nothing like a natural writer, and it only takes practice to convey persuasively. I started public speaking at every chance I got, wrote for myself just to be able to put my thoughts better on a paper, enrolled in an online course to take care of all technicalities related to legal drafting, and sooner than I knew, I was writing effective material that people resonated with. The importance of practice and proper guidance in the shape of courses, cannot be emphasized enough.

One very important thing related to case briefs that I learned through experience, is that if you have not nailed the issues of the case in the very first page of your brief in a way that anybody can understand, you have failed at your job. As discussed, it takes a judge not more than a few minutes to get to the crux, and your brief should assist in and not frustrate the whole idea of it. Like all legal documents, a brief is also not about the drafter but about the recipient. Define and reason the issue on the first page itself and see the difference.

Strong issues in the case brief will also guide you in making equally strong oral arguments. March forward in your brief through sound paragraphs and keep it to the point. Use vivid before-and-after examples and other similar tricks to put it as coherently as possible. Choose right words in your arguments and appreciate the subtle message that one particular word could send that the other synonym may not.

Banish Legalese

If you are using your case brief to showcase your wordsmith capabilities, please stop! Nobody likes to read legalese, complicated jargon and redundant words, much less the judges. “We note that”, “We advice that”, “be appraised that”, etc. etc. etc. There are a ton of such phrases that you will find in almost every legal brief that are so redundant that even striking them off completely would make no change in the brief at all.

Nobody talks like that. Do not write with a preconceived notion in mind about how lawyers should write or sound. Keep your writing style authentic, and write like a human being. Gone are the times when using Latin phrases was cool.

But what about jargon? Technical language? Should you paraphrase the legislation or quote it? Well, the talent of the best lawyers in the world is that they can take complex subjects and express them  in simple terms. Yearn to become that lawyer, and be yourself.

When it comes to writing, you cannot expect tremendous improvement overnight or just by reading articles like these. Practice is key, and there is no two-ways about it. Clear your mind, establish the purpose of your writing, set up a tone, and most importantly, know your audience, before you start to type. Remember: simplistic writing is the best writing.

Happy Lawyering!

In this article, Samadrita C Bhattacharjee currently pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the standard operating procedure for appointment of directors when all existing directors have vacated office.

Introduction

The Companies Act, 2013 (hereby referred to as the “Act”) is an Indian Parliamentary Act on Indian Company Law that regulates incorporation, responsibilities and dissolution of a company along with laying clear rules about the roles and responsibilities of the directors, board members, stakeholders and other employees of the company. The Companies Act, 1956 was amended partially after receiving the approval of the President of India on August 29th, 2013. The Act raised the maximum number of members in private companies from 50 to 200. A concept for the structure of a “One Person Company” was also included in the Act.

Who is the director of a company?

A company is a legal entity which has no physical existence. It can only function through its directors who are the officers of the business structure. The directors are appointed by a group of people whose job is to supervise a particular project or program of a company. They are usually members of the governing council or the Board of Management who are expected to act in good faith to achieve the objectives of the company with skill and diligence and exercise their independent judgements.

What does the Companies Act say about the directors?

In Chapter XI of Section 149 (1) of the Companies Act, 2013, it is clearly mentioned that every single company shall have a board of directors consisting of individual directors. In case of a public company a minimum of 3 directors are needed and in case of a private company, a minimum of 2 directors are needed to ensure smooth functioning of the company. In the case of an OPC (One Person Company) having one director is mandatory, while the minimum number of directors in a producer company have to be five. The maximum number of directors in a company can be 15. A special resolution needs to be passed if a company wants to hire more than fifteen directors.

This chapter of the Act also mentions such class or classes of companies where there has to be one female director. It states every company existing on or before the date of commencement of this Act shall comply with the requirements of the provisions of the subsections as mentioned in the Act within a year of such commencement.

The Act states that it is mandatory to have at least one director who has resided in India for more than one hundred and eighty-two days in the previous calendar year.

Can all directors of a company resign at the same time?

In Chapter 4 of the Ministry of Corporate Affairs (MCA), it states that the resignation of a director should be treated as a choice exercised by the director of a company. Although it is an extremely rare case where all directors of a company resign at the same time, such a situation is possible in the following scenarios:

• Full board disqualification

A full board disqualification is never imposed by the government but always achieved by the directors of a company themselves.

Irrespective of the list prepared by the Government of India, if any director who has been disqualified under Sections 164 and 167 of The Companies Act, 2013 continues to work, it is considered to be unlawful and calls for immediate expulsion. In a situation such as this, a company shows the door to disqualified directors to save the company from further embarrassment.

• Full board resignation

All the members of the board may resign for a number of reasons though it may seem like a distant imagination in a country like ours which has a majority of family-run firms. If such a situation ever occurs, it is honourable for the directors to vacate their offices respectfully.

This situation of full board disqualification has been foreseen in Section 167(3).

In both the private and public structures of a company, if a situation arises when all the directors of a company have resigned from their offices or vacated their offices under section 167, the promoters or, in their absence, the Central Government shall be vested with the power to appoint the required number of directors who shall hold offices until the new directors are appointed by the company after conducting a general meeting.

What happens when all directors of a company resign at the same time?

Even when all directors of a company resign at the same time the company does not stop functioning. The concept of perpetual succession comes into play and a new set of directors are appointed who are expected to carry forward the legacy and goodwill of the company.

Section 168(3) of The Companies Act, 2013 states that when all directors of a particular company resign from the Board, the promoter or the Central Government, in absence of a promoter, shall appoint the required number of directors who are going to hold the office until new directors can be appointed in a general meeting.

This section states that a director may resign from his office by giving a notice in writing to the company; the Board on receipt of such a notice shall make note of the same and inform the Registrar in such manner, within the stipulated time frame and in such form as may be prescribed in the Act. It also states that the Board shall put the fact of such resignation in the report of directors laid in the meeting by the company that immediately follows such an act, provided that a director shall forward a copy of his resignation along with detailed reasons for his resignation to the Registrar within thirty days of the resignation, in such manner as may be mentioned in the Act.

Who is responsible when all the directors of a company resign?

If a company is left with no appointed director, the shareholders of the company may have the authority to appoint new directors. According to The Companies Act, 2013 there is no vested power for the shareholders to appoint directors and this power has been delegated to the Board of members of the company. However, case laws suggest that the shareholders can act instead of the Board through conducting a general meeting. The Act mentions that the members of a company should have the power to call for a general meeting. If the articles mention of no such power, an application may be needed to be made to the court, which can intervene in the matter and call for a general meeting, which is otherwise impractical to be called under the articles of The Companies Act.

How do you assign new directors?

Usually, companies where all directors have resigned face a lot of difficulties while filing the forms for the appointment of new directors as the adopted bureaucracy of our country plays a big role in such proceedings. In such companies where no authorized signatory director is available due to deactivation of DSC of resigning director on the filing of DR11. Therefore, the appointment of directors through e form cannot be filed. The MCA issued a clarification vide General Circular No. 3/2015, dated March 3rd, 2015 that states that the RoC may allow any one of the resigned directors, who was an authorised signatory of the company, to file the e-form as applicable and subject to compliance of other provisions of the Act of 2013.

The process to be followed in the appointment of new directors

As per the internal circular of the MCA dated 6th October 2017, the following should be followed as the Standard Operating Procedure(SOP) for the appointment of new directors for the vacant board of non-compliant companies in accordance with the terms of Section 164(2):

• Power given under Section 167(3)

The power to appoint directors in case of a vacant board falls under this Section of the Act where the promoters of a company, or their absence, the Central Government shall hold the power to appoint the required number of directors to hold office until the directors are appointed by the company in a general meeting.

Although the standard operating procedure does not mention anything about where the Central Government shall call for such a general meeting to get the required number of directors appointed, it states that either the promoter or shareholders can appoint the minimum number of directors.

• Calling for a General Meeting

Public Company

In case of a public company that has a company secretary, a notice may be issued by the Company Secretary to call for a general meeting in which new directors can be appointed. In cases where there is no company secretary, the promoter or a member of the Board may take the needful action by calling a general meeting.

As per the procedure laid down in the internal department letter, to standardise the Restoring Process of Appointment of Directors in cases of Vacant Board, the quorum requirements as mentioned under Section 103 of the Act may or may not be fulfilled. The resolution, however, needs to be passed by a minimum number of members as required to constitute a public company.

Private Company

In the case of a private company, a promoter or any member of the Board can issue a notice to call for a general meeting in which new directors can be appointed. The resolution needs to be passed by a minimum number of members as required in order to constitute a private company.

• Notice and Explanatory statement

The Notice issued shall include a resolution to appoint the minimum number of directors required and also include a general authority to such appointees for any compliance and representation that they make on the company’s behalf. The explanatory statement shall cover the detailed explanation for such new appointments and provide details for the purpose of such new appointees.

• Documents required to be prepared and submitted to the MCA

1. Form DIR-2 (ie, consent to act as a director in the format enclosed in Enclosure-1) along with an address and identity proof.
2. Form MBP-1 shall be in the format enclosed (Enclosure-1) and it shall set out the interest of the appointees in other companies.
3. Form DIR-8 (Enclosure-3) providing the intimation of directors as per section 164(2) Rule 4 of Companies Rules 2014 (Appointment and Qualification of Directors).
4. Proof of shareholding of the promoters or shareholders, who are eligible to appoint new directors, in the form of the Register of members, share certificates, certification by professional with the membership number, etc, the authenticity if which has been certified by a practising professional such a PCS, PCA or Practising Cost Accountant. The field of professional has not been clearly stated in the Act.
5. A copy of the resolution for the appointment of the new directors along with a copy of the notice and explanatory statement.
6. An affidavit signed by the new director duly notarized in the format enclosed (Enclosure-4) shall need to be submitted by the promoter or the shareholders with the request letter clearly state the following:
   • The company does not have any qualified directors at the time of the appointment of the new director.
   • The fact of his appointment as discussed in the general meeting held prior to his appointment. The attendance sheet of the general meeting shall be enclosed with the affidavit.
   • Undertaking to pay the required amount for insertion of the name of the newly appointed director from the back end.
   • The newly appointed director has been given all the necessary powers for making compliances, representing the company and undertaking any other action necessary in the interest of the company.

In addition to the submission of hard copies of the aforesaid documents, it has also been suggested that all such documents may be submitted as soft copies in a portable format.

Conclusion: What do the newly appointed directors have to keep in mind?

The newly appointed directors shall have the foremost task of making the default as mentioned under Section 164(2)(a) of the Act so that all the other compliances may smoothly be processed by the company. The Companies (Amendment) Bill of 2017 allows a cooling period of six months to file all such procedures. It does not provide any such compliance making period. Once the SOP has been executed, the status of the newly appointed directors will be decided upon. Whether the appointees shall be treated as disqualified till the time they make the filing with the Registrar of Companies (RoC) or, if the RoC will allow them with reasonable time for making the compliances without treating them as disqualified is the question to be decided upon.

In this article, Varsha Jhavar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the legal framework regulating the banking sector in India

Introduction

Legal Framework

The Indian banking system is primarily governed by Banking Regulation Act, 1949.  The Reserve Bank of India Act, 1934 empowers the RBI (Reserve Bank of India) to act on a wide range of issues including rules, regulations, directions and guidelines with respect to banking and financial services. The RBI is the central bank of India.

Besides the above, the FEMA (Foreign Exchange Management Act, 1999) regulates with respect to cross-border transactions.

Reserve Bank of India (RBI)

The primary regulator for banks in India is RBI. The functions of RBI include:

• Making norms for opening up and licensing banks (including foreign bank branches in India)
• Corporate governance and organization
• Norms for various products and services
• Finalizing monetary policy
• Regulation of foreign exchange, government securities markets and financial derivatives
• Government debt and cash management
• Overseeing payment and settlement systems
• Currency Management
• To liaise with other financial sector regulators like SEBI, IRDAI etc. RBI needs to regulate banking activities which overlap or have an interaction with financial activities under the domain of other financial sector regulators.

Supervision and legislation on the functioning of banks and financial institutions is also done by the Ministry of Finance (under Central Government) through the Department of Financial Services. The Department of Financial Services does:

• Monitoring of banking operations
• Prescribes norms for the operation of public sector banks.
• Looks into the recovery of bank debts by way of examining legislative measures and establishing judicial mechanisms for the same.

Forms of Banks

There could be different form of banks as distinguished by the regulator:

• State-owned banks

State Bank of India (SBI) is the largest state-owned bank and has been established under a special statute, the State Bank of India Act, 1955. Additionally, between the years 1969 to 1980, the government nationalized several banks by a legislative mandate.

• Universal banks, commercial and retail banks

Universal banks are full-service banks and offer almost an entire range of financial products. They can be differentiated as private sector banks (non-state owned), public sector banks (state-owned) and foreign banks. As mentioned earlier licensing and operations of these banks fall under Banking Regulation Act.

• Investment Banks

These banks give investment advisory and related services. Investment banks are governed by the Securities Exchange Board of India (SEBI). The license is also issued by SEBI.

• Other Banks

For the purpose of providing banking services to underdeveloped and non-urban sectors, the banking sector has introduced special purpose banks – Cooperative Banks which cater to rural populace and small borrowers. They are formed on a co-operative basis and governed by cooperative laws formed by the state government and central banking laws. Additionally, regional rural banks were incorporated under the Regional Rural Banks Act, 1976 to develop the rural economy.

To promote financial inclusion, the Reserve Bank of India also introduced Payments Banks and Small Finance Banks. These offer basic and limited services like deposits, issuing payment instruments, savings vehicles and credit.

Banking License

Any entity that wants to do banking business has to obtain the license from the Reserve Bank of India (RBI). The license also entails the licensee to conduct ancillary business like guarantee and indemnity business, financial leasing, hire purchase business, securitization, trade finance besides borrowing and lending.

However, for dealing in foreign exchange, a separate license is required to be obtained under the Foreign Exchange Management Act.

Application Process for a banking license

• Form for application of banking license is as per the Banking Regulation Rules, 1949. Different forms are applicable based on nature of applicant or whether it is a domestic or foreign company.
• The application form for the license has to be submitted with the company’s constitutional documents and balance sheet & profit & loss statements for last 5 years (for an existing company).
• This is beside a host of information as mentioned in the form like information on ultimate individual promoters, information on various entities which are part of the promoter group, information on the persons/entities subscribing to or more than 5% of the paid-up equity capital, proposed management of the bank.
• Also, a project report has to be submitted showing business potential, financial services proposed, plan for various compliances, plan for financial inclusion.

Corporate Governance

The Companies Act 2013, prescribes the corporate governance rules for banks in the country. However, for listed banking companies SEBI Regulations, 2015 are also applicable. SEBI regulations are primarily listing obligations and disclosures.

Organizational & Supervisory Requirement

Under the Banking Regulation Act, banking business must be conducted by a company. Government-owned banks are normally incorporated under specific statutes. Private Banks need to be incorporated as companies and are governed by the Companies Act. Documents required for their constitution are – Memorandum of association, Articles of association, Certificate of incorporation & Certificate for the commencement of business.

Foreign banks can operate through a branch in India and are not required to form a separate company. In some situations, the Reserve Bank of India may prescribe the foreign bank to set up its banking business in India through a wholly owned subsidiary.

The Banking Regulation Act requires an audit of the balance sheet and profit and loss statements for all banks in India. The Reserve Bank of India has powers to order a special audit if it believes it is necessary in public interest.

Guidelines have also been prescribed for role and constitution of the board of directors. Key parameters for appointing directors include – The directors should have professional experience with 51% to have specific domain knowledge in prescribed fields. There are several other parameters prescribed by Reserve Bank of India, which need to be adhered to whilst appointing a director.

The Banking Regulation Act empowers RBI to remove the Chairman, Chief Executive Officer, Director or for that matter any other officer on grounds of public interest, improper management or if the banks functioning is being conducted in a manner which could be detrimental to the interests of the depositors.

Various risk management guidelines have also been prescribed by the Reserve Bank of India. The primary responsibility for understanding and managing risks is with the Board of Directors. The Board of Directors can appoint a risk management committee, which reports to the Board directly.

Liquidity and Capital Adequacy

Capital adequacy is having sufficient own funds to absorb losses for a limited amount of time during which it would be hoped the business can be returned to profit; liquidity is having sufficient cash to satisfy all current and expected demands by customers.

The Basel III capital regulations are being implemented in India (to be fully implemented by 31st March 2019). Banks are required to comply with the requirements as per Basel III norms. The Basel III frameworks main thrust has been enhancing the banking sector’s safety and stability emphasizes on the need to improve the quality and quantity of capital components, leverage ratio, liquidity standards, and enhance disclosures. 

Besides the above banks need to maintain – Cash reserve ratio (CRR), which is the average daily balance that a bank needs to maintain with the RBI. Currently, the CRR is 4% of NDTL. Besides CRR, banks are required to maintain statutory liquidity ratio (SLR ), which is currently 19.5% of NDTL.

Liquidation of Banks

The High Court is the authority for winding up or liquidation of the bank. The location of the registered office of the bank decides the jurisdiction of the respective High Court in case of liquidation matters. As per the Banking Regulation Act, as and when the order for winding up of a bank is passed by the High Court, a liquidator is appointed by the High Court to supervise the liquidation. RBI can also act as liquidator subject to Court approval.

Regulatory Development in recent times

To reinforce the ability of the lender to deal with distressed assets, the Reserve Bank of India has issued guidelines and norms on distressed asset resolution by lenders. The RBI has issued a notification on “Guidelines on Sale of Stressed Assets by Banks” as a part of the already existing “Framework for Revitalising Distressed Assets in the Economy”. The framework and guideline have been created as a part of the enforcement of and regulations under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The Insolvency and Bankruptcy Code, 2016 (IBC) seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The bankruptcy code is a one-stop solution for resolving insolvencies which at present is a long drawn process and fails to offer an economically viable solution.

Conclusion

The Indian banking system is primarily governed by Banking Regulation Act, 1949.  The RBI is the central bank of India and also the primary regulator of banks. There are various types of banks, like state-owned, commercial, investment, co-operative banks. Any entity that wants to do banking business has to obtain a license from the Reserve Bank of India (RBI). The Insolvency and Bankruptcy Code, 2016 (IBC) seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Regulation of a country’s banking sector is a reflection of its priorities and financial landscape. In India’s case, the Reserve Bank of India’s approach has been to prioritize stability and achieve financial inclusiveness.

In this Article, Shreya Basu, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the dematerialization of shares in India.

Introduction

The Indian stock market started its journey in the late 18th century when East India Company started to transact loan securities. During the 1830s, trading in stocks of bank and cotton presses had started in Bombay [now Mumbai]. When the American Civil War broke out in the year 1861, the stock market started to flourish. As the war ended, the market had at least 250 brokers participating. The brokers constituted ‘The Native Share and Stockbrokers Association’, an informal group, which was later renamed as the ‘Bombay Stock Exchange’ [BSE] in the year 1875. The BSE was established under the guidance and with the assistance of Premchand Roychand, who was one of the leading stockbrokers of that time. In the initial days, the investors and shareholders of the Bombay Stock Exchange traded for their stocks and shares by calling out the prices of the stocks and/or shares to buy or sell such stocks and shares. On completion of such trade, share certificates were exchanged for money. Keeping a track of the stocks and shares involved extensive manual paperwork and converting the transactions into respective agreement became complicated. There used to be a delay in receipt of securities and the restricted infrastructure in the banking and postal segments made it difficult to manage and control the number of applications and the storage of such share certificates. Furthermore, prior to dematerialization, a minimum gap of three months was required between the date of application and listing of shares.

However, with the advancement of technology, the perception of dematerialization of account came into existence in the mid 90’s over the introduction of the Depository Act of 1996.

Dematerialization: Denotation of the Concept

Dematerialization is the process of converting physical shares into electronic format. An investor who wants to dematerialize his shares needs to open a DEMAT account with Depository Participant. Investor surrenders his physical shares and in turn gets electronic shares in his DEMAT account.

Thus, the basic idea of dematerialization is to store stocks, securities and share certificates of the account holder in an electronic form rather than keeping the said stocks, securities and share certificates in physical form.

The National Securities Depository Limited, India’s first and largest depository system, played a pivotal role as its key purpose was to create a platform which would be similar to the standards followed by the international market dealing with dematerialization of accounts. Not only does the National Securities Depository Limited use versatile and innovative technologies to ensure soundness and safety of the Indian capital market, it also creates settlement solutions which increase the efficiency by minimizing risk and reducing costs.

The Central Depository Services (India) Ltd came into existence in the month of February 1999, which was supported by the Bombay Stock Exchange. It was an attempt to create a joint venture with nationalized banks like State Bank of India, Bank of Baroda, Bank of India, Union Bank of India, Standard Chartered Bank as well as Housing Development Finance Corporation. The main objective of the Central Depository Services (India) Ltd. is providing with reliable, suitable and assured depository services to investors affordably.

Presently, almost every Nationalized Banks, as well as private Banks provide the facility to open a Dematerialization Account to every investor. As per the guidelines of the Securities Exchange Board of India, the country’s stock market regulator, every investor must possess a Dematerialization Account.

The Depositories Act, 1996

In the year 1995, the Depositories Ordinance was introduced which was promulgated on January 07, 1996 as the Depositories Act of 1996 [hereinafter “Act”]. The objective of the Act was to provide the guidelines for the formation of the depositories to record the details of ownership in the book-entry form.

The Act not only provided such guidelines but also made major amendments in the following enactments, viz.-

• Companies Act, 1956;
• Securities and Exchange Board of India Act, 1992;
• Indian Stamp Act, 1899;
• Income Tax Act, 1961; and
• Benami Transactions (Prohibition) Act, 1988.

The primary objective of the Act was to establish an easy transfer of securities in a speedy manner, to provide accuracy and security by making it possible to freely transfer the securities of Public Company. However, the transfer of such securities is subject to certain exceptions which include restricting the Company’s right to the power for effective transfer of securities and providing with the deed of transfer and other requirements according to the provisions under the Companies Act.

The Depositories Act, 1996 was formulated and enacted for providing regulation for the depositories and other allied matters connected thereto.  

The terminologies that we usually come across while discussing the topic of dematerialization of Shares are categorically defined under the Depositories Act, 1996.

• As per Section 2 (a) of the Act, “Beneficial Owner” means a person whose name is recorded as such with a depository. A Beneficial Owner holds all the benefits of the dematerialized shares.
• As per Section 2 (b) of the Act, “Board” means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).
• As per Section 2 (e) of the Act, “Depository” means a company formed and registered under the Companies Act, 1956 (1 of 1956) and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).
• As per Section 2 (g) of the Act, “Participant” means a person registered as such under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).

Demat Account – Features

A Demat Account must be opened through a Depository Participant of a depository, but cannot be opened directly with a depository.

A Demat Account can be opened in a single name as well as by joint holders. However, there cannot be more than three account holders, out of which one must be the main holder.

A Demat Account can be opened in the name of a minor. However, such account shall be operated by a guardian until the said minor attains majority. Such guardian shall be the father of the minor. In absence of the father, the mother of the minor shall be the guardian. In case of the absence of the father and the mother of the minor, the guardian shall be appointed by the Court. A minor, however, cannot become a joint holder in a Demat Account.

A Demat Account can be opened in the name of a trust registered under the following Acts:-

1. Public Trust Act 1860; or
2. Societies Registration Act; or
3. Any Public Trust Act [of such state where such Dematerialization Account is to be opened].

In case of any private trust or any unregistered trust, the Demat Account shall be opened in the name of the trustees in an individual account. If there are more than three trustees, the trustees shall decide in whose name the Demat Account shall be opened.

A Demat Account cannot be opened in the name of a Hindu Undivided Family [HUF], but the shares can be held in the name of the Karta of the HUF.

An investor can open multiple Demat Accounts in the same name by the same depository participant as well as with different depository participants. In order to create a single account or multiple accounts, the investor must comply with the “Know Your Client” [KYC], which includes submitting the proof of identity, proof of address as specified by the Securities and Exchange Board of India.

Opening a Demat Account – Steps Involved

1. In order to open a Demat Account, the investor must approach a Depository Participant, who acts as an agent between the investor and the depository. According to the provisions of Section 3(1) of the Depositories Act, 1996 a depository cannot act as a depository unless it has obtained the certificate of commencement of business from the Board. Further, such certificate granted under sub-section (1) of Section 3 shall be in the form as specified by regulations. However, the Board can grant such certificate of commencement if the depository has sufficient systems and provisions to avoid manipulation of records and transactions. Moreover, before such granting of a certificate, the depository must be given an opportunity of being heard. Such grant of a certificate cannot be refused without explanation. A Depository Participant must be registered with the Central Depository Services Limited and/or the National Securities Depository Limited, which holds such electronic securities and allows the investor to make transactions.
2. According to the provisions of Section 5 of the Depositories Act of 1996, a Beneficial Owner shall enter into an agreement with the depository for availing its services. The investor must fill up an Account Opening Form, which is provided by the Depository Participant. Along with such Account Opening Form, documents relating to proof of identity, such as Voter Identity Card, Driving License, Telephone bills or electricity bills must be provided. Similarly, documents relating to proof of address should also be furnished according to the guidelines as specified by the Securities and Exchange Board of India.
3. The investor should also produce the original Permanent Account Number (PAN Card) at the time of opening the Demat Account as per the guidelines specified by the Securities and Exchange Board of India.

Advantages of Dematerialization of Shares

• Dematerialization reduces the risk of theft and robbery
  

  Dematerialization of Shares minimizes the chance of the investor’s certificate being stolen and forged since the stocks and/or shares are stored in an electronic format, rather than being in a physical format, which was previously practised.

• Transfer of stocks and shares made easy
  

  In the earlier days, it was compulsory for the investor to send the stocks and shares had to the Registrar or the concerned Company for getting the stocks and shares transferred to an individual’s name. It took several days to get those stocks and shares transferred, and sometimes such transfer took months also. Further, there was a high risk of such stocks and shares being lost in transit.

• No requirement of Stamp Duty on Transfer
  

  A security transaction tax is required to be paid by the investor. However, it is not necessary to buy share transfer stamps and paste them below the certificates as was practised earlier. Previously, in order to purchase such share transfer stamps, one had to visit the stock exchange.

• Selling one share is possible
  

  In the earlier days, it was not possible for an individual shareholder to sell an odd number of shares. However, such practice has been abolished now, making it possible for an individual shareholder to sell any number of shares, as the minimum number of share to be sold by an individual shareholder has been reduced to one.

• Nominating individuals
  

  Earlier it was not possible to nominate any individual while opening a Dematerialization Account as it was mandatory to have a joint holder. According to the guidelines specified by the Securities and Exchange Board of India, all nominations should be recorded for a Dematerialization Account which is held by an individual. Where no nomination is to be given, the account holder(s) shall give a written and signed declaration to the effect.

• Operating with a single account
  

  It is no more compulsory to open a separate account for buying debt like bonds, Non-Convertible Debentures, Tax-Free bonds etc. However, some debt instruments such as bank accounts and company fixed deposits require separate accounts. That apart, most of the instruments can be operated from a single Dematerialization Account.

• Instantly crediting Bonus and Rights Shares
  

  It is now possible to credit bonus and rights shares immediately and one does not have to wait for the certificate for a long period of time as was done earlier.

Benefits of Dematerialization of Shares

• To the Company
  

  The introduction of the depository system has helped the concerned companies to a great extent as the expense of printing and distribution has been curtailed. It improves the capability of the Registrars, the Transfer Agents and the Secretarial Departments of the concerned Companies. Communication with the shareholders and investors has become more convenient and the services related to it have also improved.

• To the Investors
  

  By introducing the depository system, the risks such as theft, loss, damage, forgery, etc. involved in holding a physical certificate, has been considerably diminished. Not only has the depository system protected the transfer of settlement, but also minimized the delay in the registration of shares. Communication with investors has become swift. Avoiding delivery problems due to signature mismatch has also reduced. The sale of shares has also become prompt and no stamp duty is required to be paid on the transfer of such shares. The depository system is much accepted and provides liquidity of shares.

• To the Brokers
  

   Delay in the settlement has been reduced by the introduction of the depository system. As the scope of trading has increased the profit margin has also escalated.  The possibility of bad delivery or forgery has been eliminated. The effectiveness of trading, profitability and confidence of the investors has improved.

Conclusion

From the foregoing discussion, thus, it can be concluded that the DEMAT Account has become a necessity for an investor, who want to trade stocks online.

DEMAT accounts eliminate the complications that investors have to face while dealing with securities. It minimizes paperwork. It facilitates faster transactions and makes the trade of securities extremely convenient.

Though the DEMAT Accounts are subject to the charges like Annual Maintenance Charge levied on a fixed basis, DEMAT and REMAT Charges, Debit Transactions based on the value of the transaction, Failed/Rejected Instruction and Pledge Charge/Invocation charges based on the value of securities, nonetheless with everything taking place in the virtual world, dematerialization of shares enables investors to trade in shares in a safe and secure way with no risk of forgery, theft, misuse or destruction and the details of the account can be accessed online anywhere anytime.

In this article, Neha Verma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on how can a private limited company raise finance.  

Introduction

The Companies Act is the statute which governs all the companies incorporated and registered in India. The Companies Act, 2013 provides for companies limited by shares and companies limited by guarantee. These two types of companies can be further divided into following sub-categories of companies being:

• One Person Company
• Section 8 Company
• Public Limited Company
• Private Limited Company

According to Section 2(20) of the Companies Act, 2013, a “Company” means any company incorporated under the Companies Act, 2013 or any other previous company law.

What is a private company?

Section 2(68) of the Companies Act, 2013 defines a Private Company as a company which by its articles:

• Restricts the right to transfer the shares of the company;
• Prohibits to make any offer or invitation to the public to subscribe to the company’s securities;
• Limits the number of its members to two hundred except in case of One Person Company. Employees and former employees of the company which hold shares of the company are not counted in the limit of two hundred members.

What are the modes by which a Private Company can raise finance?

Finance is the main bloodstream of any business. It is the most important aspect on which the existence and growth of businesses depend. A public limited company can easily raise finance by issuing securities to the public without any restriction but for a private company, it is not easy to raise finance since it is prohibited to make any invitation to public and the number of its members cannot exceed two hundred.

However, the Companies Act, 2013 does provide for various modes by which a private limited company can raise requisite finance within the framework of the Act. Some of the modes of raising finance by a private limited company have been described below.

Equity Shares

Equity shareholders are members of the company and they are the beneficial owners of the company as they invest their hard-earned funds in the company with almost no or low return. The Promoters of a company can infuse finance in the company by investing in equity shares of the company at the time of incorporation of the company and at any other time when equity shares are issued by the company either through private placement, rights issue or preferential allotment of shares. A private company can also issue shares on private placement basis or preferential allotment basis to people other than promoters.

Preference Shares

Section 43 of the Companies Act, 2013 defines “Preference shares” as that part of the issued share capital of a company that carries or would carry preferential right with regard to:

• payment of dividend either at a fixed amount or an amount calculated at a fixed rate, and
• repayment of share capital in the event of winding up of the company.

Preference shares can be issued at pre-determined dividend rate. Dividend paid on preference shares can be cumulative (interest is accumulated and paid on a specific date) or non-cumulative (interest is not accumulated and paid yearly). Preference shares can be convertible i.e. it can be converted to equity shares on a specified date or non-convertible. A preference share is a good tool to arrange finance for a company without parting with ownership rights of the company, unlike equity shares.

Rights issue of shares

In case of rights issue of shares, shares are offered by the company to the people who on the date of the offer are existing equity shareholders of the company and the shares offered are in proportion to their existing shareholding in the company. As per Section 62(1) of the Companies Act, 2013 any letter of offer for rights issue should provide the members with the right to renounce the shares offered to him in favour of any other person and such other person does not necessarily have to be an existing shareholder of the company. The company can easily raise finance for any purpose through a rights issue of shares.

Private Placement of securities

As per Section 42 of the Companies Act 2013, “Private Placement” means any offer of securities or invitation to subscribe or issue of securities to select group of persons who have been identified by the Board of the company (other than by public offer) through private placement offer letter and which satisfies the conditions as stipulated in this section.

For private placement of securities, the company should issue private placement offer letter to select persons identified by the Board of the company and those persons should submit the application form to the company and pay the application money either by cheque or demand draft or any other mode except through cash. The company is required to file necessary forms in this regard and also to keep the application money in a separate bank account which should not be utilized unless allotment of shares is made and the return of allotment is filed for the same.

Preferential Allotment

Preferential allotment of shares is made as per provisions of Section 62 (1)(c) and Rule 13 of Companies (Share Capital and Debentures) Rules 2014. “Preferential offer” means an issue of shares or other securities by a company to a select person or group of persons on preferential basis. The preferential issue does not include shares issued by way of private placement, rights issue, bonus issue, employee stock option or the like.

Equity shares, fully convertible debentures, partly convertible debentures and any other securities convertible into equity shares at a later date can be issued on a preferential basis. The preferential allotment can be made for cash or a consideration other than cash. A company can issue shares on preferential basis to its promoters, other companies, venture capitalists, angel investors, etc. for raising funds as required by it.

Sweat Equity Shares

Private companies having scarce funds or startups can issue sweat equity shares, as per Section 54 of the Companies Act, 2013, to its directors or employees for consideration other than cash in lieu of the services or the know-how given by such employees or directors to the company. The issue of sweat equity shares is a win-win situation both for the company and the Employees as the company would not have part with major funds for availing value addition services or know-how and the employees would be inclined to work austerely for a company in which they have a stake.

Debentures

Section 2(30) of the Companies Act, 2013 defines ‘Debentures’ as securities which include debenture stock, bonds or any other instrument of a company which evidences a debt of the company whether constituting a charge on its assets or not.

A company can issue debentures with an option to convert such debentures into shares either wholly or partly at the time of redemption of debentures. A company can issue both secured or unsecured debentures; however, no debentures shall have voting rights. Secured debentures can be issued upon fulfilling following conditions:

• The date of debenture redemption should not be more than 10 years from the date of issue;
• The company has to create charge a value which is sufficient for the due repayment of the number of debentures and interest thereon, on the properties or assets of the company;
• A debenture trustee should be appointed before the issue of prospectus or letter of offer for subscription of debentures but not later than 60 days after the allotment of the debentures;
• execute a debenture trust deed to protect the interest of the debenture holders;
• Debenture Redemption Reserve should be formed by the company for the redemption of debentures.

Debentures are an excellent tool to raise finance by way of debt however in case of convertible debentures, the private company should ensure that at no point in time the number of members exceeds 200.

Unsecured Loan from Director and his Relatives

A company can accept unsecured loans from a director and their relatives with or without interest. For a private company, there is no limit on the amount that can be borrowed by a company from its directors or their relatives. However, at the time of giving the loan to the company, the director is required to submit a declaration to the company that the amount of loan given by him is from his own funds and is not being given out from the funds borrowed by him by way of loan or deposit from others. The company is required to mention in its Board’s report the amount of unsecured loan taken from a director and his relatives.

The Promoters of a company can also provide an unsecured loan to the company if it fulfils three conditions:

• If the loan is brought in due to the condition imposed by a bank or any lending institution for promoters to bring in funds by way of loan;
• Loan is provided either by promoters themselves or by their relatives or by both; and
• This loan shall subsist only till there is an outstanding loan from such bank or lending institution and needs to be repaid after the bank or financial institutional loan has been repaid.

Inter-Corporate Deposit

Inter-Corporate Deposit means any deposit or loan received by one company from another company. Inter-Corporate deposits are not considered as a deposit under Companies Act, 2013 and therefore a private limited company can accept the loan from any other company and it would not be considered as a deposit. Section 186 of the Companies Act, 2013 does not apply to any loan or guarantee given by a company to its wholly owned subsidiary or joint venture company.

A private limited company cannot accept a loan from a company if:

• A director or member of the private company is a director in the lending company;
• At least 25% of the company’s voting rights are controlled or exercised by the director of the lending company either individually or along with other director or directors of a lending company;
• The Manager, Managing Director or the Board of directors of the company is accustomed to act as per directions of director or directors or Board of the Lending Company.

The aforesaid limitations shall not apply to a loan from private company provided following conditions are fulfilled:

• Any body corporate is not a shareholder of the lending company;
• Borrowing of the lending company from a bank or any body corporate or financial institution is less than twice of its paid-up capital or Rs. 50 crores, whichever is less;
• At the time of giving the loan, the lending company has not defaulted in repayment of such borrowings.

Deposit from Members

Section 2(31) of the Companies Act, 2013 defines the term “deposit” as any funds received by a company either as loan or deposit or in any other form but does not include such amounts as prescribed by the Reserve Bank of India.

In accordance with Section 73 of the Companies Act, 2013 a private limited company can accept deposits only from its members. Section 73(2)(a) to (e) does not apply to a private company which complies with either of the following conditions:

• The amount of loan accepted by it from its members does not exceed 100% of its paid-up capital and Free Reserves & Securities Premium account; or
• From the date of incorporation upto 5 years if the company is a start-up; or
• Which complies with following three conditions:
• The company which is not an associate or subsidiary of any other company;
• Borrowing of such company from banks or financial institution or body corporate is less than twice it’s paid-up share capital or Rs. 50 crores, whichever is lesser, and
• Such a company has not defaulted in repayment of money at the time of accepting deposit.

Provided that any private company accepting the deposit in the manner from (i) to (iii) files with the Registrar information about such acceptance of deposit from its members. 

Commercial Paper

Commercial Paper is a short-term money market instrument which is issued in promissory note form. Commercial papers can be issued by primary dealers, all-India financial institutions and corporates.

A company which fulfils the following criteria is eligible to issue Commercial Paper:

• As per the latest balance sheet of the company, its tangible net worth should not be less than Rs. 4 crores,
• Banks or financial institutions should have sanctioned working capital limit to the company, and
• The banks/financing institutions should have classified the company’s borrowed account as a Standard Asset.

The company issuing Commercial Papers need to obtain the credit rating of A-2 for the issuance of Commercial Paper from any of the rating agencies as prescribed by Reserve Bank of India. Commercial papers can be issued for maturity period of minimum 7 days and maximum 1 year. These papers can be issued with denominations of Rs. 5 lakhs or multiples thereof. For issuance of Commercial papers, the company shall appoint a scheduled bank as its Issuing and Paying Agent.

Individuals, Non-resident individual (NRIs), banking companies, unincorporated bodies, other corporates registered or incorporated in India, Foreign Institutional Investors, etc. can invest in commercial papers.

Bank Finance

A company can avail term loan and a working capital loan from banks or other financial institutions against the security of its assets, moveable and immovable properties. Companies can obtain fund based and non-fund based credit from banks. The various types of finance that a company can avail from a bank are as follows:

• Term Loan
• Working Capital Loan
• Bank Guarantee
• Letter of Credit
• Bridge finance
• Cash credit
• Bank overdraft
• Purchase or Discounting of Bills
• Invoice factoring
• Trade credit/Buyers Credit
• Packing Credit in foreign currency

A company must create a charge on its assets in favour of the banks from which they avail loan or other financing facilities by way of pledge, hypothecation or mortgage and file requisite forms with ROC.

Pledge of Shares

Pledge of shares means availing loan against the shares held by a person or entity. Promoters of a company can pledge shares of their own company or pledge shares of other listed companies with banks or financial institutions as a “collateral” for availing loan from such bank or financial institutions to meet the funding requirements of the company.

Banks and financial institutions can provide finance against pledge of shares in following cases:

• While providing overdraft facility against listed shares of any public company
• For a loan or overdraft facility given against a prime security and wherein pledge of shares is taken as an additional or collateral security

Banking regulations state that no banking company can hold shares in any company whether as absolute ownership or as pledge or mortgage of an amount which exceeds 30% of its own paid-up capital and reserves or 30% of the paid up capital of that company, whichever is less.

As per Companies Act, 2013 if a company’s shares are pledged for raising finance then the company should compulsorily register the charge for such charge to become enforceable.

From whom can a Private Limited Company borrow funds?

A private limited company can borrow funds from following sources:

1. Directors
2. Relatives of Directors
3. Promoters
4. Members, subject to compliance with section 73 and other applicable provisions of Companies Act, 2013
5. Banks or any other financial institutions including foreign banks or financial institutions
6. From other body corporates
7. State and Central Government, etc.
8. Employees – The amount borrowed should not exceed the Employees’ annual salary

Is there any cap on the borrowing limit?

Section 180(1)(c) provides that the Board of Directors of the company needs to obtain shareholder approval by way of special resolution in the event the money to be borrowed by the company together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium.

The aforesaid section is not applicable to private limited Companies with effect from 5^th June 2015 and therefore per se, there is no cap on borrowing limits of a private limited company.

However, to ensure a good debt-equity ratio it is advisable that a company raises debt within the limits serviceable by them as too much debt may hamper the growth of the company. Moreover, banks or financial institutions from which a company avails finance facility generally keep a debt-equity ratio as a financial covenant which limits the borrowing power of a Company. 

Conclusion

Finance is important at every stage of the business. At the time of setting up of business and to meet day-to-day funds requirement of the business. Companies require various types of finances at different stages of their growth starting from equity capital, bridge finance, a term loan to working capital finance. Business growth is possible only with adequate financing arrangements. A private limited company can raise the requisite funds by way of equity, debt and deposits. It can avail funds from its promoters, directors or their relatives, banks or financial institutions, from members and by issuing various financial instruments. However, before availing any financial facility a company should ensure that it complies with the Companies Act, 2013 and the rules and statutory modifications made thereof and ensure compliance with other laws like banking regulations, SEBI guidelines, RBI guidelines, etc. wherever applicable.

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This article is written by Vanessa Puri. This article talks about the right to hearing and the situations in which it would be possible to carve out exceptions to this right.

The right to hearing is not an absolute right. It is possible to carve out exceptions to this right in the situations of emergency, public interest and policy decisions, legislative action when there is a conflict of interest.

This blog is divided into two parts. In the first part, the exception carved out under the category of academic disqualification shall be discussed. I find this exception highly problematic since it imposes a one size fits all approach to the candidates undertaking the academic endeavor. The second part of this blog discusses the other categories under the exceptions to right to hearing and the cases under those categories.

All these exceptions to right to hearing fall prey to a contrary Rule of Law argument, which imposes the three-pronged A.V. Dicey requirements of:

1. Supremacy of law.
2. Equality before the law.
3. The predominance of the legal spirit.

This argument is to be made on the fact that such exceptions cause differential treatments to certain cases by flagging them under the category of exceptions while letting the other cases follow the conventional path where the right to be heard is a natural right. However, given that there are certain characteristics common to the cases under every category- the determination of differential treatment is not so discretionary but rather, objective.

For this reason, this blog is an attempt to generalize the identifiable characteristics under a category so that the exceptional cases are immunized from the attack of being arbitrarily differentially treated. There has been an attempt to expropriate certain persistent characteristics, which are found to be occurring in cases across that category. This has been done to be able to find certain ingredients that may help assess objectively if there is a case to be made under that particular category of the exceptions to the right to hearing. Any loopholes or conspicuous absence of arguments made has been pointed out subsequently.

First, let us examine the exception under the category of academic disqualification. This is considered problematic since it fails to make space for the differential needs of every student. The insensitivity of the education system where every candidate is assessed against the same standard seems to have reflected in the Court’s opinion as well.

ACADEMIC DISQUALIFICATION

Jawaharlal Nehru University v. B.S Narwal[1]

On the basis of the assessment of a student’s work over time by competent authorities, the work was declared to be unsatisfactory. Consequently, the student was removed from the rolls on the ground that the academic performance was not satisfactory. The student in this situation was not allowed to claim the principles of natural justice. Expulsion resulting from indiscipline would be a different scenario, though.

The reasoning behind this judgment was that this expulsion was based on academics and not indiscipline where the University had to discipline the student and the Court had to balance this against the freedom and justice of the student.

The problem with such reasoning is that since the Courts left the “mere” academic assessment to be best judged by the University- firstly, the judgment legitimizes the idea that there is only one barometer of merit, failing which candidates need to understand that she or he is not good enough or suited enough to pursue the aim for which the assessment was being conducted.

The University’s entrance exam is the assessment meant to test whether a student can brave the severity of the academic life in the particular desired environment. Given that this University reposes so much trust in their examination system, it is required to scratch the surface to find out why a student who passed the muster of this entrance examination could not even pass the assessments she or he was tested on.

Secondly, let us inspect the remaining categories of exceptions to the right to hearing and create persistent ingredients, which make the argument for falling under these exceptions more objective and easily identifiable.

NECESSITY

These two cases set the precedent that the doctrine of necessity can be invoked whenever the question of a conflict can be answered with, if not them, then who. In other words, whenever a question is raised on the creditworthiness of a particular authority doing a duty, if the answer is the absence of another authority able and authorized to carry out the same duty- then the former authority whose creditworthiness is in question, shall be allowed to do so.

For example, in the Charan Lal Sahu case, when the Union was both a stakeholder as well as the victim- the conflict was answered with the idea that in the absence of any other sovereign body to represent the victims, it is only the state that can come to their rescue. Therefore, the fact of the Union’s conflict of interest was ignored to accommodate the lack of another sovereign body and forgo the Principles of Natural Justice.

Similarly, in the next case, given that judges themselves belong to the politics of the judiciary, the question was then about their creditworthiness to be able to appoint other judges freely, fairly and objectively. The doctrine was invoked again since there was the absence of any other body authorized to make such an appointment. In case another body was deputed to this task, it would result in a smudging of the doctrine of separation of powers, and so an exception to the Principles of Natural Justice could be created.

Charan Lal Sahu v. Union of India[2] (falls under CONFLICT OF INTEREST BUT AUTHORITY NOT ADJUDICATOR/LEGISLATIVE ACT and NECESSITY)

Given that the Union of India held a twenty-two percent stake in Union Carbide Company, it became a joint-tortfeasor in the Bhopal Gas Tragedy. The question was whether the act i.e. Bhopal Gas Disaster Processing of Claims Act, 1985 was constitutionally valid since it stipulated that the Central Government must represent all the victims in this case. Due to the Central Government’s stake, there was a conflict of interest between the government and the victims.

However, the Court applied the doctrine of necessity to hold that in the absence of the Union of India, there is no other sovereign body that could rightfully represent the victims, and hence the validity of the Act and the consequent representation were upheld. The validity of the Act was also questioned on the ground of affected parties being deprived of a hearing and hence, it being violative of Audi Alteram Partem. The Court upheld the Legislation and said that so long as the legislation is within the competence of the Legislature, no principle of natural justice is attracted.

Indira Nehru Gandhi v. Shri Raj Narain[3]

The question before the Court was whether judges should be allowed to appoint judges. The Court applied the doctrine of necessity to say that in the absence of judges appointing other judges, it would result in a smudge of separation of powers and hence, the system was upheld and the Principles of Natural Justice were held inapplicable.

EMERGENCY/URGENCY CLAUSE

It is necessary at this juncture to make a distinction between two types of hearing:

1. Pre-Decisional Hearing: This is given where parties who have affected a matter of rule. If a prior hearing is not possible, as it would frustrate the object and purpose of the exercise of power, it can be dispensed with but must be followed by post-decisional hearing.
2. Post-Decisional Hearing: A hearing given by the authorities after taking a decision or making an order is known as a post-decisional hearing. According to De Smith, ‘a prior hearing may be better than a subsequent hearing but a subsequent hearing is better than no hearing at all[4].’

In these cases, there is an attempt to balance two competing interests. One is the public interest of carrying out the task in a speedy and expedited manner due to the situation of emergency or due to the requirement of the statute. This is balanced against the right of an individual to be heard.

Given the overpowering alarm clock of urgency, it manages to trump the right of the individual to be heard. However, since the right of an individual to be heard is also a very powerful part of the checklist of a fair trial, this is accommodated in the form of either a Pre-Decisional Hearing or a Post-Decisional Hearing, whichever can be balanced better with the emergent nature of circumstances.

Maneka Gandhi v. Union of India[5]

Maneka Gandhi’s passport was impounded under Section 10(3)(c) of the Passport Act of 1967 for the public interest. When Maneka Gandhi demanded reasons behind such impounding, the Ministry of External Affairs refused to produce any reasons to protect the interests of the general public. When she filed a writ petition under Article 32 before the Supreme Court, she challenged this act of impounding her passport as violating her fundamental right under Article 21.

The Court had a number of issues to decide from, however, the most relevant for this blog is the issue about whether the order of the Regional Passport Officer is in contravention to the principles of natural justice. The Court on this issue recognized the post-decisional hearing doctrine and said that wherever there is a situation so emergent that it requires immediate action, it is impossible to provide a prior notice of hearing to be followed by a full remedial hearing. The doctrine of the post-decisional hearing was then highlighted for the satisfaction that it may cater to the aggrieved on being heard, even though at a belated stage.

Swadeshi Cotton Mills v. Union of India[6]

According to Section 18 AA of the Industries (Development and Regulation) Act, the government can take over an industry after an investigation. Clause (1) of the same section says that such a take over can happen without a notice and hearing on the ground that production has been or is likely to be affected and hence, immediate action is necessary. The question before the Court was whether the word “immediate” in this Section is enough to constitute a ground of deprivation of Audi Alteram Partem.

The Court held that the word “immediate” in this Section does not take away the right to hearing of parties. It said that even in emergency situations the competing claims of ‘hurry and hearing’ are to be reconciled, no matter the application of the Audi Alteram Partem rule at the pre-decisional stage may be a ‘short measure of fair hearing adjusted’, attuned and tailored to an exigency of the situation. In this case, the Court held that where a pre-decisional hearing is dispensed with, a post-decisional hearing must be ensured.

CONFIDENTIALITY

Cases, which fall under this category, will be a competition between the public interest of disclosure and accountability versus the public interest in surveillance. After such a balance is struck, the outweighing public interest must be allowed to prevail.

S.P. Gupta v. Union of India[7]

The numerous petitions before the Supreme Court put forth Constitutional questions about the appointment and the transfer of judges. Along with this the independence of the Judiciary was also under question. To establish one of the issues about the cogency of the orders of the Central Government on the non-appointment of two judges, the petitioners claimed that the correspondence between the Chief Justice of Delhi, the Chief Justice of India and the Law Minister must be disclosed. The Additional Judge of a High Court was denied the opportunity of being heard before his name was dropped from being confirmed.The ruling of the case was based on three prongs:

1. The privilege under Articles 74 (2), which provides immunity to the advice of the Council of Ministers to the President from being questioned in Court, was claimed.
2. Sections 123 of the Evidence Act according to which without the permission of the head of the concerned department, evidence from unpublished state records on state affairs cannot be given.
3. Section 162 of the Evidence Act provides that a witness summoned to produce a document before a court must do so, and the court will decide upon any objection to this.

The first two things to be checked are – firstly, whether the consultation, which took place between the Central Government and the Ministers of the Cabinet, was complete. Secondly, if this consultation was complete then whether the decision was based on relevant grounds. In this case, both these grounds were absent, however, it finds itself ruled to quite the contrary.

Malak Singh v. State of Punjab[8]

The Court said that the Police Register is a confidential document and no member of the public or the persons whose names are entered in it can have access to it since when we balance the principles of natural justice against surveillance, in this case, the principles will find themselves trumped by surveillance.

LEGISLATIVE ACT

In such cases, the unifying thread is the presence of a statute where any act was done as a consequence of the power conferred under that statute, shall be treated as an act done under the directions of the statute. Consequently, since the Act does not provide for any redressal mechanism to the Courts, then such a mechanism cannot be read into it. It is essential that in such cases, the determination of, for example, grounds of employment, grounds of disqualification etc. are very objective and have a mathematical exactitude so that the scope of discretionary injustice to those affected by the statute can be minimized.

L.N.M. Institute of Economic Development and Social Change v. State of Bihar[9]

The Bihar Legislature used the Bihar Private Educational Institutions (Taking Over) Act, 1987 to take over an educational institution, which was named after the state’s Chief Minister. The employees were also terminated under the provisions of the said Act. The Court held that where there is a legislative direction, which provides for the termination of employee services, compliance with the principles of natural justice cannot be read into this direction. If terminations are effected without any hearing being granted to employees, due to the absence of a provision of hearing in the statute, no exception from the hearing can be carved from the same.

PUBLIC INTEREST & POLICY DECISIONS

Where there is a decision, which can only be taken by a prudent, knowledgeable man- perhaps an expert in the field, and then the validity of such a decision is questioned in a Court of law, the general answer that this category creates that given that the expert applied his or her know-how, the Court will not interfere. The only caveat to this is that the decision must not be arbitrary or capricious. There is a potential loophole here-where through evolution a Court may examine the merits of such a decision thoroughly and couch it as an inspection on whether the decision was arbitrary or capricious. And consequently, decisions, which are actually not even arbitrary or capricious, may be struck down.

To illustrate the above, in the BALCO Employees case- an investment decision was made by the financial advisors to the Government. When the employees approached the Court, it said that so long as the decision is not so grossly arbitrary, it would not interfere. Similarly, in the Gullapalli II case, it was only either a bureaucrat of the Department who could evaluate the objections or a Minister of that Department. Anybody else would not have the sufficient technical knowledge to be able to check if the demurs meet the desired degree.

BALCO Employees Union v. Union of India[10]

The government took a policy decision to disinvest in a public sector undertaking. The employees challenged this decision. The court held that in policy decisions over economic matters, principles of natural justice have no role to play. Moreover, so long as the policy decision to disinvest is not capricious, arbitrary, illegal or uninformed and is not contrary to law, it cannot be challenged for violating the principles of natural justice.

G. Nageswara Rao v. State of Andhra Pradesh (II) (Gullapalli II)[11]

In the case of Gullapalli Nageswara Rao v. APSRTC, the order of the government, which nationalized road transport, found itself challenged by the petitioner. The ground of the challenge was that the Secretary of the Transport Department heard the objections while he also initiated this scheme. The Court on the presence of bias quashed the order and ruled that consequently, no fair hearing could happen.

In Gullapalli II, the hearing of this objection was passed onto the Minister. The Petitioner challenged this. According to the Petitioner, the Minister functioned as the head of the department from where this scheme originated. And now, the same minister was being made to assess the objections against such a scheme.

The court while dismissing the petition held that:

1. The Minister was not a part of the Department in the same way as the Secretary.
2. Departmental bias is the outcome of a situation where the judge and the prosecutor are combined in the same department.

Most departments, which initiate a matter, also decide it. Therefore, the contention of the Petitioner was rejected.

I believe, that the Doctrine of Necessity could also have been invoked in this case. This is because the question became of the creditworthiness of the authority of the Minister. The answer was the same as that which is given in the Necessity cases which is, in the absence of this particular Minister, there is no other authority or office that could competently assess the merit of the objections raised by the party. And so, based on this the Principles of Natural Justice may be forgone.

With the aim of providing a time-bound hearing and disposal of complaints, Rajasthan government on Monday implemented the Right to Hearing Act. The desert state is the first one to ensure a right to hearing for the common man. The Act provides for establishment of information and facilitation centre including citizen care centre and help desk for effective implementation. The complainant can appeal to the first appellate authority against the decision of public hearing officer if he is not satisfied. Provision of penalty from Rs 500 to 5,000 has been made in the Act.

REFERENCES

[1] (1980) 4 SCC 480

[2] (1990) 1 SCC 613

[3] 1975 Supp SCC 1

[4] Judicial Review of Administrative Action, 5th edn., 1980, p.170.

[5] (1978) 1 SCC 248

[6] (1981) 1 SCC 664

[7] 1981 Supp SCC 87

[8] (1981) 1 SCC 420

[9] (1988) 2 SCC 433

[10] (2002) 2 SCC 333

[11] (1959) Supp (1) SCR 319

In this article, Varsha Jhavar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on rescission of contracts.

Introduction

What is a contract?

A contract is an agreement having specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. The contract law is at the heart of most commercial or business dealings, therefore, it is one of the most significant areas of law and can involve significant variations in circumstances and complexities. The existence of a contract requires finding the following seven factual elements:

1. an offer;
2. an acceptance of that offer;
3. a promise to perform;
4. a consideration (a payment in some form);
5. a time or event when performance must be made (meet commitments);
6. terms and conditions for performance;
7. performance.

To define contract in simple terms– a contract is an agreement between private parties creating mutual obligations enforceable by law.

Legal framework

The Indian Contract Act, 1872 prescribes the law relating to contracts in India. The Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties to a contract shall be legally binding and the enforcement of these rights and duties. The Act as enacted originally had 266 Sections and had a wide scope.

A contract may be brought to an end by several ways

• By agreement – where parties agree to end the contract before completion of work (discharge by agreement)
• Due to Force Majeure – If the contract allows for termination in the event of force majeure or for such reason as an act of God. Force Majeure is a contractual term by which either of the parties has the right to cancel the contract or can be recused from the performance of the contract
• Due to breach – Where one party has not complied with term/s or condition/s of the contract, entitling the other party to terminate the contract
• By rescission – If there is misrepresentation by a party, the other party gets entitled to terminate the contract. Rescission can be legally defined as- The abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed.
• By frustration – Where the contract cannot continue due to some unforeseen circumstances. The frustration of Contract happens when a contract becomes impossible of performance, on account of circumstances beyond the control of parties. In India, Section 56 of the Contracts Act deals with the doctrine of Frustration. An event, such as a change in a particular law, which leads to illegality or impossibility of performance of a contract, is a circumstance that justifies in the contract getting frustrated. Section 56, however, has a provision for payment of compensation for loss of non-performance. If a promisor knew or could have known with reasonable diligence had known that the act which was promised was impossible & the same was not known to the promisee, in such a scenario the promisor can be held liable (for its non-performance) to compensate for loss to the promisor.

Rescission of a contract

If a contract is not proving to be beneficial depending on the situation, one has the option to rescind the contract. The word “rescission” is derived from the Latin term rescindere, which means to cut or tear open. The right of rescission is available under Section 19 of the Indian Contract Act.

The option of Rescission is available to a party as a remedy whose consent, whilst entering the contract, has been invalidated due to following:

• Misrepresentation / false statement of fact made by the other party whilst execution of the contract
• A party is mistaken in the terms of the contract and the other party was aware of the mistake
• A party was unduly influenced by another to enter into the contract (which is considered under Section 19A of the Act).
• Non-disclosure with respect to insurance contracts

The above could be the main grounds for rescission of the contract. A party to a contract is entitled to rescind the contract in the circumstances given in Sections 39, 53, 55, 64 & 65 of the Indian Contracts Act.

• Section 39: Applies for Contracts where the performance period or time has not yet arrived
• Section 53: Applies to the liability of party preventing an event, thereby affecting the performance or the fulfilment of the contract
• Section 55: Applies where the party, who has promised to do a certain thing at a specified time, fails to do it on or before time
• Section 64: Applies for a voidable contract
• Section 65: Deals with the principle of restitution in integrum (a Latin term). Meaning restoration to original condition i.e. in situations where the benefit is received and the contract was later found to be void. It is ‘compensatory in principle’ and prevents ‘unjust enrichment’[1]

A party would be unable to go for rescission if it does not restore the other party to the pre-contractual position. If rescinding party has received a benefit, it will not be able to rescind unless and until the benefit is returned to the other party. Also if the reason for rescission is to negate a third party’s rights, rescission cannot be available.

Rescission of a contract by agreement

Where the parties may agree to the total release of their obligations under the contract or may enter a new contract having different obligations or parties. There could be a partial discharge by way of variation/waiver in terms or obligations of the existing contract.

Rescission of agreement can either be express or implied. It is implied wherein there is an alteration of prevailing terms and substituted by new terms. Or there can be novation i.e. the substitution of a new contract in place of old one.

There can be contractual termination, if the contract expressly provides an option for either of the parties to terminate the contract. This can happen if there is a breach of contract, or occurrence / nonoccurrence of a specified event other than the breach.

After facts come to notice, right to rescind must be exercised immediately or in a reasonable time frame. Circumstances of a case will define the reasonable time frame. Norm that rescission has to be immediate does not hold good if there is a tenable reason for the delay. The rescission must be communicated in the same manner as a proposal[3] .

Compensation

Section 75 of the Act applies to compensation in case of rescission in a contract. It prescribes compensation in case of rightfully rescinded contract. The section reads as follows:

“Section 75. Party rightfully rescinding the contract, entitled to compensation- A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.”

This section entitles such a party to claim compensation for the damage sustained by him or her because the contract has not been fulfilled. The claim for compensation under Section 75 is maintainable when the right of repudiation of the contract has been exercised under Sections 39, 53, 54 or 55 of the Act. This section fairly covers the right of a buyer who has paid a deposit on sale to recover it back if the seller makes default if any more specific authority is wanted then the remedy is available by way of breach of contract under the general provisions of Section 73.

Steps for Recession

Basically, a notice is presented by the aggrieved party, addressed to the opposite party stating the reasons for recession. In that notice, the party declares its intention to rescind the contract and also asks that money be refunded or compensation be paid. The notice results in unilateral rescission.

Sections 27 to 30 of Specific Relief Act, 1963 deal with the rescission of a contract. It is a type of legal redressal.

• Section 27 deals with a situation where the rescission may be adjudged or refused,
• Section 28 deals with rescission in cases of contracts for the sale or lease of immovable property,
• Section 29 deals with an alternative prayer for rescission and
• Section 30 the court may require the rescinding party to do equity.

Conclusion

In a valid contract between two or more persons, when there is misrepresentation by a party, the other party is legally entitled to have it terminated. A contract may be rescinded either by release or by agreement. Certain provisions of Specific Relief Act, 1963 provide a mode of judicial redressal for the aggrieved party against the opposite party. Rescission is fundamentally a method of undoing the injustice done to a party.

[1] Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306

This article is written by Vedant Kapur, a first year law student at Jindal Global University. Vedant also is a journalist by training and has graduated from FLAME University, with a major in Journalism.

“By sheer force of a vicious custom, even the most ignorant and worthless men have been enjoying a superiority over women which they do not deserve and ought not to have. Many of our movements stop half way because of the condition of our women.”

— Mohandas Karamchand Gandhi

For centuries, women have been physically, psychologically and socially marginalized and oppressed in society. Often religious customs and outdated traditions have been pressed into service to confine women to a life inside their homes. In modern times, however, women have been at the forefront of the economic ladder, earning their rightful place in various walks of life. This seems to irk and bother a section of chauvinist males. The more freedom that women get, the more belligerent is the attempt by such elements to show women their place in the world. The shocking recent rapes in Kathua and Unnao are a glaring testimony to how a female’s safety, including that of minors, in 21st century India remains regressive like the medieval times. All legislative reforms over the past 4 decades in this behalf seem to have come to a naught!

The laws of the land have provisions meant to protect and secure to women their rightful status with dignity. Such protection exists in the Constitution of India and various other statutes, including the Code of Criminal Procedure (hereafter ‘CrPC’), the Indan Penal Code, the Dowry Prohibition Act, 1961, etc.

The CrPC defines the procedures with which all substantive criminal laws are to be implemented. Following the rebellion of 1857 and the British Crown taking over administration from the East India Company, the CrPC was enacted in 1861 by the British Parliament. It was updated and replaced by the Code of Criminal Procedure, 1973. The CrPC has been amended from time to time to tackle rising incidents of abuse of power and assault by the police and other authorities meant to protect women. Amongst the changes brought in the legal framework are certain laws, which provide positive discrimination in favour of women. Thus, women have been given certain rights to additional protection or exceptions from being bound to do something. Positive discrimination, according to the Cambridge dictionary, is “the act of giving advantage to those groups in society that are often treated unfairly because of their race, sex, etc.”

An important case, which brought forth the need to evolve such protection arose in Tukaram vs. The State of Maharashtra [(1979) 2 SCC 143], also known as the Mathura rape case. In this case, a girl, Mathura, eloped with her lover to get married. Her brother filed a case of kidnapping against the husband and his family. Once caught, the accused along with Mathura and her brother were taken to the police station to record their statements. As the girl was on her way out, she was stopped and taken to a secluded spot by a constable and raped. This case became infamous, as an example, for the abuse of power by the police and for the regressive and conservative thinking of the Courts in trying to place the blame on Mathura herself. Following national outrage custodial rape and prevalence of dowry deaths were recognized as serious problems. It was accepted that no ivory tower idealism or a blind sense of faith could ensure that such a thing never happened again. Recognizing this disparity in the power balance between women and the police, the criminal laws, including provisions of the CrPC, were amended in 1983 [in particular, the addition of sections 372(2) & (3) and section 164 along with changes to the First Schedule] to shift the burden of proof in rape cases onto the accused, provide deterrent punishment for custodial rape and safeguard the dignity of the victim by ensuring “in camera” proceedings with confidentiality of the victim’s identity.

Provisions in the CrPC (particularly with regard to rape victims), also aim at regulating the interaction of women with male police officers, minimizing it to as little as possible. Even the arresting powers of the police have been curbed, when it comes to a female accused. According to the proviso to section 46 (1) of the CrPC, female police officers are required to be mandatorily present during the arrest unless there are special circumstances and with the permission from the local magistrate. Similarly, section 46 (4) prohibits the arrest of women after sunset and before sunrise.

In the same vein section 160 of the CrPC, which deals with a police officer’s powers to summon witnesses, was amended in 2013 to exclude women from being bound by such police summons. Instead the police are required to come to the residence of the woman, who is the witness in question, instead of summoning her to the police station.

Another noteworthy amendment, relating to sexual offences and crimes against women, was the Criminal Law (Amendment) Act, 2013, which came into force on 3rd April 2013. This amendment, related to sexual offences and violence against women, was passed in the aftermath of the gruesome Nirbhaya rape case.

The heinous rapes in Kathua and Unnao prove that a mere protectionist environment is not sufficient to rein in the bestiality towards women by the regressive elements in our society contrary to all norms of civilized behaviour towards women in our society. Laws based on simple positive discrimination are ineffective as deterrents to people targeting women. Arm-chair intellectual discussions on “what is” and “what ought to be” are all well and good in context of issues that do not negate basic civilized behaviour but have no meaning in a society when women are scared of even leaving their house. We need a serious national debate and movement touching all corners of India to herald a fundamental change in our thinking and attitude towards women.

A fair and just social order cannot be achieved, where the authorities are as much a threat to the safety of women as any other perverted human. Such a situation will only lead to a stagnated society. The CrPC must continue to evolve with the times but it is essential to also remember that it merely provides procedures to deal with criminal activities instead of transforming the people in a society. However, well intentioned and worded a law maybe unless we change people’s outlook with education and social awareness, its enforcement would be left wanting. We need this change throughout our society to restore a semblance of humanity back into the society. The target has to be to transform the thinking of not only the ordinary citizen but also of the people responsible for the security of women, like the executive and the judiciary.