In this article, Kashish Khattar discusses all you need to know about Green Bonds.

Green Bonds

A bond is a debt instrument with which an entity raises money from investors. The issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid. A green bond is the same as a bond, the only difference is that the issuer of a green bond publicly states that the capital is being raised to fund ‘green’ projects, which can be utilised under certain specified categories such as renewable and sustainable energy (wind, solar, bioenergy, other sources of energy which use clean technology etc.); clean transportation including mass/public transportation etc.; sustainable water management including clean and/or drinking water, water recycling etc.; climate change adaptation; energy efficiency including efficient and green buildings; sustainable waste management including recycling, waste to energy, efficient disposal of wastage; and sustainable land use including sustainable forestry and agriculture and afforestation etc. and biodiversity conservation. The definition has been kept expansive enough to include every type of green project that can be thought of at the present time and for the future time being.

IMPORTANCE OF GREEN BONDS IN THE INDIAN ECONOMY

The introduction of Green Bonds sets to resolve the issue of funding in the evolving renewable energy sector. India has set an ambitious target of 175 GW of renewable energy by 2022 and reduce it’s carbon footprint. An estimated investment of USD 200 billion is required to achieve that capacity. The delay in these ‘green’ projects has largely been due to lack of capital funding. Green Bonds is a fast emerging investment for clean energy. Some key benefits for issuing green bonds are:

1. Investor diversification: These bonds help the issuer to amplify funding sources and limit the dependency on specific markets by such issuers. Particularly, Green bonds have been quite popular with investors focused on sustainable and responsible investing (SRI), investors that come under the ESG criteria (Environmental, Social and Governance) etc.
2. Potential for Pricing Advantage: The green factor to these bonds brings with it, pricing advantage. The green bonds have high prospects to bring domestic and foreign capital for renewable energy on better financing terms, including lower interest rates, and longer repayment schedules.

PROCEDURE FOR ISSUE OF A GREEN BOND

To issue a green bond, the compliances laid down in Securities And Exchange Board Of India (Issue And Listing Of Debt Securities) Regulations, 2008 (“ILDS Regulations”) and the Green Bond Guidelines (“Circular”) issued by SEBI (“Board”) on 30^th May 2017 are required to be complied with:

1. The issuer has to make an application to a recognised stock exchange has been made for listing of securities. The issuer has to appoint merchant bankers registered with the Board, one of whom should be lead merchant banker. It also has to obtain in-principle approval for listing of green bonds on the stock exchange, obtain a credit rating from a credit rating agency. The issuer also has to enter into an arrangement with a depository for dematerialization of the green bonds.
2. It will also appoint one or more debenture trustees in accordance with the appointment of debenture trustees and duties of debenture trustees[1] of the Companies Act, 1956 (“Act”) and SEBI (Debenture Trustees) Regulations, 1993. Issuer cannot issue green bonds for loans or acquisition of shares of anyone for people who are part of the same group or who are under the same arrangement.[2]
3. The offer document has to contain all material disclosures which are needed by the subscribers to take an informed decision. The issuer and lead merchant have to make sure that the offer document will contain – which talk about matters to be specified in prospectus and reports to be set out[3]. And disclosures such as last three years annual report, undertaking from the issuer etc.[4] The objective of the green bond, brief details of how the issuer has determined the eligibility of the projects, procedure to be used for deployment of the proceeds of the issue. Details of the projects where the green bonds will be utilised, appointment of third party reviewer for certifying things such as project evaluation, selection criteria, project categories eligible for financing by green bonds.
4. The draft and final offer document has to be displayed on the websites of stock exchanges.[5] Advertising for public issues would include advertisements in the national dailies, no misleading material should be included, it should be truthful, fair and clear, it should only talk about the relevant subjects. Any other product or advertisement issued by the issuer during the subscription should not make any reference to the issue of green bonds.[6]
5. The issuer proposing to issue green bonds online through the website of the designated stock exchange has to comply with the relevant requirements which may be specified by the Board.[7] The price will be determined by the issuer and the lead merchant banker together or through the book building process.[8] The issuer can decide the minimum subscription which it seeks to raise by the issue of green bonds, disclosing the same in the offer document.[9]
6. A trust deed will be executed by the issuer in favour of the debenture trustee in three months of the closure of the issue. The trust has to contain clauses as maybe prescribed under Section 117A of Act, and those in Schedule IV of the SEBI (Debenture Trustees) Regulations, 1993.[10] The debenture redemption reserve will be created by a company for redemption of green bonds in accordance with the Act, and any circulars issued by the central government. The trust should will not contain limiting obligations and liabilities of the issuer in connection with the rights and interests of the investor.[11]
7. There should a proposal to create a charge or security in respect to secured green bonds which have to be disclosed in the offer document, the issuer is supposed to give an undertaking about the assets on which charge is created are free from any burden. The proceeds from the issue will be kept in an escrow account till the documents for creation of security as stated in the offer document are executed.[12]
8. Responsibilities of the issuer – The issuer will maintain a decision making process which determines the eligibility of the projects/assets. Including, without any exception, a statement on the environmental objectives of green bonds and a way to determine whether the projects or assets are eligible to be considered. He will ensure that all projects or assets are funded by the proceeds of the green bonds, and meet its objectives. The utilisation of proceeds is well established in the offer documents. The issuer or any agent of the issuer, if following any globally accepted standard for measuring environmental impact on the project or has a process of identifying projects or assets, or utilising of proceeds will disclose all the details in the offer document, disclosure document and in continuous disclosures.

PROCEDURE FOR LISTING OF GREEN BONDS

Mandatory Listing

• Issuer who desires to make an offer of green bonds to the public has to make an application for listing to one or more designated stock exchanges under Section 73 of the Act;
• Issuer has to comply with all the conditions of listing such green bonds as have been specified in the listing agreement with the stock exchange; and
• The issuer who wishes to issue privately placed green bonds has to forward the listing application with disclosures specified in Schedule 1 of the recognised stock exchange within fifteen days from the date of allotment of those green bonds.[13]

Conditions for listing of green bonds on private placement basis

• The issuer has to issue green bonds in compliance with provisions of the Act, rules prescribed and other applicable laws, credit rating has been obtained from one agency registered under the Board, securities to be listed are in dematerialized form, disclosures in Regulation 21 have been made. The issuer has to comply with conditions specified in Listing Agreement with the stock exchange where these securities are supposed to be listed, the designated stock exchange has to collect a regulatory fee as specified in Schedule V. The issuer has obtained fresh credit rating from at least one credit agency, ratings have to be revaluated on a periodic basis, appropriate disclosures have to be made in regard with re-issuance of term sheet.[14] The issuer seeking listing will make disclosures as specified in Schedule I of the regulations and the annual report of the issuers; it should be made on website of stock-exchanges and shall be downloadable in PDF/ HTML formats. Relaxation of strict enforcement of rule 19 of Securities Contracts (Regulation) Rules, 1957. The Board relaxes enforcement of sub rules (1), clause (b) of sub rule (2) and (3) of rule 19.[15]

COMPLIANCES

Continuous Listing Conditions[16]

• All issuers making public issue or seeking to list green bonds issued on private placement basis will comply with conditions of listings specified in respective listing agreement for green bonds, every rating obtained by the issuer will be reviewed by a credit rating agency and any changes will be disclosed by the issuer to the stock exchange, any change in rating will be communicated to investors as maybe determined by the stock exchange, debenture trustee will issue a press release in any of the events when – there is default by issuer to pay interest on green bonds, failure to create a charge on assets, revision of rating assigned to the green bonds. All this information has to be placed on the website if there is one of the debenture trustee, issuer or stock exchange etc.

Trading of green bonds[17]

The green bonds, public or on a private placement basis will be listed on a recognised stock exchange, will be traded and such trades will be cleared and settled in the recognised stock exchanges subject to conditions specified by the Board, if green bonds are traded over the counter – they have to be reported on a recognised stock exchange. The Board can specify conditions for reporting of trades on the recognised stock exchange.

Continuous Disclosure Requirements

Aside from disclosures made by the issuer in SEBI Listing Regulations, 2015. The issuer is required to submit to SEBI from time to time, its annual report and financial results along with utilisation of the proceeds on the basis of any internal tracking done by the issuer where such internal tracking is verified by any external auditor whereby he can verify the proper utilisation of proceeds of the green bonds and allocation of the same towards projects or assets. Also, details of unutilized proceeds will be given.

• Additional disclosures that need to be submitted with it’s annual report include the quantum of amount raised and a list of projects with brief descriptions, for which such amounts are raised. Details need not be provided when such information comes under the ambit of confidentiality. General information would suffice in these cases, and Certain qualitative and quantitative performance indicators are required, also the underlying assumptions used in the preparation of the performance indicators and metrics are required.

IMPACT OF GREEN GREEN BONDS ON THE MARKET

The Circular does a great job in formalizing the regulatory framework for issuing and listing of these bonds. They are a big boon to the renewable sector and make the investments more lucrative to investors and provide a benchmark to regulate and monitor these guidelines that funds are only used for green projects. This will broaden access to domestic and foreign capital and relieve the banks from the strain of lending and re-financing long term green projects. Green Bond Guidelines also ensure detailed disclosure norms for the borrowing authority, closed monitoring of the utility of the bond proceeds, an incentive and add immense quality to a novel financial product which has already established its success in international and domestic markets. The guidelines also strengthen India’s commitments at the COP21 Agreement.

References

[1] Section 117B of Companies Act, 2013

[2] Regulation 4 of the ILDS Regulations

[3] Disclosures specified in Schedule II of the Act

[4] Specified in Schedule I of these regulations

[5] Regulation 7 of the ILDS Regulations

[6] Regulation 8 of the ILDS Regulations

[7] Regulation 10 of the ILDS Regulations

[8] Regulation 11 of the ILDS Regulations

[9] Regulation 12 of the ILDS Regulations

[10] Regulation 15 of the ILDS Regulations

[11] Regulation 16 of the ILDS Regulations

[12] Regulation 17 of the ILDS Regulations

[13] Regulation 19 of the ILDS Regulations

[14] Regulations 19, 20 and 21 of the ILDS Regulations

[15] Regulation 22 of the ILDS Regulations

[16] Regulation 23 of the ILDS Regulations

[17] Regulation 24 of the ILDS Regulations

In this article, Gyandeep Kaushal pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the reasons why VCs refrain from investing in an LLP.

Why Don’t Venture Capitalists Like Investing in LLP?

In the recent past, India has seen as a boom in the number of startups. For any startup trying to achieve success for its business, one of the most difficult decisions to be made is the choice of legal entity in which the enterprise should be structured. The vehicle on which the enterprise will run goes a long way in determining the success and future of the same. Entrepreneurs are faced with several options in legal entities in which they can have their enterprises formed for long term business activities. They can incorporate the venture into a corporation, more often known a company, an LLC, a partnership or an LLP.

Besides choosing the right kind of vehicle on which the business must be run in the future, another challenge faced by entrepreneurs is how to raise funds for their business. Thus, in this submission, we are going to discuss basically the interplay between raising funds for a business and choosing the right vehicle for a business. Before moving on to discuss the reasons why VCs do not invest in an LLP, it is imperative that we discuss what do these two key terms mean.

What is an LLP?

The Limited Liability Partnership is a recently evolved business structure which initially originated in Texas, but is today recognized internationally by all the major economies such as the UK, Australia etc. In India, LLPs are governed by the Limited Liability Partnership Act, 2008 which was notified on March 31, 2009.

An LLP is a hybrid business structure which offers the operational flexibility of a partnership vis-à-vis the advantages of limited liability and separate identity of a company. Thus, an LLP is a blend of the advantages of both a general partnership as well as an incorporated company. The compliance requirements of an LLP, although is slightly more than that of a general partnership, is still much less than what is required for an LLC. An LLP is more suited to small businesses that are not looking forward to getting burdened by the tax compliance requirements of a corporation.

An LLP, much like a corporation can continue to exist despite the outgo and incoming of any partner. In that, an LLP has perpetual succession like a company. An LLP has a legal entity separate from its partners and is liable to the full extent of its assets. However, unlike a general partnership, any liability of the partnership in case of an LLP cannot reach its hands to the throats of the partners to any more than the extent to which the partners have agreed to contribute in the LLP. Thus, in case of an LLP, partners have what may be looked upon as some kind of protection, unlike in general partnerships where partners are personally liable and creditors can have claim to even the personal assets of the partners.

What is Venture Capital?

The above paragraphs dealt with the first concern that is, what structure should be chosen for a venture. Now, let’s discuss the second concern, which is – how to raise capital/funds for the venture. Now, any venture is basically faced with the options of bank loans or other means such as angel investments, venture capital investments or public issue of securities, in which case a company needs to be a public company and needs to be listed on a stock exchange. Now, coming on to venture capital, these days it is one of the most famous ways of having a startup financed for quick growth. Venture capital generally is a pool of fund made by investment banks, big investors and other financial institutions. Venture Capital is basically a financing mechanism through which startups and other small businesses get funding. Investors keep an eye for startups that show the capacity of quick and high growth in the future. Venture capitalists understand that out of every 10 startups they fund, two might fail, two might be successful and the other six might show average growth. However, they scope out to make the two successful startups keep the balance against the other eight in their favor. Venture capital shall be discussed in more detail while discussing the reasons why they don’t like investing in LLPs.

Now, as the topic of the assignment says, Venture Capitals or VCs don’t like to invest in Limited Liability Companies or LLPs. There are several reasons for this.

Reasons Why VCs Don’t Invest in LLPs

New Waters

Investors like to invest in business structures which are tried and tested. While the corporation has been there for decades, the Limited Liability Partnership structure is one which is of recent origin. Even in India, the act that governs LLPs, the Limited Liability Partnership Act, 2008 was only notified on March 30, 2009. Hence, because investors have spent relatively much lesser time with this structure, they tend to go with more trusted business structures and end up favoring the corporation over anything else most of the time. As we know, it takes a lot of time and effort to make a decision regarding whether or not to invest in a particular venture, after analyzing its growth potential, associated risks etc. Thus, no investor would like their position and money to be put on stake by enhancing the risks by investing in an unknown business structure.

Particular Venture

It is a fact that LLPs are governed by their LLP agreements. This makes it possible and possible for LLPs to bring in clauses in the agreement order to fix time limits for the duration of the business. Thus, if there is such a provision in the agreement that allows an LLP to come to an end, LLPs can choose to get wound up or have their names struck off from the name of the LLPs after the fixed time limit in the agreement has elapsed or the purpose or objective with which the LLP was formed has been realized. Since gaining returns on an investment can be a lengthy and time taking thing, investors are more often particular to not invest in ventures which might cease to exist soon.

Limited Legal Recourse

It is known for a fact that in LLPs, unlike general partnerships, any claim on the venture cannot reach its hand on the partners’ neck beyond what they have agreed to contribute in the business. For instance, if a partner has agreed to contribute Rs. 10 lakhs and has paid Rs. 7 lakhs, on a claim on the LLP, the partner cannot be compelled to pay a penny beyond Rs. 3 lakhs (the remaining amount). And if the claimant’s claim is still not satisfied, he cannot compel the partner to pay beyond the remaining amount. The immediate implication of this fact is that there is less security of the money invested by a VC in an LLP because the money that they will be investing might up end in the managing partner’s own pockets and the investors shall not be left with much legal recourse to contest. For this reason too, VCs prefer private limited companies where the only mechanisms to extract capital from a company is either dividend or liquidation of the company and in each case, an approval from the Board of Directors is required. And it is a known fact that investors usually have much control on the Board, so this means that there is sufficient security for their money.

Audit Requirements

For corporations, audit is a must requirement. However, for LLPs, it is not. As per Rule 24 of the LLP Rules, 2009, any LLP whose turnover does not exceed forty lakh rupees in a given financial year or whose contribution does not exceed five lakh rupees, it is not mandatorily required to get its account audited. Only if the limits prescribed by Rule 24 is crossed, the LLP needs to be mandatorily audited. Startups as we know, do not begin with huge capital amounts and may be crunching for capital. This means that when startups begin, it is highly probable that their capital might not cross the requirements of Rule 24. What this means for an investor is that they will not be having their hands on any audit report. Before making any investment, it is highly advised for investors to conduct due diligence of the venture they are going to invest in. Since audit reports play a vital role while conducting due diligence, investors don’t have much confidence in startups which are structured as LLPs.

Scalability

Investors do not only invest for quick money making. They are interested in seeing the business grow over the years while maintaining a stake in the same. On the other hand, LLPs are known to be a model unsuited for large businesses and is rather advised for professional service providers such as lawyers, accountants etc. Companies that have high growth potentials such as those working in the fields of technology or life sciences etc. are expected to be organized and structured as corporations and not as LLPs. Since such opportunities are capable of providing the financial returns VCs look forward to, they like to invest in corporations and not in LLPs. Businesses structured as LLPs can be a little disadvantageous for an investor who wants to see the business grow.

No concept of shares like corporations

LLPs do not have any concept of shares, unlike the corporations. Investors usually like to look at an employee stock pool before they invest. While VCs are not forbidden from investing in LLPs and can secure an interest in the same, the safety as well as the return of their investment can be cleanly scoped out in the form of shares the concept of which only exists for corporations and not for LLPs.

Shareholders are Partners

In an LLP it is a must for all shareholders to be partners, while the same does not hold good in case of corporations. The outlook of VCs towards investment is usually that against the money they put in, they would like to have more control in the venture rather than getting burdened with more responsibilities. In an LLP, since every shareholder must be a partner, for a VC it means that they too will have to be a partner if they are willing to hold interests in the LLP. On the other hand, this is not a requirement in case of corporations where shareholders exercise much control on the Board of Directors and don’t have to essentially get burdened with responsibilities. In case of companies, VCs have more a sort of commanding position without much responsibility and this affects their interests in the long run.

Rights of Partners

It is possible to structure an LLP in a manner where one partner has more rights than another. Thus, unlike in corporations, the one vote per share system does not exist in case of LLPs. This means that despite having a majority share in an LLP, the position of the VCs can be compromised if they have less rights than the other partners.

Greater Penalties

Although LLPs have to fulfil lesser compliance requirements, this does not translate in saving LLPs from penalties. In fact, LLPs in case of non-compliance end up paying more fines than corporations. Due to this, VCs do not like risking their investments in LLPs.

Exit Option

While a VC can buy an interest in an LLP, the fact remains that LLPs cannot be listed on a stock exchange for the mere reason that they are not the same as public companies. What this means for VCs is one of their exit routs is cut off, condemning any deal with an LLP of any size. Companies are capable of providing successful exit events within the required time frame which VCs expect. Since VCs usually want to have a planned exit event (usually in the form of an IPO or an acquisition) within three to seven years, LLPs are not what they prefer.

This was all on Why Don’t Venture Capitalists Like Investing in LLP. Hope the article added value to your knowledge. What are your views on Why Don’t Venture Capitalists Like Investing in LLP? Comment below and let us know.

In this article, Km Sai Apabharana pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the recent Amendments To The Citizenship Act, 1955.

One of the major changes that were brought to The Indian Citizenship Act, 1955 (further on referred to as the “Act”) was via Citizenship (Amendment) Act, 2015 (herein after referred as the “Amendment Act”). This amendment mainly merges the Person of India (herein after referred as the “PIO”) and Overseas Citizenship of India (herein after referred “OCI”) schemes.[1] It also introduces the concept of ‘Overseas Citizen of India Cardholder’ which replaces the concept of the two. [2] These amendments inter alia will be further elucidated in this article.

The bill for the amendment was introduced in Lok Sabha on 27^th February, 2015 and passed by it on 2^nd March 2015 and by Rajya Sabha on 4^th March 2015. It received the President of India’s assent on 10^th March 2015. The amendment was deemed to have come into effect from 6^th January, 2015.

Merger of Person of India and Overseas Citizenship of India

A person who was registered under the Citizenship Act, 1955 as an Overseas citizen prior to the 2015 amendment is referred to as an Overseas Citizen. A person who is registered as a Person of India cardholder is referred to as the Person of India. As already stated, one of the important amendments that have been brought about is the merger of PIO and OCI.

The concept of Overseas Citizens of India Card holders has replaced the concept of both OCIs as well as PIOs. This is evident from section 7A(2) which has been added to the Act which states that, the existing Persons Of India Origin cardholders (registered persons) will be deemed to be the Overseas Citizens of India Cardholders upon a notification that will be made by the Central Government in the Official Gazette.

Registration of an Overseas Citizen Cardholder

Section 7A of the Act provides the eligibility criteria for registration of an individual as an Overseas Citizen Cardholder. Upon making an application, the Central government will register such an individual if:

He is person of full age and capacity who is

• a citizen of another country, but was a citizen of India at any time on/ after the commencement of the Constitution, or
• a citizen of another country, but was eligible to become a citizen of India at the time of the commencement of the Constitution, or
• a citizen of another country, but belonged to a territory that became part of India after the 15th day of August,1947, or
• a child or a grandchild or a great grandchild of such a citizen; or

A person who is a minor child

• of a person above mentioned in point (a) or
• is a minor child, and whose both parents are citizens of India or one of the parents is a citizen of India or

Spouse of foreign origin of a citizen of India or spouse of foreign origin of an Overseas Citizen of India Cardholder registered under section 7A and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application under section 7A. Also, such spouse will be subjected to security clearance by the relevant authorities in India prior to registration.

It is also important to note that any person who is or either of whose parents or grandparents or great grandparents is or had been a citizen of Pakistan or Bangladesh cannot be registered as an Overseas Citizen of India Cardholder under the Act.

Rights of an Overseas Citizenship Cardholder

Considering that PIOs and OCIs have been merged to form the Overseas Citizenship Cardholder, the rights of the former are also provided to the Overseas Citizenship Cardholders. As per the ministry of home affairs, the registered OCI Card holders are entitled to the following rights:

1. They can have lifelong visa of multiple entry for visiting India for any purpose. But, OCI Cardholders will have to obtain a special permission to perform research work in India. For this purpose, they might have to submit an application to the Indian Mission/ Post/ FRRO concerned.
2. They are exempted from registering with the Foreigners Regional Registration Officer (FRRO) or Foreigners Registration Officer (FRO) for any time period of stay in India.
3. The rights provided to them are in parity with Non-Resident Indians (NRIs) with respect to all the facilities available to them in economic, financial, and educational fields. However, this right is not available to them in matters relating to the acquisition of agricultural or plantation properties.
4. The registered Overseas Citizen of India Cardholders is treated on par with Non Resident Indians on aspects regarding inter-country adoption of Indian children.
5. Moreover, the registered Overseas Citizen of India Cardholders are treated at par with the resident Indian nationals on matters pertaining to tariffs in air fares in domestic sectors in the country.
6. Also, the entry fee applicable to the Overseas Citizen of India Cardholders is the same as that applicable to the domestic Indian visitors who wish to visit national parks and wildlife sanctuaries in India.
7. They are furthermore treated in parity with Non-Resident Indians(NRI) with respect to the following
8. entry fees that is levied for visiting the national monuments, historical sites and museums in India
9. Carrying on the following professions in India, in accordance with the provisions contained in the relevant Acts, namely:-
   • doctors, dentists, nurses and pharmacists;
   • advocates
   • architects
   • chartered accountants
10. to appear for various tests such as the All India Pre-Medical Test to make them eligible for admission in accordance to the provisions contained in the relevant Acts.
11. Also, the State Governments are required to ensure that the OCI Cardholder registration booklets of OCI Cardholders are considered as their identification for any services that are availed to them.
12. Overseas Citizens of India Cardholder can give an affidavit attested by a notary public as a proof of residence by stating that a particular/specific address may be treated as their place of residence in India,
13. They can also in their affidavit give their overseas residential address as well as their e-mail address, if any.
14. Any further benefits to an Overseas Citizen of India Cardholder will be notified by the Ministry of Overseas Indian Affairs (MOIA) under section 7B(1) of the Citizenship Act, 1955.

It is also pertinent to note that a person registered as an Overseas Citizen of India Cardholder is eligible to apply for grant of Indian citizenship under section 5(1) (g) of the Citizenship Act, 1955 if he/she is registered as Overseas Citizen of India Cardholder for five years and is ordinarily resident in India for twelve months before making an application for registration.[3]

Registering for Citizenship

The Amendment Act has modified certain provisions pertaining to citizenship by registration. As per the Act, any individual, who is not an illegal migrant or not already a citizen of India, can make an application to the Central Government. For the application to be granted, the applicant has to fulfil the following criteria that have been laid down. As per section 5 of the Act, the applicant has to be:

‘(a) a person of Indian origin who is ordinarily resident in India for seven years before making an application for registration;

(b) a person of Indian origin who is ordinarily resident in any country or place outside undivided India;

(c) a person who is married to a citizen of India and is ordinarily resident in India for seven years before making an application for registration;

(d) minor children of persons who are citizens of India;

(e) a person of full age and capacity whose parents are registered as citizens of India under clause (a) of this sub-section or sub-section (1) of section 6;’

As per the Amendment Act, the following provisions have been added:

‘(f) a person of full age and capacity who, or either of his parents, was earlier citizen of independent India, and is ordinarily resident in India for twelve months immediately before making an application for registration;

(g) a person of full age and capacity who has been registered as an Overseas Citizen of India Cardholder for five years, and who 5 is ordinarily resident in India for twelve months before making an application for registration.’

Dual citizenship is still not recognised in India and hence, such individuals will have to renounce their citizenship. In addition, a person will also be eligible to apply for citizenship if he has been residing in India but has travelled abroad intermittently, if the total number of days that person has stayed away from India does not exceed 30 days.[4] This provision has been made to meet the needs arising out of increased globalisation which involved the needs of people to travel abroad due to economic, social and medical needs. Also, in case of special circumstances, if the Central Government is satisfied, it can relax certain criteria imposed as per Section 5(1A) of the Act, after recording them in writing. [5]

Conclusion

As can be seen from the article, even though the amendment has not addressed the need for dual citizenship, it is still a substantial change for the PIO cardholders, and individuals who want to apply for Indian Citizenship through obtaining OCI status. These concepts have to be especially taken note of by the Employers who have employed PIO or OCI cardholders or ones who wish to apply for it. They will have to guide their employees to make the relevant changes as applicable.

References

[1]‘Parliament passes Citizenship (Amendment) Bill, 2015’, GK Today, India’s daily E magazine. Available at http://currentaffairs.gktoday.in/parliament-passes-citizenship-amendment-bill-2015-3201520380.html. Accessed on 16.06.2017

[2] ‘India: Amendments To The Citizenship Act, 1955 And The Concept Of The Overseas Citizens Of India Cardholder’, by Ran Chakrabarti and Sonu Varghese, Indus law, 20 January 2016

Availableat<http://www.mondaq.com/india/x/459548/general+immigration/Amendments+to+the+Citizenship+Act+1955+and+the+concept+of+the+Overseas+Citizens+of+India> Accessed on 16.06.2017

[3] Ministry of Home Affairs, Overseas Citizenship of India (OCI) Cardholder, intro Available at < http://mha1.nic.in/pdfs/intro.pdf > Accessed on 18.06.2017

[4] i.d. 2

[5] Section 5(1A) of the Indian Citizenship Act, 1955

In this article, Bhawana Khanwani pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses how to negotiate Employment Agreement effectively.

The Employment Agreement is a legally binding document that employer and employee enter bona fidely. It is a contract of service which includes employee’s terms and condition of employment either by way of collective agreement or individual agreement. Such agreement elucidates job offer, employee’s duties and responsibilities while performing his job, compensation, salary, working hours, statutory entitlements, expense reimbursement, other benefits and confidentiality obligations in details.

Employment agreement are kind of standard form of contract as under such contracts terms and conditions are decided at employer’s end and it is expected from employee or person who wants a job under the applied job title to agree upon such terms. Mere agreeing upon the dictated terms and conditions of such agreement may be attractive in short term but in long run, it may be frustrating for employee as terms are not suiting his needs and expectation which results in resigning from the job in less time. It is better to avoid such situations as this will be loss to both employee in terms of losing job and employer in terms of losing human resource, further leads to loss of time and energy of both.

To avoid such situations it’s better to negotiate the term of employment agreement. Contract Negotiating means act of two or more parties discussing points of a potential partnership arrangement. The goal is for an agreement to be made that is beneficial to all involved parties. Discussions may go back and forth between parties until all points have been agreed upon. The end goal is an arrangement that is both fair and equitable to each party[1].

Negotiating employment agreement is must as it when negotiated by both employers and employee one is clear about the expectations of other and this can turn way out better for both the parties. Employee should not hesitate about negotiating the terms of employment as he is eligible for the job title and possess requisite skills and knowledge. Moreover, he must know his worth and work in the atmosphere where he can dedicate his energies to the work and in turn get best output which is beneficial both for him and his employer. While negotiating the employment many issues should be considered by employees which are enumerated below:-

Employee’s Experience/Specialization

As a junior or entry-level employee or a job title which has not prominent position in the organization, likelihoods are that employee will not be in a strong position to negotiate his employment agreement.  However, if one is highly qualified and specialized in a niche area, one may have more influence to negotiate – especially if one’s skills or training he possesses are very high in demand.  If one is more experienced and taking on a senior role, he will be in a much better position to negotiate the employment agreement[2].

Company Size

If one is an entry-level analyst or associate going to work for a big bank, international consulting firm or mega corporation with his recently minted business degree or other skills, he will likely have less leverage to negotiate his employment agreement.  Even if one is more senior and experienced, negotiating employment agreements with big employers is still a challenge because there is a strong desire to standardize across the organization and there are often multiple layers of approvals required to deviate from the terms offered – both of which serve as easy crutches for hiring managers to reject one requests[3].  If one is considering employment with a smaller company or startups than there are chances that one can negotiate better as per their needs and further there are less chances that employers does not accommodate one’s  request as they need human power for their organization.

Be Reasonable and Listen to the potential employer’s need

Think of things from the prospective employer/client’s perspective.one should not dictate the terms of employment but also listen to what the employer is asking. One must be patient and listen to the nitty-gritty explain by employer about organization, his expectation from you and then by reinforcing one’s desire to work together, and choosing your words wisely, one can make all the difference while negotiating the terms in his favour reasonably.[4]

Checklist of key issues to consider when negotiating an employment agreement

• Compensation – Compensation is the inevitable issue, but this issue should encompass different layers while negotiating including increase in base salary each year, bonus provisions including bonus on the basis of performance or discretion of Board/Company and circumstance where base salary may be reduced or delayed on happening of certain events in the company[5] and method of compensation- guaranteed based or incentive/performance base etc.
• Terms of Agreement and Scope of Duties – Agreement must specify when the agreement will terminate or if it renewed automatically and not terminates until specifically at the option of one party. Furthermore, agreement should elucidate the entire job description, procedure under one is responsible for any default and extent of liability, define the relationships whom one should report or team composition, expectation of employer[6].
• Performance Standards and Evaluation – agreement should contain a clause explaining how one’s performance is evaluated, criteria for getting performance enhancement awards, probationary period and criteria for promotions in the organization.
• Benefits/Perks – vacations including sick leaves, maternity benefit, distribution of holidays, insurance policies taken by employer benefitting employee – term of premium, benefit, whether includes family of employee or not, disablement insurance or compensation, retirement benefits – pension, gratuity etc. and paid expenses etc.
• Equity Grants – this is one of the important point one need to consider in employment agreement and while considering one must to look the percentage of equity issue, tax incentive stock options, employee stock options, employee option of use of such equity after termination of employment etc.
• Terms of Termination – agreement should contain a specific termination clause and the circumstances of termination such as termination ‘at will’ , terms of termination, compensation in case of early termination, lay off, breach of employment agreement, non-performance termination criteria etc.
• Reimbursement of Expenses – The issues regarding the right to the employee getting reimbursement expenses includes time period of reimbursement of business expenses, House rent allowance, travel allowance or provision of vehicle, cell phones, laptops, travel tickets or other such amenities[7].
• Confidentiality Restrictions – This is a point which every employer wants in an agreement. There may be separate confidentiality agreement or there may be clause included in the employment agreement itself. Employee should read the confidentiality clause carefully and should be aware of his liability in case of breach.
• Invention Assignment Issues – Companies expect that any inventions or business ideas developed by the employee related to the company’s business during the employment period, will be owned by the company. So they add such clause under which they have right over the ideas. Employee must know the extent of his right over his ideas, can he use his ideas or share it with someone else and what rewards will he get in return[8].
• Disability and Death – Many issues arise during employment which may lead to disablement so the employee should be aware of allowances or insurance cover under which his disablement is protected. Moreover, he should be aware about his rights and other benefits his family will get in case of death.[9]
• Post-Employment Limitations/ Non-Compete clause – It is now-a- days standard practice for companies to include ‘non-compete’ provisions in contracts of employment. It restricts an employee from competing with the employer or joining a competitor during the term of the employment and for a period thereafter[10]. Employee must see before joining the non-compete clause and also he must see other limitations which would bind him after termination of his employment.
• Dispute Resolution – employees must see into dispute resolution method in case of any disputes arise between employee and the management, law governing such dispute etc.
• Miscellaneous Provisions – employees may look into any other clause or any other specific clauses added due to nature of employment or company’s business etc. and negotiate such clause accordingly.

Thus, employee, while looking for job and entering into employment agreement, must negotiate without hesitation. The key to negotiation is not a quantitative issue but rather than qualitative one that is in simpler words rather than to put focus on how much to negotiate it should be seen that what should be negotiated. This is a sensitive process one must handle it with care as aggressive negotiation might lead to slip of offer out of one’s hands. Negotiation is a strong tool which should be used with little research, confidence and flexible skill to achieve the best of job offer and which in turn lead beneficial for both employer and employee.

References

[1] http://www.businessdictionary.com/definition/contract-negotiation.html last accessed on 15th.june.2017

[2] Patel, Naina: Negotiating Your Employment Agreement (aka Employment Offer Letter) ; Aug 23, 2016; https://www.shouldisign.com/negotiating-employment-agreement/ last accessed on 17^th.june.2017

[3] Ibid

[4]Rice, Tamara: 10 Rules for Negotiating Work Contracts; https://www.upwork.com/blog/2010/08/10-rules-for-negotiating-work-contracts/ last accessed on 17^th.june.2017

[5] Employment Contracts: the good, the bad, and the must know information; American College Of Radiology; https://www.acr.org/Membership/Residents-and-Fellows/Resident Resources/~/media/74A2FA80042146C59F3A2A2DDCC0B5D9.pdf  last accessed on 17^th.june.2017

[6] 12 Tips for Negotiating Employment Agreements; https://dental.gppcpa.com/enewsletters/article/12_tips_for_negotiating_employment_agreements/ last accessed on 17^th june.2017

[7] Wayne N. Outten: Negotiating Employment Agreements: An Employee’s Lawyer’s Perspective; http://apps.americanbar.org/labor/lel-aba-annual/papers/2000/outten2.pdf last accessed on 17th.june.2017

[8] Harroch, Richard : Negotiating Employment Agreements: Checklist Of 14 Key Issues; https://www.forbes.com/sites/allbusiness/2013/11/11/negotiating-employment-agreements-checklist-of-14-key-issues/#1b9664be24c6 last accessed on 17^th.june.2017

[9] Ibid

[10]RestrictiveClauses;http://www.businesstoday.in/moneytoday/cover-story/non-compete-provisions-in-employment-contract-validity/story/192009.html last accessed on 17th june.2017

In this article, Aparna Burman pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Introduction

The Black Money and Imposition of Tax Act had been introduced in the Parliament on 20.03.2015 which thereafter received President’s nod on 26^th May 2015 and finally, has been notified on Jul 2015.

For many years, Individuals, as well as Institutions, have been engaged in evading taxes and hence generating a huge amount of surplus and inert money which could not be accounted for in the formal economy. These funds are taxable as per the Income Tax Law. But, by evading tax, the generated huge amount of undisclosed money creates a parallel economy which is called the Black money generation and is a threat towards real economy.

What actually is Black Money

Black Money refers to undisclosed and unaccounted money. However, there is no clear definition of Black Money.

Black Money is usually obtained and transacted illegally without satisfying the norms laid by the Govt. or the Authority. Moreover, as it is illegal, it is not accounted for tax Deductions as well. It is also kept hidden from Govt. Authorities for the calculation of National Assets like GDP, GNP and so on.

Hence, this hefty amount of unaccounted money circulates within or outside the country, mainly via Cash Transactions creating a Parallel economy.

However, it should be clear from the very beginning that the black money is not fake notes. It is Legal Denomination which is usually kept hidden from Govt. and Authorities.

How Black Money is Generated in the Economy:

Black Money can never be created by a person. It is always generated from the real economy as this money is legal denominations. There are a few ways to generate this unaccounted money within the real economy.

Illegal Activities

Money which is generated from illegal activities such as trafficking, robbery, terrorism, corruption etc. usually kept beyond the sight and reach of the government and usually these are in form of raw cash.

Tax Evasion

People who unintentionally fail to deduct Income Tax on their income because of ignorance or unwillingness or due to lack of such knowledge, generates the not deducted money as the Black Money.

Tax Avoidance

This is one of the most widely distributed sources of Black Money generation.

Here, people, knowingly, takes the advantage of a few glitches and loopholes of the Taxation Legal System of the country and take unfair means to avoid paying tax on earned income.

The purpose of the Black Money Act:

1. The sole purpose of the introduction of this much-talked-about Act is to deal with the fabulous sum totalling about Rs.6500 crore, as cited by the Hon’ble Prime Minister of India, Narendra Modi, lying in the safe havens abroad and within India, untouched by the Indian law.
2. Indian Govt. has dealt with these undisclosed incomes with high priority and precision. Without rushing for any half-baked law, they took years to provide a highly stable and firm law for imposition of tax on any undisclosed foreign income and asset outside India.

Provisions of the Act

The Act applies to all Indian Residents and replaces some clauses of the Income Tax [IT] Act of 1961 and adds to it as well only for the taxation of foreign income.

The main Provisions of the Act are:

• Penalize the concealment of foreign income.
• Provide for criminal liability for attempting to evade tax of generated income in foreign
• Persons having overseas accounts having balance of up to 5 lakhs will not attract any penalty.
• One time compliance opportunity will be provided to persons to disclose overseas assets
• The opportunity will not be an amnesty scheme as no immunity from penalty is offered.

Detailed Provisions

Provided that this Act is quite heavy in both size and complexity, it needs much illustration to understand it clearly.

The detailed provisions of this act are illustrated as below:

Tax rate

• All foreign income and assets calculated on previous year assessment will attract a tax of 30% in flat rate
• No exemption will be provided to the payable tax amount under any circumstances.
• This act will be applicable from April 1, 2016 onwards.

Which income to be Taxed

• Income and Assets acquired abroad i.e. outside India which have not been disclosed in the previous year’s Income Tax Return filing.
• Income and Assets acquired abroad i.e. outside India which have not been accounted for Income Tax Return Filing, intentionally or unconsciously.

One-Time Disclosure Opportunity

• All person having Assets acquired outside India and kept secret will be able to file a declaration before Income Tax Authority and must pay penalty at a rate of 100%

Tax Authorities’ Involvement

• Power to inspect all the documents and pieces of evidence;
• The proceeding must be Judicial by nature.

Penalties

As per the Act, certain amount of penalties has to be paid in addition to the payable tax rate stated before, depending on the nature of tax evasion offence.

For Undisclosed Foreign Income and Assets

Penalty payable for this type of offence is Equal to three Times of the amount of tax payable.

For failure to furnish tax Returns

If the foreign income or asset exceeds Rs. 5 lakhs valuation then a penalty of Rs. 10 Lakhs will be applied.

For Inaccurate or Undisclosed Foreign Assets

If the undisclosed foreign income or asset exceeds Rs. 5 lakhs valuation then a penalty of Rs. 10 Lakhs will be applied.

For Second Time Defaulter:

A penalty equal to the amount of Tax Arrears will get attracted.

Other defaulters

If the defaulter fails to answer questions asked by tax authority, rejects to sign of a statement or fails to attend and produce required documents, then a penalty of ranging from Rs. 50000 to Rs. 2 lakhs will get attracted.

How prosecution will work for such offences:

If someone found keeping the Black Money generation and circulation carrying forward, this Act paves the way to imprisonment of the person through legal jurisdiction.

Intentionally attempting to evade tax

This person will face imprisonment ranging from 3 years to 10 years depending on the severity of the offence along with a hefty amount of fine 300%.

Intentionally attempting to evade payment of tax:

This person will face imprisonment ranging from 3 months to 3 years depending on the severity of the offence along with a hefty amount of fine counting 300%.

For failing to furnish Income Tax Return

This person will face imprisonment ranging from 6 months to 7 years depending on the severity of the offence along with a hefty amount of fine 300%.

Punishment for encouraging/helping a person to evade tax:

This kind of persons will be treated with no difference from the person who is committing the offence.

This person will face imprisonment ranging from 6 months to 7 years depending on the severity of the offence along with a hefty amount of fine 300%.

Liability of Organizational offence

If any organization/Institution/Company found guilty of Tax Evading Offence, each and every person responsible to the company will be treated as guilty of this offence and the penalties will be per the previous cases mentioned above depending on the genre of the offence.

However, if any person responsible to the company can prove that this offence has been carried forward without his/her knowledge/consent, his/her liability to the punishment will be absolved.

Issues with the Black Money Act

Though chalked out with high precision and implemented with firm legal stability and craftsmanship, it still has a lot of loopholes that can be used to hide those unaccounted incomes or to bypass legal proceedings.

Though most of the loopholes created while easing the complexity of the process or while securing the loyalty of loyal taxpayers, but those were expected to be dealt with much more precision to avoid further generation or movement Black Money.

Some of the issues have been illustrated as follows:

Exclusion of Non-resident Indians from the scope of Black Money act:

Non-Resident Indians have been kept aside from the applicability of the Act who can prove themselves the genuine owner of wealth residing abroad.

These persons are not obliged to declare their assets and income to Indian authorities.

So, people with hefty amount of Black Money can come to an agreement with those NRIs to hide the money as the NRIs’ income and asset by offering some share to them.

Applicability of Stated Provisions and Punishments

The punishment, penalty and provisions stated by the Act are only applicable if Indian govt. can track the income and foreign assets of the Indian people stashed abroad.

Unfortunately, there are no clear indication of the process and till date, though some improvements have been done through some pacts between India and foreign countries, but the full mechanism still not operational. So, the provisions can hardly be implemented.

Tracking the Funds going or residing abroad

The Indian Govt. repeatedly claiming that they can get information about the black money holders via the Double Taxation Avoidance Agreement or via the Tax Information Exchange Agreement which has been in place with several Foreign Governments.

However, being such agreements in place for over a decade, we hardly got any information about undisclosed income residing abroad till date.

Conclusion

There will be much disputes and arguments whether the Black Money and Imposition of tax Act of 2015 succeeded or has gone in vain, but, accounting together the Act, the MCAA, and now the FATCA agreement create a formidable system keeping the aim set for the curbing of the Black Money. This is the most systematic and stable mechanism implemented by the Indian Govt. to fight against black money till date.

REFERENCES

• http://www.thehindu.com/opinion/editorial/dealing-with-black-money/article7735241.ece
• http://www.thehindu.com/news/govt-collects-rs-3770-crore-from-over-600-stash-holders/article7710692.ece?ref=relatedNews
• http://www.insightsonindia.com/2015/05/18/the-big-picture-black-money-law-will-it-act-as-a-deterrent/
• http://www.clearias.com/black-money-india/
• http://www.drishtiias.com/upsc-exam-gs-resources-BLACK-MONEY
• http://www.fantasticfundas.com/2015/06/black-money-act-2015.html
• http://pib.nic.in/newsite/PrintRelease.aspx?relid=117477

In this article, Gautam Kumar Swain pursuing M.A, in Business Law from NUJS, Kolkata discusses export of Goods and Services Regulations.

Introduction

The Reserve Bank of India had formed ‘Foreign Exchange (Export of Goods & Services) Regulations’ 2015 by the integrity of the powers given by Section 7(3) (1) (a) and Section 47(2) of FEMA Act, 1999 and in the ambit of its Notification No. FEMA. 23/2000 – RB, Dated 23/05/2000 as modified from time to time, the latest being w.e.f 12/01/2016. Export trade is controlled by the Directorate General of Foreign Trade and its regional offices working under the Ministry of Commerce and Industry, Department of Commerce, Govt. of India.

Export With Prior Authorization

Regulation 13 specifies that certain exports require prior approval which are as follows: –

1. Export of goods under exclusive deal between the Central Government and Government of a foreign state; or
2. Export under rupee credits provided by the Central Government to Government of a foreign state shall be monitored by the terms and conditions laid out in the several public notices pointed by the Trade Control Authority in India and the information by the Trade Control Authority in India and the information issued from time to time by Reserve Bank of India.
3. An export under the line of credit provided to the bank or a financial institution performing in an offshore state by the Exim Bank for funding exports from India shall be ruled by the terms and conditions thought out by RBI to the approved dealers from time to time.

Declaration of Exports

In the case of trade abroad by Customs manual harbors, every retailer of goods or software in tangible form or through any other manner, either directly or indirectly to any place outside India other than Nepal and Bhutan, shall provide to the defined authority an affirmation in one of the forms EDR or SOFTEX.  The declaration shall be enclosed with such proofs which shall consist of true and correct material exacts including the amount symbolizing,

1. The full export worth of the goods or software; or
2. If the total financial worth is not measurable at the time of shipping, the value which the exporter, having attention to the existing market conditions expects to accept for the sale of the goods or the software in international market;
3. Recognition of export earnings in relation to export of goods/software from the third party should be accordingly asserted;
4. The Importer – Exporter Code number assigned by the Director General of Foreign Trade under Section 7 of the Foreign Trade (Development & Regulation) Act, 1992.

Export with Declaration

Regulation 3(3) explains that in regard to export of services to which any of the Forms specified didn’t apply, the exporter can export such services without providing any declaration. It shall be responsible for appreciating the amount of foreign exchange which becomes due or get accrued on account of such export and to resubmit the same to India in agreement with the rules of the Act and these regulations, as also other rules and regulations specified or provided under the Act.

Exemptions from Declarations

Rule 4 provides the list of cases which are immune from providing disclosure: –

1. For exports of worth not exceeding the US $25000
2. Trade models of goods and advertising material provided free of payment;
3. Individual belongings of travellers, either escorted or unescorted;
4. Ship’s supplies, transhipment baggage and cargo provided under the rules of the Central Government or of such officers as may be named by the Central Government in this interest or of the military, naval or air force authorities in India for military, naval or air force needs;
5. By form of award of goods and properties guided by an affirmation by the exporter that they are within the limit of Rs.5 lakh in worth;
6. Aircraft or airplanes engines and spare parts for restoring and modification abroad subject to their re import into India after change/revamp, inside a duration of six months from the date of export;
7. Goods imported without charge on re-export basis;
8. The mentioned products which are allowed by the Development Commissioner of SEZ, EHTP, STP or FTZ to be exported again, namely:
   1. 1. Imported goods found damaged, for the intention of their substitution by the foreign associates/collaborators;
      2. Goods imported from foreign associates/partners on credit basis;
      3. Goods imported from foreign associates/partners without charge found excess after production function.
9. Substitution of goods exported free of charge in conformance with the rules and regulations of Foreign Trade Policy in use, for the time being;
10. Goods sent outside India for experimentation subject to again being imported into India;
11. Damaged goods sent outside India for modification and revamping and again being imported into India provided the goods are delivered by a certificate from a lawful dealer in India that the shipping is for overhauling and repair and re-import and that the export does not include any dealing in foreign exchange;
12. Exports allowed by RBI, on request made to it, subject to the terms and conditions, if any, as mentioned in the application.

EVIDENCE

Regulation 7

It administers that the Commissioner of Customs or the Postal Authority or the office of Department of Electronics to whom the enunciation form is endorsed may, to content themselves of necessary compliance wants such proofs in support of the affirmation may establish that-

1. The exporter is a person residing in India and has a place of business situated in India;
2. The destination mentioned in the declaration form is the final venue of the destination of goods or articles exported;
3. The value specified in the declaration represents-
   1. 1. The full shipping cost of the goods or software; or
      2. Where the total shipping cost of the articles or software is not confirmed at the time of export, the worth of which the exporter, having regard to the existing market conditions anticipates obtaining from the sale of goods or articles in the international market.   

PROCEDURE

The declaration shall be performed in sets of mentioned numbers as particularized.  Regulation 6 specifies that Declaration in Form E,D, F shall have complied in duplicate to the Commissioner of Customs.  After properly verifying, validating and authenticating the declaration form, the Commissioner of Customs shall advance the authentic declaration form/data to the nearest office of RBI and give the duplicate form to the exporter for being submitted to the approved owner.

The declaration in form SOFTEX in regard to export of computer software and audio/video/television software and other third party equipment software shall be complied in triplicate to the authorized official of Ministry of Information Technology, Government of India at the software Technology Parks of India or the Free Trade Zones or Special Economic Zones in India.  After confirming the three submitted copies of SOFTEX form, the authorized official shall forward the initial copies directly to the nearest office of RBI and return the matching copy to the exporter.  The third copy shall be retained by the authorized official for the record.

Documents to be Submitted to Approved Dealer

The Documents belonging to export shall be submitted to the certified dealer specified in the declaration form, within 21 days from the date of shipment, or from the date of authorization of the SOFTEX form. The certified dealer can accept the documents further the period of 21 days, subject to the orders issued by the RBI from time to time, for reasons beyond the control of the exporter.

The Certified dealer may accept, for bargaining or collection, shipping documents including bills of exchange covering shipments, from his part. Before accepting such documents, the certified dealer shall verify –

1. Whether the financial worth mentioned in the declaration form vary from the value referred to in the documents being negotiated or sent for accumulation; or
2. Whether the value described in the disclosure form is less than the value shown in the documents being negotiated or sent for accumulation, require the part also concerned to sign such declaration and thereupon such part shall be obligated to abide with such demand and such part signing the declaration shall be considered to be the exporter for the need of these regulations to the magnitude of the full worth specified in the documents being negotiated or sent for collection and shall be administered by these regulations accordingly.

Checklist for Scrutiny of Forms to be Ensured by Authorised Dealer

The number on the corresponding copy of a GR form introduced to them is the same as that of the first copy which is usually mentioned on the Bill of Filing/Shipping Bill and the copy has been duly affirmed and validated by suitable Customs Officials.

In Statutory Declaration Form, that the Shipping Bill No. ought to be the same as that appearing on the Bill of Lading.

On account of C.I.F, C&F. and so forth contracts, where the cargo is sought to be paid at destination, that the deduction made, is only to the degree of freight announced on GR/SDF or freight indicated on the Bill of Lading/Airway Bill, whichever is less.

Documents, in essence, should not have any errors as to depiction of products or merchandise exported, value of goods exported or country of destination.

If marine insurance is made by the exporters they had to ensure that amount paid is recovered through invoice or bills raised.

Authorised Dealers can acknowledge the Bill of Lading/Airway Bill issued on ‘cargo prepaid’ basis where the sale contract is on F.O.B(Free on Board)., F.A.S(Free Alongside Ship) etc. premise provided the amount of cargo has been incorporated in the invoice and the bill raised.

Export realisable value might be more than what was initially declared to or acknowledged by the Customs.

In the event of documents being consulted by a person other than the exporter who has signed GR/PP/SDF/SOFTEX Form, he/she will have to abide by the Regulation 12 of Export Regulations.

Sometimes, contracts may accommodate for payment of penalty for late shipment of merchandise, final settlement of price might be subject to the after effects of quality analysis. As these variations came from the terms of agreement, Authorised Dealer banks may acknowledge them on generation of documentary evidence after checking the arithmetical precision of the calculations and on adjusting the terms of fundamental contracts.

Dispatch of Shipping Documents

Banks should ordinarily dispatch shipping records to their abroad branches/correspondents speedily. They might dispatch shipping records direct to the recipients where:

1. Advance payment or an irrevocable letter of credit has been received for the full value of the export, and the necessary sale contract/letter of credit provides for the exporter that the exporter is a regular client, standing and reputation record realization of shipment proceeds is satisfactory.
2. Moreover, products or software traded should be followed with a declaration by the trader that they are not more than Rs. 25000/- in value and are not declared on GR/SDF/PP/SOFTEX.

Special Economic Zone units may expedite the trade documents to the representatives outside India if proceeds are repatriated through Authorised Dealer specified in GR Forms, and GR Form is submitted to the bank within 21 days of trade, where exporters have gotten 100 percent advance for the merchandise or services they may send directly to the recipient.

Guaranteed Remittance Approval for Trade

Members of Trade Fair/Exhibition abroad are now allowed to take/export products for presentation and sale; unsold exhibit things may be sold outside the Fair, at marked down values. Moreover, members are allowed to ‘gift’ unsold merchandise up to the estimation of US $ 5000 for every exporter, per exhibition.

Authorized Dealer may endorse GR Form of trade items for show or show-cum-sale in exhibition fairs provided that:

1. Exporter shall create relative Bill of Entry inside one month of re-import of unsold goods or merchandise, sale proceeds of the goods sold are repatriated to India, procedure of disposal of all items shipped, as well as the repatriation, is accounted for to Authorised Dealer, subject to 100 per cent audit by their internal evaluators/examiners.
2. GR waiver might be granted, for, Export of Goods for re-import after repairs /upkeep /testing /adjustment, etc., subject to exporter shall deliver relative Bill of Entry inside one month of re-import of the exported goods or merchandise and if destroyed amid testing get an appropriate authentication issued by the testing organization.

Personal Particulars Form

Postal Authorities and delegates allow export of goods or articles by post only if the first copy of the form had been endorsed by an Authorised Dealer or bank only after assuring that the package is being addressed to their branch or correspondent bank in the country of import with information to deliver against payment or acceptance.

Counter Signature on Personal Particulars Form

Banks can endorse Personal Particular forms covering packages addressed explicitly to the bearers, if an unchangeable letter of credit for the full value of the goods to be exported has been issued in favour of the exporter and has been instructed through the bank of the authorised Dealer concerned or the full value of the consignment has been received in advance or acceptable plans made for recognition of the export proceeds on basis of the standing and previous record of the exporter. The Authorized Dealer should also attest any change in the name and address of beneficiary on the Personal Particulars form.

Disposal of SOFTEX Forms

Regulation 6 of Export Regulations mentions that arbitrary inspections of the relevant duplicate forms by their internal/simultaneous auditors are required. Non-realization or short realization of forms are allowed, and it should be within the powers delegated, or with prior permission of RBI. Export declaration (duplicate) form needs to be accordingly certified, where a part of the export proceeds is credited to an Exchange Earners Foreign Currency Account.

Terms of Payment-Invoicing

Exporters should bill their international customers rhythmically, i.e., at least once a month or on reaching the target as specified in the contract entered into with the international client. The last itemized bill should be raised within 15 days from the date of accomplishment of the contract.The exporters can submit the combined SOFTEX form for all the bills raised for ‘one-shot operation’. SOFTEX forms should be submitted in triplicate on shipment of computer software and audio/video/television software to the entitled official concerned of the Government of India at STPI/EPZ/FTZ/SEZ for appraisal not more than 30 days from the date of invoice. The bills raised on international clients are subject to evaluation by Government Officials, and consequent change can be made in the bill value, if necessary.

Acknowledgement of Export Value

Regulation 9 specifies that the sum representing the full worth of value of merchandise/software/services traded shall be acknowledged and repatriated to India inside 9 months from the date of trade, gave that where the products are exported to a distribution centre established outside India with the consent of RBI, the full worth shall be paid to the approved merchant as it is acknowledged and in any case inside 15 months.  The RBI, for sufficient reasons, may amplify the time of 9 months to 15 months.

Where the trade has been made by the units in SEZs/SHE/EOUs/EHTPs/STPs/BTS, the full worth of merchandise shall be acknowledged and repatriated to India inside nine months from the date of the trade. RBI may extend the said period for an adequate and sensible cause is shown.

Delay in Receipt of Installment

Regulation 14

It specifies that where in connection to merchandise or software trade of which is required to be proclaimed on the predetermined form and export of services, in regard of which no declaration forms have been made pertinent, the predefined period has lapsed and the payment accordingly has not been made, the RBI may provide to any individual who had sold the products or who is qualified to sell the merchandise or get the deal thereof, such directions as appear to it to be convenient for the purpose of securing –

1. The installment therefore if the  merchandise has been sold; and
2. The deal of goods and payment thereof, if products or software has not been sold or re import thereof into India as the conditions allow, inside such period as the RBI may determine for this sake;

The oversight of the RBI to give directions might not have the impact of vindicating the individual committing the negation from the results thereof.

Payment Methods

The Full export price of the goods or articles shall be received through a certified or an authorized dealer in the form of:

1. Bank Draft, Demand Draft, Pay Order, Banker’s or Personal Cheques,
2. Foreign Currency Notes/ Foreign Currency Traveller’s Cheques,
3. Payment out of cash reserves held in the Foreign Currency Non-Repatriable Account deposits and NRE account,
4. International Credit/Cash Cards,
5. Precious alloys, i.e. Gold/ Silver/ Platinum by the Gem & Jewellery Units in Special Economic Zones and Export Oriented Unit in equal to the value of the jewellery exported.

Advance Payments Against Trades

Regulation 15

It states that where an exporter gets advance payment from a purchaser/outsider named in the affirmation made by the exporter, outside India, the exporter shall be under commitment to guarantee that-

1. The shipment of products or merchandise is made inside one year from the date of receipt of leading payment;
2. The rate of interest, assuming any, payable on the advance payment does not surpass the rate of interest LIBOR + 100 basis points; and
3. The papers covering the shipment are steered through the approved merchant through whom the advance payment is received.

In case of the exporter’s incompetence to make the shipment, partly or completely, inside one year from the date of receipt of advance installment, no settlement towards discount of unutilized share of advance installment or towards installment of interest, shall be made after the expiry of the time of one year without the earlier approval of RBI.

The exporter may get advance payment where the trade agreement itself appropriately accommodates for shipment of merchandise extending further the time of one year from the date of receipt of advance payment.

Payment for the Export

In regard to trade of any merchandise or software for which an affirmation is required to be outfitted under Regulation 3, no individual shall except with the authorization of the Reserve Bank or, subject to the bearings of the Reserve Bank, consent of an approved dealer, do or forgo from doing anything or take or shun from making any move which has the impact of securing –

1. That the installment for the merchandise or software is generally made than in a predetermined way; or
2. That the installment is deferred past the period indicated under these Regulations; or
3. That the proceeds from sale of the products or software traded do not represent the full trade value of the merchandise or software subject to such deductions, assuming any, as may be permitted by the Reserve Bank or, subject to the directions of the Reserve Bank, by an approved merchant;

Given that no proceedings in respect of repudiation of these arrangements shall be initiated unless the predetermined period has expired and payment for the products or software representing the full export value, or the value of conclusions allowed under clause (iii), has not been made in a predefined manner inside the specified period.

Export of services to which no Form indicated in these Regulations apply, the exporter may export such services without outfitting any declaration, the points (i), (ii) & (iii) above shall apply.

Directions by RBI in Specific Cases

Despite everything is followed the exporter shall, before trade, shall agree to the conditions as may be indicated in the order of RBI, namely –

1. That the payment of the merchandise or software is secured by an irrevocable letter of credit or by such other course of action or report as may be mentioned in the order;
2. That any declaration to be furnished to the predetermined authority shall be submitted to the approved merchant for its prior endorsement, which may, having regard to the conditions, be given or withheld or might be offered subject to such circumstances as might be indicated by the RBI by directions issued now and then;
3. That a duplicate copy of the declaration to be outfitted to the predetermined authority shall be submitted to such expert or association as may be demonstrated for ensuring that the value of products specified in the declaration represents the proper worth.

RBI shall give no direction, and no endorsement shall be withheld by the Authorized merchant unless the exporter has been given a reasonable chance to make a representation in that matter.

Consolidation of Air Cargo

If dispatched under combination, the aircraft organization’s Master Airway Bill will be issued to the Consolidating Cargo Agent. Authorized Dealer may arrange House Airway Bills only if the relative letter of credit particularly allows to do so. Authorized Dealers can acknowledge Forwarder’s Cargo Receipts (FCR) issued by (rather than ‘IATA’ affirmed operators), in place of bills of filing, only if the relative letter of credit particularly permits. Relative deal contract with the abroad purchaser. It should also provide that FCR’s might be acknowledged instead of Bill of Lading /Air Waybill.

Shipping to Neighbouring Countries by Road, Rail or Waterways

Exports by freight boats/country craft/street transport, the form should be introduced by the exporter or his operators at the Customs station at the border through which the vessel or vehicle has to pass before crossing over. Shipments by rail, Customs staff, has been posted at predetermined railway stations for taking care of Customs formalities, exporters must make necessary arrangements to introduce GR/SDF forms to the Customs Officer at the Border Land Customs Station.

Shipments Lost in Transit

When shipments from India are lost in transit, banks must guarantee that insurance claim is made as soon as the misfortune is known of.

The duplicate copy of GR/SDF/PP form should be sent to Reserve Bank with following particulars:

1. Amount for which shipment was protected or insured.
2. Name and address of the insurance agency.
3. Place where the claim is payable.

Banks must make necessary arrangements to accumulate the full amount of claim due on the lost shipment, through the medium of his international branch/correspondent and discharge the duplicate copy of GR/SDF/PP form only after the amount has been accumulated. Banks need a guarantee that claims partially settled correctly by shipping organizations/aircraft’s under transporter’s risk, if settled abroad are also repatriated.

Reference

1. www.bcasonline.org/
2. www.taxmanagementindia.com           

In this article, Debarati S Tripathi pursuing M.A, in Business Law from NUJS, Kolkata discusses the valuation of copyright.

Introduction       

Valuation is a term used to ascertain the worth of an asset. An asset is a resource from which future economic benefit can be expected. Assets can be fixed or tangible like property, machinery movable like jewelry, and intangible like goodwill in a business, intellectual property or IP. Valuation is a common and everyday practice and not all valuations require a formal analysis. Valuation is an art and has a science behind the value ascertained.

IP assets include patents, industrial designs, trademarks, copyright and trade secrets. IP assets are a subset of intangible assets and distinguished from other intangible assets by the fact that these are created by law – legally protected and can be legally enforced. These can be independently identified, are transferable and have an economic life (in contrast to their legal life, which is generally longer than their economic life). While an IP asset can be defined in terms of particular qualitative features or standards like novelty, originality, it may not directly be linked to market value, e.g. there are patent filed that do not contribute to production of protection of income but are aimed at technical and scientific aspects which indirectly may create a value or block competition.

The objective of this write-up is to give an overview of the ever evolving and changing legal framework in India in the domain of IPRs, with a mention on the current context.

Value of an IP Asset

IPRs have very little intrinsic value. Successful exploitation of the asset creates value, like an IP asset which is able to exclude competitors from a particular market is value to the user/owner.

The legal right grants exclusivity or the right to exclude and the economic right is based on the ability to control the use of an IP asset thus creating exclusivity of use. For an IP asset to have a quantifiable value, it should generate measurable amount of economic benefit to its owner/user and /or enhance the value of other assets with which it is associated.

Value may be derived from an IP asset by,

1. Direct exploitation of the IP
2. Through sale or licensing of the IP
3. Even by not exploiting an IP asset (i.e., by merely owning it), it may be possible to add value, e.g. by raising barriers to entry by competitors, reducing the negotiating power of customers, balancing out supplier power, mitigating rivalry, and lowering the threat of substitutes.

IP Valuation is a Process to Determine the Monetary Value or Worth of Subject IP

Valuation often combines objective and subjective considerations. It is an opinion about the result of a virtual transaction. IP Valuation is dependent on various factors, such as:

• Use of the IP assets
• Market position of the company
• Openness of economy (in the country or region of operation)
• Legal protection of IP
• Enforcement cost
• Overall economic growth and profile of economy

Copyright

The subject of this write-up is Copyright, as the representative of IP.

A Copyright provides for a bundle of exclusive rights to authors of original literary, musical, dramatic and artistic works, the sole right to authorize (or prohibit) the following uses of their copyrighted works:

• To reproduce all or part of the work.
• To make new (derivative) versions.
• To distribute copies by selling, renting, leasing, or lending them.
• To perform (that is, to recite, dance, or act) the work publicly.
• To display the work publicly, directly, or by means of film, TV, slides, or other device or process.

The first three rights are violated when anyone copies, excerpts, adapts, or publishes a copyrighted work without permission. Thus, a copyright legally protects the original expression of ideas, NOT the ideas themselves, that means an idea cannot be copyrighted. It is the expression of the idea — the way it is presented — that is copyrighted. The value derived from a copyright is by virtue of using the copyright.

As is true with all intellectual property, a copyright has a special set of legal rights and protections that is afforded to the copyright owner. These legal rights are the basis for the value of a copyright. A copyright can confer monopoly to the owner by creating a barrier to entry and thereby translate to buying power and greater profit margins for the owner.

It brings about a domain of permissibility – where the owner permits a party to use the IP in return for compensation which can be a license or has a sale value. A copyright can be enforced and is often subject of litigation – where the benefits are the litigation award or the owner can sue for damages.

On the face of it, a copyright signals creativity, innovation and uniqueness which may result in additional sales and incremental margins with reduced promotion and marketing efforts. For a copyright to command value it requires other resources like natural resources/tangible resources or people resources or capital when combined by way of a Copyright and exploited in terms of products or services has the capability of yielding profit.

The Value of a Copyright can be broken down to Two Step Process

• Determine the profits.
• And then apportion the profits to the Copyright.

This in turn determines the Value of the Copyright. The value of a copyright that is most commonly enjoyed is the Royalty earnings by licensing the Copyright. The rate of this Royalty is often driven by the earnings of the business of the licensee from the Copyrighted material.

IP Valuation

Qualitative Approach   

• Income Method    

• • History – based Method
  • Relief from Royalty Method      
  • MEEM
  • Incremental Cash Flow Method

Quantitative Approach

• Market Method
• Cost Method
  • Direct Cash Flow Method
  • Future – based Methods

The 3 generally accepted methods of IP valuation may be applicable to the analysis of copyrights. The Cost method is less commonly used than the Income method or the Market method. Because the copyright grants monopolistic rights to the owner, the Cost approach is not always applicable to a copyright valuation analysis.

1. Cost Method

This method is based on the intention of establishing the value of an IP asset by calculating the cost of developing same or identical IP asset either internally or externally. The method aims to determine the value of an IP asset at a particular point of time by aggregating the direct expenditures and opportunity costs involved in its development and considering obsolescence of an IP asset. The Cost Method is generally the least used method as, in most cases, it is considered suitable only as a supplement to the income method.

Both creation cost and re-creation cost methods may be used with regard to copyright valuation analysis. In all cost approach valuation analyses of copyrights, the analyst should consider as cost components both, the developer’s profit and the entrepreneurial incentive – both of which often represent the largest components of value. The cost approach has certain limitations when analyzing of a corporation-owned copyright and is often considered to provide a minimum estimate of value — as opposed to a maximum estimate of value.

The Cost Approach is based on the economic principle of substitution. This principle suggests that an investor will typically pay no more for a fungible intellectual property asset than the cost to purchase or construct a substitute asset. However, it is not legally possible to purchase or reconstruct a substitute intellectual property with regard to copyrights. Because by definition of Copyrights – they are unique and original work. Therefore, the hypothetical investor who attempts to purchase or construct a substitute intellectual property will be guilty of copyright infringement. Therefore, the “willing buyer” in a copyright market value transaction cannot legally re-create the subject and similarly a willing seller will not sell for less than his cost, which mostly would mean his investment. Hence the cost method is not the most accurate approach to arrive at a ceiling or maximum copyright valuation.

Reproduction Cost method and Replacement Cost method are the two alternatives of the cost method.

2. Market Method

The Market Method is based on comparison with the actual price paid for a similar IP asset under comparable circumstances. Market approach methods are commonly used in a copyright valuation analysis. The free and simple sale of copyrights is usual practice in the market and is true with regard to all of the types of copyrighted materials like musical, artistic, literary. However, the pricing details related to these copyright sales are not publicly disclosed. Also, it is often difficult for analysts to develop metrics in order to extract market-derived pricing multiples from these transactional data, e.g. it is not easy to convert pricing data regarding the actual sale of a copyright into a logical “per picture”, “per lyric” or “per word” pricing multiple.

Licensing of all types of copyrighted materials is on the other hand a thriving option. Thus, the most common market approach methods involve some form of royalty rate or similar license analysis. Analysts sometimes have the problem of developing units of comparison if the selected empirical license agreements call for fixed periodic dollar payments — for example, $100,000 per year.

Many copyright license agreements employ either a royalty rate formula or a per-use formula. In the royalty rate formula, the license agreement typically compensates the author by a percentage of the total revenues generated through the use of the copyrighted materials. In the per-use formula, the license agreement typically compensates the author as a dollar amount for each time the copyrighted material is performed, displayed, or otherwise used.

3. Income Methods

They are very commonly used in the valuation and economic analysis of copyright intellectual properties. It focuses on the income generating capability of the property. The Income method values the IP asset based on the amount of economic income that the IP asset – Copyright is expected to generate, adjusted to its present day value.

To determine the Economic Income  

1. Project the revenue flow or cost savings generated by the Copyright over the remaining useful life (RUL) of the asset.
2. Offset those revenues/savings by costs related directly to the Copyright. Here, Costs could comprise labor, materials, required capital investment and any appropriate economic rents or capital charges.
3. Take account of the risk to discount the amount of income to a present day value by using the discount rate or the capitalization rate.

The Various Income Approach Methods typically involve some form of the following types of Analysis

1. Incremental Income Analysis

This is the estimation of the difference between the amount of income that the owner/operator would generate with the use of the subject copyright and the amount of income the same owner/operator would generate without the use of the subject copyright.

2. Profit Split Income Analysis

The estimation of the total income that the owner/operator would generate from the use of the copyright where the total income estimate is split between the copyright and all of the other tangible and intangible assets that contribute to the generation of the owner/operator total income estimate.

3. Residual (or Excess) Income Analysis

The estimation of the residual owner/operator income with the ownership/operation of the copyright. This residual income analysis is accomplished by first estimating the total owner/operator income.

The analyst then identifies and values all of the owner/operator tangible and intangible assets. A fair rate of return, which represents a capital charge or an economic rent, is then assigned to each category of the tangible and intangible assets. The analyst would then subtract the capital charge on contributory assets from the total owner/operator income estimate. Finally, the residual or excess income is assigned to the copyright.

For analysis based on an income approach, the copyright income is projected over an estimate of the Remaining Useful Life (RUL) of the copyright income stream. The maximum amount of time that may be considered is the very long legal life remaining in the copyright – typically, the author’s life plus 50 years. However, the more practical time span to consider is the expected period of popular acceptance and commercial viability for the copyrighted work. Some computer games, for example, have a limited lifetime of trendiness and popularity before they are overtaken by the “next big thing”. The determination of remaining useful life of earning potential obviously has a significant effect on the calculation of today’s net present value. The present value of the owner/operator income (defined as excess, incremental or residual income) over this expected RUL is an indication of the value of the copyright.

Case Study Examples

A. Market Method

Assume for example that a valuation expert must find the fair market value for a Rembrandt portrait from 1642. The expert will have to toil hard and collect probative information from market transactions of other Rembrandts of the same subject matter (same person, similar pose, similar social position, etc.), year painted and other characteristics. However, if the particular subject Art is copyrightable – it would be original and hence there would be room for differences from those available and such differences can attribute disproportionate value. In the end, the appraiser will need to account for differences as well as similarities with the market-based transactions found to come up with a value.

B. The Relief from Royalty Approach

It provides one estimate of the fair market value of the Subject Assets as shown below. This estimate can be used in negotiating a transaction price with the Acquirer.

The University could negotiate a range of terms with the prospective acquirer – from a running royalty rate of 4% of revenue for products incorporating the intellectual asset to a fully paid up license fee of 2.66 million Euro. The University could also set terms that included a one-time payment plus a running royalty or set terms that included a one-time payment plus a running royalty should cumulative product sales exceed a certain level.

C. Income Method

Roses N Thorn (“Thorn”) is a composer of rock and roll music and lyrics. Last year, Thorn composed the words and music to “Blue Valley” (“Valley”), a classic rock and roll number. Thorn is a contract employee of music producer RocknRoll Corporation (TV1). Valley was a work for hire and therefore the copyright is owned by TV1. The local taxing authority assesses the TV1 on a unit valuation basis. The local taxing authority assessor estimated the total unit value of TV1, as of January 1, 2009. In the taxing jurisdiction in which TV1 is located, intangible personal property is exempt from tax. In this case, a copyright intellectual property clearly qualifies as an exempt intangible asset. Accordingly, TV1 management will use this valuation to contest its tax assessment.

Fact Set and Illustrative Valuation Variables

The date of the copyright valuation is January 1, 2009. TV1 management prepared a projection of the income it expects to earn from the recording and distribution of the “Valley” work. For popular rock and roll songs like ‘Valley,” it is the TV1 historical experience that the average life of consumer popularity is five years.

Also, according to TV1 historical experience, consumer demand of such a successful popular musical composition approximates an exponential decay curve function. Therefore, starting with the January 1, 2009, valuation date, the percent surviving in the consumer demand curve will be less than 10 percent (i.e., immaterial) after the year 2019.

This expected decay curve for consumer demand is based on,

• A Five-year Average life
• An Exponential Decay function

Based on the analyst’s cost of capital analysis, the analyst concluded that the appropriate present value discount rate is 16 percent. The analyst performed a comprehensive search for musical composition license agreements. Such license agreements are very common in the music recording industry. The analyst identified several guideline copyright license agreements with regard to commercially popular rock and roll musical compositions that had already been released. Based on this research, the analyst concluded that the most applicable license royalty rate for “Valley” would be a 50 percent profit split. That is, in such copyright license agreements, the copyright licensor receives 50 percent of the composition-related net income, the copyright licensee also receives 50 percent. In such license arrangements, the licensor is typically the copyright author or an owner/operator corporation copyright holder.

Also in such arrangements, the licensee is the recording artists and/or recording producers that actually record and distribute the recordings. In this case, TV1 corresponds to the typical copyright licensor in these musical composition license agreements. In the case of the TV1 license agreement, let’s assume that net income subject to the “profit split” royalty rate is defined as:

Total revenue Less: Cost of goods sold Less: Selling, general, and administrative expenses Equals: Net income.

Application of the Copyright Valuation Approaches and Methods

The income approach is the most applicable analysis, based on:

1. The Information available to the analyst (including the TV1 business plan)
2. The Objective of the analysis (i.e., to estimate the value of the subject copyright for taxation appeal), the income approach is the most applicable analysis.

Exhibit 2

Exhibit 2 summarizes the TV1 management-prepared business plan with regard to its recording and distribution of the “Valley” song.

1. The projection of total revenue generation
2. The Gross Profit (i.e., total revenues less cost of goods sold)
3. The Net income (i.e., gross profit less selling, general, and administrative expense)

Based on the TV1 projection of net income over the expected life cycle of the production and distribution of the “Valley” recordings, the analyst estimated the expected copyright license payments to the subject owner/operator corporation copyright holder.

Using a present value discount rate of 16 percent, Exhibit 2 presents the present value of the expected license payments to the subject owner/operator corporation of the “Valley” copyright.

Based on the income approach valuation analysis summarized in Exhibit 2, the value of the TV1 owner’s intellectual property of the “Valley” copyright, as of January 1, 2009, is (rounded) $110,000,000. This amount represents the value of the subject corporation owner’s intellectual property of the copyright on the subject musical composition. This value is based on an income approach valuation method — the profit split method.

IP Valuation is Useful

•      For commercial transactions
•      For pricing the product, work or service
•      For evaluating potential merger or acquisition candidates
•      For identifying and prioritizing assets that drive value
•      For strengthening positions in commercial negotiations
•      For making informed financial decisions on IP maintenance, commercialization and donation
•      For evaluating the commercial prospects for early stage R&D projects
•      For evaluating R&D efforts and prioritizing research projects
•      For financing or securitization
•      For litigation
•      For tax planning

Benefits of Copyright Valuation

The value of copyrights can be a significant factor in determining reasonable royalty rates for licensing agreements. Further, the value of copyrights can be an important factor in determining damages in cases of copyright infringement. They are of value when selling a business.

Copyright generate the following benefits for,

• Increases the pricing power
• Greater Profit Margins
• Litigation award (PV of award less cost)
• Protect from threat of litigation
• Additional Sales
• Reduced Marketing
• Incremental margin

References

http://www.willamette.com/insights_journal/09/autumn_2009_1.pdf

http://www.wipo.int/edocs/mdocs/mdocs/en/cdip_17/cdip_17_inf_2.pdf

http://corbinpartners.com/wp-content/uploads/2012/12/vue1108.pdf

In this article, Jisnu Datta pursuing M.A, in Business Law from NUJS, Kolkata discusses all you need to know about Employees Deposit Linked Insurance (EDLI).

Introduction

The total number of Indian workforce in 2004-05 as per National Sample Survey Organization (NSSO) was 459 million. Out of the total workforce,26 million works in the organized sector.

Indian Constitution under ‘Directive Principles of State Policy’ provides that the state shall make useful provision towards ensuring social security for the employees among other directives.

The EPF & MP act 1952 was the first act which was enacted by the Central Government as an important legislative initiative by the inspiration of Directive policy with the goal to provide social security to employees.

The legislative enactments related to social security in the organized sector includes Employees’ Provident Funds and Miscellaneous Provisions Act 1952, Employees State Insurance Act 1948, the employee’s deposit-linked insurance scheme 1976 and Employees Pension Scheme 1995.

The EDLI scheme was enacted as a part and parcel of the social benevolent legislations enacted by the Government of India in 1976.

The socio economic condition of India traditionally had higher unemployment rates. In case, one of the family members becomes lucky enough to find a job rest of the family members become economically dependent upon him. When that person retires, the entire family lives on his retirement income / Pension. But several such situations came where the person died before completion of service.

Other legislation such as EPF act and misc provisions act or employee pension schemes were not sufficient in solving the problems arising out of early death of an employee. This part of the problem was clearly left unaddressed.

It is felt by the govt that social security aspect of employee is required to be looked into with greater importance in such situation. In this backdrop, the Act was amended to incorporate an insurance scheme through the promulgation of Employees’ Deposit Linked Insurance (EDLI) Scheme in 1976.The scheme helps the dependent family member by extending financial assistance in case of accident or death of an employee.

This Scheme, like other social security schemes, was designed to guarantee at least a minimum level of financial support for the sustenance of dependent family members when the earning member dies or suffers a disability.

The scheme

The employee’s deposit-linked insurance scheme 1976 was primarily an insurance scheme promulgated by the central government among other social welfare initiatives for the employees of organized sector.

Assurance Benefit

As per this scheme, monetary benefit known as ‘Assurance benefit’ will be payable to the nominated or dependent family members of employee based on his last twelve months average salary and fund account balance in the event of death of the employee.

Administration of scheme

The scheme is administered by a central board constituted under section 5A of the EPF Act. However, one regional committee supervises the work of central board and advice the board on the administrative matters which were referred to them.

The contribution to scheme

The monthly contribution by the government and the employer in respect of any employee towards the scheme is dependent upon employee’s basic wages, dearness allowance including cash equivalent of food compensation and retaining allowances if any actually drawn during the month.

In the inception stage of the scheme, the upper limit of such monthly wages was predetermined at Rs 5000/-.ie Every employee drawing a wage less than or equal to Rs 5000/-are entitled for the scheme.

With effect from 1st September, 2014 the new wage limit was made INR 15,000/ under EDLI Scheme, 1976 .In effect, the limit had been increased from INR 6,500/- to INR 15,000/- per month. All the employee who are not covered by approved group insurance scheme are now covered under EDLI scheme.

The employer has to pay its contribution and administrative charges at a rate determined by central Govt to the fund within 15 days from every month closing.ie contribution for the month of January to be submitted within 15th February.

It shall be the responsibility of the employer not only to contribute in respect of employee working directly under it but also in respect of employee employed for its own purpose though working under a contractor.

At the inception stage of the scheme, the central Govt use to provide its contribution after financial year closing.

The employer cannot deduct any amount paid by him as contribution to this fund from the wages of employee.

Penalty for non-submission of contribution

If any employer makes default in payment of its contribution within due date, the central provident fund commissioner or any other officer assigned by the central Govt shall recover penalty at the following rates:

Period of default Rate of damages

1. If period of default is Less than two months: Rate of damages shall be payable at 17 % per annum.
2. If period of default is more than two months but less than four months: Rate of damages shall be payable at 22 % per annum.
3. If period of default is more than four months but less than six months: Rate of damages shall be payable at 27 % per annum
4. If period of default is Six months and above: Rate of damages shall be payable at 37 % per annum

From the above, it is clear that more is the days of default ,more is the rate of penalty imposed. Though, the fund commissioner may waive the damages on circumstances specified in the act.

Responsibility of Employer

The employer also has certain responsibilities under this act which are given below:

He has to send a return in Form 5 to the commissioner of the employee provident fund scheme within 15 days from the month closing.

It shall specify the new entrants who were qualifying to be a member of the scheme for the first time and the person leaving the service. Further, certified nomination detail in respect to such employees are also required to be sent.

It is also stipulated in the scheme that a monthly abstract providing aggregate wages of the members in respect of whom contribution is required to be paid and employers actual contribution for all such members are required to be submitted by the employer within twenty-five days from the closing of the month.

The employer has to keep record of EDLI contributions paid, payable and the wages paid to the worker. Commissioner or any other officer may ask to submit such record for his inspection. The employer has to produce such record or any other register he is supposed to maintain according to any other act or rules whenever called for.

The Fund Accounts

Two accounts ,namely the Insurance Fund Central Administration Account and  Deposit-Linked Insurance Fund Account shall be created for the purpose of running the scheme. All the administrative related charges is credited to The Insurance Fund Central Administration account and the related expense is also met from this account.

The contribution toward the employee insurance scheme gets accumulated in the Deposit-Linked Insurance Fund Account and any related expenditure is also made from the account.

The present contribution rates of employer are 0.5% in contribution accounts and 0.01% of administration accounts. However, monthly administrative charges payable under EDLI has to be rounded to the nearest rupee subjected to a minimum amount.

Contribution shall be computed upon total basic wages, DA and Food concession by both employers and employee. The contribution under EDLI scheme is as described below:

1. Contribution in this scheme shall be computed on wage subjected to a maximum wage ceiling of INR 15000/- (fifteen thousand) though Provident Fund is paid on higher wages .Simply put, the contribution for any employee getting wages more than 15000, shall be INR 75/- ( 0.5% of 15000)
2. The contribution calculated as described above is required to be rounded to nearest rupee.
3. EDLI contribution is payable even if an elderly member crossed fifty eight years age and pension contribution for him is not payable as per act. EDLI contribution has to be paid till the member is in service and PF is being paid.

Updated rates of contribution for different scheme.

Investment of the Fund

All the money accumulated in this fund will be deposited with the central government in public account on which interest will be paid as per the directive of central Govt time to time.

The money contributed in the insurance fund will be invested as per the investment pattern under section 52 of employees provident fund scheme 1952.

Section 52 of employees provident fund scheme stipulates that the investment by the fund shall adhere to clauses a to d of section 20 of the Indian Trusts Act. All expenses including any loss from investment shall require to be debited to insurance fund.

The investment of this fund may be made in promissory notes, debentures issued by state or central govt.

The audit of the insurance fund shall be done as per the instructions issued by the central government in consultation with CAG (Comptroller and auditor general of India).The charges on account of audit shall be paid from insurance fund.

The scheme benefits

On the event of death of any employee, who is a member of the insurance fund or of a provident fund which is exempted under section 17 of the employee provident fund Act , the persons who are legally entitled to receive the provident fund accumulated in the name of deceased, in addition, shall also receive an amount in EDLI scheme depending upon average of preceding 12 months salary and balance in the fund account of the deceased.

If the deceased had not completed 12 months membership when the death occurred, then his average balance during period of membership will be considered for fixation of additional benefit to his heirs.

For the purpose of average balance determination in the fund in relation to any employee, the contributions by the employer will be considered .If  any of the contributions whether to be paid by employer becomes due up to the relevant period that will be deemed to have been paid and interest thereon shall also be payable.

The twelve months period for calculating the benefits under this scheme shall be computed backwards from the month immediately proceeding the month of death occurrence of the member.

If the amount so calculated exceeds twenty-five thousand, then the amount payable shall be twenty five thousand plus 25% of the amount by which it exceeded twenty-five thousand rupees subjected to a ceiling of rupees thirty-five thousand.

However, by the notification dated 24th May, 2016, the central Govt amended the benefit of the policy. The relevant portion by which the benefit of the scheme payable to nominees/family members is to be computed is quoted below:

“ The average monthly wages drawn (subject to a maximum of fifteen thousand rupees), during the twelve months preceding the month in which he died, multiplied by thirty times plus fifty per cent. of the average balance in the account of the deceased in the Fund or of a provident fund exempted under section 17 of the Act or under paragraph 27 or 27 A of the Employees’ Provident Funds Scheme, 1952, as the case may be, during preceding twelve months or during the period of his membership, whichever is less, subject to a ceiling of one lakh and fifty thousand rupees, subject to a total ceiling of six lakh rupees;”

Illustration A

If deceased member’s average monthly wage is INR 10,000/- and average balance in the account of deceased is INR 3,20,000.Both averages are being computed for last twelve months preceding the month in which he died. Further, the duration of his membership is more than 12 months.

Here, the first component which will be computed on salary shall be 30 x Rs 10,000 =3,00,000.

Second component based on 50% of average balance of fund for last 12 years become 1,60,000 ( 50% x 3,20,000).But this will be subjected to a limit of 1,50,000.

Accordingly second component of compensation shall be limited to 1,50,000.

When both component added it becomes 4,50,000.As this amount is less than total cap of six lakh ,the total amount of 4,50,000 shall be payable to nominees/family members.

Illustration B

If deceased member’s average monthly wage is INR 18,000/- and average balance in the account of deceased is INR 4,00,000.Both averages are being computed for last twelve months preceding the month in which he died. Further the duration of his membership is more than 12 months.

Here, first component which will be computed on salary shall be 30 x Rs 15,000 =4,50,000

Second component based on 50% of average balance of fund for last 12 years become 2,00,000 ( 50% x 4,00,000).But this will be subjected to a limit of 1,50,000.

Accordingly second component of compensation shall be limited to 1,50,000.

When both components added it becomes 6,00,000.As this amount equals to the total cap of six lakh, the amount of INR 6,,00,000 shall be payable to nominees/family members.

The part time employee shall also be covered under this scheme. If such employee works in more than one factory then the benefit in respect of such person under this Scheme shall be determined with reference to the average of the total balance accumulated in all his accounts.

Beneficiary of Assurance benefit

The nomination exercised by the employee under employee’s provident fund scheme or under the similar fund exempted under section 17 of the Act will be accepted as valid nomination under the EDLI scheme and the assurance amount will be paid to such nominee.

In case no nomination exists or part nomination is available then the remaining amount for which no nomination is made will be equally payable to his family.

If a person who is eligible to receive the monetary benefit of the scheme on death of a member is charged with the serious offence of murdering the member or charged against abetment of such crime, his claim for assurance benefit shall not be decided upon till the conclusion of the criminal proceedings instituted against him. In case he is convicted his share of assurance will not be payable. However if is acquitted of charge, he will be paid his share.

Assurance amount – how to be paid

The nominee or other claimants shall require to send an application to the Commissioner through the employer. The claim has to be lodged in the format as required by the commissioner.The nominee of the expired member can claim the insured amount from EDLI scheme by attaching an attested copy of the death certificate of member along with duly filled up Form 5 (IF). The form is required to be filled up by each claimant separately. In case of claimant is a minor, the form shall  be filled up by the guardian of the minor .

The payment may be made in the following modes as per the option of claimant:

1. Postal money order
2. Depositing in the payee’s bank account in bank or post office
3. Depositing term annuity in the name of  claimant
4. Through the employer

As per the recent circular, henceforth payment will be disbursed through online mode.

Conclusion

The EDLI completes the sphere of social security legislation enacted for the labor force of organized sector along with legislations of Employees’ Provident Funds, Miscellaneous Provisions Act, 1952 , Employees State Insurance Act, 1948 and Employees Pension Scheme 1995 .As per  EDLI scheme, a lump sum amount is paid to the member’s nominated beneficiary or his family member in the event of death of the employee.

The objective of EDLI is to provide employees families with lump sum amount in the event of death of the member to mitigate the loss of a earning member. The money shall be sourced from the EDLI fund which is funded by the periodic contributions from the employer and central government. However, at present central government does not provide any monetary support. EDLI scheme takes no contribution from employee.

EDLI scheme shall be applicable to factories or establishments which are subjected to the statutory requirements of the different provisions of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In brief, all employees who join the Employees’ Provident Fund are also covered by employee deposit linked insurance scheme. The EDLI cover its members on worldwide and 24-hours a day basis and it provides the insured amount to nominees or family members without judging the cause or reason of the death.

The EDLI  scheme, since its introduction, had undergone several amendments. Now, the central government does not contributes money to the scheme and the related benefits of the scheme have been modified many times. However, the central government provides administrative support to the scheme. A full fledged administrative framework was set-up by the central government for smooth functioning of the scheme. Presently, only employer has to make the contributions towards fund account and administrative charges.

According to EDLI scheme, in any organization where group insurance scheme is not available to the employees, the employer has to contribute 0.5% of monthly basic pay (basic pay is capped at maximum Rs. 15,000 for computation) as insurance premium for the life insurance cover. The employer contributes the amount in respect of each covered employee of the EDLI scheme for every month of their employment. All employees who are the members of their organization’s Provident Fund and are contributing to their PF account as per rate stipulated by the government are also eligible for EDLI.

The benefit under the scheme is given based on the subscriber’s average balance in fund and his average basic pay over a period of last 12 months .

The insurance coverage amount is sum of the two

1) 30 times the average basic pay of the past 12 months (up to Rs. 15,000 per month), i.e. Rs. 4.5 lakh [Rs. 15,000 X 30]

and

2) fifty percent of the average balance in the fund account of the deceased subjected to a ceiling of 1.5 Lakh

The summation so arrived shall be subjected to a total ceiling of Rs 6 Lakhs.

There also exists a scheme of group insurance policy which gives better coverage than EDLI scheme. At the inception, the government introduced the EDLI scheme as a compulsory scheme to be opted by all employees. But now, with the advent of plenty of insurance companies in India, many of them provide different type of insurance options as compared to traditional  EDLI.

Further, It is also felt that the compensation amount giving life cover under EDLI  is not sufficient for the dependents. The government has also provided that an employer can approach a life insurance company for better coverage for its employees as an alternative to EDLI scheme. The employer can fix a higher sum assured for the employees.

Now, the employer can opt for others insurance scheme for its employees with the approval from board. The necessary exemption from the scheme in this regard can be allowed under section 17 of the act. In these cases, on application, the EPFO (Employees’ Provident Fund Organization) exempts an employer/company from EDLI. This alternative scheme is known as group insurance scheme.

Reference:

Book

Practical Guide to Employees’ Provident Funds Act, Rules & Schemes – by H. L. Kumar

Website

• http://labour.gov.in
• epfindia.com
• https://www.actuariesindia.org
• http://www.fingyan.com/employees-deposit-linked-insurance-scheme-and-its-benefit/
• http://www.livemint.com/Politics/hFs09bnSztSDuaJ03A4hGI/EPFO-hikes-minimum-PFlinked-life-insurance-payout-to-Rs25.html
• http://www.indiainfoline.com/article/news-sector-others/edli-insurance-benefit-to-employees-113111500221_1.html

In this article, Harshal Joshi pursuing M.A, in Business Law from NUJS, Kolkata discusses how will RERA, 2017 impact Indian real estate industry in the long term.

INTRODUCTION

“RERA is going to be a game changer for buyer and developers and the wider industry. With its implementation, the act will bring in greater transparency and further consolidation of the industry. A more regulated market means that the lines of laws and policies will no longer be blurred and for the first time, every developer will be on a level playing field that puts the interests of the consumer above everything else.”[1]

From the time we obtained independence, the citizens of the country are aware that the builders/promoters have been cheating customers in various ways, and the general public has endured incalculable suffering and have been facing injustice while trying to buy an apartment/plot/building. This has been due to the lack of an effective and suitable law to control, regulate, and monitor the activities/dealings of builders/promoters in the Real Estate industry.

The Real Estate Regulatory Act, 2016, popularly known as the “RERA” Act, is a unique legislation made by the Central Government led by our Honourable Prime Minister Shri. Narendra Modi. The purpose and objective of this Act is to reduce the mental and financial distress that consumers have suffered from the fraudulent builders/promoters and the Real Estate lobby. The RERA Act will help the consumers to get possession of their units in a timely manner as per time schedule, with better condition and without much hassle with the fraudulent builders and promoters. This Act will also bring complete transparency in the Real Estate Sector benefitting both the home buyer’s community and the Developer’s Community. This article briefly states various aspects of RERA and its impact on the Real Estate Industry.

SOME OF THE KEY PROBLEMS FACED BY CONSUMERS AND BUYERS OF APARTMENTS, PLOTS, SITES AND BUILDINGS ARE AS FOLLOWS.

1. Long term delays up to 3-5 years, in handing over of units has been common in most of the projects related to Apartments, Sites, buildings in layouts in contravention to the agreement of sale with the home buyers;
2. Decamp and abscond after collecting substantial deposits and funds from the home buyers;
3. Abandon the projects during construction;
4. Modify and change building plans without any information to the consumers;
5. Dishonor some or all the terms and conditions laid and signed by the home buyers and builders in the Sale Agreement/Memorandum of Understanding without any explanation or compensation resulting in not providing the amenities and facilities in the project/individual units;
6. Even though the Sale agreement has clauses for withdrawal or cancellation of the agreement by the home buyers, the builders refuse to adhere to these clauses and refuse to refund the amount invested by the home buyers;
7. Construct homes, flats, apartments on illegally encroached government land/lake beds;
8. Poor quality of project execution;
9. At the time of construction, grossly violate all the approved building plans and sanctioned project plans, deviate from the original plans, and thereby penalize and fail to provide the consumers with Occupancy Certificate and Completion certificates;
10. Obtain illegal permissions from BESCOM, BWSSB, and other government controlled bodies to get power, water and other legally required utilities by producing forged documents which will put the consumers in great difficulty after occupying the units.

MAIN PROTECTION TO CONSUMERS FROM THE CENTRAL RERA ACT

The promoters

1. Cannot register their proposed duly sanctioned project by the Local Authorities/Planning Authorities under RERA without obtaining a Commencement Certificate of the project from the sanctioning authority. Cannot advertise or sell the units of the proposed project before Registering with the RERA Authority;[2]
2. Must complete the project before the completion date mentioned in the Agreement and hand over the project to the home buyers, in case of delay, the promoters are required to pay the agreed upon fair compensation to the purchasers of the units, for the period of delay;[3]
3. Promoters have to sell the units on carpet area basis which can be easily measured by purchasers.[4]

The RERA Act recommends and provides the framework for formulating an effective Regulatory Authority in the Real estate sector.[5] The RERA Act also provides an effective resolution mechanism for resolving disputes between home buyers and promoters, by appointing of Adjudication Officers and constitution of the Appellate Tribunal at the state level[6].  All disputes must be resolved within a period of 60 days from the day of complaint.[7]  The home buyers and promoters cannot approach the High Court, before obtaining the decision and judgment from the Appellate Tribunal constituted under the RERA Act.[8]  As per the provisions of the RERA Act, civil cases cannot be filed by Promoters and consumers in any of the lower courts.[9]

The primary objective of the Central RERA Act is to bring in the much-needed transparency, effective management, efficiency and adequate quality control in Real Estate Industry so that the home buyers are benefitted and protected as consumers and investors.[10]

This RERA Act has been enforced all over Indian States and Union Territories (except Jammu & Kashmir) from May 01, 2017 by the Notification issued by Government of India on April 19, 2017 but the same has been only implemented so far by 13 States.[11] RERA cannot be implemented in other states as they have not framed rules and notified the same to enable the implementation of the Act.

                                                                                                                                    Rest of the Governments by failing to implement such a pro-buyer, pro-consumer RERA Act is only contributing to the hardships of the poor, middle and lower middle classes, who have invested their life time savings in the hope of owning a home. The delay in implementation of the RERA act is also hampering the business activity of the honest Promoters who are unable to register their new projects and ongoing projects due to non-constitution of required RERA Authority in the States. This inordinate delay in notification and implementation of RERA in other States and Union Territories is highly condemnable as the entire Real Estate Industry will come to a grinding halt which will affect all homebuyers.

                                                                                                                                   In this Central RERA Act, there are 92 sections, of which 60 sections were notified and enforced by the Ministry of Home Affairs from May 01, 2016.  While enforcing 60 sections of the RERA Act, the Central Government has given a hint to all States that entire RERA act will be enforced from May 01, 2017, and hence has asked all state Governments to facilitate the implementation of this Act, by fulfilling the following responsibilities in a timely manner.[12]

1. Immediately appoint a senior officer of the State, the Principal Secretary of the State Housing Department, as the designated Authority for the State, until such time the Regulatory Authority is functional under this Act; (by June,2016);[13]
2. Diligently frame the State Government Rules, and notify the final Rules under RERA Act, by October 31, 2016;[14]
3. As directed in this RERA Act, form the Selection Committee inclusive of the Chief Justice of the High Court to select the Chairman of the State Regulatory Authority and the remaining two members before April 30, 2017, in the process of establishing the State Regulatory Authority;[15]
4. In consultation with The High Court Chief Justice, appoint the present or retired judge to the State Appellate Tribunal as president before April 30, 2017;[16]
5. Complete the Appointment of the remaining two members of the Appellate Tribunal by the Select Committee inclusive of the Chief Justice of the High Court before April 30, 2017;[17]
6. Appoint Adjudicating Officers before April 30, 2017;[18]
7. Provide all facilities and infrastructure facilities and staff to The State Regulatory Authority, Appellate Tribunal and Adjudicating Officers to effectively carry out their functions and duties.[19]

Unfortunately, most of the state governments have not fulfilled any of the above-mentioned responsibilities in the last 15 months. These Governments have failed totally to implement RERA Act since its inception and we are not sure how many more months it would require for implementing the Act by following various procedures mentioned above.

There is no evidence to see the desired level of interest and intentions of these governments to firmly implement this Act for providing the relief and redress the issues of defrauded and cheated apartment/site/building buyers, who have been suffering from the last 5-6 years. These governments have failed to safeguard the financial interests of the lakhs of already suffering home buyers and provide remedy to their financial problems.

Only the Karnataka government’s housing department’s secretariat on October 24, 2016, issued a draft of appropriate RERA Rules, and Karnataka was the country’s first state to issue a draft rule. As per standard process the Government of Karnataka provided 15 days’ time for public to give their suggestions on the draft rules and promised to notify finalized rules by the end of November 2016. However, the citizens have been disappointed by the inordinate and inexplicable delay and frustration has set in among the existing buyers of home property and the persons planning to buy home property.

IMPACT OF RERA IN THE LONG RUN

After enforcement of RERA act legally no registration of sale deed of any unit of the project in planning areas of the state can be done in sub-registrar’s office without obtaining the Completion Certificate/Occupancy certificates of the project by the promoter. Currently, registrations of units in the project are occurring unchecked in contravention of the Central RERA Act without obtaining completion/occupancy certificate and without fear of legal consequences. Though the senior officials of the Department of Stamps & Registrations are aware of the implications of the Central RERA Act on such illegal registration activity taking place, they have not initiated any steps or passed any orders to stop the illegal registration of sale deeds of such property. This has resulted in more blatant corruption in the already corrupt Registration Offices, across the state.

The Central Government has notified model and sample RERA Rules and Agreement of Sale eight months back, but very few States have taken the initiative to notify their State Rules/agreement of sale in accordance with the central government guidelines. In a classic example of feet dragging, the Government of Karnataka instead of adopting the model Rules/Agreement of Sale notified by the central government has taken a different decision in the Cabinet meeting held on 30 May 2017. It is reported that the Cabinet has decided to study the RERA Rules of different states, that too after delaying the notification for more than 7 months. Instead of becoming the torch bearer and model for the whole country by notifying strong RERA rules, the Government of Karnataka seems to resort to an easy way of studying RERA Rules of states where the RERA Act has been diluted, resulting in anti-consumer, and anti-home buyer approach to the issue.

According to Media Reports, many state cabinets are contemplating the exclusion of projects promoted by Housing Boards, Cooperative Housing Societies etc (all government controlled organizations) to keep outside RERA and challenge the Central RERA Act on this issue in the High Court/Supreme Court.[20]

The Central Government after analyzing and understanding that the projects developed by institutions like the BDA, Housing Board, Cooperative Housing Societies throughout India are poor in the Project management, unsatisfactory quality control and inordinate delay in completing the project had taken a long-term solution approach to include all housing project developments of such entities within the purview of the RERA Act. These institutions and their projects were also included even in the RERA bill introduced to Rajyasabha 2013 by UPA government during August 2013. On March 10, 2016, when passing RERA bill in the Rajyasabha where NDA government has no majority, the Congress Vice-president Mr. Rahul Gandhi agreed to support the bill only if the bill is not diluted from earlier RERA bill introduced by UPA government in Rajyasabha. As a classic example of the Government Apathy, the Cabinet Ministers of Government of Karnataka have forgotten the stand taken by their own Congress party and its Vice-president while passing the RERA bill in Rajyasabha within 15 months.  To say the least the present stand of Cabinet Ministers of Government of Karnataka to challenge these provisions of the RERA Act at Higher courts is laughable, and highly condemnable. Citizens are losing faith in the congress party, its policies and its leadership, because of such decisions of the Cabinet of GOK.

IMPACT

Fewer Project launches

The number of projects launched by builders and promoters will drastically come down initially as the Real Estate Industry will study and analyse the impact of regulations and policy change and its resultant impact on the business. However, those honest developers/builders/promoters that are known for timely delivery of their projects will only benefit from this situation as there will be lesser competition for them in the market.[21]

Fly-by Night Builders to disappear

Many fly-by-night builders, who dupe innocent investors/homebuyers, will be thrown out of market and only genuine builders will sustain, post RERA implementation.[22]

Beneficial for developers with sound financial status

The newly added 32 sections to the Real Estate Regulations Act will induce a financial discipline in the real estate sector. Before RERA implementation, Developers would normally circulate money/advance collected from one project to the previously initiated project thereby increasing the chances of defaulting on the new project for which the advance was collected. However, this is not possible with the provisions in RERA.[23]

Increased Compliance for Developers

Compared to pre-implementation, post RERA implementation, Developers will be required to follow many formalities if they happen to make any changes in the projects post initiation. Proper reporting to the authorities will be required for any minor changes in the project.[24] This will create short term chaos in the industry but in the long term this will increase the customer confidence in the industry and customers will invest more.

Increased Cost

Timely completion of projects will have its own side effect on the cost of the project. The developers/builders will pass on the cost of timely completion to its customers in turn raising the cost of the apartments. As developers will be required under RERA to timely notify completion of every stage of the project, the cash starved developers will borrow money from lenders at higher rate of interest and pass on such cost to their customers. Increase in the construction cost will be passed on to the buyers. “Seeing the current scenario of uncertainty, property rates may rise for home buyers. After notification of these sections, the number of project launches will be limited and this will affect the demand supply equilibrium in the market”.[25]

Demand Supply Equilibrium will be affected

The number of projects launched will come down and the demand supply equilibrium in the real estate market will get affected. This will also result in increased rise in the cost of the projects.

Transparency

With the registration of project and property being compulsory with the Regulatory Authority under RERA sections, there will be increased transparency in the marketing and execution of the projects. If any developer fails to comply with the provisions of RERA, it may cost him 10% of the total cost of the project in terms of penalty and a repeat offence would land him in jail.[26]

Protection of Homebuyer’s Interest

Real Estate Projects and Real Estate Agents are mandatorily required to register with the Regulatory Authority under new sections of the RERA. There are severe penalties under RERA with respect to project delays and completion time. This will have a positive effect on the Homebuyer’s confidence while investing in real estate. Further, the developer is also required to put 70% (seventy percentages) of the advance collected from the buyer in a separate escrow account. This is to stop the developer from diverting money collected for the project for any other purposes and to ensure timely completion and delivery of the project. “Due to strict regulations and norms, now it will not be easy for developers to skip from their due commitments. Right from project approvals to delivery and later possession, developers will now be seriously responsible and answerable.”[27]

Healthy Competition

Apart from the Home buyers who are the direct beneficiaries of RERA implementation, Developers who are genuinely interested in the business of Real Estate will certainly gain from the timely delivery of projects. It will instill customer confidence in to the projects and in turn will help them build developers their brand and reputation in the market. The presence of the projects of reputed builders will increase in the market creating a healthy competition. This will immensely help credible developers and weed out unorganized and fly-by-night developers who thrive on the innocent homebuyers.[28]

Lower Equity Cost

Due to lack of trust amongst the lenders towards developers, developers end up taking huge amount of loans at a very high rate of interest. . Once the real estate regime is organized post RERA implementations, Private Equity Players (PE), Banks and other Non-banking financial Companies (NBFCs) will not hesitate in funding projects proposed by developers. Institutional Funding will play a major role in real estate. Developers having all the requisite permits will find it easy to fund their project through these lenders. This will in turn amount to lower cost of equity and lesser debts for the developers.

Impact of RERA on the residential under construction Projects

There will be huge impact on the on the ongoing projects due to RERA. Pre-launches by developers are barred under RERA, so developers will find it difficult to channelize liquidity. This liquidity crunch will delay the ongoing projects.[29]

Developers’ Rush to get completion Certificate

Many developers are rushing to acquire Completion Certificate as they do not want to default under the provisions of RERA Act. Some of the large township developers are rushing to procure partial completion certificate from authorities in order to avoid default on the completed blocks of apartments. As per some media reports, some unscrupulous developers have obtained Completion Certificate from Authorities by producing fake and fraudulent permits.[30]

RERA Impact on Ready to Move Residential Market

As the effect of RERA on the real estate market is uncertain, many home buyers refrained from taking the plunge. There is a significant drop in the ready to move in residential market. However, as compared to under construction projects, ready to move in projects observed increased inquiries. This has further fueled the rental activities across major cities like Bangalore, Delhi, NCR, Chennai and Pune.[31] The ready to move in residential properties will remain major attraction for homebuyers as opposed to the under construction projects.[32]

Impact on Retail Investors

Retail investors who rely heavily on under construction projects for assured returns will have more clarity and confidence in to the project owing to strict regulations under RERA. They will now have access to the transparent information about the developer, developer’s track record and his financial stability.[33]

Impact on the Commercial Space Occupiers

Those who occupy Office Space will not worry about the clarity in terms of building layout plans, statutory approvals etc. The competition between the developers will lead to availability of better quality office space in the future.[34]

Conclusion

While RERA promises to transform the Real Estate Industry in to an organized, transparent and a profitable Sector, one has to wait and watch to really understand, the impact it will have in the long run. The initial hiccups in the implementation of RERA are unavoidable but the holistic impact of this revolutionary Act will definitely be positive and beneficial for the homebuyer’s community.

References

[1] Gaurav Sawhney, President Sales Piramal Realty @ http://www.99acres.com/articles/expertsonrera-gaurav-sawhney-president-sales-piramal-realty.html

[2] Section 4(2) (C) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[3] Section 14(1), Section 15(2) and Section 18 (1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[4] Section 1(k), Section 4(2)(h) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[5] Section 20(l) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[6] Section 43 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[7] Section 29(4) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[8] Section 58(1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[9] Section 56 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[10] Preamble of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[11] http://profit.ndtv.com/news/property/article-rera-comes-into-force-from-today-only-13-states-notify-rules-1687960

[12] http://realty.economictimes.indiatimes.com/news/industry/ministry-of-housing-notifies-remaining-sections-of-rera/58264133

[13] Section 20 (1) of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[14] http://timesofindia.indiatimes.com/city/ahmedabad/Realtors-request-Gujarat-government-to-frame-rules-under-RERA/articleshow/54760270.cms

[15] Section 22 of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[16] Id

[17] Id

[18] Id

[19] Section 22 Supra of THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016

[20] http://realty.economictimes.indiatimes.com/news/regulatory/are-on-going-realty-projects-being-covered-under-rera-in-your-state/58164948

[21] http://www.99acres.com/articles/rera-implementation-immediate-and-long-term-impact.html

[22] Id

[23] Id

[24] http://www.99acres.com/articles/rera-implementation-immediate-and-long-term-impact.html

[25] As quoted by Suresh Garg, Chief Managing Director, Nirala World in RERA Implementation: Immediate and Long Term Impact.

[26] Id

[27] As quoted by Jetaish Gupta, Director Adore Realtech in RERA Implementation: Immediate and Long Term Impact.

[28] Id

[29] In Focus RERA by 99 Acres.com

[30] Id

[31] Id

[32] Id

[33] In Focus RERA by 99 Acres.com

[34] Id

In this article, Mishika Bajpai discusses Constitutionally taming prejudice dealings in the context of Public Procurement.

Abstract

The note analyses the concept of public procurement in the light of transparency and accountability on part of the Governmental agencies and the right to equal opportunity and freedom of trade granted to business entities as enshrined in the Constitution of India, 1950. This note has been written with the intent of familiarizing businessmen with the rationale behind a fair and competitive bidding procedure deployed by the government for procurement of goods and services. The note invites the attention of the quintessential businessman to be acquainted with the rights that are protected in the course of business and trade with the government. A level playing field is considered to be the keystone to the edifice of government procurement and any departure from the same has been met with widespread criticism. This is where judicial supervision plays its vital role in curbing any inefficient and opaque approach in selection of the bidders which may have been overlooked by the purchaser i.e. the Governmental entity.  While examining the General Financial Rules, 2017, the author draws attention to possible difficulties and offers solutions. The issues which may augment the violation of the equality clause under Article 14[1] and the possible encroachment on fundamental right of the class of intending tenderers under Article 19(1)(g)[2] have been addressed by suggesting certain recommendations.

Introduction

1. Procurement is an activity of finding, acquiring, buying goods, services or works from an external source. Public procurement[3] as defined in the Public Procurement Bill, 2012 – means the acquisition by purchase, lease, licence or otherwise of goods, works or services or any combination thereof, including award of Public Private Partnership projects, by a public procuring entity, whether directly or through an agency with which a contract for procurement services is entered into, but does not include any acquisition of goods, works or services without consideration. Most governmental procuring entities opt for tendering or competitive bidding processes by inviting prospective and eligible bidders.
2. This expenditure undertaken by the government is not only for meeting the its day to day needs but also for supporting various services expected from it such as infrastructure, national security, public utilities, employment and educational services and an overall economic development. This way, the private sector too has significant number of opportunities to benefit by supplying various products and services to the government – from hired taxi services[4], hotels[5] and hospitality services[6], building of roads[7], offering professional services and technical support[8], etc. It is noteworthy that this power to spend is derived from the Constitution which vests the executive powers of the Union of India in the President of India[9]and the President, by his order and issuance of allocation rules of the Government of India[10], vests the financial powers of the Indian Government in the Ministry of Finance.
3. The requirement of due process and equal treatment are not only restricted to the Central or State governments but include government owned entities as well such as public sector undertakings, statutory corporations, municipalities and local bodies, etc. Article 299[11] of the Constitution of India stipulates that all contracts made in the exercise of executive power of the union or state shall be supposed to be made by the President or by the Governor. Public procurement is, thus, an all pervasive function across the government machinery. It has grown phenomenally over the years in scale, variety and complexity and is a major activity within the Government.
4. While there are no definitive estimates of total size of India’s public procurement at any place, an Organization for Economic Co-operation and Development (OECD) estimate puts the figure for public procurement in India as high as 30 per cent of India’s GDP.^[12] There is no gainsaying that since the Government allocates a large share of taxpayers’ money to public procurement, the onus, is on the Government to make sure it gets greater value for its money. The policies framed by the Government dole out the ultimate goals of serving public interest.

An example to depicting how differently a private party enters into a contract

1. For instance, let’s suppose that a renowned private motel chain is looking for a local consultant to construct a hotel in a town. This company enters into a typical engineering, procurement and construction contract with the consultant and decides to invite proposals from interested consultants. These consultants will pitch before the management of the company. Out of the 15 consultants who were invited to the pitching session with their bid, the company was specifically overwhelmed with the 7th bidder and wants to award the contract to him. The rest of the program was called off and the remaining 8 bidders were asked to return, without any hearing or evaluation of their proposals.
2. As arbitrary as it sounds, this process if challenged before a court of law shall not be held to be invalid for the simple reason that private business entities are allowed to enter into contracts freely without requiring them to observe any specific procedures before entering into the contract. With near complete immunity for their decisions, private parties will not be held liable for not letting the participation of each and every bidder. Hence, the above procedure might be upheld as perfectly valid, since it has been entered into between two consenting business entities, none of which have alleged either fraud or misrepresentation or any other illegality with the contract.
3. However, cancellation of a contract midway by the government without providing a fair opportunity to party might be successfully challenged before the courts. The rights which a businessman has over fair play and equal opportunity, fundamental rights enshrined in Part III of the Constitution of India, cannot be ignored while responding to the final awarding of contracts. The need for an unbiased and non-arbitrary bid evaluation regime cannot be overstated, which might also form subject matter of challenge before a court of law. In the present example, the Government could have only been able to award the contract only after granting audience to each and every bidder and then selecting the most eligible (financial and technical eligibility) one of them.

The key to understanding how public procurement takes place is to differentiate it from an entry into a private contract agreement.

1. This is because when most private individuals or companies intend to procure, they are free to choose the suppliers and have full autonomy and immunity to choose which procedure shall guide their procurement mechanism. There is no such initiation to any tender or bid for potential suppliers, and entry into a contract is direct. While it is true that an initiation to bids might reduce the prices a private procurer may have to pay for a given project, given the advantages of a competitive bidding process, a private entity still never feels the need to follow specific rules for the evaluation course of action.
2. The Government on the other hand cannot practice or procure without any rules or regulations – this is premised on the rationale that it may give rise to allegations of bias, favoritism and not giving equal opportunity to the eligible and unheard Article 14 of the Constitution prohibits the Government from arbitrarily choosing a contractor at its will and pleasure. It has to act reasonably, fairly and in public interest in awarding contract. Undisputedly, the legal position which has been firmly established from various decisions of the Apex Court is that government contracts are highly valuable assets and the court should be prepared to enforce standards of fairness on the Government in its dealings with tenderers and contractors.^[13] The Constitutional principles of equal opportunity to all and level playing field[14] in governmental contracts has to be followed throughout the procedure of the bidding and eventual allotment. Wherever a contract is to be awarded or a licence is to be given, the public authority must adopt a transparent and fair method for making selections so that all eligible persons get a fair opportunity of competition. To put it differently, the State and its agencies/instrumentalities must always adopt a rational method for disposal of public property and no attempt should be made to scuttle the claim of worthy applicants. When it comes to alienation of resources it is the burden of the State to ensure that a non-discriminatory method is adopted for distribution and alienation, which would necessarily result in protection of national/public interest.[15]
3. The aforenoted concept is adorned with Part XIII of the Constitution deals with Trade, Commerce and Intercourse within the Territory of India which under Article 301 specifically provides for freedom of trade, commerce and intercourse throughout the territory. The freedom to trade throughout the territory is not only derived from this article but also from Article 19(1)(g) which grants the right to a level playing field. Certain restrictions in favor of public interest and prohibiting any discrimination are also set out in the aforesaid chapter.^[16]
4. Though nobody has any right to compel the State to enter into a contract, everybody has a right to be treated equally when the State seeks to establish contractual relationships. The effect of excluding a person from entering into a contractual relationship with the State would be to deprive such person to be treated equally with those, who are also engaged in similar activity.[17]
5. This does not imply that the government is devoid of fixing the rules of the game[18] and does not have the freedom to choose from the potential bidders, however, it must follow a definite and a fair regime to procure goods and services. The Government is also given the independence to choose who it wants to contract with, and one can only challenge unfair treatment and discrimination in the selection process, which has been held to be detrimental to public interest. Once it is proved that the procurement was in fact illegal due to its opaqueness, the Courts will not and has not shied away from nullifying the effects of even mega-scale procurements such as the coal scam case[19] and the 2G spectrum allocation case[20]. At the same time, no person can claim a fundamental right to carry on business with the Government.[21]

Are Governmental contracts only applicable for big businesses? What about small business entities?

1. All kinds of opportunities are open to all potential business entities, including small businesses, which are not kept outside the realm of public procurement and are equally eligible to participate in the procurement process. Like big business entities benefit from supplying to the government, giving huge boosts to their business reputations, small businesses are not deferred from entering into contract which might also result in huge cash flows, as the government usually procures on a large scale. The cushion against any economic downturn is also saved when the demand from the private sector falls.
2. Resurrecting the Small and Medium Enterprises (SME’s) by meeting the transparency requirements can support and promote them immensely. In order to overcome the digital divide between the SME’s and the bidding information, there needs to be an efficient communication mechanism in place. Such paucity of notifications, inability to access market information and business opportunities, not only hampers their market penetration but also creates monopoly of certain regular big players. A channel for wider dissemination between such SME’s and the Government needs to opened, such as an e-portal, where registered SME’s are alerted of the daily updates of bidding invitations. This shall require an e-registration system which sends updates through emails to all the registered bidders preparing them well in advance to apply for the bids they are eligible for. This way an increased participation can be seen from the SME’s towards public procurement. Automated invitations to bid specifically for small and medium businessmen will be seen as a welcome change following with an efficient bidding pool.
3. Likewise, the government cannot outcast private and foreign firms which could again amount to discrimination. The concentration of profits cannot merely reside with the local business entities while the foreign entities suffer. This would not only result in an imbalance in the pool of potential and suitable bidders, but would also affect the profits of private and foreign competing firms. Thus, it is the government’s duty to look out for any discrimination against players in the bidding sphere and encompass optimal policy regimes for both private & public[22] and local & foreign bidders. The aforenoted issue was discussed by the Apex Court in the Assn. of Registration Plates case[23] wherein the petitioners had challenged the condition laying down a prescribed minimum turnover of business (Rs. 12.5 crores). It was alleged that fixing a high turnover for such a new business was only to advance the business interests of a group of companies having foreign links and support but it was impossible for any indigenous manufacturer of security plates to have the same. The Court, while rejecting the claim, noted that the clauses requiring experience in the field of supplying registration plates in foreign countries and the quantum of business turnover were not intended to keep indigenous manufacturers out of the field.[24] It was held that selecting one manufacturer through a process of open competition did not amount to creation of any monopoly, as contended, in violation of Article 19(1)(g) of the Constitution read with clause (6) of the said article specially when the tender conditions were formulated taking into account the public interest consideration and aspects of high security.[25]
4. Whilst the above view, it is also true that India has adopted a tit for tat policy against nations who do not entertain Indian suppliers. Nations excluding Indian suppliers shall face similar curbs in participation and competing in bids for the government procurement in India.^[26]

Judicial decisions on the Governmental autonomy and accountability and businessman’s right to fair bidding process

Since the above dialog has given a brief description to the difference between a private and public procurement, it shall now follow with a legal rationale that is followed by the courts while assessing cases challenging government procurements.

1. Where the Government formulated a new scheme by which offered invites from intending purchasers of kendu leaves but the invitation was restricted to those individuals who had carried out the contracts in the previous year without default and to the satisfaction of the Government, the Court held that this was ex facie discriminatory and imposed unreasonable[27] restrictions upon the right of persons other than existing contractors to carry on business.[28]
2. While limiting the course to challenge the Courts have found that a mere disagreement with the decision making process or the decision of the administrative authority is no reason for a Court to interfere.[29]
3. In fact, it has been laid that the threshold of mala fides, intention to favour someone or arbitrariness, irrationality or perversity must be met before the constitutional Court interferes with the decision making process or the decision.[30]
4. While the courts have given enough leverage and standing to the tenderers or contractors seeking damages in a civil court. Attempts by unsuccessful tenderers with imaginary grievances, wounded pride and business rivalry, to make mountains out of molehills of some technical/procedural violation or some prejudice to self, and persuade courts to interfere by exercising power of judicial review, have been resisted. Such interferences, either interim or final, the courts have found, may hold up public works for years, or delay relief and succour to thousands and millions and may increase the project cost manifold.[31]
5. The Supreme Court of India in the case of Michigan Rubber (India) Limited State of Karnataka[32] while observing the issue of the formulation of tender conditions, held that their interpretation was also a matter falling within the domain of the executive agency. And unless the process adopted or decision made by the authority was mala fide or intended to favor someone, no judicial interference would be warranted.
6. The grasp of Article 14 in government contracts is not only to secure propriety, maximization of economy and efficiency, but also to promote healthy competition among the tenderers, to provide for fair and equitable treatment of all tenderers, and to eliminate irregularities, interference and corrupt practices by the authorities concerned.[33] Although equality and justice cannot take a backseat there may be situations compelling reasons necessitating a departure from the rule. However, these reasons must be rational and should not be suggestive of discrimination.[34]
7. The law is well-settled that contracts by the State, its corporations, instrumentalities and agencies (government entities) must be normally granted through public auction/public tender by inviting tenders from eligible persons and the notification of the public-auction or inviting tenders should be advertised in well-known dailies having wide circulation in the locality with all relevant details such as date, time and place of auction, subject-matter of auction, technical specifications, estimated cost, earnest money deposit, etc.[35]
8. In another case, the Supreme Court was concerned with a tender which set forth certain “minimum qualifying requirements” and also went on to require some documents ‘along with the application for issue’ of tender documents. The court held that if the tendering authority had in its wisdom decided to relax some non-essential or ancillary conditions or to grant extra time for furnishing the same, that would not by itself render its conduct objectionable or the bids received consequent to such deviation bad.. It held that such deviations (if made) should not result in arbitrariness or discrimination or substantial prejudice to any of the parties involved or to the public interest in general.[36]
9. Where it was found by the Cyber Crime Cell that some modifications were made to the technical evaluation clause in the bid document, but which clause did not form part of the mandatory criterion for opening the financial bid, the Court held that it warranted no interference. The Court further held that in the absence of mala fides or arbitrariness, court interference should be slow as re-tendering would delay the projects.[37]

General Financial Rules, 2017

For the purposes of this paper, the General Financial Rules, 2017 (GFR) have been analyzed in terms of the check and balances that have been offered therein and how they acknowledge the need for equality, probity and propriety in the procurement procedure. [38]

The GFR framed by the Ministry of Finance notified on 8^th March, 2017 lay down the principles for general financial management and procedures for Government procurement. The rules have the status of subordinate legislation. All government purchases must be in accordance with the principles outlined in the GFRs.

Certain salient features and loopholes present in the GFR, 2017 have been discussed below

1. By way of Rule 144, the Government has enshrined the fundamental principles of public buying (for all procurements including procurement of works) which provides that every authority delegated with the financial powers of procuring goods in public interest shall have the responsibility and accountability to bring transparency and efficiency in matters relating to public procurement[39] and for fair and equitable treatment of suppliers and promotion of competition in public procurement.
2. The GFR 2017 also preserves the concept of transparency vide Rules 159, 160 and 167. The encouragement of use of digital technology is likely to make the procurement process much more efficient, transparent and impartial.[40] This enshrinement of digital systems in public procurement system puts India on par with global best practices in transparency in public procurement.[41]
3. GFR 2017 also enables prospective bidders to formulate and send their competitive bids with confidence and all government purchases be made in a transparent, competitive and fair manner, to secure best value for money.[42] This includes the criteria for eligibility, description of the goods or services required, procedure of sending bids, responsiveness, evaluation, etc.[43]
4. It is interesting to note that the UK’s Public Contracts Regulations (PCR) 2015 under its Regulation 12 mentions where a contracting authority awards the contract to an entity which it controls, such a contract is exempt from the purview of the regulations, the Indian Public Procurement Bill, 2012 and GFR 2017 do not provide for this exception. This speaks volumes of the thorough transparency that is being ensured by the government disallowing any exceptions to the formalities even to its own subsidies.[44]
5. The right to know the reasons for rejection have also been included vides Rule 173(iv) –by stipulating that the reasons for rejecting the tender or non-issuing a tender document to a prospective bidder must be disclosed where enquiries are made by a bidder.[45]
6. Another aspect that has been added to the GFR 2017 is the Competitive Dialog Mode vide Rule 164, GFR, 2017. In case a contracting authority is not able to define the technical means to satisfy its needs or is not able to identify in advance the legal and/or financial make up of a project, it can enter into a ‘competitive dialogue’.[46] A similar issue arose where a challenge as sought against the negotiations held between the government and two competitive contracts regarding the allotment of land for the construction of hotels to boost tourism. The Court noted that the State did not commit any breach of any constitutional or legal obligation if it negotiated with such party and agreed to provide resources and other facilities for the purpose of setting up the industry. [47]
7. India vide GFR 2017, has kept open the foreign participation open to public procurement. However, this operates only in exceptional circumstances, i.e. in case goods of the required quality assurance or specifications are not readily available domestically or it is feasibly necessary to look for suitable competitive offers from abroad.[48] It is nonetheless, the prerogative of a government as to whether and to what degree its government procurement market should be kept open to foreign participation. Recently, enthused by the response received from overseas developers for the station redevelopment programme, the Indian Railways has intended to hold roadshows abroad to showcase the financial robustness of the scheme and attract more investors.^[49]
8. The Rules are also wary of any collusion, bid rigging or anti-competitive behavior that may impair the transparency, fairness and the progress of the procurement process; improper use of information provided by the procuring entity to the bidder with an intent to gain unfair advantage in the procurement process or for personal gain.[50] However, Rule 175(1) does not make an independent or an impartial party in power in order to check for misappropriations and misconduct. The present position would turn out to be disadvantageous since there might be collusions between the bidders and the procurer. The position of an independent external monitor would be crucial for the enforcement of the Code of Integrity[51].

Conclusion

Now what is keenly awaited is the action of the Government in enacting the Public Procurement Bill 2012 which provides Grievance Redressal Committees for the mechanism for quick redress of the grievances of bidders an aspect missing in the GFR 2017. International examples, such as the UNCITRAL Model Law on Public Procurement and the Government Procurement Agreement of WTO have also upheld the independent administrative review mechanism for this purpose.[52]

With the given autonomy for its decision and the stakes being exceedingly high, the cardinal principle which the Government ought to follow is that procurement of material and/or services ought to be done at the most competitive prices in a fair, just and transparent manner. The right to audience of businessmen ought not to be whittled down. There can be no question of infringement of Article 14 if the Government tries to get the best person or the best quotation. The right to choose cannot be considered to be an arbitrary power.[53]

The above must be done keeping in mind that public procurement has a significant economic impact, considering governmental procurement contracts, inclusive of Defence[54], by the Centre, States and local bodies are valued annually at almost 30 percent of India’s GDP, and cover almost every sphere of government activity. As has been discussed, the praiseworthy General Financial Rules, 2017 are a step towards the right direction in India’s need for proper procurement laws serving well against the transparency and equality drive in the business sector. The concept of equality is all the more important when India is pacing towards, Indigenization i.e. local preferences for the ‘Make-in-India’ drive boosting economic growth and generating jobs for our local suppliers. A legitimate tool under our multilateral commitments with a number of major government initiatives can leverage and promote value addition, create employment and give a much needed boost to the manufacturing and economic expansion.

References

[1] Article 14, Constitution of India, 1950 – Equality before law – The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

[2] Article 19, Constitution of India, 1950 – Protection of certain rights regarding freedom of speech, etc. – (1) All citizens shall have the right— (g) to practise any profession, or to carry on any occupation, trade or business.

[3] Section 2(r), Public Procurement Bill, 2012 available at http://www.prsindia.org/uploads/media/Public%20Procurement/Public%20Procurement%20Bill,%202012.pdf last seen on 20/06/2017 [A Bill to regulate public procurement with the objectives of ensuring transparency, accountability and probity in the procurement process, fair and equitable treatment of bidders, promoting competition, enhancing efficiency and economy, maintaining integrity and public confidence in the public procurement process and for matters connected therewith or incidental thereto]

[4] In India’s cities, public transport run by private operators makes for a happy ride – if done right (20/04/2017) available at https://scroll.in/article/834542/in-indias-cities-public-transport-run-by-private-operators-makes-for-a-happy-ride-if-done-right, last seen on 20/06/2017

[5] Sachidanand Pandey v. State of W.B., (1987) 2 SCC 295

[6] Debabrata Das, Building blocks of a monopoly, (23/05/2017), Fortune India, available at http://fortuneindia.com/2017/may/building-blocks-of-a-monopoly-1.10862, last seen on 20/06/2017

[7] Sharmistha Mukherjee,  Toll-operate-transfer: Private tolls to fund new roads, (05/08/2015) available at http://indianexpress.com/article/india/india-others/toll-operate-transfer-private-tolls-to-fund-new-roads/

[8] Infosys to take over MCA-21 project from tomorrow (16/01/2013) Business Line available at http://www.thehindubusinessline.com/economy/economy/infosys-to-take-over-mca21-project-from-tomorrow/article4312484.ece, last seen on 20/06/2017 (for continuous improvement and up-gradation to the electronic service delivery of the Corporate Affairs Ministry.)

[9] Article 53, Constitution of India, 1950 – Executive power of the Union.

[10] The Government of India (Allocation of Business) Rules 1961, http://cabsec.nic.in/shownewpdf.php?type=allocation_aob_a1&id=29&special, last seen on 20/06/2017 ; Also, Article 77, Constitution of India – Conduct of business of the Government of India.

[11]  Article 299, Constitution of India, 1950 – Contracts.

[12] Public procurement needs to be opened up (03/03/2017) available at http://www.thehindu.com/business/public-procurement-needs-to-be-opened-up/article17395912.ece, last seen on 20/06/2017

[13] Assn. of Registration Plates v. Union of India [(2005) 1 SCC 679 at para 43; Michigan Rubber (India) Ltd. v. State of Karnataka, (2012) 8 SCC 216 at para 23; See Air India Ltd. v. Cochin International Airport Ltd., (2000) 2 SCC 617; Asia Foundation & Construction Ltd. v. Trafalgar House Construction (I) Ltd., (1997) 1 SCC 738; Krishnan Kakkanth v. Govt. of Kerala, (1997) 9 SCC 495; Ugar Sugar Works Ltd. v. Delhi Admn., (2001) 3 SCC 635; Sterling Computers Ltd. v. M&N Publications Ltd., (1993) 1 SCC 445; Union of India v. Dinesh Engg. Corpn., (2001) 8 SCC 491

[14] United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera , (2008) 10 SCC 404

[15]  Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1 at pg. 59, para 95

[16] Articles 301-307 of the Constitution of India, 1950

[17] Patel Engineering Ltd. v. Union of India and Anr. (2012) 11 SCC 257 @para 14

[18]  See Mohd. Fida Karim And Anr vs State Of Bihar, (1992) 2 SCC 631

[19] Manohar Lal Sharma v. Principal Secy., (2014) 9 SCC 614

[20] CPIL, supra 11, at 59

[21]  Michigan Rubber (India) Limited v. State of Karnataka and Others, (2012) 8 SCC 216 at para 23

[22] United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera , (2008) 10 SCC 404 at pg. 424-427

[23] (2005) 1 SCC 679

[24]  Ibid at para 38

[25] Ibid at para 40

[26]Government unveils tit-for-tat public procurement policy (16/06/2017) available at  http://www.thehindu.com/todays-paper/tp-business/government-unveils-tit-for-tat-public-procurement-policy/article19078600.ece, last seen on 20/06/2017

[27]  See Tata Cellular v. Union of India, (1994) 6 SCC 651 [the decision must not only be tested by the application of Wednesbury principle of reasonableness (including its other facts pointed out above) but must be free from arbitrariness not affected by bias or actuated by mala fides.] See Associated Provincial Picture Houses Ltd.v. Wednesbury Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680 (CA)

[28] Rashbihari Panda v. State of Orissa, (1969) 1 SCC 414

[29] Afcons Infrastructure Ltd. v. Nagpur Metro Rail Corporation Ltd., (2016) 16 SCC 818 at pg. 825, para 11-13

[30]  Ibid at pg. 825, para 11, 13

[31] Jagdish Mandal v. State of Orissa [(2007) 14 SCC 517, pp. 531-32, para 22

[32] (2012) 8 SCC 216, at para 23-24

[33] Nagar Nigam v. Al Faheem Meat Exports (P) Ltd., (2006) 13 SCC 382 at page 395, para 16

[34]  Sachidanand Pandey v. State of W.B., (1987) 2 SCC 295 at page 326, para 35

[35] Nagar Nigam v. Al Faheem Meat Exports (P) Ltd., (2006) 13 SCC 382 at page 395, para 16

[36] G.J. Fernandez v. State of Karnataka (1990) 2 SCC 488 at p. 501, para 15

[37] Chhattisgarh State Industrial Development Corpn. Ltd. v. Amar Infrastructure Ltd., (2017) 5 SCC 387 at p. 403-405

[38] The General Financial Rules (GFR) 2017, framed by Department of Expenditure, Ministry of Finance, Government of India. Available at http://mof.gov.in/the_ministry/dept_expenditure/GFRS/GFR2017.pdf, last seen on 20/06/2017

[39]  Rule 174, GFR, 2017

[40] “Transparency Mechanism”, Chapter III of the Public Procurement Bill, 2012 available at http://www.prsindia.org/uploads/media/Public%20Procurement/Public%20Procurement%20Bill,%202012.pdf, last seen on 20/06/2017

[41] Rule 173, GFR, 2017. See generally Regulation 22(5) of the Public Contracts Regulations, 2005– the contracting authority is duty bound to “…ensure that the integrity of data and the confidentiality of tenders and requests to participate are preserved” (Regulation 22(11) of the Public Contracts Regulations, 2005; Read generally “Business Recommendations For Public Procurement Policy In India White Paper” by GCNI-CEGET (04/05/2017) available at http://ceget.in/white-paper-business-recommendations-for-public-procurement-policy-in-india/, last seen on 20/06/2017

[42]  Rule 173, GFR, 2017

[43]  Ibid

[44]  Ibid

[45] Rule 173(iv), GFR, 2017

[46] Also see Rule 173 (xiv), GFR, 2017 – Negotiation with bidders after bid opening must be severely discouraged. However, in exceptional circumstances where price negotiation against an ad-hoc procurement is necessary due to some unavoidable circumstances, the same may be resorted to only with the lowest evaluated responsive bidder.

[47] Sachidanand Pandey v. State of W.B., (1987) 2 SCC 295 at page 327, para 37; Kasturi Lal Lakshmi Reddy v. State of J.&K. [(1980) 4 SCC 1, para 14

[48] Rule 161(iv), GFR 2017

[49] Saurabh Kumar, Railways station redevelopment drive: Public sector giant to hold road shows abroad to attract investors,  (17/06/2017) http://www.financialexpress.com/economy/railways-station-redevelopment-drive-public-sector-giant-to-hold-road-shows-abroad-to-attract-investors/722957/

[50]  Rule 175 (1) – Code of Integrity , GFR2017

[51]  Ibid

[52] Supra 38, at 16

[53] Tata Cellular v. Union of India, (1994) 6 SCC 651 at page 675 para 70; Food Corporation of India v. Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71 at page 76, para 7

[54] Amrita Nair-Ghaswalla, Indian defence manufacturers cautiously optimistic on defence partnership policy (26/05/2017)  available at http://www.thehindubusinessline.com/economy/indian-defence-manufacturers-cautiously-optimistic-on-defence-partnership-policy/article9713540.ece,  last seen on 20/06/2017