With increasing cross-border trade, the significance of transfer pricing is growing at a rapid pace. In this article, Aditya Shrivastava, Marketing Manager at iPleaders, talks about why there is a dearth of talent in this field of practice, and the increasing career opportunities in transfer pricing practice.

In an article by TechCircle, Reduce Data Inc’s founder Asif Ali says, “India has a mature ecosystem, but it has become very expensive to operate here. You can run a great global startup from Chennai or Bangalore today because the internet has done away with the boundaries that existed. But if the costs in Bangalore is as high as the Silicon Valley and if the retention of people is harder, it is not surprising to see many more companies choosing to move to US to run a company in the Silicon Valley itself.”

However, one cannot blame the high costs of operations alone. We are witnessing a time where India is coming at par with the rest of the world in terms of international structuring of the companies. There are numerous small budgeted startups like these which have gone truly international and there are several others coming up.

With the globally changing scenario and international trade growing faster than ever, international structuring is not restricted to large companies only. The situation has undergone a sudden boom as technology is playing a vital role to make the collaboration easy. The business section of the newspapers sees more and more businessmen collaborating each day.

Social media is an add on too. You can witness businesses increasing massively on platforms like Google, LinkedIn, Facebook etc., to continuously market themselves, or you can also see a dozen startups earning money from Freelancer.com, Fiverr, 99designs, YouTube and thereby make international sales.

However, what most of these newly venturing businessmen fault at is understanding one of the most crucial elements of this exercise – International Taxation. It is indeed revolutionary that today, a relatively small company or a startup can begin a business that squarely caters to an international rather than a local clientele, which cuts across services, manufacturing, and even agriculture. However, what does this mean for lawyers? The answer to this question might make or break careers of many.

So what is transfer pricing?

Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.

Transfer pricing can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax, to countries where it does business. Transfer pricing results in the setting of prices among divisions within an enterprise.

So what are the risks and benefits involved in transfer pricing?

There are plethora of benefits of transfer pricing, however, there are equal risks involved and that is exactly where the role of the lawyers comes into play.  I will try to discuss some of them here.

What benefits are associated with transfer pricing?

1. Bringing down income tax in countries with greater slabs by overpricing goods/services in countries with a relatively lesser tax slab. Needless to say, this is an effective technique to increase profits.
2. Transfer pricing also effectuates reduction in the duty costs by sending shipments to high tariff countries at minimal prices so that the associated duty base with the said transactions is reduced.
3. As a lawyer, you are entitled to a lot of remuneration as it takes special skill-set and knowledge to effectuate transfer pricing and accounting systems.

 

What are the risks associated with Transfer Pricing?

1. There is a constant policy fluctuation between the organizational division managers.
2. Transfer pricing is a bit dicey for estimating service transfers, as setting an estimate cost on services is situational.
3. Transfer pricing is complicated and time consuming.

Why should you as a lawyer be interested in Transfer pricing?

Any lawyer, or an aspiring lawyer, cannot deny that knowledge of tax law is required at any point of time. If taxation is your specialization, this is an area you cannot afford to ignore, as international taxation requires expertise. The expertise in this area is crucial as there are various foreign companies who want to understand the tax implications of their global moves.

Not just that, lawyers these days frequently encounter international taxation/transfer pricing issues in many international transactions. They have an option to steer the transactions through these issues by performing the work themselves, or referring to an expert, but they cannot take a hands-off approach.

Even if you are someone who does not understand international tax and transfer pricing, and wants to restrict yourself to your area of corporate law or intellectual property expertise, you will still need to walk each step with your client and ensure that the involvement of another expert plays out successfully. If you can’t take full responsibility for steering the transaction, the client may not want to engage with you on such matters. Thus, this field is more rewarding than ever.

However, The talent deficit in this sectors has never been as high as it is now. There has perhaps never been a better time to learn international taxation and transfer pricing laws, owing to growing international trade and increasing industry demand. This will only go up. How you can do it is by either assisting a lawyer dealing with transfer pricing cases, interning at a reputed company who deals with international transactions or taking up this course which is a comprehensive guide on every practical aspect associated with transfer pricing.

With the rise in international trade and ease of doing business, the desi companies are going truly global. High time, we as lawyers adapt ourselves to the change too.

All the luck.

In this article, Vedashree Kurukuri, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses tax provisions an entrepreneur must know about.

Tax provisions an entrepreneur must know about

Tax is a mandatory amount levied by the government on individuals. Article 265 of the Constitution of India states that ‘no tax shall be levied or collected except by authority of law’. The power to levy taxes has been divided between the Central Government and State Government as per the schedules of the constitution of India. Income tax is regulated by the Central Government while the State Government dealt with sales tax, service tax, VAT and the like. The GST regime which has been adopted in 2017 has now replaced various forms of indirect taxes. Tax evasion is an offence as per the provisions of law and any person if found to have evaded tax is liable to be punished.

Types of taxes

Direct Taxes

Direct tax is the tax levied on the income of the assessees. The tax must be paid directly by the assessee to the government. The tax is levied annually on the income of the assessee. Income tax is the most important form of direct tax which is regulated by The Income Tax Act, 1961. A certain percentage of the income of an individual is mandatorily payable as tax. The tax slabs are decided and notified through the budget every year. This act further divides Income into the following categories for the purpose of calculating taxes:

• Income from salaries
• Income from house property
• Income from profits and gains of profession or business
• Income from capital gains
• Income from other sources

The form of business chosen by the entrepreneur helps the person to decide under which of the above category would the income fall under in order to be taxed in consonance with the provisions of the Act.

Indirect Taxes

Indirect taxes involve a third party i.e., the tax is levied on one party while it is collected from another. For example, the tax is levied by the government on the consumer of goods or services while it is collected from the consumer. Indirect taxes are collected as per transactions and not necessarily annually.

Goods and Services Tax

A business is carried either for sale of goods or rendering of services or both. These aspects of a business require the consideration of indirect taxes which currently is followed as the GST regime. GST provides for a single legislation for the regulation of taxes on goods and services. It has provided for the percentage to be charged as tax with respect to various categories of goods and services. IGST provided for the taxation rates and structure when there is exchange of such goods or services or both interstate.Under the GST regime, tax is to be paid by the taxable person who undertakes the supply of goods and/or services. It mandates that the taxable person must be carrying on a business of supplying goods and/or services must pay GST when the business crosses the threshold limit of Rs.20,00,000. This can be said to be an exemption i.e., only once a business crosses Rs.20,00,000, it is liable to pay tax. In order to pay tax under the GST regime, the taxpayer must be registered for the same. Upon registration a unique identification number i.e., GSTIN is allotted for further recognition. GST also provides for certain categories of goods and services which are exempted from being taxed under GST. Input tax credit may also be claimed by the taxpayer but in order to do the same it is necessary to be registered under the GST. The GST legislations have specifically stated the rules that compliance that is to be carried out by the taxable persons.

Types of Business and their effect on taxation

Sole proprietorship

A sole proprietorship is a business solely run by the proprietor in his own capacity. The complete control of the business is in the hands of the owner which provides a high degree of flexibility in taking business decisions. The main disadvantage of this form of business is its unlimited liability which poses a risk to the personal assets of the owner of the business. A sole proprietorship is not a separate legal entity. Its existence is tied to that of its owner. It is required that a bank account is created on the name of the business to facilitate business transactions. A PAN card also must be obtained. With respect to taxation, the tax is to be paid by the proprietor and not the business as it is not a legal entity. The owner of the business is taxed based on the profits made from the business. It becomes the income earned by the sole proprietor along with any other incomes that the sole proprietor may earn.

Partnership firm

A partnership firm is one where two or more persons come together with the object of conducting a business. A partnership is formed on the basis of a partnership deed which may or may not be registered as per the decision of the partners. A partnership firm is also not recognised as a legal entity. The partners may either take a salary from the firm or a share in the profits or both as per the terms of the partnership deed. The income so earned by the partner would either fall under the head salary or business or both as per the facts of the case for the purpose of taxation.

Limited liability partnership

A limited liability partnership is a form of business which has benefits of a partnership along with that of a company. While it is easier to incorporate, it taken a higher stand over a partnership as it has limited liability and a recognised legal status. But a limited liability partnership mandates that the firm is registered in order to be vested with the legal status. The relevant tax aspects include the tax levied on the salaries of the partners, if any, and the profits made by the firm separately.

Company

A company is one which is recognised by the Companies Act to be a company. It could either be a private limited company, one person company or a public limited company. These types of companies are characterised by limited liability and perpetual succession. One of the most promising advantage of setting up a company is that a company is recognised as separate legal entity. This status enables the company to sue and be sued on its own name. its existence is separate from that of its shareholders and members. A company is also empowered to enter into contracts on its own name and every record is maintained under the name of the company. The transactions are carried on in the name of the company. All these factors are essential in identifying its tax liability. The company is liable to pay tax on the profits in the due course of the business. The calculation of such tax has to be done in a specified format after making the necessary payments. Any business that has employees must also consider the provisions of tax deducted at source (TDS). The Income tax Act provides for tax to be deducted by the employers in certain cases. This is an offence if not followed in a proper manner under the Income Tax Act, 1961 which also mandates that the tax which ought to have been deducted must be paid to the government irrespective of it actually being deducted from the salary of the employee.An entrepreneur must essentially focus on the provisions of the Income Tax Act which require the returns to be filled by all those individuals who fall within the category of an assessee.

Conclusion

An entrepreneur has various legal aspects that must be taken into account before the business is actually set up. It ranges from the steps that must be taken from much before the incorporation of the business to appointment of the necessary personnel for the management of the business to the yearly reports that must be submitted to the government. One of the most important aspects are that of taxation. Tax evasion is an offense punishable by law. The provisions that come into play are based on the form of the business set up by the entrepreneur. While one for of business has few regulations, another has more. This is due to the effect it has on its respective market and the consumers. Also another aspect that led to differentiation on the tax of different forms of business is due to the amount of money that goes into various transactions of the business. The more the money that is circulated, the more regulations are needed. In order to ensure that the business runs without any hassle, the entrepreneur must ensure compliance with the various regulations and aim to prevent any form of tax evasion.

In this article, Nandhini Ramakrishnan pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on how to start a taxi business in India.

Introduction

Until a few years back, Taxis were used by the common man as a mode of luxury not necessity. Taxis were not affordable for the poor and lower middle class people until recently. Due to modernization and digitalization, almost every other man in the country possesses a smart mobile phone. Availing this opportunity, and making use of the technology, companies like Ola, Uber, Taxiforsure, etc. have entered into the market through the hands of the common man, making taxi rides easier and affordable to all classes. To avoid the congestion of public transport and to gain comfort, the common man prefers the taxis/ cabs, thereby making it one of the beaming markets in the country. The citizens, who are rich enough to own a car, prefer taxis for the sake of convenience and non requirement to appoint a driver separately. The technology has made us avail a taxi at the ease of home, a phone call away/ use of app/ other options.

Structuring the Business

To begin taxi business in India, one has to first look into the business type suitable for him/ her.

• If it is going to be sole proprietorship, then the compliances to follow for setting up are much less. But the risk of loss in the business will sound scary as one single person has to bear all the losses.
• If the business structure is partnership, then one has to ensure that a registered partnership agreement with detailed clauses as to everything including liability, share of profit and loss, etc is in place. A partnership firm may be registered with the Registrar of Companies by making an Application under Section 58 of the Indian Partnership Act.
• If the business structure is a Limited Liability Partnership, wherein the liability of partners is limited, the same requires registration with the Registrar of Companies. The process of incorporation of a limited liability partnership is entirely online. An LLP agreement must also be executed during the registration process.
• If the business structure is a Company, then it requires a detailed registration and incorporation process. The company must have its own Memorandum of Association and Articles of Association which also must be filed with the Registrar of Companies. A Public Limited Company can raise funds from the public whereas the investor has to make the entire investment in a Private Limited Company. One – Person Company is also a gradually developing trend which was introduced in the Companies Act, 2013.

Hence, one has to make a detailed analysis on the structure of business to be chosen for starting taxi business. The factors that one must look upon include the size of business, capital availability, risk sharing capability, compliance requirements, etc., while structuring the taxi business.

Types of Taxi Business

There are typically two types of taxi businesses – Traditional & Radio Taxis.

Traditional Taxi business is losing its hold in India. Examples of traditional taxis business include (1) individual taxis & (2) organizations owning a number of cars & thereby running taxi business (Eg. Fast Track Call Taxis, Meru Cabs, etc.). This kind of traditional taxi business is not preferable at this point in time and people tend to prefer the modern type i.e. Radio Taxis due to ease of access.

Radio Taxis contain GPS installed systems wherein the taxis are booked online and the taxi driving route is traceable. Examples of Radio Taxis include Ola Cabs, Uber, etc. which uses the online platform/ app based platform for booking.

It is the Motor Vehicles Act which governs the taxi business in the country. However, with the advent of technology, since the taxi business is making it possible for people to book taxis online, it would be better if the scope of Information Technology Act is widened and the radio taxis come under the preview of the Information Technology Act. Usually in Radio Taxi type, it is the drivers of the taxi who own the vehicle, unlike the traditional type. The drivers will receive the consideration for the taxi ride and pay a percentage of the same to the company which co-ordinated and scheduled the taxi rides.

Registration & Obtaining Permits for Vehicles

Registration Process and Required Compliances

Purchase, registration and obtaining permits for the taxis/ vehicles will be a herculean task during the initial stages of setting up the taxi business.

Step 1

While purchasing cars for the purpose of taxi business, one has to ensure that the cars are of taxi-type and economically affordable.

Step 2

Once purchased, the vehicle needs registration before the District Transport Office/ Regional Transport Office (as it is called in that particular State) within 7 days from the date of purchase of the vehicle as mandated under Section 39 of Motor Vehicles Act, 1988.

The transport authority provides the owner with the registration certificate. It is an offence to drive unregistered vehicles which attracts a penalty of Rs.2000/-.

The portals and Application forms differ with respect to the Transport Authority in the particular state where the vehicle was purchased.

Step 3

The taxi needs to be insured with, so that it will be useful if any harm or damage is caused to a third party by the taxi. Vehicle insurance can be obtained from various insurance companies by filling in their Application forms and complying with the various mandatory procedures as stated by the insurance companies.

Step 4

It is to be seen to it that the car has complied with all the environmental clearances as required by the State Authorities.

Vehicle Permits

Not all cars can be used for taxi business. Certain vehicle permits are required to transport people/goods from one place to another. Hence, permit for transporting people must be obtained from the Regional Transport Office/ State Transport Office by submitting forms as required under the respective procedures.

Contract of carriage of passengers

Further, an Application must be made with respect to contract carriage of passengers i.e. the owner/ driver carries the passengers under a contract to a particular place for a particular sum. The Application has to be filed in accordance with Section 73 of Motor Vehicles Act, 1988 as per which the type & seating capacity of the taxi, the area in which the taxi is going to operate and other such details as prescribed by the State Authorities.

Fitness Certificate

Further, in accordance with Section 84 of the Motor Vehicles Act, 1988, every vehicle should carry a fitness certificate from an Authorized Testing Station. The vehicle should be maintained properly as mandated under the provisions of the Motor Vehicles Act. The speed limit of the taxi varies from state to state. Usually, the speed limit for taxis is about 50 to 65 km/hr. The name and the address of the operator of the vehicle shall be painted or affixed on the taxi.

All India Tourist Permit

If the taxi is to ply from state to state, then a permit called All India Tourist Permit is required for the said taxi. The All India Permit may be obtained by making necessary application before the Transport Authority after properly analyzing the same. The number plate of taxi for which All India Permit is granted should contain that the taxi has All India Tourist Permit. The taxi which has been provided with All India Transport Permit cannot be used for local purposes i.e. it cannot carry passengers locally.

Drivers, their Licenses & their Work Hours

The driver of taxis should obtain commercial vehicle driving license from the Regional Transport Office of that particular state. In order to obtain commercial driving license, the taxi driver should qualify certain basic requirements such as 18 years of age, should have completed at least Class 8, should get training from a Government Motor School and should pass a written test and driving test. The taxi driver should also submit a medical certificate regarding his/ her physical and mental fitness. The commercial driving license will be granted by the Regional Transport Authority after analyzing all the above factors and consideration of the Application.

The work hours for a taxi driver shall be as provided under Motor Transport Workers Act, 1961. Section 13 of Motor Transport Workers Act, 1961 provides that an adult motor transport worker shall not work for more than 8 hours per day or 48 hours in a week. If the taxi business involves driving long distances, etc., then the employer shall obtain permission from the prescribed authority, with whose permission the driver may be allowed to work for an extended period but not more than 10 hours a day and 54 hours a week.

Conclusion

To be precise, if any new startup is looking forward to start taxi business in the country, they have to first choose the business structure, then purchase cars suitable for taxi business, subsequent to which one has acquire permits for the cars (if the cars are to be owned by the company), ensure if the drivers have obtained commercial driving licenses for driving taxis and thereafter step into the field of taxi business. It is advisable that, any new venture into the taxi business may take the route of Radio Taxis, since the same is thriving in the market presently and looks like it will have a booming market in the near future as well and to state further, it is being highly preferred by the common man, due to ease of access.

REFERENCES

http://www.thesaurus.com/

http://www.tn.gov.in/sta/go.html

Is It Legal To Drive A Vehicle With Temporary Registration Plate In India?

Motor Vehicles Act 1988

The Motor Transport Workers Act, 1961

http://www.mondaq.com/india/x/278154/Corporate+Commercial+Law/One+Person+Company+A+Concept+For+New+Age+Business+Ownership

In this Article, Rose Mathew pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on Combinations under Competition Law.

Introduction

The world as we know it thrives on Competition. It is, without doubt, a fundamental incentivising agent in the grant arena of development and progress. And of course competitions aren’t always constructive and beneficial in the wider scheme of expansion. It is for this cause the Indian Constitution relays up on the Regulation of Combinations in Competition Law.

Competition Law in India

It is in the wake of harmonization of competition, the Finance Minister in the year 1999 during his budget speech renounced the then existing Monopolistic and Restrictive Trade Practices Act, as proposed within the international economic development. And in the year 2002 the Parliament passed the Competition Act, 2002.

The Competition Law preserves a state of balance within the realm of business, it specialises in regulating discrepancies among businesses and overseeing monopolies. The Competition Combination of India states “the need for Competition Law arises because markets can suffer from failures or distortions, and various players can resort to anti-competitive activities such as cartels, abuse of dominance etc. which adversely impact economic efficiency and consumer welfare.”

The Competition Act, 2002 declares objectives that are rudimentary to the law, encompassing the listed.

• Establish a Commission to prevent practices having adverse effect on competition.
• Competition to be promoted and sustained in the markets.
• Interests of the consumers are to be protected.
• Ensure freedom of trade in the Indian market

What are Combinations?

Section 5 of the Competition Act explains combination as:

‘Acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises’.

Combination within the Competition Law is the merger between two or more enterprises or firms or the business sector acquisitions (such as companies or firms) by other business enterprises. The Government controls combinations or mergers and acquisitions within the country to promote competition and thereby seeing to that small scale establishments are not overshadowed and swallowed by more reputed industries. This is because the merger of big shot companies not only reduce competition but also make it difficult and almost impossible for smaller firms to grow or profit from their business. The accumulation of wealth in certain sectors of business and the consumer concerns can lead to major economic and social discrepancies within the nation.

Types Of Combinations

Horizontal Combinations

Horizontal Combinations involve the merging of enterprises or firms with identical level of production process, with substitute goods and are competitors. The horizontal combination is primarily a friendly merger between companies, although it can be a takeout of one by the other. Of course the synergy formed by this combination enhances the business performance, financial gains and shareholder value in the long run. The cost efficiency with the staff cut-offs leads to the increased margins of the company. However this tends to pave way for reduced competition as a monopolist agenda emerges from the combinations of powerful enterprises, along with the unemployment that follows which has a very drastic and adverse effect on the economy of the country. It is also bad for the consumers as the reduced competition gives the companies a “higher pricing power.” Therefore these merges are the chief focus and are often scrutinised by the Competition Law Authority for the above given reasons.

Non-Horizontal Combinations

The non-horizontal combinations are of two types: Vertical and Conglomerate combinations.

Vertical Combinations

Vertical merging is “combining of business firms engaged in different phases of the manufacture and distribution of a product into an interacting whole”. This leads to increased competitiveness, a greater process control, wider market share, a better supply chain co-ordination and decline in cost as this sort of integration is the structuring of supply chain of companies under a particular company.

Conglomerate Combinations

Conglomerate combinations involve firms or enterprises in unrelated business fields. Such combination happens when two companies that provide different services and goods or are integrated into varying sectors of business merge together. This sort of merger happens when the companies achieve a stronger stand in the market both in products and services and profit management unlike when they are individual enterprises.

Conglomerate merges can lead to an ascend in “market share, synergy and cross selling”. Here diversification takes a major roll and thereby reduces the “risk exposure” factor. The cons of this particular combination can be the monopolization of a company over a certain market and the over expansion of the conglomerate can seriously affect the quality of functioning of the company and result in the collapse of the system. Such coalescence can be detrimental as it restricts business options for newly formed enterprises in the market. However it is to be note that Non Horizontal Conglomerations do not promote loss of direct competition and are therefore not anti-competitive within an overall framework.

Regulation of Combinations

A merger or a combination can be held valid under the purview of the Competition Act 2002 and its regulation policies only if the newly acquired or merged enterprise passes the threshold pertaining to the assets and the turnover mentioned in the Act. If not confined to the criteria then the attractancy of the new enterprise will be nil as far as the provisions of the Competition Act are concerned. Sections 5 and 6 of the Competition Act covers the definition and regulation of combinations.

The Procedural Aspects

Step 1: To Notify

Once the threshold is met the next step is to non optionally notify the Competition Commission of India (CCI) on the merger or combination as prescribed in section 6 (2) of the Competition Act. This is for the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market while regarding factors like the actual and potential level of competition through imports in the market; extent of barriers to entry into the market; level of combination in the market; degree of countervailing power in the market etc.

The CCI has been amended on the 8th of January 2016 bringing in key changes closing in to complete ease of doing business in India and also in the regulation of combinations through the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulation, 2016. Any new enterprise to be considered by the CCI will have to abide by the section 6(2) of the Competition Act read with Regulation 5 and Regulation 8 of the Combination Regulation (2016).

Step 2

Inspection of the Notice: The CCI is to scrutinise the notice for defects or incompleteness on the premises of Regulation 14 of the CCI Amendment Regulation , 2016. After the process the parties to the merger are asked to remove the defects if any.

Step 3: Prima Facie Opinion

The Commission has to form a prima facie opinion under sub-section 1 of section 29 of the Act within thirty days of the receipt of said notice. The procedure related to forming a prima facie view is contained in Regulation 19. As per sub regulation 2 of Regulation 19, the Commission may, if considered necessary, require the parties to the combination to file additional information.

Further the parties are asked to publish the details of the combination as per section 29 (2) which creates an open invitation to the public to come forth with objections within fifteen working days from the publishing under section 29(3) , which are to be pacified by the CCI accordingly. The CCI may call upon the parties for additional information pertaining to the merger under section 29(4) read with section 29(5).

Step 4

Proceeding to the Final Order: After receiving the additional information the Commission decides as to whether or not the merger or combination will have unfavourable effects on the current competition market as per under section 31. If the commission has concluded after careful scrutiny that the combination at hand will not have harmful effects on the competition market then the Commission shall approve of the transaction under section 31(1) of the Act. On the other hand if the Commission has concluded negative on the transaction due to its adverse effect on the market , it shall hold the transaction null under Section 31(2) of the Act. In a third scenario the Commission can provide the parties with modifications to be made in the transaction to rinse out the provisions likely to be inharmonious to the competition market [Section 31(3)].

Conclusion

The regulation of combinations in a broad sense has two expressions. The first one being the procedural format to be followed by the parties and the CCI , starting off from the point of notifying the Commission proceeding to the dispensation of the final order. The transactions presented to the Commission through notification maybe countenanced , countenanced with modification or held null in accordance with the concerned provisions of the Act. At the centre of any resolution made by the Commission is the, COMPETITION APPRAISAL, markedly pertaining to vertical and horizontal combinations. Further in the challenge of steading the competition market what helps is the careful and erudite assessment of the unilateral and coordinated effects both quantitatively and qualitatively owing to specific cases. A number of factors come and go while assessing combinations but the overall guiding notion is a barter between the anti-competitive effects and the pro-competitive effects.

In this article, Raj Dhakan, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the laws relating to debt resolution in India.

What is debt resolution?

Debt can be defined as the loan taken by an individual or an organization from the bank or financial institutions to meet its expenses, start a new business, buy a new house or vehicle etc. The person or organization taking the loan is called as the debtor and the lender is called as a creditor. Many a times the debtor is not able to repay the creditor its principal amount (he may go bankrupt) or the interest amount due to losses in business or due to other possible reasons. In such cases the creditor might try to settle the issue in person or approach the court to intervene and help them recover their money. This process of settlement is called as debt resolution.

Need for Debt Resolution Laws in India

In 2016, besides GST and Demonetization the other thing that made news headlines was the Insolvency & Bankruptcy Code (also known as IBC Code 2016). With the enactment of this Act, India has jumped 30 points and reached 100th rank in Ease of Doing Business world rankings. Before understanding what the code actually means, let us look at why was it needed.

Industrialists in India have started venturing into all the possible directions to expand their business and take huge risks. Private and Public institutions were competing to lend to these industrialists at dirt cheap rates. Companies started investing in long term projects with short term floating interest rates loans. With the global recession, inflation started rising in India and so did the interest rates. Industrialists were now facing it difficult to repay the loans with higher interest rates, from low or steady income stream from those projects. Adding to it, as inflation rose the prices of products started skyrocketing and the income from projects further declined. This was the time when the corporates started defaulting on the loans and the lenders started approaching courts to pave a path out. Banks started getting NPAs on their balance sheets and currently 56% of bad debts on banks’ balance sheets are from Corporates.

Difference between Rehabilitation and Liquidation

Liquidation of a company refers to selling of all the tangible and intangible assets of the company and repaying the creditors with the proceeds. The money received from the proceeds is known as ‘Liquidation value’.

However, the value we might receive from liquidation would be far less as the assets are being sold because they are not in a good state to produce any benefit in future, for example obsolete machines. So, what if the business can be restructured and profits can be generated in future to repay all the debts of the creditors, law gives us an option of creating a rehabilitation plan to revive the business on the principle of ‘Going Concern’.

Timeline

The timeline for debt resolution laws in India can be stated as below

1956 – Companies Act, 1956

1986 – Sick Industrial Companies Act, 1986

2016 – I&B Code

Old Laws in India

One would argue that why did India not have any laws pertaining to this issue before IBC. The answer is, we did have 2 major laws, but they had some shortcomings.

Section 433 and 434 of the Companies Act, 1956 (later Section 271 of the Companies Act, 2013): This section of the Companies Act dealt with the liquidation of the company. which means selling of the assets of the company and paying the creditors’ with the sale proceeds. Any of the creditor who the company has defaulted can go to the court and demand for liquidation of the company on the grounds of its inability to pay them. It was on the discretion of the court whether the company should be wound up or not. The issue here is that the court would not be savvy enough to evaluate the business, and inhibit an accurate rehabilitation plan for the business.

Sick Industrial Companies Act 1986 (SICA)

To address the above problem of rehabilitation, SICA gave the authority to the managing committee and board of directors of the business to come up with a plan to rejuvenate the business. The key feature of this act was that, while the scheme was being prepared and approved, there was a moratorium of any legal actions against the company by any of its creditors. SICA failed because companies chose to stay in its protection for years without any successful scheme for rehabilitation.

The Insolvency and Bankruptcy Code 2016 (IBC)

The Insolvency and Bankruptcy code was introduced in 2016 due to the failure of the existing laws and the mounting up of NPAs in the public sector banks. IBC gave a new policy structure to the rehabilitation and liquidation process, thus giving a strong exit structure for business and investors.

Under the IBC, there are 5 steps to solve the rehabilitation and liquidation problem.

Step 1 – Application to NCLT

A company is called as an insolvent when it is not able to pay back its debt or losses which are more than the net worth of the company. In such cases a financial creditor, an operational creditor or the company itself (also known as Corporate Debtor) can submit an application to the National Company Law Tribunal (NCLT) to start the insolvency process also known as a Corporate Insolvency Resolution Process (CRIP). NCLT has to accept or reject the application within 14 days of the application submission. The creditor can file the application only if the company’s default in payment is more than 1 lakh rupees. Financial and operational creditors have different criteria for qualifying to submit the application.

Step 2 – Starting of CRIP

Once the application is approved by NCLT or NCLAT, the board of directors are suspended and the management is placed under the control of an Interim Resolution Professional also known as IRP. Management does not have any control over the company while the company is under CRIP. Along with this, a moratorium is applied on the company which prohibits:

(a) the existing or new legal proceedings against the company,

(b) the transfer of its assets,

(c) the collection of any security interest,

(d) the recovery of any property from it by an owner or lessor

(e) the suspension or termination of the supply of essential goods and services to it. The moratorium lasts till the corporate debtor is in CIRP.

Step 3 – Creation of CoC

Once the company is into CRIP, within 30 days of its admission, the IRP has to verify the claims made by all the creditors and form a team of all the Financial creditors (please note it is only Financial creditors and not Operational creditors) called as Committee of Creditors (CoC).

Step 4 – Appointment of Resolution Professional

Once the CoC has been formed, the committee appoints a Resolution Professional known as RP which may be same as the IRP depending upon the discretion of the CoC.

Step 5 – Formulation of Resolution plan or Liquidation

Within 180 days of starting of the CRIP a resolution plan needs to be prepared and approved by 75% of the creditors and the NCLT. The NCLT may extend this time by an additional 90 days. Any person including the former management, or creditors, or RP or a third party can propose a resolution plan and it would be the responsibility of the RP to check its feasibility with the IBC and get it approved by NCLT.

Once approved the plan is binding on all the stakeholders involved in the process of CRIP.

If no plan is approved by the CoC and the NCLT within the stipulated time frame, then the NCLT will order for the liquidation of the company.

Resolution Plan

Under IBC, the resolution plan needs to be approved by at least 75% of the financial debtors forming the CoC and also the RP needs to check whether the plan satisfies the needs of the IBC and the NCLT. Once approved, the plan is binding on all the stakeholders for example – Employees, Creditors, Members, Guarantors and other Stakeholders. In IBC other stakeholders is defined as any person who is liable to receive a compensation on the liquidation of a company.

One major complaint received so far on the working of IBC is that the promoters, CoC and the RP collude together to come up with a resolution plan and get it approved without checking its viability for preventing the liquidation of business. To deal with this issue, the IBC has been amended and in 2017 known as Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) 2017, which limits promoters from submitting resolutions for the corporate debtor.

Liquidation Process

Under Section 33 of the IBC, if no resolution is passed before the expiry of the CRIP or if it rejects the plans because it did not comply with the IBC guidelines, then the NCLT can order the liquidation of the corporate debtor.

Under Section 33(4), NCLT can order the liquidation of the company even if the resolution plan was approved if any of the creditor approaches the court on the grounds of his interests being affected due prejudicial contravention of the plan.

RP will be assigned as the liquidator unless the IBBI appoints someone else explicitly to do the needful.

After the liquidator has been appointed, he will sell the assets of the company part by part. He has to follow the auction method for selling as it is the most transparent price discovery mechanism. However, private sale can be conducted under certain conditions for example if the inventories are highly perishable in nature. Under Section 44(1) of the IBBI, the liquidator should liquidate the debtor within a time period of 2 years.

Section 53 of the IBC states the priority in which the proceeds of the liquidation should be distributed:

Liquidation and insolvency costs.

The following debts which rank equally: (i) workmen’s dues for the period of twenty-four months before the liquidation starting date; and (ii) debts owed to a secured creditor.

Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

Financial debts owed to unsecured creditors

Ranking equally, (i) any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

• any remaining debts and dues;
• preference shareholders
• equity shareholders or partners.

Advantages of IBC Code over previous laws

A robust and efficient authority to hear the cases.

A regulated profession of insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.

A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform legislative, executive and quasi-judicial functions with respect to the IPs, and IUs and draft regulations for the resolution procedures under IBC.

Challenges for IBC Code

The biggest challenge is to transition existing cases to IBC.

At present there are around 4200 cases pending with the CLB and 4000 cases get added every year, hence it is going to be a challenge for them to clear all of them in the stipulated time period.

Conclusion

After going through the details of IBC, we can conclude that IBC is a more time and deadline based process which helps in quicker resolution to the creditors of the defaulting company while giving ample opportunity for rehabilitation.

In this article, Swapnil Singh, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the process followed when founders decide to split up.

Introduction

The growth of the business field has marked the development of several forms of business organizations such as Companies (including One Person Companies), Limited Liability Partnerships, Co-operative societies, Partnerships etc., apart from the traditional sole proprietorship and family owned businesses. The advantages of these various forms of organizations over the traditional business forms is their better financial standing and stability, due to increased number of contributors.

Something interesting happens between the time an idea is developed and it becomes extremely profitable. Typically, everyone who had a role in the process — no matter how small or large — begins to jockey for position and to fight for a piece of the company. In other words, everyone wants some equity, regardless of the amount of work they’ve put in. As a member of the founding team, you should take responsibility for splitting equity in a way that’s fair to all contributing parties, while simultaneously positioning your startup for long-term success.

The problem with splitting equity, however, is that there’s never a “clean cut.” Any time you have more than a couple of people involved, disagreements will erupt over what value people bring to the table, which parties were there from the beginning, etc., etc. But by keeping several guidelines in mind, you can ensure the process is grounded in fairness.

However, at the same time, when two or more persons come together and decide to operate a business from their ideas and resources, the determination of the control and profit sharing ratio becomes a fundamental question.

Founders Decide To Split Up – What should be kept in mind?

Splitting equity is difficult if you haven’t done it before. The tricky part being, there’s no right or wrong way to divide equity. Some startups split equity equally, others wait to get to know each other; some go through a negotiation process, and few save the decision for later just so they can launch a successful product first.

Before you settle on splitting equity 50/50, there are a few key concepts you should understand. Once you grasp the following pieces of information, you can rest assured you will have enough knowledge to keep everyone involved motivated and financially rewarded throughout your startup journey.

Solving the equity equation is typically the most challenging and time-consuming aspects of structuring your startup correctly. I recommend taking the information from this article and discussing your situation with industry experts: investors, successful founders, or startup advisors. These professionals will be able to leverage their experience to provide you with the unbiased insight needed to make important decisions. One thing that should be kept in mind before splitting is – split the shares without giving away the company. You never know what your co-founder will do in a span of months whether he decides to walk away from the company and still retains the large portion of the company. It will be like giving the value of your hard work to a person who doesn’t contribute.

Issues that might arise when Founders decide to split up

One of the most pressing and significant issue that might arise is with respect to the discomfort that might arise due to the split, would necessarily be the change in working environment, if either of the founders are discontent with their share of equity in the company. Therefore, if such a decision is taken without due discussion and deliberation, it might lead to counterintuitive effects in the working of the firm in future.

The second issue that might arise is with respect to analyzing and monetizing the net contribution in terms of money, skill, management or any other form that the co-founder(s) will be able to provide in future. Such a form of estimation is based on future expectations the co-founder(s) has/have from each other and therefore, needs to be done with utmost care and caution.

Hence, it is sufficiently explicit that any incorrect decision at this first instance might prove to be detrimental for the interests of co-founder(s) and eventually the company.

Splitting the Equity: Key aspects to be considered

Understanding the significance of this step, several experts have provided with their own tips and guidelines as to how should the ‘pie’ that represents the company be divided amongst its founders. The famous ‘Founders’ Pie Calculator’ is a widely accepted test in determining the elements that need to be necessarily considered in the event of splitting the equity.

Coming up with the idea

The first aspect that needs to be taken into account is that who actually came up with the idea of the start-up. The founder who is the mind behind the instrumentality of the business should under all circumstances, be accorded a special status as compared to other founders. Now this does not compulsorily imply that the individual who proposed the idea should get a greater share, but instead it provides that the significance of the brain behind the corporate should not be undermined.

Contribution towards the preparation of the business plan

The second feature that needs to be considered is that which founder contributed to what extent toward the preparation of the business plan. It is pertinent to note that the mere existence of an idea is not enough for a successful business to be set up, a considerable amount of importance should be attached to its translation into a commercial viability i.e. done through the business plan preparation.

Expertise in the proposed business

The next component that is imperative to be thought of while distributing the equity is whether the co-founder possesses any degree of expertise or skill, specifically with respect to the proposed business. Therefore, if there are two founders, out of which one of them is highly skilled and owns a certain amount of expertise in the field, the equity split should consider this aspect also along with the other components. This is desirable because knowledge of the working or management of the business is an essential pre-requisite for the success of any form of business and thus, the founder should feel that he is being significantly rewarded for his contribution to it.

Amount of risk/commitment offered

The fourth aspect that requires due consideration is the amount of risk and commitment the founder is willing to offer. In order to explain this better, the concept of sleeping partner can be appreciated. A sleeping partner is essentially a partner that primarily contributes money in the business, but is not involved in its day to day functioning, as opposed to a working partner. Thus, it makes more sense if the founder who is actively involved in the affairs of the business is provided a greater share than his inactive counterpart, as he is serving more valuable to the organization. Similarly, the risk-taking founders would be like to portray more loyalty and hard work towards the business.

Distribution of responsibilities

The fifth aspect is based on the distribution of responsibilities and is closely linked to the commitment towards the business mentioned above. Nevertheless, it is better to consider the responsibilities that each person is willing to take up and ascertain his future interest in the business through that.

Therefore, majorly these are the five things that need to be taken into account while assessing the split of equity between the members. It is pertinent to note that the weight attached to each of these aspects may vary from organization to organization and on that basis decisions can be made. However, it would be a grave sin if, as is the usual practice among close friends, the equity is split into equal parts, in complete disregard of the aforementioned conditions.

Conclusion

It is pertinent to note that if in order to avoid discussions on this issue, a middle ground is adopted wherein every founder is accorded equal share, it would lead to a plethora of problems.

Firstly, it would prove as disincentive to the more deserving founder and may lead to his dissatisfaction and discontentment in the long run.

Secondly, if at a later point in time, any of the founders wish to alter this ratio, it would lead to clashes and may not also be possible.

Hence, in order to avoid such a situation in future, it is better to deliberate upon these issues in a sophisticated and professional manner, considering the Founders’ Pie Calculator test.

Apart from this, there is another thumb rule that needs to be established while deciding upon equity split. This thumb rule states that whatever be the situation, no co-founder should be provided lesser than ten percent of the total equity in the company. If it is less than that, the founder would constitute the category of first employee and should be then, entitled to remuneration.

Thus, it can be said that this is the manner in which the co-founders should proceed.

In this article, Asim Ansari, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the topic Venture Capital Financing in India.

“The combination of entrepreneurship education in schools and colleges, the hassle-free flow of venture capital and evolution of good market will give momentum for the National Growth.”

-By A.P.J Abdul Kalam

Introduction

Venture Capital refers to the finance provided by Venture Capitalists, who invest in relatively new, high growth companies or startups that have a potential to grow and develop into highly profitable ventures. It has high-risk and high-return characteristics. Therefore, it acts as an important source of finance for entrepreneurs with new ideas.

Venture Capital is the most suitable form of funding for companies and for businesses having large up-front capital requirements which have no other cheap alternatives.

What is Venture Capital?

It is a private or institutional investment made to early start-up companies. Venture Capital is money invested in businesses that are small; or exist only as an initial stage but have huge potential to grow. The people who invest this money are known as venture capitalists.

It is an investment made when a venture capitalist buys shares of a startup company and become a financial partner in the business.

Venture Capital is also stated as a huge capital risk or patient risk capital investment, as it involves the risk of losing the money if the venture doesn’t succeed.

It is the basically the money invested by an outside investor to finance a new, growing or troubled business. The money invested, by capitalists, is in exchange for an equity stake in the business rather than given as a loan.

Importance of Venture Capital

Venture Capital institutions lets entrepreneurs convert their knowledge into viable projects with the assistance of such Venture Capital institutions.

• It helps new products with modern technology become commercially feasible.
• It promotes export oriented units to earn more foreign exchange.
• It not only provide the financial institution but also assist in management, technical and others.
• It strengthens the capital market which not only improves the borrowing concern but also creates a situation whereby they can raise their own capital through capital market.
• It promotes modern technology through the process where financial institutions encourage business ventures with new technology.
• Many sick companies get a turn around after getting proper nursing from such Venture Capital institutions.

Features of Venture Capital

High-risk investment: It is highly risky and the chances of failure are much higher as it provides long-term startup capital to high risk-high reward ventures.

High Tech projects: Generally, venture capital investments are made in high tech projects or areas using new technologies as they have higher returns.

Participation in Management: Venture Capitalists act complementary to the entrepreneurs, for better or worse, in making decisions for the direction of the company.

Length of Investment: The investors eventually seek to exit in three to seven years. The process takes several years for having significant returns and also need the talent of venture capitalist and entrepreneurs to reach completion.

Illiquid Investment: It is an investment that is not subject to repayment on demand or a repayment schedule.

Venture Capital in India

Evolution of Venture Capital

In 1983, the first analysis was reported on risk capital in India. It indicated that new companies often face barriers while entering into the capital market and also for raising equity finance which weakens their future expansion and growth. It also indicated that on the whole, there is a need to assess the equity cult by ensuring competitive return on equity investment. This all came out as institutional inadequacies and resulted in the evolution of Venture Capital.

In India, IFCO was the first institution to initiate the idea of Venture Capital when it established the Risk Capital Foundation in 1975. It provided the seed capital to all small and risky projects. However, the concept of Venture Capital got its recognition for the first time in the budget for the year 1986-87.

Objectives of Venture Capital in India

It allows for the working together of capitalists and startups/businesses closely and for the promoting of entrepreneurs to focus on making more and more ideas.

• It creates an environment suitable for knowledge and technology-based enterprises.
• It helps to boost scientific, technology and knowledge-based ideas into a powerful engine of economic growth and wealth creation in a suitable manner.
• It aims to play a catalytic role to India on the world map as a success story.
• Process Of Venture Capital Financing
• The Venture Capital Funding process gets completed in six different stages:

Seed Stage

In this stage, a small amount of capital is provided to an entrepreneur to market a better idea having future prospects. The investor investigates into the business plan before making any investment and, if he is not satisfied with the idea or he does not see any potential in the idea/product, then the investor may not consider financing the idea. But in case if the part of the idea is worth, then the investor may spend some time and money further on the idea. At this stage, the risk factor is very high because there are many uncertain factors.

Startup Stage

If the idea/product is fit for further investigation, then the process moves on to the second stage, also known as the Start-up stage. At this stage Venture Capital has to submit a business plan which must include the following:-

• Executive summary of the business plan,
• Review of current competitive scenario,
• In-detailed financial projections,
• Details of the management of the company,
• Description of the size and potential of the market.

All the above analysis needs to be submitted, in order to decide, whether or not, Venture Capital to take the project or not. This type of financing is provided to complete product development and commence initial market strategies.

Second Stage

At this stage, the idea transforms into a product and is being sold. The main goal at this stage is that Ventures tries squeezing between the rests and getting some market shares from the competitors. The management is being monitored by the Venture Capital firms in order to know the capability of the team just to ensure the development process of the product and how they respond to the competitors. If the firms find out that the capabilities are against the competition. Then the Venture Capital might not go to the next stage.

At this stage of financing, working capital is provided for the expansion of the business in terms of growing accounts and inventory.

At this stage, risk factor decreases as the product is not developing at the former start-up stage. But it concentrates on the promotion and sales of the product.

Third Stage

This stage is also called as later stage finance. Capital is provided to an enterprise that has basic marketing set-up, typically for market expansion, acquisition product development etc. At a later stage, ventures try to multiply market shares by increasing the sales of the product and having better marketing promotion.

Venture Capital monitors objectives of earlier stages i.e. second stage and also of the current stage to evaluate whether the team has made the expected cost reduction or not.

Venture Capitalists prefer this stage than any other stages as the rate of failure in the later stage is low. It is also because firms at this stage have a track record of the management, past performance data and established the procedure for financial data.

Risk at this stage is still decreasing because venture relies on the income from the sales of the current product.

IPO Stage

This stage is also known as a bridge finance stage. It is the last round of financing before exit. The Ventures at this stage gain a certain amount of shares which gives them opportunities, such as merger and acquisition, eliminating the competitors, keeping away new companies from the market. At this stage, Venture has to determine the product position, and if possible, reposition it attract the new market.

Advantages of Venture Capital

Expansion of Company: Venture capital provides large funding that a company needs to expand its business. It has the ability for company expansion that would not be possible through bank loans or other methods.

Expertise joining the company: Venture capitalists provide valuable expertise, advice and industry connections. These experts have deep knowledge of specific market standards and they can help you avoid your business from many downsides that are usually associated with startups.

Better Management: It’s not always that being an entrepreneur one is also a good business manager. However, since Venture Capitalists hold a percentage of equity in the business. They will have the power to say in the management of the business. So if one is not good at managing the business, this is a significant benefit.

No Obligation to repay: In addition, there is an obligation to repay to investors as it would be in case of banks loans. Rather, investors take the investment risk on their own shoulders because they believe in the company’s future success.

Value Added Services: Venture Capitalists provide HR Consultants, who are specialist in hiring the best staff for your business. This helps in avoiding to hire the wrong person. It also offers a number of other such services such as mentoring, alliances and also facilitates the exit.

Disadvantages of Venture Capital

Complex Process: It is a lengthy and complex process which needs a detailed business plan and financial projections. Until and unless the Venture Capitalists are properly satisfied with the business plan, whether or not it will succeed in the future, they won’t invest. So securing a deal with a Venture Capitalist can be a long and complex process.

Loss of control: Venture Capital firms add one of their team members to your management team, while this is usually done for ensuring the success of the business, it can also create internal problems.

Loss over decisions: Another big problem faced in Venture Capital funding is that you will have to give up many key decisions on how the company will process or operate. This is because Venture Capitalist are required to be informed about all the key decision relating to business plans, and they usually can override such decision if they are unsatisfied with the decision.

No Confidentiality: Generally Venture Capitalist treat information confidentially. But they refuse to sign non- disclosure agreement due to the legal ramification of doing so. This puts the ideas at risk, especially when they are new. Further, your investor will expect regular information and consultation to check how things are progressing. For example, accounts and minutes of board meetings.

Quick Liquidity: Most Venture Capitalists seek to realize their investment in the company in three to five years. If your business plan expects a longer timetable before providing liquidity, then Venture Capital funding may not be a suitable option for you.

Conclusion

As world markets are becoming more and more competitive, thus, it is necessary to choose the right access to human capital to guide and monitor along with the requisite funds necessary for new projects. Venture Capitalists in India have ensured newer avenues and expansion. There are large sectors of the economy that are ripe for venture capital investors like IT, Pharma and other service industries too. Therefore, Venture Capitalists are having positive response to do business in Indian. As there is a risk factor, one should do a thorough study before getting into the process.

Recommendations

To promote and develop the Venture Capital business, the government should provide fiscal relief by exempting the dividend paid to Venture Capital fund investors from income tax.

Venture Capital funds should be made easier by establishing Private Venture Capital funds. It allows funds independently rather than a Joint Venture with banks and financial institution.

Commercial banks should allow categorizing the investment in Venture Capital Funding as “priority sector lending”.

There must be a change in perception that Venture Capital is only for the high tech industry. The Venture Capitalist should seize the opportunities such as biotechnology, food processing, call centers, BPO’s, etc.

Create profitable disinvestment opportunities as every Venture Capitalist identifies the exit route before it plans for investing in a company.

The role of Indian Venture Capital Association should be strengthened. It should build a database on the Venture Capital industry so as to enable, to disseminate information for those who are interested.

It is essential to create coordinating bodies among technology institutes, as it can provide high-quality manpower which is essential to the success of the industry.

About the Author

Dhanya Sree is an Associate with Magus Legal LLP, Kochi, Kerala. She focuses on Corporate and Commercial Laws, Compliance Management and Intellectual Property Rights. She can be reached at [email protected] or at www.maguslegal.com

The above article was originally published on www.faizallatheef.com, the personal blog of Faizal Latheef, a business attorney in Dubai, UAE.

During September, 2017, the Ministry of Finance (Ministry) issued a notification disqualifying directors associated with shell companies for a period of five years. It took the corporate world by surprise. Many representations were made before various Registrars of Companies (ROC) and numerous cases were filed in High Courts throughout India. After more than three months, now, the MCA have come up with the Condonation of Delay Scheme, 2018, offering a much needed relief to the corporate world. This article intents to provide an overview of the different facets of the subject including particulars of the notification, objective behind the action and Condonation of Delay Scheme, 2018.

As we all know, the aforementioned notification on disqualification was perceived in awe by the corporate world. It abruptly resulted in the disqualification of over 300,000 directors owing to their association with shell companies. The Ministry carried out this mass disqualification, relying u/s. 164(2) of Companies Act, 2013 read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. In clearer terms, those directors who acted as directors in such companies which failed to file their financial statements and annual returns for 3 consecutive years and have not cured the default cannot act as directors in other companies too. Also, they are restricted from using their Director Identification Number (DIN) for any further filing purposes. It is believed that this restriction is part of a structured crack down on illegal transactions.

Shell companies are not defined under the Companies Act, However, it is generally perceived that these are companies which adhere to the basic elements of company laws, with their main intention being avoidance of taxes or legislations. Earlier, around 220,000 shell companies were frozen, and they were barred from carrying out any operations. This disqualification saga should be seen as furtherance to that, more in the form of a constructive action to trace black money and ensure compliance. Resultantly, many prominent figures including politicians, business tycoons and celebrities were disqualified from acting as directors.

This is an action with wider magnitude. The said disqualification not only affects the respective boards, but also the directorship of such directors in every other company they associate with. Around 20-24 ROCs have released list of disqualified directors, and more lists are to be published. This makes it clear that the ministry targets around 300,000 directors of shell companies. Again, as a step towards better compliance, it was perceived that the ministry is likely to initiate action against many professionals including Charted Accountants, Company Secretaries and Cost Accountants who are associated with such shell companies. The government clarified that the prime intention is to curb money laundering activities carried out under the cover of these companies. The silver lining of this action is that, it ensures better compliance. More importantly, it will ease doing business in India and protect the interest of stake holders in a better manner.

Under the Companies Act, there is no provision to redress the disqualification, whereas, Companies (Appointment and Qualification of Directors) Rules, 2014 authorizes the ROC to lift the disqualification. That being the case, there is no specific procedure laid down by the statute to be followed by the ROC while removing the disqualification.

The condonation scheme permits companies which are active on the records of MCA which failed to file annual returns and as a result whose directors have been disqualified to condone the delay from 1st of January, 2018 till 31st March, 2018 initially, which was further extended till 30th of April, 2018 following compelling request from the part of stakeholders. Accordingly, within these three months such companies can file their annual returns, compliance certificates and auditor’s appointment form for all the defaulted period. For this purpose, the DIN of concerned directors will be revived temporarily, and all those forms can be filed with additional fees up to a maximum of 12(X) times the normal fees. Further after the aforementioned filing, companies must file a form to condone the delay, paying a fee of INR 30,000. Once all these forms are filed and approved the DIN will be revived permanently, and thus the disqualification will be cured.

It is welcoming that MCA have been lenient by giving a second chance to the defaulting companies to revive, by implementing this scheme. We can only hope that this will act as a lesson, though a hard one, for such companies and their management. Let’s also hope that this will bring in a new era where the corporate sector will look forward to embracing better governance and compliances practices.

In this article, Bhumica Veera from Kirit P.Mehta School of law discusses Open Prisons in India.

“Society must strongly condemn crime through punishment, but brutal deterrence is a fiendish folly and is kind of a crime by punishment. It frightens never refines; it wounds never heals”

Justice Krishna Iyer

In December 2015, United Nations adopted the Standard Minimum Rules for treatment of Prisoners (Nelson Mandela Rules) which enlisted the rights of the prisoners such as Right to life including the right to contact the outside world, right to proper sleep and clothing, right to security, right to proper healthcare etc.

The concept of Open Prisons

The paradigm of Reformative Punishment does not support the traditional inhuman jails with bars but is more liberal and supports the concept of open prisons, which is a trust-based prison with minimum security.

The concept of Open prisons was first developed in U.K in the 1930s and was based on the idea of ‘carrots’ rather than ‘sticks’.

This open prison helps the prisoner to gradually connect with the world before the release.

In India currently, there are 69 Open Jails:

• Rajasthan (29), and
• Maharashtra (13) having the highest number.

As per the data of 2015:

• Open prisons have 3786 prisoners out of which 2227 prisoners are in the Maharashtra and Rajasthan prisons.
• Almost 60% of the total prisoners in the open prisons are concentrated in two states.
• Many states have an open prison but do not accommodate any prisoners.
• The reasons for this overcrowding and at the same time under-utilization could be because the Jails are a part of the state list and hence a collaborative approach cannot be adopted by the states.
• Open Jails are prisons without boundaries and cells

In open jails the prisoners are given the liberty:

• To live with their families
• Allowed to find employment
• Prisoners can move out of the prison for their work and are supposed to come back to the prison campus after their working hours.

The open jails in India involve the prisoners in activities like:

• Farming,
• Animal husbandry etc.
• Convicts can be sent to Open jails for two purposes
• For the purpose to slowly cut down his/her level of socialization, instead of directly confining the convict in a closed prison, as this can negatively affect the mental health of the prisoner.

Secondly, in order to help the prisoner to slowly re-socialize with the world. While serving in the closed prison, the prisoner is bound to lose touch with the outside world and hence wouldn’t be able to rehabilitate himself after the release.

However, in India, only the second scenario is accepted. Rajasthan, Maharashtra and Himachal Pradesh have the maximum number of active open prisons in India. Some of the most popular Open Prisons are located in:

• Yerwada
• Akola
• Kolhapur
• Paithan
• Sangamner
• Bikaner etc

Prisoners are transferred from closed to traditional prison. Only selected prisoners are transferred from closed or traditional prison to an open prison. These prisoners in Maharashtra generally do agricultural work to earn their living and prisoners in Rajasthan also work at factories and industries.

The money earned by these prisoners is spent by them for their families and no amount except a small administration charge is to be paid to the Jail.

Every morning at 6 a.m. a roll call takes place after which the prisoners are allowed to move out and another roll call is scheduled at 7 p.m., till then the prisoners are expected to return to the prison.

These prisons exist for almost 8 decades now, however, no complaints of any prisoner escaping have come forward.

The condition open prisons in India

The conditions of prisons in India has been severely criticised. There have many cases of

• Custodial violence
• Custodial deaths
• Suicides, and

Overcrowding etc. in Indian jails.

As per the NCRB’s 2015 data:

1. 77 deaths were caused due to custodial suicide, and
2. 11 deaths due to custodial murders which shows the poor administration and structure of Indian Prison system.
3. The Supreme Court has time and again given directions on Prison Reforms, In many cases, the Supreme Court has actively endorsed the Open Jail system.
4. The basis on which the selection of these prisoners is done

Open Prison rules in Maharashtra

The selection is governed by Maharashtra Open Prison Rules, 1971. As per the act a Selection Committee consisting of:

• Inspector General
• Deputy Inspector general
• Superintendent of the Prison, and
• Superintendent of the Open Prison is formed
• Selection is done on the basis of:
• Good behavior
• Mental and physical fitness
• The period of imprisonment etc.

However, there is a long list of the ineligibility criteria, of which some are completely arbitrary for e.g.

• Women prisoners
• Convicts of narcotics
• Prisoners with any history of mental illness
• Professional murderers
• Convicts of crimes like:
• Collection of arms
• Sedition
• Crimes against the army etc.

This provision eliminates the possibility of rehabilitation of a large number of convicts, who are actually in need of it and offers rehabilitation to those are who are not in dire need of it.

However, the committee can consider certain special cases even if they’re ineligible.

Open Prison Rules in Rajasthan

As per the Rajasthan Prisoners open-air camp rules, 1972 the Open Jails aim at encouraging and rewarding good behavior and give prisoners an opportunity to social adjustment and economic independence.

In Rajasthan the Jail Superintendent sends the list of potential prisoners to the Open Air Camp Advisory Committee and the decision is taken by the committee.

The eligibility criteria are similar to that of Maharashtra however, the convict is expected to spend 1/3rd of the sentence in a closed prison.

Even in Rajasthan, arbitrary provisions for ineligibility exist such as:

• Convicts not having an abode in Rajasthan or
• Have a place of Residence outside Rajasthan
• Prisoners below the age of 25 or above the age of 60
• Civil prisoners
• Unmarried prisoners
• Prisoners with any history of mental illness
• Professional murderers
• Convicts of crimes like a collection of arms, sedition, crimes against the army etc.

Although women are given access to open jails the provisions of Rajasthan are stricter than those of Maharashtra. Such provisions don’t provide equality to the convicts and thus are violative of the rights of the prisoners.

The committee does not have the power to consider special cases, like Maharashtra.

Rajasthan also provides for a unique rehabilitation system, where every open prison has a panchayat consisting of 5 to 7 members, who are selected by the prisoners, amongst the prisoners.

This Panchayat looks after the daily management of the prison. This helps in improving communication and leadership in the prisoners.

Open Prison Rules in Himachal Pradesh

Himachal has 7 open prisons. The working is governed in a similar way as Rajasthan, however, the rape convicts, and convicts of other heinous crimes are also ineligible.

Criticisms of the Open Jails in India

Unnecessary and arbitrary provisions for ineligibility, which filter out many deserving convicts.

• Under-utilisation of the Open Prisons. These prisons have a capacity to accommodate 25776 prisoners however, only 3786 prisoners are currently in these prisons (as of 2015). This shows that despite the heavy overcrowding in the closed prisons, open prisons are vacant.
• The prisoners in most states are selected by a committee, who have no accountability over them, as they are not expected to provide reasons for their selections. This leads to partiality and corruption.
• No measures are taken for the convicts beginning their sentence. At least, semi-open prisons should be made open for the fresh convicts.
• No provision of Open Jails to under trial prisoners.
• Inadequate Open Prisons in every state. Some states are concentrated with Open Prisons while some have just one and no Union Territory in India has an Open Prison. Due to the state list subject, this inequality exists among different states.
• Open Prisons are the only rehabilitative prisons in India. Which also favor only a small number of convicts. There is a need for more rehabilitative provisions for other convicts, in order to reduce the amounts of custodial deaths.
• The rules and laws governing the selection and administration are extremely old and thus unfit for the present situations.

Reforms needed in the status quo

• The number of Open Prisons and better utilization of the currently existing ones through amendments to the rules and relaxation of the strict eligibility criteria.
• Efforts should be taken to move the subject of prisons to the union list. As this will bring in uniform reforms and every prisoner will get similar rights.
• In order to bring accountability in the selection procedure, the state committee should be compelled to provide reasons to the Chief Minister of the concerned state for the selection made. These documents should also be made available within the ambit of RTI so that common people can also get access to it.
• Semi-open Jail in order to provide rehabilitation to mentally disturbed prisoners, semi-open jails should be promoted. They do not provide complete liberty, but there are no prison cells and prisoners are provided with employment opportunities within the Jail campus. One of the finest semi-open jail in India is the Tihar Semi-Open Jail in Delhi.
• Supreme Court or the concerned High courts should also be given the jurisdiction to allow certain prisoners to directly go to the Open Prison.
• Every prisoner whether in open or closed prison should be made aware of his/her rights and should be informed about the process of selection to open prisons. This will not only give the required information to the prisoners but will also reinforce good behavior among these prisoners.

Conclusion

The concept of open prison has existed in India since almost 7/8 decades, however, many states still do not have enough open prisons. With the current scenario of overcrowding of Jails, it is extremely important to build and utilize the open prisons. Open prisons are excellent in providing rehabilitative justice, as it helps the convicts to re-socialize with the world before they’ve completed their sentence. Although the existing open prisons are well- managed and have a good record in the past there is still room for improvement in terms of laws and rules. Active measures should be taken to amend these rules, to provide access to justice to all the prisoners. This system if properly utilized will also help in reducing the custodial deaths.

References

[1] Re: Inhuman Conditions in 1382 Jails. Supreme court of India. 2017.

http://supremecourtofindia.nic.in/supremecourt/2013/18545/18545_2013_Judgement_15-Sep-2017.pdf

[2] Standard Minimum Rules for treatment of Prisoners. United Nations. 2015.

https://www.unodc.org/documents/justice-and-prison-reform/GA-RESOLUTION/E_ebook.pdf

[3] Maharashtra Open Prison Rules, 1971.

http://mahaprisons.gov.in/Uploads/pdf_GR/69170524-f83d-4be5-9092-13c3f70a177aChapter_2.pdf

[4] Rajasthan Prisoners open-air camp rules, 1972.

http://home.rajasthan.gov.in/content/dam/homeportal/homedepartment/pdf/RulesGroup12/OPEN%20AIR%20CAMP%20RULES%2C%201972.pdf

[5] Himachal Open-Air Prisons Notification, 1977.

http://admis.hp.nic.in/hpprisons/Downloads/open%20air%20notification.pdf

[6] Reformative Theory of Punishment. Raw octopus blog.

Reformative Theory of Punishment

[7] Rajasthan State Legal Services Authority. Press note on Open Prison

http://rlsa.gov.in/pdf/pressnote_271117.PDF

[8] NCRB Data on Number of Jails in India.

https://data.gov.in/resources/stateut-wise-and-jail-type-wise-number-jails-their-location-and-video-conference

[9] NCRB data on Number of prisoners in Open Jails In India

https://data.gov.in/node/3086521/download

Ebooks

[10] Ghosh. Open Prisons and Inmates- A socio-psychological study.

https://books.google.co.in/books?id=kG5J5XTcJlwC&printsec=frontcover&dq=open+prisons&hl=en&sa=X&ved=0ahUKEwjsmen6_9LZAhVGXLwKHThWAbsQ6AEILTAB#v=onepage&q=open%20prisons&f=false

[11] Nitai Chowdhury. Indian Prison laws and correction of prisoners. https://books.google.co.in/books?id=eEt7sYvMgSEC&pg=PR9&dq=open+prison+laws&hl=en&sa=X&ved=0ahUKEwjZ2_il6tTZAhXCrI8KHbwmCCkQ6AEIKDAA#v=onepage&q=open%20prison%20laws&f=false

Generic and cliched NDAs are taking their significance away from them. In this article, Sarang Khanna, Marketing Executive at iPleaders, writes about why NDAs are starting to become useless and how we can change that by making effective Non-Disclosure Agreements.

As a lawyer, my job is to advice my clients to make legally sound decisions, and to protect them in case they don’t. However, many years back during the start-up boom in India, when I was still a student, I remember having a conversation with a practicing intellectual property lawyer about the infamous Non-Disclosure Agreements (NDAs), and his words stuck with me for life. Upon asking if I should be suspicious about signing NDAs, he said and I quote “Sign anything. Just anything. I’ll get you out of it, if it comes to that.”

His words changed two things in me – first, made me gain confidence in the practice of law, and second, made me lose confidence in NDAs. So well, are confidentiality agreements really so useless? Are they even worth the paper they are printed on? That is really not an uncommon question regarding NDAs today, at least outside the context of employment agreements, where they are still acceptable.

It is understandable that an employer would want an employee to keep trade secrets secret.  It also gives the employer more leverage to threaten with a lawsuit if the contract is violated. However, in the business world it is never too clear as to what can and cannot be disclosed, and to whom, and who exactly “owns” what piece of information.

The increasing unenforceability of Non-Disclosure Agreements have made everyone skeptical about the purpose and validity of NDAs.

So Should You Even Bother With An NDA?

In my honest opinion, the answer would still be a definite YES! Imagine a simple scenario where you discuss your business secret with a friend over a casual chat and they spill the beans in front of someone, or even worse, use the secrets only to show up as your competitor in no time? This is an extremely common scenario and signing an NDA in advance does save you the hassle of proving a lot of unnecessary things.

A carefully and cleverly drafted confidentiality agreement can save you the hassle of proving the ownership over certain information. It will also go ahead and establish your prudence in furtherance of trying to protect that information, and help your lawyer to immediately and effectively deal with a breach.

Moreover, you don’t have to depend on a lawyer for your confidentiality agreement. They are cheap and can be drafted on your own. In fact several online resources can help you draft any legal contracts for yourself or your business on your own without ever needing a lawyer. NDAs have some basic outline clauses (talked about later in the article) that are stationary in all agreements. Drafting your own NDA is not as intimidating as it sounds

These are the typical good reasons to still stick to NDAs :

1. They provide written evidence of the factors talked about above. So, the more clearly the NDA actually describes the information to be protected, the better, as there is less room for doubt.
2. NDAs are contracts, and you can always sue for breach.
3. Finally, an NDA can include extra clauses that go beyond confidentiality, like non-compete or non-solicitation clauses. Having confidentiality obligations can help you enforce these clauses even if the other party might argue they are illegal restraint of trade.

Should You Ask Potential Investors To Sign Your NDA?

Firstly, you must realize that ideas amount to nothing. They are like cabs doing numbers of a crowded street on a busy Monday morning – you will see one after another. Even if you consider your idea to be novel and worth protection, it is important to realize that investors come across business ideas every day, several of which are tremendously similar. God help the investor if he signs an NDA for all. Hence, it is only the execution of an idea that will ever get any real credit.

Good luck asking your investor to sign your NDA as the first thing in your pitch. Sometimes, just by mentioning the NDA you might risk losing all interest in you from any potential investors whatsoever. You might also look like an amateur and newbie if you mention the NDA right off the bat. So, proceed with caution.

So, what to do? Well, for starters, it will help if you don’t walk around waving your NDA like you’re a king with a sword. Use it after you have built an interest in knowing you and your product further. “I have a product that will not only make cow’s milk taste like ice cream but also prevent diseases like cancer in them.” Keep your opening pitch intriguing and informative. If you establish real interest and when the discussions proceed, ask for an NDA before you reveal proprietary information.

Also, building trust with someone you are asking money from is important, and NDAs can sometimes kill any possibility of that. Otherwise as well, VCs and investors are always reluctant to sign confidentiality agreements. However, exceptions are always there, and in circumstances where you possess extremely confidential agreement such as patents or other forms of already registered intellectual property, confidentiality agreements are completely justified.

How To Draft An Effective NDA? What Are The Points To Keep In Mind?

As a business or as the possessor of any confidential information, striking the balance between collaborating with people and risking  the misuse of your information is important. Whenever possible, it is best to share your secrets with people who have sufficient character and capability to protect your information.

It is even more difficult for start ups and young business to legitimize their demand of an NDA due to lack of experience and reputation. This is where your skill of negotiation and drafting will come into picture to get your potential partners to sign that agreement that indemnifies you against a breach. Be it raising investment, financing smaller projects, or the use and monetization of your company’s intellectual property, you will need contracts and confidentiality agreements for everything. Know how to draft an undeniable contract before you ask and get rejected.

It is also always great to have non-public information at your disposal to justify your NDA and make it foolproof. Where the nature of the information is a little more complicated, it is advisable to have a detailed schedule describing the subject-matter at length. The schedule can later be updated with mutual consent, without going through the hassle of redrafting the entire NDA.

When the information is obtained from another outside source for both parties, it is best to add it to the NDA with an additional clause that mandates noticing if anytime that information is to be relied on. This defeats the argument of the other party that it already had the said information at an earlier date. Smartly anticipated clauses are the spine of any NDA; let us look at a few extremely essential clauses that must always be present in every NDA.

What to include:

The definition of “Confidential Information”: Undoubtedly, this is the foremost important clause in your NDA. This clause must clearly spell out the information that demands protection. The information that may not be considered confidential must also be pointed out. The more comprehensive this clause is, the more credible your NDA will become. However, you must also develop strong internal company policies in furtherance of such protection. For instance, letting employees take information home or make copies can show lack of diligence and can invalidate an agreement.

Term of Confidentiality: A clearly defined time frame is essential as well. For how long does the confidential agreement stay confidential? Be it 10 years or 20 months, include your intended duration in the contract. Although it is important to keep in mind that courts won’t enforce an unrealistic time limit when it comes to NDAs. To add, very few sponsors or parties will even sign an NDA that has a long time duration, so this one is important.

Use of Confidential information: This clause should state the purpose of sharing the information and where all it could be used. All third parties should mandatorily be named in this clause if they will, during the course of this agreement, be required to deal with the confidential agreement.

Legal obligation to disclose: Sometimes, the parties may be legally obligated to disclose the confidential information that forms the part of your non-disclosure agreement. This clause acts as a measure to protect both parties, and considers such disclosure as not a violation. Language in this article should also ensure that the confidential information still stays confidential, and is not made public during the legal proceedings.

Return of information: Another must have clause is of due return of information after the expiry of the NDA. This clause can call for return, deletion or even destruction of the confidential information, as per the convenience of the parties. It is more crucial in times of such technological advances and increased usage of hard drive, email and other electronic media. Also, the clause must also specifically mention the exact time for such return, deletion or destruction of such information.

What to exclude:

The common exceptions in a confidential agreement pertain to the definition of confidential information.

(i) Information publicly known or in the public domain prior to the time of disclosure,

(ii) Information publicly known and made generally available after disclosure through no action or inaction of the recipient,

(iii) Information already in the possession of recipient, without confidentiality restrictions,

(iv) Information obtained by the receiver from a third party without a breach of confidentiality, and

(v) Information independently developed by the recipient.

The discloser of the information will always try to limit the exceptions. It is important to understand that the exception for an information that is required to be disclosed by law, is an exception to the duty to not disclose, and not an exception to the definition of confidential information.

Exceptions are important, and the courts are likely to invalidate an NDA that have no exceptions or appear to be too difficult to adhere to.

Its is your hands to ensure that your confidentiality agreement is not just a formality but also respected by the gainer of the information. It is always better that you don’t have to indulge in a litigation to get your NDA enforced, because then how good is that $ 500,000 that you raised if you have to spend almost half of it just on legal fees? You need to be smarter in your approach right from the start of initiating your NDA. Know how to draft an impeccable agreement without always relying on a lawyer and paying hefty fees. For inside out knowledge of business strategies and industry secrets, you can always take this online course and be one of the several success stories this course has been the reason for.

Till then, keep negotiating!