In this article, Janvi Ahuja of SLS Pune discusses what happens when an IPO is oversubscribed and how can one profit from IPOs.

Introduction

When a company wants to become a part of shareholder family, they offer shares or convertible securities to new investors and it is called public issue. When these public issues are given for the first time, publicly selling of shares in market is known as Initial public offering. It is done when a company believes that they are not financially viable to take up the business and they are unlisted in SEBI. They make a fresh issue of these shares or convertible security or offers existing shares or convertible security for sale or both for the first time to public, it is an IPO (Initial Public Offering). IPO is also known as Going Public as it paves the way for the investors for issuing of shares. It gives early investors a chance to make high profits by cashing their stockholding.

IPO is mainly used by startup companies, seeking a source of capital for growth and expansion. It was introduced by underwriting investment bank, which aids the issuing company by soliciting potential investors. IPO also helps in public sale of stock. For an investor, IPO is significantly at higher risk as opposed to trading stock, as it is issued in primary market where the investor can get first crack at new security insurance.

An IPO is different from FPO that is further public offering or follows on offer. An IPO is issued by a company newly entering the market which is not listed in SEBI, whereas an FPO is an already listed company either making a fresh issue of shares or convertible security to the public.

Issue of share is done in two ways

Fixed pricing– Where a prospectus is made and all the details are given, price and quantum of share is mentioned. The company goes public, already determines a price is mentioned at which its shares are offered to investors. The investors know the share price before the companies go public. This price is issued by issuer in consultation with merchant banker on the basis SEBI guidelines. Then the issuer at the outset decides the issue price and mentions it in the offer document. Here the offer document contains full disclosures of the parameters which are taken into account by Merchant Banker and the issuer for deciding the price.

Book building– In this the issue of shares is done on the basis of bid, where the price band and the quantum of good are decided in the red hiring prospectus, it can be equal to above the floor price. When the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels, it is called book building. In this the floor price is decided by merchant banker on the basis of SEBI guidelines, when the price is decided, the investors in same trick size are issued shares at par and the investors in the next trick size are issued share at premium, the company can issue a share more than the nominal value. There is no restriction on the sale of shares at premium.

Green‐Shoe Option- Green Shoe Option is a price stabilizing mechanism in which shares are issued in excess of the issue size, i.e., a maximum of 15%. It is a mechanism to stabilize the issue price post listing. In this a provision is contained in an unwritten agreement that gives the underwriter the right to sell investors more share than originally planned. It is an overall allotment option which can provide additional price stability to a security issued because the underwriter has the ability to increase supply and smooth out price fluctuation. It is only one type of measure permitted by SEBI.

When oversubscription comes into play

When the investors asks for the shares more than the value, it is the term used for the situation in which the security issue is underpriced or is in great demand by investors. When a new security issued is oversubscribed, underwriters or others offering the security can adjust the price or offer more security to reflect the higher than the anticipated demand. It is good to invest in a company whose IPO is Oversubscribed, as it indicates how keen the market players are in the company. It is a reconfirmation of the interest in such a stock. At the same time the oversubscription of shares means exceeding the total number of shares issued by underlying company. If the shares which are oversubscribed, where the permission of stock exchange has been taken, the oversubscription portion money is given back to the applicants forthwith.

Allotment to Qualified Institutional Buyer

A merchant banker holds the authority to allot shares with regard to QIBs. The shares, in any case, are allocated proportionately to applicants. So, if the shares are oversubscribed by four times like the QIB applied for 10, 00,000 shares then he will receive 2, 50,000 shares.

Allotment to Retail Investors

There is an upper limit of INR 2 Lakh for any retail investor who is investing in an IPO. The total numbers of candidates are calculated and if the applicants are more than the number of shares offered for retail investors, the maximum investors who are eligible for the allotment of the minimum bid lot are determined. The total number of equity shares available for allotment to investors is divided by the minimum bid. Example: if shares worth 2 lakh need to be allotted to individual investor and the minimum lot size is INR 10,000/- only maximum of 200 applicants will be allotted the shares with minimum lot of INR 10,000/-

Allotment to non-institutional Buyers

There are individual, trust, companies who bid for more than 2 Lakhs are known as non institutional Bidders. They have an allocation of 15% of shares of the total issue size in Book Building IPO’s.

Guidelines for investing in Newly Formed Company

• If the company is new make sure you study the performance of the previously established company by same promoter, if they have done well, then chances of new one doing well are also high.
• Before investing in a company checks its reputation and market standing of the foreign collaboration, if there is any, as the company with foreign collaboration are often good investment.
• Make sure you invest in a company that have something new to offer, they are introducing new product or industrial process for the first time, or introducing a technologically advanced or better quality product.
• Invest in a company that operates in high growth sectors of the economy, as incident to failure is likely to be lower for such companies.

How can an investor profit from IPO

Public issues provide for shares at relatively low prices. A newly formed company usually offers for shares subscription at par value, whereas existing companies price their new issues more than 20% to 30% lower than the market price of their existing share.

Similarly, the shares issued at par by new companies also quote at higher premiums soon after being listed in stock exchange. This is the main reason why the public issues are so popular with the investors. They offer opportunities for making easy and quick money in market bull’s phase. So you should feel yourself lucky enough if you get small number of shares, it is with this background in mind that you should calculate the pros for applying in this IPO.

Conclusion

An IPO is when the company gives its share to public. If a company convinces investors to buy certain shares, it invests a lot of profit for future. IPO’s is often issued by smaller, young companies seeking capital for their expansion. An IPO is basis for allotment, where there are two ways for issuing the share Fixed price issue where the price and quantum of shares is pre decided and is fixed, where as in book building the investors bid in the price and then it is fixed, the investors whose price matches with the bidding gets shares on par basis, and the shares in which the investors invested more than the floor price will get the share at premium. In this, one gets profit as when a person initially invests they give a minimum purchase price which later gets increased.

References

• http://www.businessdictionary.com/definition/initial-public-offering-IPO.html
• http://www.investinganswers.com/financial-dictionary/stock-market/initial-public-offering-ipo-1076
• https://www.nseindia.com/products/content/equities/ipos/ipos.htm
• http://www.investopedia.com/terms/o/oversubscribed.asp

In this article, Salma Jennath discusses the issue of corporate governance and social responsibility.

Corporate Governance is to conduct the business in accordance with owner or shareholders desires, which generally will be to make as money as possible while conforming to the basic rules of the society embodied in law and local customs.[1]

What is Corporate Social Responsibility or CSR? What all work does a corporation have to undertake in order to become socially responsible? Does a body corporate derive any benefit from being socially responsible other than moral satisfaction? How does it affect the governance of the corporation? These questions are answered briefly in this paper. In addition, a comprehensive comparison between India, UK and US with regard to their CSR policies, their development, impact and effectiveness is incorporated.

Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.[2] This is in contrast with the Friedmanite assertion that the only responsibility of businesses is to make money.[3] The four principles of good governance: Accountability, Transparency, Responsibility and Fairness are related to corporate social responsibility.

There are certain issues that have to be addressed by good corporate governance. These include creating sustainable value and performance, increasing credibility, increasing stakeholder satisfaction, keeping a balance between economic and social benefit, keeping the Board independent from management, etc. [4]

Correspondingly, there are certain benefits that can be derived from socially responsible corporate performance. In the long term, a corporate shall achieve an enhanced reputation with the public and the business community and there will be lesser government regulation and therefore, time and energy can be saved. It has been shown that there are improvements in financial performance, increased customer loyalty, boosted productivity and performance from workmen, etc.

India

The Indian government felt the need to introduce various reforms in corporate governance and create a system of ethical, transparent and accountable corporate functioning[5] after various scams in the corporate sector manipulated by Ramalinga Raju[6], Harshad Mehta[7], Ketan Parekh[8], etc.

In 1998, the Confederation of Indian Industry (CII) came up with a voluntary code of corporate governance, which was followed by the formulation of Clause 49 of the Listing Agreement as per the recommendations of the SEBI^* appointed Kumar Mangalam Birla Committee on Corporate Governance. Subsequently, there were many revisions to Clause 49[9], which focuses primarily on: Board composition and procedure, Audit committee responsibilities related party transactions, subsidiary companies, risk management, CEO/CFO certification of financial statements and internal controls, legal compliance and other disclosures.[10] Subsequently, in 2002, the Naresh Chandra Committee Report examined the Auditor-Company relationship and the role of independent directors, defined punitive measures for auditors committing irregularities and introduced CEO/CFO certification.

Other guidelines for good corporate governance include Corporate Governance Voluntary Guidelines (2009),[11] etc. In addition to all this, the National Stock Exchange of India (NSE) set up an independent expert advisory body called the NSE Centre for Excellence in Corporate Governance (NSE CECG) to encourage the Indian corporate to maintain standards of Corporate Governance.[12] The Companies Act, 2013 deals with several aspects of corporate governance such as director’s duties and related party transactions.

Corporate Social Responsibility can be divided into four: Economic, Legal, Ethical and Discretionary. It is practised by businesses to address stakeholder expectations and enhancing shareholder value. It is mandatory for every company having net worth of Rs 500 crores or more, or turnover of Rs 1000 crores or more or a net profit of Rs 5 crores or more during any financial year to constitute a Corporate Social Responsibility Committee of the Board consisting of a minimum three directors, of which at least one should be an independent director.[13] The main functions of the Committee include formulating a Corporate Social Responsibility Policy as specified in Schedule VII, recommending the amount of expenditure to be incurred and monitoring the said policy. The Board has to ensure that the mentioned duties are carried out. Supplementing this, there is Voluntary Guidelines for Corporate Social Responsibility, 2009.[14] The CSR Guidelines envisage the assimilation of social and environmental issues into businesses’ decisions, goals and operations and in interactions between corporations and their stakeholders.[15]

There are certain international instruments like the United Nations Global Compact Principles[16] and ISO 26000 Standard on Social Responsibility[17] of the International Organization of Standards, which identifies the contours of CSR and gives guidance to organizations for the integration of social responsibility within themselves respectively.

The emergence of all the new laws, regulations and guidelines has had a positive outcome. This is clearly laid out in a study[18] analyzing the corporate governance practices in three prominent Indian firms, namely, ITC Ltd., Reliance Industries Ltd., and Infosys Technologies Ltd. The companies have a very satisfying approach to Corporate Governance and CSR and they are doing very well. In addition to these companies, one of the companies that is leading in this respect is Tata, which was the pioneer of CSR activities in India.

United Kingdom

In the UK also there were many frauds that shook the corporate world, including that of Polly Peck[19], BCCI[20] and the Maxwell[21] group of companies, linked with corporate governance failures. A committee chaired by Adrian Cadbury prepared a report[22], which made three recommendations:

1. Separation of CEO and Chairman,
2. Inclusion of at least three non-executive directors (two of whom should have no personal or financial ties to executives), and
3. Creation of an Audit Committee composed of non-executive directors.

Later, there was the adoption of the UK Corporate Governance Code, which was a Cadbury Code, the Greenbury Report, the Hampel Report, Higgs Review, the Walker Review, etc. The contents of the code can be divided into five sections: Leadership, Effectiveness, Accountability, Remuneration, and Relations with shareholders.

The UK government seems very enthusiastic in developing CSR policies. British CSR minister Stephen Timms has drafted a global framework that will use British embassies and diplomatic staff ‘to promote CSR principles to governments, companies and civil society and explain the role they can play in promoting sustainable development.’ The government has recognized the need to raise social and environmental issues at international forums like the G8, the Doha Development Agenda and the Commission on Sustainable Development, as they would be encouraged to integrate CSR considerations into their actions. It seeks to form a CSR Academy to train them to practice good governance and wants to create partnerships with the businesses to help them to work on poverty eradication. In addition, the London Stock Exchange is also creating a centralized database to collect information on the social, environmental and ethical performance of companies.[23]

Fujitsu Services Ltd, Imperial Tobacco Group PLC, Jaguar Land Rover, etc have taken up CSR practices that are commendable.[24]

United States

The Foreign and Corrupt Practices Act was passed in 1977 followed by Securities and Exchange Commission in 1979 for the tightening of mandatory reporting of internal financial controls. Later, in 1987, the Treadway Commission submitted a report highlighting the need for a proper control environment, independent audit committees and an objective internal audit function.[25] In 1998, the New York Stock Exchange and the National Association of Securities Dealers jointly established the Blue Ribbon Committee on Audit Committee Effectiveness. However, even this did not prove to be very effective as there were many scams like the Enron and WorldCom, which led to the passage of the Sarbanes-Oxley Act (SOX) in 2002 to regulate auditing and corporate financial reporting.[26]

CSR practices in the United States was not voluntarily taken by the corporates but was a reaction to public responses to issues, which were not considered as part of their business responsibilities. There are four points put forward by the proponents of CSR, i.e., moral obligation, sustainability, license to operate, and repute. [27] One of the guidelines available is the OECD (Organization for Economic Cooperation and Development) Principles.[28]

There is a Corporate Social Responsibility team in the Bureau of Economic and Business Affairs, which promotes responsible and ethical business practices. It is their mission to provide guidance and support to companies and encourage them to adopt corporate policies that help companies “do well by doing good”.[29] There is a body called the US National Contact Point, which works with the Bureau to promote the OECD Guidelines for Multinational Enterprises.[30] An Award for Corporate Excellence program carried out by the Secretary of State to encourage corporates to conduct good governance. A few corporations, like Ben & Jerry’s, Patagonia, Microsoft[31] and the Body Shop have made a difference by taking up social responsibility.[32]

Analysis

• In all the three countries, the need for corporate governance arose due to some failures in the management of companies and various frauds that were conducted by officers and board members.

Each country has a statutory law, which sets out the principles of corporate governance.

• In the UK, it is mandatory to have a Nomination committee while in India it is not so. There is a distinction made between small and large quoted companies with regard to Audit committee in the UK while no such distinction is made in India. In both countries, there should be a Remuneration committee.[33] In US, the Sarbanes-Oxley Act makes only the Audit Committee mandatory.
• Clause 49 of the Listing Agreement was a transplant of governance reforms adopted in the US and the UK into the Indian context without any comprehensive analysis of Indian corporate structures. This is why Clause 49 was criticized a lot.[34]
• Unlike in India and UK, exchanges in the US have shown no movement to increase corporate governance and social responsibility.[35] The US seems more reluctant to take up CSR activities compared to the other two.

Corporate Governance and Corporate Social Responsibility are complementary and are closely linked with market forces. CSR operates in a free-form manner while CG operates within well-defined and accepted structures.[36] In India, UK and US, the importance of CSR and CG are being increasingly recognized and this had had a positive impact on the society as well as the corporates in general.

 “If you want to build a million-dollar enterprise, one can take all the shortcuts; but if you are keen on building a billion-dollar enterprise, there is no other way than to run your business rightly. Honesty has to be accepted as an axiom, which is the only way to do business. It gives you the mental and moral strength and ability to do it the right way.” N.R. Narayana Murthy

References

[1] Definition given by Economist and Noble laureate Milton Friedman

[2] Lord Holme and Richard Watts, Making Good Business Sense, The World Business Council for Sustainable Development publication

[3] See Richa Gautam, Integrating CSR into the Corporate Governance Framework: The Current State of Indian Law and Signposts for the Way Ahead

[4] See Güler Aras, David Crowther, Culture and Corporate Governance (2008, Social Responsibility Research Network, UK)

[5] See Afra Afsharipour, Directors as Trustees of the Nation? India’s Corporate Governance and Corporate Social Responsibility Reform Efforts.

[6] Satyam Computers Scandal (2009). The chairman, Ramalinga Raju, of Satyam Computer Services falsified the company’s accounts it make a change of US $1.47 billion. http://in.reuters.com/article/2015/04/09/satyam-computer-fraud-idINKBN0N00CQ20150409 last visited on 28^th September 2015.

[7] Mehta triggered an escalation in the Bombay Stock Exchange by trading in shares at a premium across any segments and scammed at good amount of Rs. 40 billion in 1992. http://indianeconomyataglance.blogspot.in/2009/03/harshad-mehtas-scam.html last visited on 28^th September 2015.

[8] Parekh swindled crores of rupees from banks and bought shares in smaller exchanges in fictitious names.

^*Securities and Exchange Board of India. http://www.icmrindia.org/free%20resources/casestudies/ketan-parekh-scam3.htm last visited on 28th September 2015.

[9] The Narayana Murthy Committee Report 2003 made revisions to Clause 49. Later, the original provisions were adopted again. The last amendment applicable w.e.f October 1, 2014 to comply with the provisions of Companies Act, 2013.

[10] http://taxguru.in/sebi/clause-49-listing-agreement-corporate-governance.html last visited on 26^th September 2015

[11] http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf last visited on 26^th September 2015.

[12] Corporate Governance in India: Development and Policies, ISMR, www.nseindia.com

[13] Section 135 of the Companies Act, 2013.

[14] www.mca.gov.in/Ministry/…/CSR_Voluntary_Guidelines_24dec2009.pdf

[15] supra note 5

[16] http://www.unglobalcompact.org/AbouttheGC/TheTENPrinciples/index.html

[17] http://www.iso.org/iso/socialresponsibility.pdf

[18] Debabrata Chatterjee, Corporate Governance and Corporate Social Responsibility: The Case of Three Indian Companies, International Journal of Innovation, Management and Technology, Vol. 1, No. 5, December 2010 ISSN: 2010-0248

[19] The CEO of Polly Peck International, Asil Nadir, stole more than £150m from Polly Peck and faced trial on 13 specimen charges and was found guilty on 10 counts of theft. http://www.theguardian.com/business/2010/aug/26/polly-peck-business-asil-nadir last visited on 28^th September 2015.

[20] This was one of the biggest banking scandals in UK. The money of money launderers and drug dealers flowed through the bank’s accounts. See http://news.bbc.co.uk/2/hi/business/3383461.stm last visited on 28^th September 2015.

[21] Robert Maxwell took money from the pension funds and channeled it to companies he was connected with outside of Britain to buy stock from MCC, which later became bankrupt. http://articles.baltimoresun.com/1991-12-22/news/1991356032_1_robert-maxwell-daily-mirror-britain last visited on 28^th September 2015.

[22] The Cadbury Report of 1992, which led to the formation of the Cadbury Code of Best Practices.

[23] Nathan E. Hurst, Corporate Ethics, Governance and Social Responsibility: Comparing European Business Practices to those in the United States, Santa Clara University.

[24] CR Index 2015: Company Listing available at www.bitc.org.uk/node/355077 last visited on 28^th September 2015.

[25] Speech delivered by Shri Vepa Kamesam, Chairman, Governing Council, Institute for Development and Research in Banking Technology (IDRBT), Hyderabad at the top management workshop on Corporate Governance & Corporate Social Responsibility in Public Enterprises, organized by ICFAI and Indian Institute of Public Administration at New Delhi on 8^th July, 2004.

[26]See L. Murphy Smith, Audit Committee Effectiveness. Did the Blue Ribbon Committee Recommendations make a difference? Int. J. Accounting, Auditing and Performance Evaluation, Vol.3, No.2, 2006.

[27] Michael E. Porter & Mark R. Kramer, Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review (December 2006).

[28] The OECD Principles of 1999 and 2004 http://www.oecd.org/corporate/principles-corporate-governance.htm last visited on 26^th September 2015

[29] http://www.state.gov/e/eb/eppd/csr/ last visited on 28^th September 2015

[30] http://www.state.gov/e/eb/oecd/usncp/index.htm last visited on 28th September 2015

[31] Microsoft was ranked the corporation with the best CSR by Forbes magazine in 2012 http://www.forbes.com/sites/jacquelynsmith/2012/12/10/the-companies-with-the-best-csr-reputations/ last visited on 28^th September 2015.

[32] Supra note 27

³³http://www.grantthornton.co.uk/en/insights/corporate-governance-in-india-and-the-uk-a-comparative-analysis last visited on 28th September 2015

[34] Supra note 5

[35] Supra note 23

[36] Lawrence E Mitchell, The Board as a Path toward Corporate Social Responsibility in Doreen McBarnet, Aurora Voiculescu and Tom Campbell, The New Corporate Accountability: Corporate Social Responsibility and the Law (2007) 279 in M.M. Rahim, Corporate Social Responsibility, Corporate Governance and Corporate Regulation, Legal Regulation of Corporate Social Responsibility, Springer-Verlag Berlin Heidelberg 2003.

In this article, Janvi Ahuja discusses the legal precautions to take while advertising your business.

Introduction

The advertising business has evolved itself from small-scale business to full-fledged dynamic industry. Earlier it was a way for promoting sales and marketing, it was designed to deliver personalized interactive commercial message and now in the western markets, the industry is quite ahead where there is more experimentation in new media, new customer interface and all of this is integrated with the help of technology.

Indian advertising business is moving with an accelerated growth rate of 11.5% in 2017 according to IPG media report, this is lower than revised estimate of 16.2% put out in 2016. After the effect of GST, it is likely to create a disruption in short term. Within offline it is estimated to grow at 9.7% while digital will grow at 25.5% over next five years. But with these growing needs of the society and advancement in this field, there is an emerging threat to the companies. Digital platforms tend to be far more comprehensive than traditional marketing vehicles. 

Digital marketing paradigm

Advertising revolution is data collection and measurement, which is specific and more precise form for gathering and assessing user interaction and response, yielding response of individual customer’s. Advertising is done to attract more and more customers, but while attracting customers they forget to take some precautions. While advertising they need to be aware that the ad does not infringe a right of an individual or the ad which is posted is in favor of the society.

Intellectual Property in advertisement

Like the elements of a good product, a good advertising is likely to be imitated by others. So there are some IP rights that comes into play, while developing an advertisement.

• An advertisement needs to be creative, means it should have some layout of advertisement.
• A web design is likely to be protected by advertisement.
• Signs slogans and sounds are protected under circumstances, by trademark and copyright laws.
• Some forms of advertising technique or means of doing business may be protected by utility models;
• Unfair advertising methods, including false advertising claims, false endorsement of products, deceptive packaging, dishonest promotion or marketing are prohibited under unfair competition law.

Precautions to be taken while advertising

Advertisements are one which lasts longer, longer than the words of mouth or networking. An advertisement has greater potential to reach to a large number of people, and can affect many people and so it is subject to many regulations. While an advertisement is telecasted it has its fear of being copied and the creative inspiration efforts and skills are vain. Therefore it is advised to maintain an appropriate strategy to protect your creation by using the legal method available through IP system.

• Make sure your advertisement is registered and there is no similar advertisement to it. Registration includes any other copyright material including your website with national copyright office. By registering an ad and protecting it by copyright material it alerts the competitor of a new advertisement and gives customer assurance that the ad is true and not false.
• The advertisement should not infringe the privacy rights of other party; it must be taken care that an advertisement is not copied or the idea when an advertisement is made.
• You can use material owned by other in your advertisement if you are using e-commerce system, computer program advertising technology, or any other technical tool for creation of advertisement make sure you have a written license agreement.
• Make sure when you are advertising your product or service do not compare it with those of the competitors. E.g. it is always seen that coca-cola and Pepsi are challenging each other in taste test. Comparative advertising may be direct or indirect. In direct advertisement a product is described as superior to named competitors on specific features or benefits, in indirect claims the competitors are not named and advertisement brand is simply described superior but not clashes with the competitor’s brand.
• Not false or misleading, make sure the advertisement which is broadcasted is not vague of fictitious, it should not be deceptive and not unfair. When promoting a product or service, you need to ensure that any branding, statement or quote is not false and true to your belief and it should always have evidence available to the backup claims they make. False or misleading advertisement also includes bait advertisement where a product is advertised at a certain price and is not available in the market. These categories of advertisements are illegal and are against the trade customs. It is illegal if a business sells the product knowing that they cannot meet expected demand.
• While direct marketing it is most important to make sure that the company complies with the federal or state laws. Before conducting a direct marketing check that you comply with the privacy legislation and spam regulations.
• Make sure that the competitor’s confidential information is not disclosed, as it is generally protected by trade secrets. It is generally known as readily ascertainable by public. Although the owner does not need to provide protection to his confidential information, if it is independently obtained, the owner is entitled to the court relief against who has stolen or divulged the confidential information in violation of duty or a written non-disclosure agreement.
• All the advertisement should comply with the local laws of the area the advertisement target. There are some local requirement which ads need to take care of, in India, there are some ads which are not allowed like prohibited medical services, pre natal gender discrimination (Supreme Court Order (PDF) but this is not an exhaustive list.

Advertising Standards Council of India

It aims to maintain and enhance the public’s confidence in advertising. It is a self regulatory voluntary organization of the advertisement industry, which ensures the protection of interest of consumers.

Aim

• To ensure the truthfulness and honesty of representations and claims made by advertisements.
• To ensure that advertisements are not offensive to generally accepted standards of public decency.
• To safeguard against the indiscriminate use of advertising for the promotion of products regarded as hazardous to society or to individuals.
• To ensure that advertisements observe fairness in competition so as to inform the consumer on choices in the marketplace while observing the canons of generally accepted competitive behavior in business

Legal issues in advertising

With liberalization and globalizing the Indian economy firms have vigorously been promoting their product and services. In the changing proliferation of advertisement, the law needs to be further strengthened. There are many laws which deals with advertisement like:

1. Consumer protection act, 1986 section 6 grants consumer to be informed of quality, quantity, potency, purity, standards of goods and services as the case may be to protect the consumers from unfair trade practices.
2. Drugs and cosmetic act, 1940 section 29 of the act imposes penalty upon whomsoever uses a report or analysis made by central drug lab, or extracts such report, for the purpose of advertisement.
3. FSSAI act, 2006 section 53 provides penalty upto 10 lakhs for false or misleading ads relating to nature of good, description, substance or quality.
4. Young person’s harmful publication act, 1956 section 3, imposes a penalty for advertising or making known by any means whatsoever that any harmful publication as defined under the act can be procured from or through any person.
5. IPC, 1806 widens the array of provision, it prohibits defamatory publication, obscene or statement creating disharmony in the society.
6. Competition act, 2002 deals with comparative advertising.

In the recent case of HUL vs. P & G the petitioner claimed TV commercial of respondent is in respect of Fairness cream and it is disparagement, as it communicates that other products lack something. The court held that such comparison is permitted as there is no direct attempt to defame HUL’s product and there is no economic loss established. Similar was the dispute between RIN &TIDE.

Conclusion 

Advertisement is whole and sole of a business. It is a part of service industry.  Companies try to compete while advertising where they forget to take legal precautions. As justice Markandeya Katju has pointed out that media shall be given freedom at the same time they need to be controlled. The basic principle of wrongs and crimes are the same, and the laws dealing with that. But the technology may change and you must keep pace with the technology.

Advertisements are common framework for infringement of lawsuits. This article provides some tips that can help while advertising your business. As it is wisely said precaution is better than cure. So before advertisement there are some points which need to be taken care off both from general perspective and legal perspective.

References

• http://www.livemint.com/Consumer/B22ShRuwGMr4daQtdrdoCN/Indian-advertising-spend-to-grow-at-115-in-2017-says-IPG.html
• https://www.ibef.org/industry/advertising-marketing-india.aspx
• http://www.indianmirror.com/indian-industries/advertising.html
• https://support.google.com/adwordspolicy/answer/6023676?hl=en
• https://www.business.gov.au/info/plan-and-start/develop-your-business-plans/marketing/legal-obligations-of-marketing
• https://yourbusiness.azcentral.com/list-ethical-legal-issues-advertising-16861.html
• http://www.wipo.int/sme/en/documents/ip_advertising_fulltext.html#types
• https://www.legalindia.com/the-legal-framework-of-comparative-advertising/
• https://www.lawteacher.net/free-law-essays/commercial-law/advertising-laws-in-india-law-essays.php

In this article, Navonil Datta pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Liabilities of directors after dissolution of a company.

Understanding the meaning of director of a company

The Companies Act, 2013 defines a director in section 2(34) as a director appointed to the board of a company. A company is a juristic person and therefore needs an agent to act on its behalf. A director of the company plays the role of an agent and acts a trustee for the assets of the company. The directors along with the board of directors, act as a face for the company and take decisions on behalf the company keeping its interests in mind.

Bad Corporate governance by companies in cases such as Satyam or Kingfisher, highlighted the need for more stringent provisions to ensure the good management of a company. The Companies Act, 2013 has introduced provisions for the same. Enhancing the roles and responsibilities of directors, clearly defining their duties and imposing stringent liabilities for the violation of such duty has improved the standards of corporate governance.

Duties of a director

The duties of a director are mentioned in section 166 of the act. The duties mentioned under the section provide a general guideline for the conduct of a director. The director is not supposed to act in a manner which is inconsistent with the articles of association of the company.[1] He shall exercise his duties with due and reasonable care[2] and act in good faith for the promotion of the object of the company for the benefits of its members and its interests.[3] He shall not be involved in a situation where his interests directly or indirectly are in conflict with the interests of the company[4] and shall not try to achieve any undue gain for himself or his relatives, partners and associates.[5] A director cannot assign his office to any other individual and such assignment would be invalid.[6]

Thus broadly, directors are supposed to act with diligence and care for promotion of the interests of the company and discharge a fiduciary duty towards the company. As a fiduciary, a director is supposed to put his personal interests after the interests of the company.

Civil and criminal liability of a director

A breach in discharging the duty, whether statutory or fiduciary, exposes directors to liability. The liability imposed on a director may be civil or criminal in nature. Certain examples of such liability imposed on directors by the act are:

1. For misstatements in prospectus[7]
2. For breach of solvency declaration[8]
3. For fraudulent trading[9]
4. For breach of directors’ duties [10]

Dissolution of a company means that the company ceases to exist legally. The dissolution of a corporation under the Companies Act, 2013 can be brought about in two steps. The two steps being winding up and striking off.

Winding up is the process that brings about the dissolution of the company. The assets of the company are collected and used for the payment of the company’s debt to its creditors. Chapter XX of the Companies Act, 2013 deals with winding up of a company. Under the act, the winding up of a company may be done voluntarily or by the order of the tribunal.[11] A petition for winding up may be instituted by the company, creditors, contributories, registrar or any person authorized by the central government.[12]

The tribunal has the authority to look into the merits of the petition and pass an order as it deems fit. It may dismiss the petitions, appoint a liquidator till a winding-up order is passed, pass a winding-up order or pass an interim order as it thinks fit.[13] If a company liquidator has been appointed, then he can make an application to the tribunal for dissolution under section 302. If the tribunal is convinced, then it may pass an order for dissolution of the company. An application may be made to the tribunal or the central government. On order of the tribunal or the central government, the Registrar shall strike off the name of the company.[14]

During the winding up process, the directors can be held liable for certain actions. If in the process of winding up, it is discovered that a director has misapplied or retained or become liable for any money or property of the company or has been guilty of misfeasance or breach of trust in relation to the company, the liquidator can submit an application to the tribunal for looking into the conduct of the director. However, such an application has to be made within five years of the date of winding up order or the first appointment of liquidator.[15]

A similar application can be made by the official liquidator to the tribunal, if it found that the business of the company was carried out in a manner to defraud the creditor or any other person for fraudulent reasons.[16] The liability in such a case extends to the director.[17]

Another way of dissolving a company is the striking off the name of the company by the Registrar under section 248. If the Registrar is of the opinion that the company has not commenced its business within one year of its incorporation, or the subscribers to its memorandum have not paid their subscription within 180 days or the company is not carrying on business for a period of two immediately preceding financial years, then he shall send a notice to the company conveying his intention to strike off the name of the company from the register of companies and ask them to make their submissions.

Sub-section 7 of the section talks about the liability that can be imposed upon directors and other officers of the company. It states that the liability, if any, of every director, manager or other officers who was exercising any power of management in the company dissolved, shall continue and can be enforced as if the company had not been dissolved.

A bare reading of this provision points out that the continuance of existing liability of a director, member or an officer of a company which was subsequently dissolved seems to have been the legislative intent. The dissolution of a company cannot be used an excuse to escape liability the rests on a director. A director, member or an officer are not usually held liable for the acts of the company. Directors of a company owe no fiduciary or contractual duties or any duty of care to third parties who deal with the company.[18] The dissolution of the company cannot be seen as a reason to escape personal civil or criminal liability. The effect of section 248(7) is only to continue the liability of a director which existed before the dissolution. It does not enhance the liability such as making them personally liable, when they were not so liable before.[19]

In the case, Re: U.N. Mandal’s Estate Private Ltd.,[20] the High Court of Calcutta observed:

“Section 560(5) of the Companies Act, 1956 provides that when the name is struck off the register, and the notice thereof published in the official Gazette, then the Company stands dissolved on the publication in such official Gazette. But such dissolution of the company does not affect the liability, if any, of any director, managing agent, secretaries and treasurers or manager or even any other officer who was exercising any power of management or of any member of the company & it is expressly provided by proviso (a) of that sub-section that for enforcement of such liability it will be deemed in law to continue and may be enforced as if the company had not been dissolved. The special statutory provisions of Section 560(5) of the Companies Act 1956 appear to indicate that the dissolution of the Company thereunder does not mean a total and complete extinction of the Company for all purposes but that it exists for the special purpose expressly mentioned in proviso (a) of Section 560(5) of the Act as if the company had not been dissolved.”[21]

Section 560 of the Companies Act, 1956 dealt with the striking off the name of a company from the register of companies. The section is analogous to section 248 of the new act. Even though they are two separate acts, the court’s interpretation of section 560(5) of the old act could be considered to be providing some insight towards the interpretation of section 248(7)

In the United States, section 105 of the Model Business Corporation Act states :

The dissolution of a corporation shall not take away or impair any remedy available to or against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceedings thereon is commenced within two years after the date of such dissolution.

The existing jurisprudence regarding the interpretation of the section offers varying views. In the case of Bishop v. Schield Bantam Co.,[22] the defendant had been dissolved as a corporation in 1964. In 1965, a post dissolution crane manufactured by the defendants injured the claimant in 1965. The claim was brought before the court against the corporation and its directors in 1967. The court observed that the claim was barred by law. While barring the claimant’s action, the court observed that it did not bar the action initiated by the claimant because it was post dissolution but only because it was after the statutory period of two years.

In a different case of Stone v. Gibson Refrigerator Sales Corp.,[23] the court interpreted the section to include shareholders and directors but to exclude corporations. The court held that post dissolution claims could give rise to a cause of action against shareholders and directors but not against corporations.

In another case of Chadwick v. Air Reduction Company[24], the court refused to entertain post dissolution cases. It observed that “it is, therefore, quite clear that under the Model

Business Corporation Act and those state statutes patterned after it, a corporation may be sued for pre-dissolution torts only.”[25]

References

[1] Companies Act 2013, Section 166(1)

[2] Id., Section 166(3)

[3] Id., Section 166(2)

[4] Id., Section 166(4)

[5] Id., Section 166(5)

[6] Id., Section 166(6)

[7] Id., Section 34

[8] Id., Section 68

[9] Id., Section 339

[10] Id., Section 166(8)

[11] Id., Section 270

[12] Id., Section 272

[13] Id., Section 273

[14] Id., Section 365

[15] Id., Section 339

[16] Id., Section 340

[17] Id., Section 341

[18] Tristar Consultants vs. M/s. VCustomer Services India Pvt. Ltd. & Another, AIR 2007 Delhi 157.

[19] A RAMAIYA, Guide to the Companies Act, Vol 3, 18^th edn.

[20] AIR 1959 Cal 493

[21] Id., Para 32

[22] 293 F. Supp. 94

[23] 366 F. Supp. 733

[24] 239 F. Supp. 247

[25] D. Gilbert Friedlander; P. Anthony Lannie, Post-Dissoulution Liabilities of Shareholders and

Directors for Claims against Dissolved Corporations, 31 Vand. L. Rev. 1363, 1422 (1978)

In this article, Nakul Sharma pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Jurisdiction of Indian Courts on International Commercial Arbitration.

ARBITRATION

• Arbitration is the settlement of disputes between the parties, in which the parties by mutual consent agree to submit the dispute to the one or more number of arbitrators who tries to settle the dispute between the parties by making a binding decision on the dispute. Arbitration is a way of settling the dispute outside the courts.
• According to section 2 (1)(a) of The Arbitration and Conciliation Act, 1996 “arbitration” means any arbitration whether or not administered by permanent arbitral institution.[i] The arbitrator is the neutral third party and the arbitration proceedings are conducted privately unlike courts.
• Arbitration and Conciliation Act, 1996 (amended in 2015) is an act that deals with domestic arbitration, international commercial arbitration and with the enforcement of foreign arbitral awards.

INTERNATIONAL COMMERCIAL ARBITRATION

• As per section 2 (1)(f) of The Arbitration and Conciliation Act, 1996 (amended in 2015), “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is,
  • An individual who is a national of, or habitually resident in, any country other than India; or
  • A body corporate which is incorporated in any country other than India; or
  • An association or body of individuals whose central management and control is exercised in any country other than India; or
  • The Government of a foreign country.[ii]
• International Commercial Arbitration is an arbitration where the matter involved is a cross-border dispute and the parties do not want to get into filing of case in national courts. International Commercial Arbitration, in this manner helps the parties get rid of the long and technical procedure of the courts.
• International Commercial Arbitration, unlike the pre-established rules and procedure of the law, works on the terms and the manner previously decided by the parties in the arbitration agreement. The whole procedure of arbitration revolves around the arbitration agreement previously signed between the parties and revolves around the same.

ARBITRATION AGREEMENT

• As per section 7 (1) of The Arbitration and Conciliation Act, 1996 (amended in 2015) “arbitration agreement” is an agreement that is submitted by the parties for the purpose of arbitration of all or some of the specific, which have arisen or which might arise between the parties. The relation between the parties has to be a legal relationship, which may or may not be a contractual relation. [iii]
• As per section 7 (2) of the aforementioned act, here can be a whole separate agreement for the arbitration agreement or it can be in the form of an arbitration clause in an arbitration agreement.[iv]
• As per section 7 (3) of the act, the arbitration agreement has to be in writing.[v]
• As per section 7 (4) an arbitration agreement is considered to be in writing if it is contained in-
  • A document signed by both the parties
  • An exchange of letters, telegrams, information through electricity, which also includes telecommunication.[vi]
  • If in a contract, a reference has been made to the document to make the arbitration clause part of the agreement, then the part that consists of arbitration clause is considered to be arbitration agreement, as a whole, provided that the contract is in writing and the intention is to make the arbitration clause part of the agreement.

International Commercial Arbitration – The Indian Perspective

• As mentioned above, international commercial arbitration is an arbitration that deals with commercial matters, wherein the parties may be of a foreign nation or a resident there or an association or a company incorporated there.
• The same analogy is followed by Indian law. When the seat of arbitration is in India but at least one of the parties is a foreign national, then such matters would be dealt under the provisions of ICA, i.e., International Commercial Arbitration and are dealt under part 1 of “The Arbitration and Conciliation Act”. However, if the seat of arbitration is outside India, then part 1 would not be applicable and such matters would come under the ambit of part 2 of the act.

WHEN THE SEAT OF INTERNATIONAL COMMERCIAL ARBITRATION IS IN INDIA

The following laws would apply to ICA (International Commercial Arbitration), when the case falls under part 1 of the act, i.e., when the seat of the arbitration is in India.

Notice of the Arbitration

It is the first step in any arbitration proceeding. One party sends notice to the other party, asking for the settlement of the dispute through arbitration. Therefore, it implies the requirement of the following elements:

• There should be an intention of the party submitting the notice to refer the matter to arbitration.
• The party notifying should ask the other party to settle the dispute through arbitration

Court’s reference for arbitration

As per section 8 of “The Arbitration and Conciliation Act, 1996”, if the party before the judicial authority, applies for referring the case to arbitration by submitting an application along with the original copy of the arbitration agreement on the date of submitting its first statement itself, then the judicial authority is bound to accept such application and refer the parties to arbitration. If these requirements are complied with then such judicial authority would not give any negative judgment, i.e., it cannot deny the parties to refer to arbitration in spite of any judgment, decree or order of the Supreme Court or any Court, unless the court feels that prima facie there is no arbitration agreement. However, if the party fails to submit the original arbitration agreement or a duly certified copy thereof, then such application can be dismissed.

If the original arbitration agreement or the certified copy is not available with the party or is retained by the other party, then in such a situation the party applying will submit the application along with the copy of the agreement and shall file a petition, praying to the court to order the other party to submit the original arbitration agreement or its duly certified copy, to the court. If the application that has been submitted under sub-section (1) is pending before the judicial authority, the parties may commence or continue the arbitration and an arbitral award can also be made.[vii]

Interim reliefs in Arbitration

Interim relief is available to the parties under section 9 and section 17 of The Arbitration and Conciliation Act, 1996. Under section 9, interim relief is granted to the parties by the court and under section 17, interim relief is granted by the arbitral tribunal. The objective of this provision is to provide security to the party seeking relief until the final decision is given.

Appointment of arbitrators

Section 11 of the act provides for the appointment of arbitrators. The arbitrator can be of any nationality unless otherwise agreed by the parties. The parties have to appoint one arbitrator each and both the arbitrators have to further appoint a third arbitrator, within thirty days, since the arbitrators are required to be an odd number. However, if there are even number of arbitrators, for example there are two arbitrators and both the arbitrators give the same decision, then, in that case, there is no boundation of having a third arbitrator.[viii]

Grounds for challenging the appointment of an arbitrator

An arbitrator is required to act in an independent and impartial manner. These are the basic two requirements that have to be there in an arbitrator. If he is found to be partial and dependent, then his appointment can be challenged. Moreover, if he does not possess the qualifications that are agreed to by the parties then in that case also his appointment as an arbitrator can be challenged. The arbitrator is also required to solve the dispute in a time bound period.

Basics of the proceedings

The parties are needed to be flexible in terms of the procedure, place and language of the arbitration. The arbitral tribunal has the power to decide that in what sequence the evidence are to be examined. The parties can also settle the dispute through a mutual consent or it can be settled by the arbitral tribunal a well. After the decision is given it is recorded as an arbitral with the consent of both the parties and the arbitral tribunal as per section 30 of “The Arbitration and Conciliation Act, 1996”.

Cost of the arbitration

The arbitral tribunal decides the cost of the arbitration and that how much amount each party has to pay. If a party refuses or fails to pay the legal and administration fees, then the tribunal in such a case refuse to give the award. After refusing to pay, the parties can approach the court and the court can further give its decision on the cost.

Application for setting aside arbitral award

If a party is not satisfied with the decision of the tribunal then it can make an application to the court under section 34 of the act to set aside the arbitral award. For example, if the party making the application was not given proper notice of the appointment of the arbitrator, or if a party was under some incapacity, or if the arbitration agreement is not valid, or if the arbitral award is not related to the dispute, or is against the terms of submission to arbitration, or the matters that are not appropriate to submit to the arbitration.

As per section 34 (2-A), an arbitral award arising out of arbitrations other than international commercial arbitration may also be set aside, if the award made is illegal in nature.

The application to set aside the award has to be made within three months from the date of receiving of the award, unless there is a sufficient reason due to which the party could not apply within the required time. In such a case the court can entertain the application to set aside the arbitral award within a further period of thirty days.[ix]

Appeals

An appeal can be filed for the following situations:

• Refusal to provide interim relief under section 9 and section 17
• To set aside the arbitral award under section 34[x]

Finality and Enforcement of arbitral award

The arbitral award becomes binding on both the parties under section 35 of the act and is considered to be the same as an order passed by a court of law based on the provisions of the Code of Civil Procedure, 1908.

WHEN THE SEAT OF INTERNATIONAL COMMERCIAL ARBITRATION IS OUTSIDE INDIA

Bhatia International v/s. Bulk Trading ((2002) 4 SCC 105)

• In the case of Bhatia International v/s. Bulk Trading, it was held that Indian courts can exclusively use their jurisdiction in order to test the significance of an arbitral award made in India, even if the actual law of the contract/agreement is the law of another country.

Facts

• In this case the parties had referred the case to arbitration as per the rules of the ICC of arbitration in Paris, with a sole arbitrator.
• The foreign party wanted to ensure that they receive the recovery of their claim from the Indian party and for that purpose it moved to Indian court for interim relief so as to secure its property.
• The same was opposed by the Indian party on the ground that as per the New York Convention (Convention on Recognition and Enforcement of Foreign Arbitral Awards, concluded on 10^th June, 1958), there is no provision to claim interim measure through a court, other than the one where arbitration is taking place. Therefore, in this case the arbitration is taking place in Paris, thus the Indian court cannot be approached to claim the interim relief. [xi]

Held

• The High Court set aside the plea of the Indian party. The matter went to Supreme Court. The Supreme Court upheld the decision of the High Court.

Rationale

• In its reasoning, the court said that Part 1 of “The Arbitration and Conciliation Act, 1996” gives effect to UNCITRAL (United Nations Commission on International Trade Law) Model Law and gives power to the court to grant interim relief even when the seat of international commercial arbitration is outside India.

Bharat Aluminium v/s. Kaiser Aluminium Technical Services (BALCO) (Civil Appeal No. 7019 of 2005)

• The doctrine laid down in the case Bhatia International v/s. Bulk Trading was overruled by the judgment of Bharat Aluminium v/s. Kaiser Aluminium Technical Services.

Facts

• The parties signed an agreement with respect to the supply of equipment, modernization and up-gradation of production facilities.
• However, disputes started arising and the dispute was referred to arbitration. The seat of the arbitration was in England and therefore the proceedings took place in England and the award was made in favour of the Respondent.[xii]
• Dissatisfied with the decision, the appellant filed application against the award in India, before the Chhattisgarh High Court under Section 34 of the act, i.e., under Part 1 of the act.

Held

• The court held that Part 1 of the act would not apply to the cases where the seat of arbitration is outside India. It shall be applicable to only those arbitrations where the seat of the arbitration is India.
• No suit can be filed for interim relief in India under Part 1, when the seat of arbitration is not in India.
• This judgment will be applicable to the cases in which dispute took place after the decision of this case. The judgment will not have a retrospective effect.[xiii]

Rationale

• The rationale behind the judgment is that it is the sat of arbitration that administers the jurisdiction and if the parties decide to conduct the arbitral proceedings outside India, then Indian courts don’t have any jurisdiction to grant interim relief to the related parties.

CONCLUSION

With the changing time, there has been an increase in the international dealings and contracts. Thus it also increases the need of the international arbitrations, since with the increase in businesses on international level there is an increase in the disputes pertaining to international arbitration. It also provides a sense of protection to the parties and because of this parties can easily enter into agreements on international level. The judgment of the BALCO case holds importance with the view that parties while entering into arbitration do not want to face any inconvenient procedures. It is important that the judicial process is followed in the country where the arbitration is taking place in order to simplify the procedure for the parties in the cases of international commercial arbitration.

References

[i] The Arbitration and Conciliation Act, 1996, pg.3 (ed. 2016).

[ii] Supra note 1, pg.4

[iii] Supra note 1, pg.6

[iv] Supra note 1, pg.7

[v] Supra note 1, pg.7

[vi] Supra note 1, pg.7

[vii] Aparajita, International Commercial Arbitration- Indian Perspective, (August 31^st, 2017, 09:27 PM), http://ijldai.thelawbrigade.com/wp-content/uploads/2015/09/4.pdf

[viii] Ibid note 7

[ix] Supra note 7

[x] Supra note 1, pg.31

[xi] The case of Bhatia International and its Overruling, (August 30^th, 2017, 08:15 PM), http://lawmantra.co.in/the-case-of-bhatia-international-and-its-overruling/

[xii] Niyati Gandhi and Vyapak Desai, India: What Finally Happened in Bharat Aluminium Co. (BALCO) v/s. Kaiser Technical Services, (August 30^th, 2017, 09:30 PM), http://www.mondaq.com/india/x/467264/Arbitration+Dispute+Resolution/What+Finally+Happened+In+Bharat+Aluminium+Co+BALCO+v+Kaiser+Technical+Services

[xiii] International Commercial Arbitration, (August 30^th, 2017, 09:45 PM)

In this article, Kashish Sinha pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Limitation of Liability clause and its enforcement under Indian contracts.

A contract executed between two parties consists of a certain set of promises in lieu of consideration. But parties can choose to perform and provide consideration without any existence of a contract as well, so what purpose does a contract serve? The essence of any contract between two parties is liability which may be enforced upon the party which defaults on its obligations under the contract. This liability allows a party to recover costs for any defective or incomplete performance as may have been set out. Absence of affixation of liability would have resulted in the contract having no legal, or practical, value whatsoever.

But can a contracting party seek to limit its liability, or absolve itself in certain circumstances? For instance, if a dry-cleaning service accidentally damaged an expensive dress, seeking full compensation for such service for the dress would, in effect, bankrupt such a service provider. In such situations, parties to a contract may choose to include limitation clauses within the contract. These limitation clauses seek to limit the liability which can be imposed upon the party contravening the contract. An example of such a clause existing within the contract includes:

For a dry cleaning service

“XYZ Dry Cleaners shall be liable for a maximum compensation of Rs. 1,000/- for any damage which may have been caused as a result of the service provided”.

The existence of such a clause ensures that even if the dress may cost in thousands, or lakhs, the liability of the service provider is limited to only Rs. 1,000. The limitation, incorporated on part of the dry-cleaning service provider, ensures that he or she does not lose commercial value in providing such a service. It ensures that the service provider is liable for the damage in proportion to the service provided and not for the entire transaction of purchasing the dress. Incorporation of such a clause in the contract (which may include a receipt in the present instance) also ensures that the party using such a service cannot feign ignorance and accepts the risk which may be associated with the service itself.

Liability can be limited in two ways: in terms of money by ensuring liquidated damages are agreed upon, as was the case in the dry cleaning instance or by the time period, i.e. by limiting the time period in which the damage caused in service can be remedied. We shall be attempting to go through the legal understanding of these type of limitations, and also understand the difficulties that may actually arise in enforcing these clauses.

Limitation of liability in terms of money

If the “limitation of liability” clause exists within the contract which stipulates a certain sum of money which is to be paid when the contract is breached, such stipulated penalty can be enforced under Section 74 of the Indian Contract Act, 1872. However, the penalty being enforced in this situation would not exceed the penalty which has been stipulated within the clause of the contract.

For instance, if the clause of the contract stipulates that the maximum compensation provided will be Rs. 10,000/-, then the penalty cannot exceed Rs. 10,000/-.

An important thing to understand while drafting such a limitation of liability clause is that the penalty is to be determined keeping into account a fair estimation of damages which would amount from the breach. The money stipulated cannot reach exorbitant levels such that the penalty would exceed the damage caused.[1] For instance, one cannot claim a penalty of Rs. 10,000/- on a damage caused on a dress which itself cost only Rs. 500/-.

This leads us to the second principle of drafting such a clause, that it should specify a maximum amount, but state that the penalty shall not exceed that particular amount. This is to ensure that the balance between the breach actually caused and the penalty to be levied is actually maintained, and the courts on their discretion can determine the value of the penalty to be levied to the breach actually caused. If the clause includes “not exceeding Rs. 10,000”, it allows any amount less than 10,000 to be levied as well depending upon the circumstances of the breach. But if the clause is worded as “Rs 10,000 shall be paid for breach” it would result in Rs 10,000 being levied for even the smallest of breaches, thus causing a disproportionate penalty to be levied.

Thus the two important requisites which always have to be considered include (i) a reasonable amount actually being stipulated as the penalty. (ii) an upper threshold being attached to such an amount.

Additionally, limitation clauses may be specific for breaches for specific nature. For instance, a dry cleaner can specify a sum of money of unclean laundry or a higher sum for excessive bleaching etc.

Limitation of liability in terms of timeline for damages to be enforced

Limitation clauses which restrict liability only for the timeline in which breach is to be enforced are under contemplation of Section 28 of the Indian Contract Act. In its initial version, it was held that such clauses which sought to reduce the time available for enforcement of rights under the Contract Act would not violate the Act and hence can be upheld. This proposition was also affirmed in the case of The New India Assurance Co Ltd v Radheshyam Motilal Khandelwal[2] by the Bombay High Court.

However, the 97^th Law Commission Report clarified that Section 28 did not allow the parties to stipulate their own time for limitation, which the Courts were allowing through the ‘prescription’ route, i.e. a situation where parties were allowed to extinguish a right to sue if not exercised within a certain time. The earlier Section 28 provided for contracts to be held void only if it barred exercising of a legal right, and did not bar extinguishing an entire right in itself, if not exercised.

The prescription of a time duration merely extinguished a ‘right’, it did not interfere with the ‘remedy’, as Section 28 sought to prohibit.[3] However, Section 28 itself was amended in 1997, which then disallowed parties to stipulate time within which such rights would be extinguished which would result in the discharge of the liability of the parties themselves. A number of decisions since then have resulted in clauses limiting the time in which such rights can be enforced as void.[4]

However, a new amendment (Banking Laws Amendment Act, 2012) provides for an exception to this section, which provided for allowing banking and financial institutions in agreements for guarantee to provide a time limitation clause as long as it is one year within the date of occurrence of such an event.

As a result, liability cannot be restricted in terms of time for the contracting parties, unless one of the contracting parties is a bank or a financial institution which is carrying out a guarantee contract. Even in such a scenario, the bank or financial institution cannot stipulate a time which is less than one year post the occurrence of event on which such a guarantee was provided.

Limitation clause application in various other provisions

Under the Consumer Protection Act, a limitation of liability clause has been considered to be valid to which the parties have specifically agreed.[5] However, if the clause is considered to be unconscionable in nature, i.e. that it does not balances the interests of both the parties, then such a clause may not be enforced.[6]

Standard form contracts in e-commerce

A growing concern in this arena arises through the existence of standard form contracts which are constantly used by the e-commerce players. These contracts may consist of certain limitations of liability which would reduce the liability the platform may have to incur in case of deficiency of services from such players. The reluctance of the consumer to read and understand these contracts makes such liability susceptible to be accepted without understanding of actual implications.

As a result, it has been suggested on various forums mechanisms which would impose timelines before the customer is allowed to agree the contract, so as to ensure that he or she attempts to read such a contract, or placing such limitation clauses near the agreement part of the contract.

Conclusion

Limitation of liability clauses are one of the best sources of indicators of what the contracting parties intended to execute as a part of their contract. For contracts which may be considered unconscionable or unbalanced between both the parties, the nature of such a clause helps in understanding the balance existing between these parties. But a lot regarding such clauses depend upon how they are actually executed between the parties, and how well they are drafted. It is important to understand the significance of both determining the liability proportional to the breach caused and ensuring that the liability is an upper limit while drafting a limitation on liability. It is also a keen concern to avoid ambiguities and nullities in contract by not drafting any time limitations unless one of the contracting parties is a party eligible under Section 28, Limitation on liability of contract is here to stay!

Want to learn more? learning about contract drafting and negotiations do not really require a legal background or previous legal knowledge. Anyone can learn it, get very good at it, and use it to take their career to newer heights. Let be the message you take away from this article. If you want to systematically enhance your contract negotiation skills, please check out this contract negotiation course.

References

[1] ONGC v Saw Pipes (2003) 5 SCC 705.

[2] The New India Assurance Co Ltd v Radheshyam Motilal Khandelwal AIR 1974 Bom 228.

[3] National Insurance Co. Ltd v Sujir Ganesh Naik AIR 1997 SC 2049.

[4] Explore Computers Pvt Ltd v Cals Ltd 131 (2006) DLT 477.

[5] Bharathi Knitting Company v DHL Worldwide Express Courier (1996) 4 SCC 704.

[6] Maruti Udyog v Sushil Kumar Gabgotra (2006) 4 SCC 644.

In this article, Parth Sarthy Kaushik discusses how can a foreign company access Indian securities market to raise funds.

A foreign company desirous of accessing Indian securities market for the purpose of raising funds is not permitted to directly list its equity shares on an Indian stock exchange and can only issue Indian Depository Receipts (IDRs). IDR is a rupee denominated negotiable financial instrument which can be listed and publicly traded on an Indian stock exchange. It represents the underlying equity shares of a foreign listed company. Thus, IDRs allow Indian investors to diversify their investments by providing access to the shares of foreign companies at a lower cost and better terms. Further, it provides foreign companies with brand recognition in the Indian market and opportunity to expand their investor base.

Eligibility to Issue IDRs

A company shall, in addition to the directions issued by SEBI and RBI from time to time, meet the following criteria to be eligible to make an issue of IDRs:-

As per Rule 13 (2) of the Companies (Registration of Foreign Company) Rules, 2014

• Its pre-issue paid-up capital and free reserves are at least USD 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least USD 100 million.
• It has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years.
• It has a track record of distributable profits in terms of section 123 of the Companies Act, 2013 for at least three out of immediately preceding five years.
• It fulfils such other eligibility criteria as may be laid down by the Securities and Exchange Board of India from time to time in this behalf.

As per Regulation 97 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR)

• The issuing company is listed in its home country.
• The issuing company is not prohibited to issue securities by any regulatory body.
• The issuing company has track record of compliance with securities market regulations in its home country.

As per Rule 4 of the Companies (Issue Of Indian Depository Receipts) Rules, 2004 (IDR)

• Its pre-issue paid-up capital and free reserves are at least USD 100 million and it has had an average turnover of USD 500 million during the 3 financial years preceding the issue.
• It has been making profits for at least five years preceding the issue and has been declaring dividend of not less than 10% each year for the said period.
• Its pre-issue debt equity ratio is not more than 2:1.

Process of Issuance of IDRs

As per Rule 13 (3) of the Companies (Registration of Foreign Companies) Rules, 2014 the process for the issuance of IDRs is very similar to an initial public offering (IPO) by a domestic company and broadly involves the following procedure:

1. Preparation of draft prospectus which is to be filed (along with a due diligence report) with the Securities and Exchange Board of India (SEBI) at least ninety days prior to the opening date of the IDR issue.
2. Once SEBI grants principal approval to the issue, a prospectus, which shall incorporate all the changes and suggestions made by SEBI, is required to be filed with both SEBI and the Registrar of Companies (RoC).
3. Appointment of an overseas custodian bank and a Domestic Depository for the purpose of issue of IDRs.
4. Deliver the underlying equity shares to the Overseas Custodian Bank which in turn shall authorize the domestic depository to issue IDRs to the investors through a public offer.
5. Obtain listing permission from one or more stock exchanges having nationwide trading terminals.

It is to be noted that the Trading and settlement procedure for IDRs is similar to the one prescribed for Indian shares.

Who can Invest in IDRs?

Any person who is a resident of India as defined in Section 2 (v) of the Foreign Exchange Management Act, 1999 can invest in IDRs. As per Regulation 98 of ICDR Regulations, 2009 the minimum application amount in an IDR issue shall be Rs. 20,000 and at least 50 % of the IDRs issued shall be subscribed by Qualified Institutional Buyers (QIBs). Further, a minimum of 30% of IDRs being offered in the public issue are required to be allocated to retail individual investors (However, exemption can be given in the case of under subscription in retail individual investor category).

Rights of IDR Holders

IDRs are similar to equity shares and IDR holders are entitled to same rights (such as entitlement to bonus issues, dividends and rights issues etc.), except attending Annual General Meeting and voting on special resolutions, as are enjoyed by the shareholders of the issuer company in its parent country.

The rights available to an IDR holder are exercised in accordance with the depository agreement (which is also summarised in the draft prospectus) through the domestic depository and overseas custodian bank.

Distribution of Benefits

The process is similar to distribution or corporate action by any domestic Indian company. On the receipt of dividend or other corporate action on the IDRs, the Domestic Depository notifies IDR holders of such distributions and follows the following process:

1. Bonus Issue – The proportionate IDRs are credited into the dematerialised account of the IDR holders.
2. Rights Issue – The Domestic Depository makes application forms available to the IDR holders and IDR holders are required to apply for their proportionate rights. Thereafter, the Domestic Depository credits the IDRs to the dematerialised account of the relevant IDR holders.
3. Dividend – The cash dividend is either credited to a bank account or warrants are dispatched to IDR holders.

It is to be noted that if, for any reason, it is not possible to distribute underlying equity shares then such underlying equity shares or interest in such underlying equity shares is generally sold by the Domestic Depository and the resulting cash (excluding certain fees and expenses) is paid to the IDR holders.

Conversion of IDRs into Equity

IDR holders can convert/redeem IDRs into the underlying equity shares after one year from the date of issuance, subject to the compliance of the Foreign Exchange Management Act, 1999 and regulations issued by SEBI and the Reserve Bank of India (RBI).

However, IDR holders are permitted to convert only up to 25% of their originally issued IDRs into underlying shares in a financial year (See, SEBI Circular dated August 28, 2012) and this option can be exercised during the Fungibility Window i.e. the time period specified by the issuer company during which IDR holders can apply for conversion/redemption of IDRs.

Further, SEBI requires the issuer company to fix and declare the total number of IDRs available for conversion/redemption before the opening of the fungibility window and 20 % such IDRs are required to be reserved for retail investors.

It is pertinent to note that the SEBI norms on Redemption of Indian Depository Receipts (IDRs) into Underlying Equity Shares provides for two-way fungibility i.e. fungibility is not restricted to just conversion of depository receipts into equity shares but also provides for underlying shares to be converted into IDRs.

Conclusion

Indian Depository Receipts allows foreign companies to access Indian capital and provide tremendous opportunities in terms of branding by becoming part of the Indian growth story. Further, foreign companies looking to expand their business operations in India can use IDRs as a tool to raise acquisition currency (i.e. the money raised through IDRs can be used to structure various investments and acquisition transactions in India). Therefore, it is expected that a surge in the popularity of IDRs is inevitable as Indian economy keeps on improving and creating a tremendous interest among foreign companies to step up their business operations in India.

In this article, Debarati Tripathi pursuing M.A, in Business Law from NUJS, Kolkata discusses legal framework and procedure for establishing a foreign company in India.

Introduction

The economic development of a country can be catalyzed by the influx of Foreign Direct Investment (FDI) as it can fuel growth in GDP by investing capital through FDI in various resources like infrastructure, manufacturing, technology, transport, services, productivity. India is an attractive hub for foreign investments in the manufacturing sector. With impetus on developing industrial corridors and smart cities, the government plans enormous development of the nation.

Key Advantages of Doing Business in India

Here are some key advantages of doing business in India,

1. Growth Potential: The world’s largest democracy and the 2nd fastest-growing major economy.
2. Stability of Government and Pro-Business: Political stability is vital to foreign investments. A pro-business work culture of the Government machinery with the business sector to promote economic growth.
3. Extensive Trade Network: Trade network backed by regional and bilateral free trade agreements with numerous trading partners helps leverage investor’s RoI.
4. Competitive Tax System: Competitive tax regime and comprehensive network of Tax Treaties, further modified by the introduction of Direct Taxes Code and the Goods and Service Tax – single tax for the whole nation.
5. Skilled Workforce: Highly-rated human capital base sought globally for – talent, knowledge and skills.
6. A Well – Developed Financial System: Well regulated financial system with access to developed capital markets as an alternative source of financing.
7. Robust Legal System: Efficient legal and judicial system, improved enforcement of laws.
8. Great Work Ethics: Professional manner of working and willing to learn.

Business Ventures in India

To set up a business venture in India, a foreign company has the following choices :

Form an Indian Company

To Form an Indian company, incorporation of a company under the Companies Act, 1956 through

1. Joint Venture with an Indian partner, for example, strategic collaborations with Indian partner organizations
2. Wholly owned subsidiary, set up a wholly-owned subsidiary in sectors which permit 100% Foreign Direct Investment [FDI] under the FDI policy. 100% foreign equity in such Indian companies is permissible, subject to equity caps prescribed in the FDI policy concerning the various areas of activity and depending on the investor’s decision.
3. Limited Liability Partnership (LLP), a new form of business structure in India, that combines the advantages of a company (a separate legal entity having perpetual succession) with the benefits of organizational flexibility associated with a partnership. The FDI policy for LLPs has been notified recently making this a possible viable entity form for Indian business operations of foreign investors.

For registration and incorporation, one has to file an application with the Registrar of Companies (ROC). Once such a company has been incorporated and duly registered as an Indian company, it is subject to Indian law and regulations as applicable to all other domestic Indian companies.

As a Foreign Company

The entry into India for a business venture via the mode of Registration of Liaison Office, Branch Office or Project Office requires RBI and/or Government approval. Hence, the cost and time taken for registration of liaison office, branch office or project office for a foreign company are higher as compared with the incorporation of a private limited company. Also, to open a branch office, liaison office or project office, one has to be an Indian, foreign nationals cannot do so, thus limiting the scope for foreign nationals.

Liaison Office/Representative Office

A Representative office acts as a communication channel or liaises between the headquarters or the principal place of business and offshore entities in India. Collecting information about business opportunities in the present market and providing information about the parent company and its products to prospective clients in the region, ie,. India is the main function of this office. The office can not undertake any commercial activity directly or indirectly and therefore cannot have any income/earnings in India. Examples of permitted activities are the promotion of export/import from/to India and also facilitation of technical/financial collaboration between the parent company and companies in India.

The Reserve Bank of India (RBI) is the body that approves establishing a liaison office in India.

Project Office

Temporary project/site offices are frequently set up by foreign companies when they expect to execute specific projects in India. Project offices cannot take up or initiate on any activity other than those relating to the execution of the project. A general permission to foreign entities to establish Project Offices is granted by the RBI, subject to specified conditions. The offices may remit any surplus funds outside India once the project gets completed, general consent for which has been granted by the RBI.

Branch Office

Typically Branch offices of a foreign company carrying out manufacturing and trading activities abroad are set up in the region/market of manufacture for the following purposes:

• Import/Export of goods/merchandise – raw material and finished product.
• To bring about better technical/financial collaborations between Indian companies and the parent or overseas group company.
• Providing consultancy, advisory or professional services.
• Supplementing research work and experimentation, in which the parent company is engaged – more economical.
• Catering to software development and Information Technology services.
• Authorized buying/selling agents in India for the parent company.
• Providing technical support to the products coming from the parent/ group companies and troubleshooting any local issues.

The Reserve Bank of India (RBI) is the authority responsible for approving Branch office permissions.

Manufacturing activities have certain restrictions. A branch office is not permitted to carry out manufacturing activities by itself but are prescribed to subcontract these to an Indian manufacturer. The profit of the branch may be remitted outside India for Branch Offices subject to the approval from RBI. The remittance is net of applicable Indian taxes and subject to RBI guidelines.

Branch Office on “Stand Alone Basis”

Standalone Branch offices are those that are isolated and set up in the Special Economic Zone (SEZ) or Export Oriented Unit (EoU). Due to the specific nature and purpose of setting up and demarcation of the EoU/SEZ, approval from RBI shall not be necessary for a company to establish a branch/unit in the SEZs for manufacturing and service activities, subject to specified conditions. No business activity/transaction will be allowed outside the EoU or SEZs in India, including with branches/subsidiaries of its parent office in India.

Foreign Direct Investment (FDI)

The entry of FDI by non-residents into India is controlled by the Government through two routes –the automatic route and approval route. The automatic route is less restricted and more liberal and aimed for prescribed sectors and levels of investment. While in the case of approval route, FDI is allowable in all sectors and activities specified in the consolidated FDI policy of the government, however, requires prior approval from the RBI/Government and is scrutinised depending on the sector and the nature of the investment.

New Ventures

FDI investment up to 100% is possible in new ventures, under the automatic route, except 

• Proposals outside the purview of notified sectoral policy
• Foreign partner having a previous venture in India
• Proposals under a sector in which FDI is prohibited
• Proposals that require Industrial License namely;
  • Distillation and brewing of alcoholic drinks.
  • Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
  • Electronic Aerospace and defence equipment of all types.
  • Industrial explosives including detonating fuses, safety fuses, gunpowder, nitrocellulose and matches; Hazardous chemicals.
  • Drugs & Pharmaceuticals (according to modified drug policy issued in September ‘Foreign Investment in Existing Companies for Expansion Plans

• If they are engaged in industries under the automatic route.
• If the increase in equity level is for expansion of equity base.
• If the foreign equity is in foreign currency.

FDI in Small Scale Industries (SSI) Sector

The current FDI norms restrict a ceiling of 24 percent FDI for companies in the small scale industries sector (SSI) having capital investment in plant and machinery not exceeding Rs. 50,000,000 (USD 1,250,000). Further, SSI units with foreign investment exceeding the notified sectoral cap are liable to lose their status as SSI units, but there is no bar on higher foreign equity holding as such. Under the relaxed norms, SSI units are eligible to raise foreign equity in accordance with the caps/limits governing the sectors in which they operate, thereby improving their access to technology and capital and assisting in the growth and modernization of the sector.

If SSI manufactures items reserved for SSI, foreign investment beyond 24% would require an industrial license with a 50% mandatory export obligation.

Foreign Direct Investment (FDI) Procedure

Automatic Route

• FDI under automatic route is now allowed in quite a few sectors, including the services sector, except a few where the existing and notified sectoral policy prohibits FDI beyond a ceiling limit for Indian companies to accept investment without prior approval of RBI.
• To file required document and report in Form FC-GPR with concerned Regional Office of RBI within 30 days after the issue of shares to foreign investors.
• The facility is available to NRI/OCB investments also.

Government Approval

All FDI proposals other than those under automatic route are considered for Government Approval on the recommendations of the Foreign Investment Promotion Board (FIPB)

• The prescribed application is to be submitted to the Secretariat of Industrial Approvals (SIA), in New Delhi.
• Applications can also be submitted to Indian Mission abroad who in turn forward them to SIA.
• The Proposal received by SIA is placed before FIPB within 20-30 days.
• The FIPB has the flexibility of purposeful negotiations with the investors.
• RBI has granted a general permission under FEMA(Foreign Exchange Management Act) with regard to proposals approved by Government.
• Indian companies do not require separate clearance from RBI for receiving inward remittance and issue of shares once FIPB approval is available.
• An Indian company, issuing shares as prescribed in the Regulations should submit the details of advance remittance to the RBI, no later than 30 days from the date of receipt of the amount of consideration, giving the following details
  • Name and address of the foreign investors
  • Date of receipt of funds and their equivalent in Indian rupee
  • Name and address of the Authorized Dealer(Authorized Banks) through whom the funds have been received, and
  • Details of the Government approval, if any.
• Once the shares are issued, the company is required to file a report in Form FC-GPR no later than 30 days from the date of issue of shares with the Regional Office of RBI in the place where the registered office of the company is situated.

Documents and Information Required for FIPB Application

The FIPB application requires a comprehensive project report – executive summary (ES) to be submitted. The contents of the ES and further information may follow later,

1. The ES should be accompanied by the copy of the Annual Report (Balance Sheet and Profit and Loss Account) of the Foreign company.
2. Copy of the foreign company’s profile, product/service profile also required.
3. Board resolution of the Board of the foreign company agreeing to the sale of shares and consideration thereof.
4. Declaration by the foreign company that it has no other collaboration, financial or trade agreement or technical assistance agreement in India with another company under the same or allied subject.
5. This declaration should be replaced with no objection from the Indian Company, expressing it has no objection to the shares being acquired by the overseas company.
6. An authority Letter, to apply, follow up and obtain the FIPB approval from the foreign company.
7. These documents should be filed under the Cover letter of the acquirer company requesting approval of the Secretary (Chairman) Foreign Investment Promotion Board.

Process & Documentation required for Incorporation of a Company, to open a Branch Office/Liaison Office in India

The Process of Incorporation of a Company in India

1. An application in Form 1A of the Companies (Central Government’s) General Policy Forms, 1956 setting out the names of the company in order in preference, is to be filled with the Registrar of Companies along with the prescribed fee. (Rs 500/- presently).
2. The Memorandum and Articles of Association of the proposed company is required to be drafted.
3. There should be at least two subscribers to the Memorandum and Articles of Association in case of a private limited company and minimum of seven subscribers in case of public limited company. As per the Indian laws at present foreign nationals and foreign companies, through authorized representatives, can subscribe to the Memorandum and Articles of Association of a company without the prior approval of the Reserve Bank of India.
4. If the name of the Parent Companies is proposed to be part of the name of the company, then a No Objection Certificate addressed to the Registrar of Companies is required to be submitted, by way of Board resolution.
5. The subscribers shall obtain the name approval and subscribe to its Memorandum and Articles of Association. The minimum capital to be subscribed by the Memorandum of Association is Rupees 100,000/- (Rs. One hundred thousand only)(US$ 2000 approx) in case of private limited company and Rupees 500,000/- (Rs. Five hundred thousand only)(US$ 10000 approx )in case of public limited company.
6. Authorized Capital would be dependent on the Funds requirement of the new Company. Filing fees depend on the proposed Authorized Capital of new Company.
7. The Memorandum and Articles of Association is required to be stamped as per the Indian Stamp Act, and signed by the subscribers at the relevant page in their own handwriting.

Following documents are required to be filed, signed and filed along with the Memorandum and Articles of Association of the proposed company :

1. Declaration of compliance in Form 1.
2. Notice of the location of the registered office of the company in Form 18.
3. Particulars of Directors (name of the Directors, father’s name, address, age and nationality of the nominee directors) in Form 32.
4. Consent of the Directors in Form 29 (in case of a public limited company).
5. Power of Attorney to make corrections and submissions.
6. Approval for Foreign Investment (if applicable).

All the documents referred to above are required to be filed for registration within six months from the date of availability of name along with registration fee, which is calculated on the basis of the authorized capital of the company. The Registrar of Companies after scrutinizing the documents registers the company and issues certificate of incorporation. Private Company is eligible to commence its business immediately after obtaining the certificate of incorporation. However, public companies are required to obtain a certificate of commencement of business before initiating any business activity.

Documents Required for the Incorporation of Indian Subsidiary of a Foreign Company

At the Time of Filing Application for “Availability” of Name

1. No objection by way of Board Resolution from “FOREIGN COMPANY” for Incorporating the Joint Venture Company in India duly notarized and certified by Indian Embassy/Consulate in the Foreign Company.
2. Memorandum and Articles of Association (Charter) of “FOREIGN COMPANY” duly translated into English.
3. Name, address and father’s name of proposed Equity Shareholders and Directors of the Indian subsidiary.

Points to note – At the Time of Incorporation of a Company 

1. Authorization vide Board Resolution, for the signing the Memorandum and Articles of Association and other documents for Incorporation of the company in India, translated into English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.
2. Memorandum and Articles of Association (charter) of “FOREIGN COMPANY” to be duly translated in English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.
3. Authorization by the attorney/representative vide Board Resolution, for representing the Company before the Registrar of Companies and making corrections if any at the time of Vetting of Memorandum and Articles of Association and other documents for Incorporation of the company in India duly notarized and certified by Indian.
4. Embassy/Consulate in Foreign Country.
5. No objection vide Board Resolution, of “FOREIGN COMPANY” for Joint Venture Company in India, translated into English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.

Requirements to Open a Branch/Liaison Office of a Foreign Company in India

The Reserve Bank of India considers the track record profitability, existing business in India and Financial position of the applicant company while approving. It may sometime give conditional permission, so the Branch or Liaison Office shall have to operate in India subject to compliance with such conditions.

Documents Required to be Filed along with the Application

• English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association of the applicant company attested by Indian embassy and Notary public in the country of registration.
• Latest audited Balance Sheet of the applicant (preferably Last 3 years).
• Power of attorney /authorization in favour of Chartered Accountant/Consultant in India to follow up the approval matter and to represent the applicant company with the Reserve Bank of India.
• Board Resolution of the applicant company covering,
  • Decision to open an office in India.
  • Authorizing official /director of the applicant company to sign the application for approval and follow up /represent the applicant before the Reserve Bank of India.
  • Details about the operation of proposed bank account in India.

Following Information would be Required

• Name and address of the applicant.
• Date and place of incorporation /registration of the applicant.
• Details of Capital of the company i.e paid up capital and free reserves as per the last audited balance sheet.
• Description of the activities of the applicant.
• Details of the activities /services proposed to be undertaken in India.
• Place where the office would be located in India.
• Details of Staff who will manage the office.
• Particulars of existing arrangements, if any, for representing the company in India.
• Further the Liaison office is required to file an undertaking to the fact that all expensed in India by such office shall be met out of inward remittance received from the parent company abroad.

Requirements to Open a Project Office of a Foreign Office in India

A foreign Company may open a Project Office/s in India provided.

• It has secured from an Indian company a contract to execute a project in India, and.
• % of the project is funded directly by inward remittance from abroad; or
• The project is funded by a bilateral or multilateral International Financing agency; or
• The project has been cleared by an appropriate authority ;or
• A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
• Project office shall not undertake or carry on any other activity other than the activity relating and incidental to execution of the project.

Documents Required to be Filed

• English version of the certificate of incorporation/registration of Memorandum & Articles of Association attested by Indian Embassy/Notary Public in the country of registration.
• Latest Audited Balance Sheet of the applicant company/firm.
• Documentary evidence that the Project is funded by bilateral or multilateral International Financing Agencies OR the project has been cleared by the concerned regulatory authority, OR the Indian company has been granted term loan for the concerned Project by a Financing Institution or a Bank in India.
• Power of attorney /authorization in favour of Chartered Accountant/Consultant in India to follow up the approval matter and to represent the applicant company
• Board Resolution of the applicant company covering
  • Regarding decision to open a Project office in India.
  • Authorizing official /director of the applicant company to sign the documents and follow up / represent the applicant before the Reserve Bank of India.
  • Details about the operation of proposed bank account in India.

Following Information would be Required

• Name and Address of the foreign company.
• Reference No. and date of letter awarding the contract referred to in clause (ii) of Regulation 5.
• Particulars of Authority awarding the Project/Contract.
• Total amount of contract.
• Address and tenure of Project Office.
• Nature of Project undertaken.

Conclusion

In conclusion, registration of a Company had been a major hassle for entrepreneurs looking to set up their businesses in India, was ranked 142nd on the Ease of Doing Business Index and 158th on Ease of Starting a Business. However, the introduction of INC-29, a five-in-one form introduced by the Ministry of Corporate Affairs (MCA) in May 2015, is an active step to address the ease of doing business matter.

The INC-29 significantly reduces interaction with the authorities through the clubbing of forms for DIN allotment, name reservation, incorporation, PAN & TAN, as well as ESIC registration. Supporting documents and information need to be submitted on the MCA’s e-biz (ebiz.gov.in) portal, as these are yet to be integrated electronically.

A report released by tax consultancy giant EY in October 2015, highlights that India is considered the most attractive market by international investors, ranking India as the premier choice for investors worldwide, with 32 percent of respondents ranking it the most attractive market. India’s outlook among investors has improved, that India would be among the top three economies by 2020, is the view of 37%, against 29 percent last year. Existing investor experience has been encouraging, with 70 percent of businesses, which already operate in India extending support to that idea.

References

http://www.icec-council.org/wp-content/uploads/2015/12/POLICIES-PROCEDURES-TO-START-A-COMPANY-IN-INDIA.pdf

https://www.iaccindia.com/userfiles/files/Doing_Business_in_India-%20A%20Business%20Guide.pdf

https://www.mea.gov.in/images/pdf/DoingBusinessinIndiaGuide.pdf

http://www.cgitoronto.ca/documents/Setting%20up%20Company%20in%20India.pdf

https://www.pwc.de/de/internationale-maerkte/assets/doing-business-in-india.pdf

http://www.iberglobal.com/files/2017/india_dezan_shira.pdf

http://www.ey.com/Publication/vwLUAssets/India_-_Doing_Business/$FILE/Doing%20Business%20in%20India.pdf

http://www.leadingedgealliance.com/thought_leadership/Top%2010%20Things%20to%20Know%20About%20Doing%20Business%20in%20India.pdf

http://www.indialegalhelp.com/files/doing_business_india.pdf

http://www.startupentity.com/pdf/procedure_for_Branch_office.pdf

http://www.business-standard.com/article/economy-policy/india-most-attractive-investment-destination-globally-says-ey-report-115101400204_1.html

In this article, Darrelene Dias pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Arguments against Uniform Civil Code.

Introduction

The Uniform Civil Code is mentioned in the Article 44, Part IV of the Indian Constitution in the Directive Principles of State Policy. The Article states that the state shall endeavour to secure for the citizens a UCC throughout the territory of India.

Uniform Civil Code is an endeavour to replace personal laws which are enforced throughout India.

These personal laws are founded on various religious customs and scriptures which are interpreted by religious leaders. Uniform civil code tries to establish a common set of laws for people belonging to all communities. These laws cover laws related to marriage, divorce, inheritance, maintenance and adoption. Different personal laws (Codified and Uncodified) practised in India are discussed below.

• The Indian Christian Marriage Act of 1872 (applicable to whole of India except areas of erstwhile Travancore- Cochin, Manipur and Jammu & Kashmir),
• Anand Marriage Act, 1909 (For Sikh marriages),
• Cochin Christian Civil Marriage Act of 1920 (applicable for Travancore-Cochin areas),
• Muslim Personal Law (Shariat) Application Act, 1937 (making Shariat laws applicable to Indian Muslims),
• The Parsi Marriage and Divorce Act, 1937
• Hindu Marriage Act, 1955 (applicable to not merely Hindus, Buddhists and Jains but also to any person who is not a Muslim, Christian, Parsi or Jew, and who is not governed by any other law). Hindu Widow Remarriage Act of 1856, Hindu Inheritance (Removal of Disabilities) Act, 1928, which is a significant move and paved way for Hindu woman’s right to property. Hindu Women’s Right to Property Act of 1937 was a significant step for assuring rights to women.
• Married Women’s Property Act of 1923

The Muslim religious and social bodies have primarily opposed any move towards the implementation of Uniform Civil Code. These are some arguments which are placed against the implementation of Uniform Civil Code.

Arguments against Uniform Civil Code

Secularist perspective

It is argued that implementing the Uniform Civil Code would destroy the secularism and diversity which is the cornerstone of India’s rich heritage. Implementation of the Uniform Civil Code will distort the right to practice and profess one’s religion freely.

This would also mean that the authority held by various religious leaders would be taken.

It is believed that individuals should be given the right to choose freely on how they would like to make important life decisions like marriage and inheritance.

Feminist perspective

It is very important to have the female voice representative while forming and implementing the Uniform civil code. It has been argued that while drafting the policy and implementation of the act the female voice from every community and class have to be considered. The crux of UCC is women’s rights. However, taking into consideration too many different standpoints may get complex. It has also been argued that a female voice will not be considered at all which causes more risk to the implementation of UCC.

Hence, implementation of UCC in a country like India will not be possible.

Religious perspective

Most Indian customs and practices are guided by their personal laws. This gives a sense of Identity. By the implementation of the UCC there will be a sense of loss to the religious and cultural sentiment of individuals. Hence, they will lose their sense of identity.

Customs like the dowry system is seen as “laxmi” or good fortune to the family the girl gets married into. Customs are not seen as detrimental to individuals. Hence, implementing the UCC is also seen as un-necessary and intrusion of the government in the private life or the family life of Indians.

It has been argued that individuals who wish to follow laws that are not religious in nature are free to do so but personal laws which are already implemented shouldn’t be meddled with.

Economic perspective

Many personal laws are economic in nature. As mentioned in the Section 3(1)(a) of the Muslim Women (Protection of Rights on Divorce) Act, 1986 which states that “a reasonable and fair provision and maintenance to be made and paid to her within the iddat period by her former husband”. Here, in cases like the Shah Bano case in the landmark decision held that a Muslim woman could obtain maintenance under Section 125 of the Code of Criminal Procedure. Uniform civil code will have to be implemented keeping in mind gender equality. If the woman is supposed to bring up the children the husband could pay for maintenance of the children. It is difficult to implement and draft a law that is fair to all gender.

Political perspective

India has a majority of Hindu population. With about 79.8% population of Hindus, it is believed that while drafting the Uniform Civil code it will cater to its majority.

The arguments against implementation of UCC are that the bill will be a guise to challenge the faith of the Non-Hindu population. It is also argued that it will propagate the very core of political influences which has a stronghold in India. These influences will try to spread the Hindu faith across India, making India, a complete “Hindu” nation. As idealized by many political parties. To quote Senior Congress leader Jairam Ramesh,

“The demand for UCC is a cloak for imposing Hindu Personal Law, which is actually deeply anti-women and has been made progressively more and more pro-women,”

Conclusion

The idea to implement a uniform civil code is to empower women to live out of their religious personal laws. The UCC is also implemented to do away with many archaic laws. If the UCC is implemented then India can match up to the cultural and social standards of developing countries that empower women.

Most importantly India needs a mindset change and an attitude change. It starts from empowering our women to live lives the way they choose to live. We have to encourage women to compete with men in their careers, encourage women to educate themselves and encourage households with shared responsibilities.

It is also important to educate children on the ideas of a progressive world. The education system and the media play a crucial role in the shaping of young minds. It is important to develop an education system based on modern ideas yet deep rooted in our traditional beliefs. The implementation of the policies will only happen when people and community see a need for it to happen. This need can be developed once the individual what is right and wrong. This mismatch between the existence of good laws and their actual implementation is itself a commentary on state capacity in India.

But despite many rightful laws in place, non-constitutional decision-making bodies like the khap panchayats and kangaroo courts have a greater influence on the implementation of personal laws. The khap panchyats overrule law implementation at the village level. While the social media like radio and newspaper try their best to influence their modern ideas at the village level the final say will always be of the ‘elders’.

The government has to keep a check on the khap panchayat and define their limitations and extent to implementing laws. The khaps are also functional due to stronger political forces which are difficult to do away with.

Uniform Civil Code should also cater to the rights of LGBT community. It should include the rights of marriage and re-marriage, property, adoption rights etc. By including the LGBT community the UCC moves beyond the religious personal laws making it inclusive in nature.

It is also important to understand that India is a country that has diverse cultures and religions. Religions are also a basis for identity and it is very difficult to do away with religious identity. If people sense that the state is taking away their sense of identity then there will be a rise in tension between the people and the state. The 2016 report on caste-based discrimination by the UN special rapporteur on minority issues noted that caste-affected groups continue to suffer exclusion and dehumanization.

Hence, the government needs to focus on two things, developing the education system and using the social media platform to bring out a mindset change in adults.

It is very important to shape the young minds of tomorrow. The ideas shared in textbooks should be liberal in nature. The teachers should encourage both young girls and boys to see themselves as equals. Every individual should be given enough opportunities to pursue their careers. The schools should focus on methodology and teaching mechanisms when dealing with young boys and girl at different age group. The staff and teachers should be sensitized to this need.

The government can use social media to give out strong messages. The government can tie up with local NGO’s to conducting short programs and activities for adults during village panchayat meetings. The NGO volunteers can perform skits based on the need for cultural change. During such interventions, the idea of Uniform Civil Code could be introduced. Adults literacy and cultural change go hand in hand.

India has to be ready both socially and culturally to accept this change. Only when we are culturally ready to implement the Uniform Civil Code law will the law be implemented in the rightful nature.

References:

1.http://www.business-standard.com/article/current-affairs/uniform-civil-code-what-kicked-up-the-issue-and-why-are-some-opposed-to-it-116101400374_1.html

2.http://scroll.in/article/730642/arif-mohammad-khan-on-shah-bano-case-najma-heptullah-was-key-influence-on-rajiv-gandhi

3.http://educoncours.com/2017/07/20/uniform-civil-code/

4.http://www.opindia.com/2016/10/this-is-why-bodies-like-muslim-personal-law-board-oppose-uniform-civil-code/

5.http://www.indiaonlinepages.com/population/hindu-population-in-india.html

6.http://www.thehindu.com/opinion/lead/good-laws-bad-implementation/article5639799.ece

7.https://www.hrw.org/world-report/2017/country-chapters/india

In this article, Kunal Ahuja of Vivekananda Institute of Professional Studies does an overview of Insolvency and Bankruptcy Code.

INSOLVENCY

When an individual or a business entity is unable to meet its outstanding debts to the investors, creditors or lenders that person or business entity is termed as insolvent and this whole state is called insolvency. Insolvency can also take place when the liabilities/debts of the company surpass the assets/income of the company. A person is declared insolvent when any creditor, lender or investor submits an application with respect to the same.

Insolvency can get resolved by two ways

1. Modifying the repayment plan to the creditors or investors.
2. Selling off the assets of the company and paying back to the creditors or investors from the sale proceeds of the assets.

BANKRUPTCY

Bankruptcy is more or like insolvency but when a person declares himself as an insolvent and submits same to the juridical authorities. On being bankrupt it is the responsibility of the court to liquidate the assets and distribute the sale proceeds to the creditors.

INSOLVENCY RESOLUTION PROCESS

Initiation

When any corporate or business entity is not able to pay back the amount to its creditors or investors or lenders on time and this goes on for a very long period of time, this leads to the process of insolvency for which the application of insolvency is submitted to the National Company Law Tribunal (NCLT).

The insolvency resolution process can be initiated by any one of out of following three

• Financial creditor
• Operational creditor
• Corporate debtor himself

Provided operational creditor has to send a prior notice of demand for 10 days to the corporate debtor before the initiation of insolvency resolution process.

Before initiating with the insolvency resolution process creditors analysis whether the inability of the corporate debtor has occurred because of the financial crisis or business crisis. If the creditors are certain that the corporate entity is unable to fulfill its outstanding debts because of the business stress and there is no possibility of it getting better than any of the above creditors or corporate debtor can initiate the insolvency resolution process.

Insolvency resolution process by creditor under section 7 of Insolvency and Bankruptcy Code, 2016

1. Financial creditor himself or jointly will initiate by filing an application for the insolvency proceedings against the corporate debtor before NCLT.
2. Along with the application, he has to submit the proof of default and the name of the proposed resolution professional to be appointed
3. If NCLT is of the opinion that there is no default on the part of the corporate debtor or there is a proceeding pending against the proposed resolution professional NCLT may reject the application.
4. NCLT has to entertain the application within 14 days of making the application.

Initiation of insolvency resolution process by operational creditor under section 8 of the code

Before initiating insolvency resolution process operational creditor will serve the corporate debtor with a prior notice of 10 days to the corporate debtor asking him to pay back the dues.

If the corporate debtor does not pay back in that time period or does not bring to the attention of the operational creditor about any dispute or any arbitration proceeding pending against the business or any record of repayment of unpaid operational debt, then the operational creditor can file an application for the insolvency resolution process.

Resolution of insolvency by the corporate debtor under section 10 of the code

Where the corporate debtor is at fault, the corporate debtor or any corporate applicant can file an application for the initiation of the insolvency resolution process along with the books of accounts and other financial documents of the business. The corporate debtor shall also file the name of the proposed resolution professional along with the application.

Time period for the completion of the insolvency resolution process under section 12 of the code

Insolvency resolution process will have to be completed within the time period of 180 days after the admission of the application and can extend the time period to 90 days in addition to 180 days only if NCLT thinks fit that the resolution process will take more point of view.

In all the above three situations NCLT has to either admit or reject the application for initiation of insolvency resolution process within 14 days.

Within 14 days of admitting the application, NCLT will appoint the interim insolvency professional with the consent of the insolvency and bankruptcy board.

Public announcement and moratorium under section 13 & 14 of the code

Public announcement

Once the application for the insolvency resolution process has been admitted the NCLT will make a public announcement for the submission of claims by the creditors also the adjudicating authority i.e. NCLT will appoint the interim resolution professional.

Moratorium

NCLT will declare the moratorium for prohibiting the following

1. The institution of any suit or pending suit including execution of any judgment or decree against the corporate debtor.
2. Transferring, encumbering, alienating or disposing of any property or right or beneficial interest.
3. Any action to foreclose, recover or any security interest created by the corporate debtor in respect of its property.
4. Recovery of any property by the owner or lessor which is in the possession of the corporate debtor.
5. Terminate the supply of goods and services to the corporate debtor.

The moratorium shall cease to have the effect on the date on which the resolution process is approved or on the date of the liquidation order.

Appointment of interim resolution professional and his role under section 16-20 of the code

Role of insolvency professional

• Interim insolvency professional will have the control over the assets and the financial details of the corporate debtor.
• Interim insolvency professional is empowered to admit or reject the claims based on the verification of the claims from the database of the corporate debtor held by the insolvency professional with the claims submitted by the creditors.
• Interim resolution professional shall manage the affairs of the corporate debtor.
• He will have the powers of the board of directors or partners of the corporate debtor.
• He shall have access to the books of accounts of the corporate debtor.
• He will act as a supervisory body for the officers and managers and the financial institutions of the corporate debtor.  
• Any other function which is deemed necessary for proper appropriation of assets of the corporate debtor.
• The interim professional resolution shall be appointed for the tenure of 30 days.

Appointment of resolution professional and committee of creditors including their functions under section 21-25 of the code

Formation of the creditor’s committee of the code

After submission of the claims, the insolvency professional shall form a creditors committee and all the creditors whose claims get admitted shall be the part of creditors committee. The creditor’s committee will decide upon the question of the reason for the inability of the corporate debtor to pay back its debts and if they are justified that the reason is a business crisis but not the financial crisis, then creditors committee shall either go for restructuring repayment plan to the creditors or for the liquidation process.

• All the members of the creditor’s committee will be allotted the voting rights as per their voting share that will be based upon the financial debts owed to the corporate debtor.
• Creditors committee will hold their first meeting within seven days of appointment and may appoint a final insolvency resolution professional or may give their affirmation to the interim insolvency professional to be appointed as insolvency professional with the approval of 75% of votes of the creditors of creditors committee.
• All the meetings of creditors committee will be conducted by the resolution professional.
• The partners, directors shall attend the meeting but won’t have the voting rights.
• One representative of the operational creditors shall also join the meeting but without any right to vote. Only the operational creditors whose aggregate dues is not less than 10% of the total debt.

Resolution professional have to prepare an information memorandum to enable the resolution applicant to form a resolution plan. A resolution applicant will submit the restructuring of repayment plan to the resolution professional and the resolution professional after its satisfaction will present the same plan to the creditor’s committee for approval. The plan will be confirmed only if it gets the affirmation of 75% of votes of the creditors of creditors committee in favor.

If the above approval has been obtained then NCLT will order the execution of the restructuring plan in a prescribed manner.

After the order of approval by NCLT, the moratorium shall cease to have an effect and resolution professional will forward all the records and documents to the board of directors to conduct the insolvency resolution process effectively.  

Liquidation under section 33 of the code

Liquidation is the process of acquiring the assets of the corporate debtor and releasing them in the market and then distributing the sale proceeds to the creditors as per their priority list described under Insolvency and Bankruptcy Code, 2016.

There are several reasons to the liquidation of the corporate debtor –

1. That the resolution plan was not presented to the NCLT within prescribed time period i.e. 180 days and if the extension of 90 days was provided including those 90 days.
2. When NCLT does not approve the resolution plan and rejects it.
3. If the resolution plan is contravened by the corporate debtor or any other person whose interests are prejudicially affected by such contravention files an application for liquidation.
4. If committee of creditors before giving approval to the resolution plan orders for the liquidation process.
5. If a corporate debtor fails to comply with the resolution plan then NCLT can order for liquidation process.

After the affirmation to the liquidation process, NCLT shall order for the liquidation of the corporate debtor in accordance with the prescribed rules and shall make a public announcement regarding the liquidation of the corporate debtor.

PROCESS OF LIQUIDATION

• Resolution professional will act as a liquidator if not replaced by the approval of 75% votes of the committee of the creditors.
• The liquidator will form an estate of assets of the corporate debtor which will include all the properties, rights or interests of the corporate debtor.
• The liquidation process will take place in accordance with the rules and regulations as prescribed under this code.
• The liquidator will verify all the claims submitted by the creditors and then he will either approve or reject the claim.
• Liquidator after verifying the claims will sell the immovable or immovable assets of the corporate debtor through public auction or private contract.
• The liquidator will satisfy the claims of the creditors as per the priority list of the creditors or debts to be satisfied under the section 53 of Insolvency and Bankruptcy Code, 2016.

FAST TRACK CORPORATE INSOLVENCY

Fast track corporate insolvency can take place in case of following corporate debtors:-

1. The corporate debtor having income and assets below a certain level ascertained by the central government.
2. A corporate debtor with such class of creditors or such amount of debt notified by the central government.
3. Any other corporate debtors which the government may time to time notify.

Fast track corporate insolvency process usually takes place with the small scale or medium sized enterprises. Fast track insolvency has to be completed within the time period of 90 days from the commencement of the corporate insolvency resolution process and if required NCLT can extend the time period but not more than 45 days.

VOLUNTARY LIQUIDATION PROCESS

Voluntary liquidation process can take place if the corporate debtor intends to voluntarily liquidate the company or occurring of an event which was mentioned in articles of association will result in a liquidation of the company.

If the corporate debtor desires to liquidate its company and does not intend to defraud any of its creditors he can voluntarily liquidate the company.

For voluntary liquidation process, the corporate debtor has to submit a declaration stating that the corporate debtor does not intend to defraud anyone and either the company has no debts or he will be able to satisfy all the debts from the proceeds of the assets of the company.  

Through a resolution by the members of the company, an official liquidator will be appointed and NCLT on the application of the liquidator shall pass an order that the corporate debtor shall be dissolved. Corporate debtor will be declared dissolved from the date of such orders