In this article, Rituraj Singh Bhati who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Ten must-have clauses in Articles of Association that are not prescribed by default under the Companies Act.

Article of Association

Article of association is the backbone of incorporation of any company. Article of Association is the rulebook of any company in which the company’s bye laws and the procedure to be incorporated in running, amalgamating and winding up of a company. The article of association is the extract of all the things a company is run upon; it recognises the rights and duties of directors and chairperson of the company, it defines the nature and the work type of the business to be undertaken etc. the article of association includes Memorandum of Association which in turn contains the name of the companies to be associated with the business, contents and nature of the final product or the service to be delivered to the end user.

The Article of Association is considered to be the 2^nd most important document in the incorporation of a company after the Memorandum of Association. The AoA contains the rules and regulations by which a company is regulated; it contains clauses related to amalgamation of the company, winding up of the company, nature of business, issue and allotment of shares, issue and allotment of debentures, it also clarifies the statute to be used in bonds distribution, rights and duties of shareholders, when and where the Annual General Meeting is to be held, how and when the profit will be distributed amongst the shareholders, what will happen upon winding up of the company etc. the Article of Association contains and can contain medley of clauses which may or may not be applied according to the laws of the land where the company is incorporated. The clauses embedded in the article of association define how the company will run but numerous of times it also defines what has to be done at the time of happening of an unexpected event or unexpected situation if faced by the company.

The government of India has made it compulsory for the companies to have an Article of Association while incorporation of the company to attain necessary documents, licences and registration needed by a mandate to run business in India. Any company with collaboration with any company situated out of India will also need the Article of Association to be prepared mandatorily to continue business in India.

The Article of association also provide shareholders certain powers to question the Management of the company as the shareholders are considered to be part owners of the company as they own shares of the company. By the way of Article of Association the shareholders can also question Board of Directors upon their decision related to the company and administer control over the decisions taken by the Board of Directors or the management. The Article of Association gives the shareholders power to question any decision and also binds them in rules according to which the shareholders can attain the profit and bonuses. The Article of Association also puts certain limitation upon the shareholders as a safeguard to the companies from the shareholders and vice versa.

The Article of Association can be amended by resolution whenever the time and situations demand. The amendment or amalgamation of a clause under Article of Association is quite typical and rigid but at the same time flexible in interest of the company. The clauses of the Article of Association are amended on strict needs and by the majority if provided by the shareholders.

The Article of Association is a public document as soon as it is registered with the Registrar of Companies and everyone whether he is an employee of the company or not or whether he is a shareholder of the company or not. The Article of Association is made public by the act of 2013 to keep the management and working of the company transparent and legal.

The Article of Association provides a path on which the company will be run upon. The clauses of the Article of Association provide as its bye laws by which the company will work and the clauses of the Article of Association in themselves serve as contracts signed by the signed parties. Anything which is not according to the Article of Association can be questioned in Annual General Meetings and several other quarterly meetings called by the companies. These meetings are a part of Article of Association and can be called whenever needed with prior intimation and sometimes it is a mandate to call a meeting before taking any further decision as described in the Article of Association.

The Memorandum of Association and Article of Association can be traced back to the 19^th century when the Indian Companies Act, 1892 was firstly brought in force by the Britishers. The information given under an Article of Association and Memorandum of Association should be complete and absolute as they are cross checked and passed by the Registrar of Companies. Any clause or information in the Article of Association if in contrary with any provisions prescribed by the law will be invalid in toto.

ten non-default clauses which are not prescribed by law but should be put up with an Article of Association

Valuation of the partner’s properties

A clause relating to the valuation of the partners should be put up in Article of Association as a safeguard to the outsiders and the beneficiaries’ related to the business. The valuation of Intellectual rights and property of the partner should be calculated and mentioned in the Article of Association before registration from the registrar of the Companies. In the same manner a valuation of the partner’s real estate, movable property shall be prepared to keep transparency in the business. This procedure will safeguard the outsiders and the shareholders in case of winding up or in case of insolvency of any partner or directors.

The valuation of the property shall also constitute of the Brand Value of the present company as well as any other brands or companies’ owned by the partners. The valuation of the property will also provide a hustle free inspection and scrutiny to the government authorities. This step will also bring regulation to avoid circulation of Black money in the local and international markets. When all the property will be valued and assessed in a public document a person will hesitate in tax cutting and purposely not paying taxes. The disclosure of valuation of assets should be made a part of the Article of Association to further regularise the system and working of a Company.

Covert Trade Secret

A clause should be put up in Article of Association related to the covertness of trade secret related to the company. The clause should refrain any person related to the company from letting out the trade secret of the company; whether the person may be a top official or a mare employee of the company, there should be strict and harsh punishment to let out a trade secret. There can also be a provision under the clause which describes the law and type of proceeding by which the person letting out trade secret will be prosecuted with.

Trade secret is the main ally of any companies through which different companies refrain each other from using the technology or process used by one company to produce its final product or service.

The clause defending the trade secret of a company should be made a part of the Article of Association and should contain legal and penal consequences as deterrent way to restrict any person letting out a trade secret.

Any information if let out can disturb or even cause to collapse the companies system and its business. Therefore, the covertness of a trade secret should be a company’s first and foremost step to safeguard its business and secret which makes different from any other company in the course of business.

The clause should equally apply to the higher officials of the company as well as the lowest employee working under the company.

Entrenchment Clause

The concept of entrenchment clause is firstly introduced by the Companies’ Act of 2013. The term ‘entrench’ refers to establishment of any belief, style, habit, procedure so firmly that to change it or amend it is a difficult task. The entrenchment clause is necessary in today’s Article of Association because there are also minor shareholders who have invested in the company and they are too part of the company as well as there are work unions and workmen’s lobbies concerned with the betterment of workmen and employees. The entrenchment clause gives them power to change or amend or amalgamate any clause which according to the present time and demand is hindering the employees’ or shareholder’s rights.

The amendment of article is only possible with a majority of consent of the members passing a special resolution to amend or amalgamate an article as per Section 14 of Companies Act 2013. The majority of the members consenting for the amendment of the article should not be less than 75% of the total members of the Company.

The special resolution passed to amend, add or subtract and clause of article from the Article of Association is to be passed according to the Entrenchment Clause present in the Article of Association. If the company is incorporated before 2009 the company can by special resolution also call in for amendment in the article too add such clause which will be profitable to the company in today’s scenario. These articles incorporated in Article of Association are binding upon the signing parties as contract itself to follow and be abided by the clauses of Article of Association

The procedure of inquiry upon the employees and directors

A clause regarding the procedure of the enquiry should be prescribed in the Article of Association or an easy and non-complicated process of enquiry to be carried whenever any bye law or a procedure has been disturbed with. A procedure should be setup in the Article of Association itself through a clause to commence the disciplinary action or enquiry upon an employee of the company or even the director of the company in case of any irregularity with the work of the company or any decision taken which was forbidden by the Article of Association or by the prevailing laws. The clauses in the Article of Association are not legally binding in themselves but can direct towards the law through which the case is to be dealt in case of any irregularity or any action contrary to the laws of the land.

Any rule broken in the company whether by the directors or the employees should attract this said clause and the person not abiding the rules of the company or the rules established by the country should be held and dealt according to this clause and if further needed should also be subjected to legal action.

Interest of Minority shareholders

The Article of Association should also contain clause relating to the shareholders of the company who are not a major investors in the company but are the owners or a small number of shares in the company.

Generally, in Article of Association, the small stakeholders and small shareholders of the company are not sought after. The meetings are attended by the big players of the companies and thus the decisions taken by the company are only a reflection of what its major shareholders think of. The small shareholders of the company are not in positions to attend every meeting called upon by the company and are left aloof from the fact findings and the way of working of the management of the company. Therefore, a clause should be added in the Article of Association describing the rights of minor shareholders, who can advise and put up their view as how should the company be working because after all its also there hard earned money which is invested with the company.

Doctrine of constructive notice

Doctrine of constructive notice is a well-established and followed practice by the companies having shares, debentures and public issues. It being a regular and very sought after practice is still not mentioned in the Article of Association which is a public document. The doctrine of constructive notice should be contained in a clause present in the Article of Association so that laymen investing in your company may not feel cheated regarding not knowing the rules and regulations of a company. Doctrine of constructive notice is followed to safeguard the outsider investing in the company or carrying business with the company.

This doctrine of constructive notice comes into action when an outsider whether shareholder or a person doing business with the company takes the defence of not being aware of the rules and regulations of the company and committing a mistake prohibited by the rules and regulations of the company. At such a point the company has a defence of the doctrine of constructive notice which says that the Article of Association is a public document and the person performing business or investing in the company is considered to be fully aware of the rules and regulations of the company. In such case the outsider cannot take the defence that he was not aware of the rules and regulations of the company. The major reason of making the Article of Association public was duly the same that any person can access the document and be fully aware of the rules and regulations of the company.

Workmen safety and end user safety clause

There should be a clause regarding the safety of the workmen; if the nature of the work is hazardous and risky the workmen should be provided with safety features and compensation if anything happens to them while the period of employment. In same manner the company should also draft a safety clause for the customers of the end product. The company incorporating shall by this clause gain better PR which can be uttering helpful for the future aspects of the company.

Where the workmen work under hazardous conditions, the workmen should be duly compensated and be insured for the damages they would have to suffer due to the nature of the work.

The company should also safeguard the environment from the waste and bye product produced in the production of the final production.

Business expansion clause

The company should also embed a business expansion clause in the Article of Association to save the company from stagnation. The company can incorporate the clause as a term describing the procedure and time barred limitation as to how and when the company needs constant expansion. The clause can explain that upon earning a profit and after paying the profits the company will expand on yearly basis.

Shareholder’s right to appoint directors

The shareholder whether he is a major shareholder or a minor shareholder should be entitled to choose and appoint the director/ directors for the company they have invested in. This process further brings transparency in the running of the company and will also further safeguard the company from frauds as the directors itself would be chosen by the members of the company.

The directors chosen by the members would be more competent towards providing the information the shareholders’ demand. The shareholders should have a right to demand the information about the companies’ affairs and the matters of importance. The shareholders know how the company works and what it produces but the shareholders don’t know the internal working of the companies’ management and the indoor procedures applied by the company. Thus, the shareholders shall have a right to know about the hidden procedures and processes of the company.

Productivity clause

The managers of the company should always emphasize upon the productivity of the company and that the growth of the company should not be hindered. The productivity of the company in return provides the company with a stable backdrop and the company would also run smooth because of growth in the sector. Such a productivity clause would help the company to easily attain public undertakings, shares, bonds etc.

Any violation in the clause may lead to severe dysfunction in the company and may harm the business of the company and also may endanger the company due to proceedings that would be followed by the violation of the procedure.

Through these clauses, the company can attain a better stability and smoothness in the long run. The corporate governance is a must in the present scenario especially for companies either incorporated under the tag of public companies or private companies. These clauses safeguard the company from entering into a loophole. The clauses help in proper functioning of the incorporation.

There is always place for clauses which are future worthy and keep up with the betterment for employees. For example there should also be a clause for a preference to the employees in the process of share issuance and allotment.

The corporate governance of a public company is much typical and complex than of a private company and other unlisted public companies. And still it is a must for the companies to follow corporate governance.

Conclusion

The Article of Association is a public document as soon as it is registered with the Registrar of Companies and everyone whether he is an employee of the company or not or whether he is a shareholder of the company or not.

The companies should try new nature of clauses as per the demand of time and nature of the business to be carried on by the business. The best thing about the Article of Association is that it may not be legally forcing it contains certain clauses which impanel the wrongdoer for a legal and penal proceedings. The clauses in the Article of Association form a contract in itself by the binding both the parties have provided to the documents by agreeing to it and signing the authority.

All the above clauses form significant clauses wherein a company should adopt an appropriate measure of Corporate Governance as the rules have become more stringent in cases of listed public limited companies than that of other public & private limited companies. To have smooth operations in the competitive market, the clauses described in this article is required for the company to avoid loopholes in their corporate governance structure.

In this article, P. Mohan Chandran who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Legal requirements and restrictions on labeling a product ‘Organic’.

It is an established fact that the food you choose affects your family and shapes their eating habits. Shopping can be challenging when we all come across food labels in several sizes and forms on the packaging of goods, in the ingredient list, or on stickers. The ‘Certified Organic’ label enables you to make informed decisions at the farmers’ market or the supermarket. The risk to exposure of pesticides, antibiotics, hormones, and resultant cancer reduces when you and your family eat organic food, which promotes the development of long-lasting, good eating habits.

The swift pace of growth of organic products continues across the U.S. as organic products become a household benchmark for 81% of families in the country. In 2015, the organic sector witnessed a growth of 11%, and the organic marketplace is projected to continue growing with increasing demand for organic products (Refer Table-1).

Source: www.ccof.org

To provide a focused and effective development of organic agriculture and quality products, the Ministry of Commerce and Industry (MCI), Government of India, launched the National Program on Organic Production (NPOP) in the year 2000. NPOP was notified in October 2001 under the Foreign Trade & Development Act. The NPOP is developed and implemented by MCI as the apex body, which established a National Steering Committee for the NPOP (NSCOP). The NSCOP comprises members from the MCI, the Ministry of Agriculture, the Agricultural and Processed Food Products Export Development Authority (APEDA), the Coffee, Spices and Tea Boards, and other government and private organizations associated with the organic movement.

The Indian organic program is modeled after the International Federation of Organic Agriculture Movements (IFOAM) Basic Standards for Organic Production and Processing, the Codex Alimentarius Guidelines and the EU Regulation 2092/91.

What is ‘Organic’?

The term ‘organic’ was first used by Northbourne, in 1940, in relation to farming, in his book ‘Look to the Land’.

Organic agriculture reinvigorated as an eco-agriculture in the 1970s and institutional strengthening and diversity became a part of the movement. Formation of IFOAM in 1972 indicated that the movement has matured and that it is going to strengthen and carve a niche for itself around the world of agriculture. Explosive growth of organic agriculture occurred only in the 1990s.

The IFOAM definition of organic agriculture is based on:

• The principle of health
• The principle of ecology
• The principle of fairness and
• The principle of care.

Organic food is produced through the adoption of farming methods that avoid the use of human-made fertilizers and pesticides, growth regulators and additives. Any product manufactured from genetically-modified organisms (GMOs) are barred from being classified as ‘organic.’ In today’s terminology, organic is a method of farming system that primarily aims to cultivate the land and raise crops in a way that keeps the soil alive and in good health by use of organic wastes – crop, animal and farm wastes, aquatic wastes – and other biological materials, along with beneficial microbes, i.e., bio-fertilizers, to supply nutrients to crops for improved sustainable production in an eco-friendly environment, devoid of pollution.

Sewage sludge, bioengineering, ionizing radiation, and most synthetic pesticides and fertilizers cannot be used in organic production. Organic meat, poultry, eggs, and dairy products are produced from animals that are fed 100% organic feed, without administering antibiotics or growth hormones, and raised in natural behavioral conditions. With regard to land, certified organic produce is grown on soil that has been devoid of banned substances for three years prior to harvest to ensure prevention of contamination of crops. By focusing on the use of renewable resources and conservation of soil and water, organic farmers strengthen and sustain the environment for future generations.

Moreover, national organic standards (NOS) also include regulations for organic processed products, including non-usage of artificial preservatives, flavors, and dyes. Organic ingredients are required; however, the National List contains some exemptions such as baking soda and yogurt enzymes. National Organic Program (NOP) standards include specific labeling rules for both produce and processed goods.

Regulation of the term ‘Organic’

Several major developments in the field of standards and regulations occurred in 2009. The new EU regulation on organic production and the Canadian organic standard came into effect. Moreover, the Australian domestic organic standard was also implemented. Canada and the U.S. concluded the world’s first fully reciprocal agreement between regulated organic systems, and the EU established procedures for approving certification bodies from outside the EU. These developments are expected to ease trade in organic products and boost the future growth of the sector. The number of countries with regulation of organic standards has risen to 73, while 16 countries are in the process of drafting legislation.

United States (U.S.)

The US Department of Agriculture (USDA) organic products are strictly regulated. They should have strict production and labeling requirements and the organic products must meet the following requirements:

• Must be produced without prohibited methods such as genetic engineering, ionizing radiation, or sewage sludge.
• Must be produced using permitted substances as mentioned in the National List of Allowed and Prohibited Substances.
• Must be supervised by a certifying agent authorized by USDA NOP, following all USDA organic regulations.

India

The use of the ‘Indian Organic’ logo is regulated by Section 6 of the NPOP. This logo may only be used on products that have been duly certified by accredited inspection and certification agencies as satisfying all organic standards prescribed in the NPOP (sec. 6.1). Although the use of certifiers’ mark is voluntary, it is mandatory to place the ‘Indian Organic’ logo on all certified organic products originating from India (NPOP, sec. 4.A.12).

What does labeling of a product as ‘Organic’ mean?

In the U.S., when a food or beverage product is labeled as ‘organic,’ it means that the product has been grown, produced, examined, and certified to be following the organic standards as mandated by the NOP, a program of the USDA.

Only the USDA can authorize a company to market and label its food/beverage as organic. If a company is authorized to label a product as USDA Organic, it implies it has met the standards of USDA NOP, which include the following:

• Pesticide-Free: Foods are produced without the usage of most conventional pesticides.
• Fertilizer-Free: Foods are produced without the usage of fertilizers made with synthetic ingredients or sewage sludge.
• Bioengineering & Radiation-Free: Foods produced are devoid of bioengineering or ionizing radiation.
• Antibiotics & Growth Hormone-Free: Organic meat, poultry, eggs, and dairy products from animals must not contain antibiotics or growth hormones.
• Sustainable Practices: The production process must employ renewable resources and conserve soil and water to improve environmental quality for succeeding generations.

Distinct Organic label statements for different levels of Organic

There are different organic label statements for different levels of organic foods as mentioned below:

• ‘100% Organic’: 100% of ingredients are organic, with 100% organic processing.
• ‘Organic’: 95% or more of ingredients are organic, some chemical additives approved by USDA may be used in processing.
• ‘Made with Organic Ingredients’: Certain ingredients are organic. This label statement is not a USDA standard labeling statement and cannot be used outside the ingredients panel on the label. However, it can be made if a certifying agent approved by the USDA has verified the claim of some ingredients as organic.

It is necessary that the product must be labeled with the correct organic statement. Before starting the usage of the term ‘organic’ on a product label sold in the U.S., the USDA must give your business the official certification and approval.

Legal requirements for Organic labels

If a producer/seller wants to label their business products as ‘organic’, they need to be certified first and must fulfill the requisite standards that apply to organic products in their respective country and comply with consumer law. However, a business cannot label a product ‘organic’ if it does not comply with the strict criteria as set by the law in their respective countries. Businesses that label their products as ‘organic’ should be able to verify their claims, whenever questioned so by consumers.

The certification can be obtained with the completion of applications, audit procedure, and the process of getting approval for organic labeling. After certification, producers can legally label their products with an ‘organic’ symbol, logo or trademark to indicate such status. Labels such as ‘100% organic,’ ‘made using organic ingredients’ or ‘certified organic’ target those customers who are buying the product for its organic status as much as for the specific product. When products are labeled ‘organic,’ sellers know that consumers find it a very attractive proposition.

AUSTRALIA

In Australia, the prescribed standard for organic products is determined by Australian Standard (AS 6000). This guideline was developed with a view to standardize practices within the organic industry. It aims to operate as a standard yardstick across Australia that regulates how people can grow, produce, distribute, market and label organic products. Through a uniform regulatory mechanism, consumers can comfortably distinguish whether a product is organic or not, without confusion. A seller of an organic product should ensure that his operations are compliant with this standard, while a buyer of organic products should watch out for the label that mentions whether the product complies with the AS 6000.

Certification is provided by several different private organizations in Australia that are accredited by the Department of Agriculture, Fisheries and Forestry. The consequences for falsely labeling products as ‘organic’ when they are not certified can be quite serious. The Australian Consumer Law (ACL) protects consumers in Australia from false or misleading representations made by sellers. Consumers have every right to know whether what they are buying is organically sourced and produced, be it from an ethical standpoint, or health or religious reasons.

UNITED STATES (U.S.)

Certified organic foods are manufactured in accordance with the federal standards determined by the USDA NOP. These standards were followed in 2002 after the Organic Foods Production Act of 1990 and continue to be interpreted and developed by the National Organic Standards Board, a federal advisory committee appointed by the Secretary of Agriculture. Organic standards comprise many factors such as soil quality, animal raising, pest and weed control, and use of input materials.

Apart from determining requirements for growing, processing and handling organic agricultural products, the NOP also sets labeling requirements for such products. Labeling requirements are based on the percentage of organic ingredients in a product. Products labeled ‘100% organic’ should contain ingredients and processing aids – excluding water and salt – that are only organically produced. Any other ingredients or additives are not permitted.

Products labeled ‘organic’ should contain a minimum of 95% organically produced ingredients (excluding water and salt). Any residual ingredients should comprise non-agricultural substances that are included on the NOP National List of Allowed and Prohibited Substances.

Products that fulfill either of these labeling requirements may display the necessary phrases, as well as the percentage of organic content, on the product’s primary display panel. Organic products bearing such labels should be grown, handled and processed without the use of pesticides or other synthetic chemicals, irradiation, fertilizers made with synthetic ingredients or bioengineering. The USDA seal and the organic certifying agent seal/mark may be displayed on product packages and in advertisements.

To use the phrase ‘made with organic ingredients’ and mention up to three of the organic ingredients or food groups on the primary display panel, processed products should contain minimum 70% organic ingredients. For instance, a soup produced with minimum 70% organic ingredients and only organic vegetables may claim ‘soup made with organic peas, potatoes, and carrots’ or ‘soup made with organic vegetables.’ Processed products containing below 70% organic ingredients cannot use the term ‘organic’ anywhere on the primary display panel. However, they can identify specific ingredients that are organically produced on the ingredients statement on the information panel.

Akin to other organic products, processed products labeled ‘made with organic ingredients’ cannot be produced using any processes disapproved by the NOP. The percentage of organic content and the certifying agent’s mark may be used on the primary display panel. However, the USDA seal cannot be used anywhere on the package.

The NOP does not have any limitations with respect to the use of other truthful labeling claims such as ‘no drugs or growth hormones used,’ ‘free range’ or ‘sustainably harvested.’

The label ‘organic’ can be used only by agricultural products that achieve organic certification. Such products include foods and beverages such as cheese, chocolate, cookies, juices, meats, milk, pasta, poultry, prepared sauces, soups, wines and alcoholic beverages, etc. When made of organically grown natural fibers, fiber products such as clothing, bedding, and tablecloths can also be labeled ‘organic’.

INDIA

In India, section 3.5 of the NPOP lays down the general principles, recommendations and specific requirements for the use of organic labeling and claims. The labeling should convey unambiguous and accurate information on the product’s organic status. Following closely the IFOAM Basic Standards, four categories of products are identified for labeling purposes based on their organic composition:

• Single-ingredient products with 100% organic: Raw or processed agricultural products containing 100% certified organic ingredients (excluding water and salt, but including additives) may be labeled ‘produce of organic agriculture’ or such similar description.
• Multi-ingredient products with minimum 95% organic ingredients: Raw or processed agricultural products containing a minimum of 95% certified organic ingredients (by raw material weight, excluding water and salt, but including additives) may be labeled ‘certified organic’ or such similar description.
• Multi-ingredient products with minimum 70% organic ingredients: Raw or processed agricultural products containing between 70% and 95% certified organic ingredients (by raw material weight, excluding water and salt, but including additives) may be labeled ‘made with organic ingredients’ or a description akin to it on the principal organic agriculture and the law display, provided that the proportion of organic ingredients is clearly stated. Such products cannot be simply labeled ‘organic’.
• Multi-ingredient products with below 70% organic ingredients: Raw and processed agricultural products containing below 70% certified organic ingredients may only contain indications that an ingredient is organic on the ingredient list, but cannot be labeled ‘organic’.

In all cases, the person or company legally responsible for the manufacture and processing of an organic product shall be identified and no such product can be labeled as GE (genetic engineering) or GM (genetic modification) free to prevent possible misleading claims about the end-product. Moreover, all raw materials of multi-ingredient products, including additives, should be listed on the product label as per their weight percentage (NPOP, sec. 3.5).

The NPOP accreditation system has been recognized by the USDA as satisfactory to meet the accreditation requirements of the US NOP. This implies that inspection and certification agencies accredited by India’s National Accreditation Body are qualified to certify Indian organic products as compliant with the standards of the US NOP. The USDA seal may be appended to products certified as such, which can then be exported to the US as organic.

Labeling of various Categories of Organic products under National Organic Standards (NOS)

An overview of labeling the various categories of organic products is as follows,

• Primary Display Panel: The part of the package most likely to be seen by buyers at the time of purchase.
• Information Panel: This includes that part of the label of a packaged product that is immediately adjacent to and to the right of the primary display panel as observed by a person facing the primary display panel, unless any other section of the label is designated as the information panel because of package size or its attributes.
• Ingredients Statement Panel: The list of ingredients contained in a product shown in their common and usual names in the descending order of predominance.
• Other Panel: Any panel other than the primary display panel, information panel, or ingredients statement panel.

The certifying agent will review and approve each of the product labels to ensure compliance.

Products labeled as ‘Organic,’ but aren’t

The manufacturer/seller can face serious legal repercussions if products labeled ‘organic’ are, in fact, not organic. Therefore, businesses cannot simply make statements or representations that are incorrect or likely to mislead the consumer’s mind.

The sellers should also be cautious not to copy another product’s ‘certified organic’ logo without their permission. This not only constitutes an infringement of consumer law, but also leads to infringement of someone else’s trademark. Businesses are liable for misleading or deceiving customers even if they didn’t do it deliberately. It is imperative for manufacturers / sellers to ensure compliance with the requisite standards before labeling their products as organic. As a precaution, producers / sellers should keep detailed records of their production processes, farming techniques and ingredients used in case of future disputes.

To sum it up, if a company manufactures a product and wants to claim that the product or its ingredients are organic, the final product needs to be ‘certified.’ If the product is not certified, the company should not make any organic claim on the primary display panel or use the USDA organic seal anywhere on the package. However, there are some operations that are exempted from certification, including organic farmers whose revenues are $5,000 or less. Only on the information panel, the company can identify the certified organic ingredients as organic and the percentage of organic ingredients.

BIBLIOGRAPHY & REFERENCES

1. Annie Gunn, Organic Labelling Legal Requirements, https://legalvision.com.au/organic-labelling-legal-requirements/, August 26, 2016.
2. Get the Numbers on Organic, https://www.ccof.org/sites/default/files/Statistics%202016.pdf, 2016.
3. Elisa Morgera; Carmen Bullon Caro; Gracia Marin Duran, Organic Agriculture and the Law, http://www.fao.org/docrep/016/i2718e/i2718e.pdf, 2012.
4. Labeling Organic Products Factsheet, https://www.ams.usda.gov/sites/default/files/media/Labeling%20Organic%20Products%20Fact%20Sheet.pdf, October 2012.
5. Kginter, How to Get a Certified Organic Product Label (in the USA), http://blog.quicklabel.com/2010/10/how-to-get-a-certified-organic-product-label-in-the-usa/, October 26, 2010.
6. Labeling Packaged Products Under the National Organic Standards, https://www.ams.usda.gov/sites/default/files/media/NOP%20Labeling%20Packaged%20Products.pdf, July 27, 2009.
7. National Programme for Organic Production, http://www.apeda.gov.in/apedawebsite/organic/organic_contents/english_organic_sept05.pdf, May 2005.
8. How is the Term Organic Regulated, https://www.fda.gov/AboutFDA/Transparency/Basics/ucm214871.htm.
9. Organic Labeling Requirements, http://www.nsf.org/consumer-resources/green-living/organic-certification/organic-labeling-requirements.
10. Organic Labeling, https://www.ams.usda.gov/rules-regulations/organic/labeling
11. Electronic Code of Federal Regulations, https://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=c4e0df8f46a4f4b6f56d80be31f95ed3&rgn=div6&view=text&node=7:3.1.1.9.32.4&idno=7.
12. Organic Certification and Accreditation, https://www.ams.usda.gov/services/organic-certification.

13. What is Organic? https://www.ccof.org/organic.

14. A.K. Yadav, Training Manual – Certification and Inspection Systems in Organic Farming in India, http://ncof.dacnet.nic.in/Training_manuals/Training_manuals_in_English/Cert_and_Inspection_manual.pdf.

In this article, KNoopur Kalpeshbhai Dalal who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses New E-Waste Management Rules, 2016 [i]

Introduction

The E-waste (Management and Handling) Rules, 2011 were notified in the year 2011 and came into force on May 1, 2012.  However to ensure effective implementation of these Rules and to define the role of the producers, the Government of India overriding the E-waste (Management and Handling) Rules, 2011 notified the New E-Waste (Management) Rules, 2016 vide G.S.R. 338(E) dated 23.03.2016 which came to force on October 10, 2016. Increased usage and dependence on Electrical devices and Electronic Equipment’s like PC’s, Laptops, Data Storage Devices, Mobile phones, Servers, Xerox Machines, Televisions, Microwaves, Refrigerators and other home electronic appliances including Heavy Air Conditioners is resulting into large quantity of E-waste day by day.

These Electronic Devices and Equipment have hazardous and toxic components, which can cause damage to public health and environment if not disposed-off properly in a scientific manner. Thus, the New E-Waste Management rules are designed to enable recovery and reuse of the useful components or materials from the Waste Electrical and Electronic Equipment (WEEE) and thus reducing the risk of wrong disposal of the hazardous waste in the environment.

Applicability of the new E-Waste Management Rules, 2016

The E-Waste (Management) Rules, 2016 are applicable to each producer, consumer, dismantler, recycler, bulk consumer and collector of E-waste involved in the sale, manufacture, purchase, processing and use of the electrical and electronic equipment or components as are specified in the schedule-1 of the said rules.

However, the said Rules shall not apply to the below mentioned products,

1. Used Leads acid batteries as governed by the Batteries (Management and Handling) Rules, 2001;
2. All the Micro entities which are governed by the Micro, Small and Medium Enterprises Development Act, 2006 ; and
3. Radio-active wastes as governed by the Atomic Energy Act, 1962.

Schedule 1 of the E-Waste Management Rules, 2016

(Categories of the electrical and electronic equipment (EEE) including their components, spares, consumables, and parts as specified in the rules)

Important Terms in the E-Waste Management Rules, 2016

1. Act[1]: Act here means the Environment (Protection) Act, 1986;
2. Bulk consumer[2]: Bulk consumer means the bulk users of Electricals and electronic equipment (EEE) like the Central or State Government Departments, any public sector undertakings, banks and financial institutions, educational centres and institutions, Multinational Organisations, partnership firms or public or private limited companies, international agencies which are governed and registered under the Factories Act, 1948 and the Companies Act, 2013 and all the health care facilities which are having turnover of more than one crore or have more than twenty employees;
3. Consumer[3]: A Consumers means any person who is using the Electrical and Electronic equipment (EEE) other than the Bulk consumers;
4. Component[4]: Components means one or any part of a self-assembly or assembly of which a manufactured product is made of and into which it can be determined and includes an accessory or attachment to another component;
5. Consumables[5]: Consumables means any item, which is required in a manufacturing process or is a part in or for the functioning of an electrical and electronic equipment (EEE) and may or may not be a part of the end-product. Any items which are totally or substantively consumed during a manufacturing process can be said to be consumables;
6. Dealer[6]: Dealer means any individual or firm who buys or receives electrical and electronic equipment (EEE) as per the Schedule 1 of these rules and their components, spares, parts and consumables from the producers for sale;
7. Disposal[7]: Disposal means any process which does not lead to recycling, reuse or recovery and includes physico-chemical or biological treatment, incineration and deposition in secured landfill;
8. End of Life[8]: End of life of a product means the time period after which the product is anticipated to be discarded by the user or consumer;
9. Electrical & Electronic Equipment
   (EEE)[9] : Electrical and Electronic equipment (EEE) means any equipment which is dependent on electric current or electro-magnetic field to function properly;
10. E-waste[10]: E-waste means electrical and electronic equipment (EEE), whole or in part discarded as waste by the consumer or bulk consumer as well as rejects from manufacturing, refurbishment and repair processes;
11. Extended Producer Responsibility[11]: Extended Producer Responsibility means responsibility of any producer of electrical or electronic equipment, for channelisation of e-waste to ensure environmentally sound management of such waste. Extended Producer Responsibility may comprise of implementing take back system or setting up of collection centres or both and having agreed arrangements with authorised dismantler or recycler either individually or collectively through a Producer Responsibility Organisation recognised by producer or producers in their Extended Producer Responsibility – Authorisation;
12. Manufacturer[12]: Manufacturer means a person or an entity or a company as defined in the Companies Act, 2013 or a factory as defined in the Factories Act, 1948 or Small and Medium Enterprises as defined in Micro, Small and Medium Enterprises Development Act, 2006, which has facilities for manufacture of electrical and electronic equipment;
13. Producer[13]: Producer means any person who, irrespective of the selling technique used such as dealer, retailer, e-retailer, etc.; (i) manufactures and offers to sell electrical and electronic equipment and their components or consumables or parts or spares under its own brand; or (ii) offers to sell under its own brand, assembled electrical and electronic equipment and their components or consumables or parts or spares produced by other manufacturers or suppliers; or (iii) offers to sell imported electrical and electronic equipment and their components or consumables or parts or spares;
14. Recycler[14]: Recycler means any person who is engaged in recycling and reprocessing of waste electrical and electronic equipment or assemblies or their components and having facilities as elaborated in the guidelines of Central Pollution Control Board

Responsibilities of the manufacturer under the E-Waste Management Rules, 2016

The Responsibilities of a Manufacturing can be pointed out as below,

1. Collection of the e-waste which is generated during the manufacture of the Electronic and electrical equipment and channelize it for disposal or recycling;
2. Apply for the authorisation of Form-1:

• In accordance with the procedures as prescribed under sub rule (2) of the rules from the concerned State Pollution Controlled Board.
• Ensuring that no damage is caused to the environment during the transport and storage of the E-waste;

1. Maintaining the records of E-waste generated, disposed and handling as per the prescribed Form-2 as may be needed for the scrutiny by the State Pollution Control Board;
2. Filing of Form-3 for filing of annual returns to the State Pollution Control Board on or before 30^th June for every financial year.

Responsibilities of the producer under the E-Waste Management Rules, 2016

The Responsibilities of a Producer can be pointed out as below for the implementation of the Extended Producers Responsibility:

1. Collecting and channelizing the e-waste from the end of life of the products as per the targets as prescribed in schedule III of the Rules;
2. Mechanism used for the authorised dismantler and the authorised recycler will be as per the Extended Producer Responsibility- Authorisation;
3. for disposal in Storage, Treatment and Disposal Facility, a pre-treatment of the E-waste is necessary to immobilize the mercury and reduce the volume of e-waste.
4. Provide the contact details such as name, email address, postal address, toll free telephone numbers/ contact numbers, or any other helpline numbers to the consumers or the bulk consumers through the website of the producer or in the product user interface (document) so as to facilitate them with the return policy of the end of life of the electrical and electronic equipment(EEE);
5. Spreading awareness through the media, newspapers, advertisements, posters or by radio or any other means of communication for the proper disposal of the electrical and electronic equipment(EEE) at the time of the end of use of the product;
6. The Extended producer responsibility should be comprising of the general scheme for the collection of the e-waste which is generated and collected from the market which was placed earlier and through dealers, Producer responsibility agencies, Collection centres, Buy-back or Exchange Schemes, etc. by channelizing to the Authorised recyclers;
7. The import of such electrical and electronic equipment (EEE) should only be allowed to the Authorised produces who have obtained the Extended Producer responsibility Authorization.
8. Maintaining the records of E-waste generated, disposed and handling as per the prescribed Form-2 as may be needed for the scrutiny by the State Pollution Control Board;
9. Filing of Form-3 for filing of annual returns to the State Pollution Control Board on or before 30^th June for every financial year.
10. Every producer of the electrical and electronic equipment(EEE) shall apply and obtain the Central Pollution Control Board (CPCB) by producing necessary details as per the Form-1 and the procedure laid down in these rules;
11. Affixes a visible and legible symbol on all the electrical and electronic equipment(EEE) or in the user manual or product manual for prevention of the disposal of the E-waste in garbage.
12. Any operations by the authorised producers out of the scope of the extended producer responsibility shall be considered to be a damage caused to the environment.

Responsibilities of the consumer or bulk consumer under the E-Waste Management Rules, 2016

1. The consumers or the Bulk consumers shall ensure that the e-waste as generated by them shall be properly channelized through the collection centres or the authorised producer or the dealers or through the recycler or through the dismantler through the authorised take back or buyback or exchange services provider of the producer to the recycler or the dismantler;
2. Bulk consumers of the electrical and electronic equipment (EEE) shall ensure that they maintain the records of E-waste generated, disposed and handling as per the prescribed Form-2;
3. The Bulk consumers or the consumers shall ensure that such end of life electrical and electronic equipment (EEE) product is not mixed with the e-waste containing radio-active material as governed by the Atomic Energy Act, 1962;
4. The Bulk Consumers are required to file Form-3 for filing of annual returns to the State Pollution Control Board on or before 30^th June for every financial year.

Responsibilities of the collection center under the E-Waste Management Rules, 2016

1. Collect the E-waste as generated by the consumer on behalf of the producer, dealers, bulk consumers and send it to the dismantler or recycler for recycling.;
2. Ensure that all the policies, guidelines and standards as per the Central Pollution control Board are followed properly from time to time;
3. Ensure that no damage or harm is caused to the environment while dismantling or recycling of the E-waste;
4. Maintain the records of E-waste generated, disposed and handling as per the prescribed Form-2;

Responsibilities of the dismantler under the E-Waste Management Rules, 2016

1. Ensure that the procedure for the dismantling of the E-waste is made as per the standards and Guidelines as provided by the Central Pollution Control Board;
2. Obtain necessary authorisation from the State Pollution Control Board for the said dismantling process;
3. Ensure that no harm or damage is caused to the environment during the transport and storage of the E-waste;
4. Ensure that the non-recyclable and non-recoverable consumables and components are sent to proper authorised centres for storage and disposal facilities;
5. Maintenance of the records of E-waste generated, disposed and handling as per the prescribed Form-2;
6. File Form-3 for filing of annual returns to the State Pollution Control Board on or before 30^th June for every financial year.
7. Operation without Authorisation from the State Pollution Control board shall be considered to be harmful to the environment;
8. Ensure the security and registration and recognition of the workers working at the dismantling centres.
9. Undertake proper maintenance of the health and safety measures for the workers working at the dismantling centres.

Responsibilities of the recycler under the E-Waste Management Rules, 2016

1. Ensure that the procedure for the recycling of the E-waste is made as per the standards and Guidelines as provided by the Central Pollution Control Board;
2. Obtain necessary authorisation from the State Pollution Control Board for the said recycling process;
3. Ensure that no harm or damage is caused to the environment during the transport and storage of the E-waste;
4. Ensure that there is no adverse effect to the environment during the recycling process of the E-waste;
5. Maintenance of the records of E-waste generated, disposed and handling as per the prescribed Form-2;
6. File Form-3 for filing of annual returns to the State Pollution Control Board on or before 30^th June for every financial year.
7. Operation without Authorisation from the State Pollution Control board shall be considered to be harmful to the environment;
8. Ensure the security and registration and recognition of the workers working at the recycling centres.
9. Undertake proper maintenance of the health and safety measures for the workers working at the recycling centres.

Responsibilities of the state government for the management of waste under the E-Waste Management Rules, 2016

1. Any Government agency as appointed by the State Government shall ensure the proper allocation of the industrial space for the dismantling and recycling of the E-waste generated by the use of Electrical and Electronic Equipment (EEE);
2. Department of Labour shall ensure that the agencies carrying on the dismantling and recycling work are undertaking the below mentioned preconditions:
3. Ensure the security and registration and recognition of the workers working at the recycling centres.
4. Undertake proper maintenance of the health and safety measures for the workers working at the recycling centres.
5. Undertake Industrial Skill development activities;
6. Assist in formation of labour groups of such workers who are setting up such dismantling or recycling
7. Preparation of an Implementation plan for the effective implementation of the E-waste Management Rules, 2016 and reporting to the Ministry of Environment and Forest Climate Change Board.

Schedule–III of the E-Waste Management Rules, 2016

Targets for Extended Producer Responsibility – Authorisation

Conclusion-What’s new in the E-Waste Management Rules, 2016

The new E-waste management rules have come up with certain provisions which are beneficial to the overall health and well-being of the population and Environment.

Certain important points can be noted as below:

1. Provisions with regard to the Dealer, Manufacture and the producer responsibility have been introduced and organizations have been set up for them as the additional stakeholders in the said rules;
2. Mercury and other Compact Fluorescent Lamps have been brought up to the purview of these rules;
3. The applicability of the rules is extended to the consumables, spares, parts and components of Electrical and Electronic Equipments along with the Equipments as stated in Schedule 1 of the Rules;
4. Collection centres and points have been established for the collection mechanism to take back the e-waste as per the Extended Producer Responsibility;
5. Options for Buyback and Deposit refund scheme and the e-waste exchange scheme and various other options are made available for the Effective implementation of the Extended Producers Responsibility to ensuring effective dismantling and recycling of the E-waste;
6. Provisions for the authorisation of the Extended Producers Responsibilities is introduced by the Central Pollution Control Board instead of PAN India Extended Producers Responsibility Authorisation;
7. Targets are set up for the Collection and channelizing of the E-waste as per the prescribed phases in Schedule –III of the Rules;
8. Deposit Refund Scheme is introduced wherein the producer charges an additional amount as a deposit at the time of the sale of the electrical and electronic equipment (EEE) and the same is refunded to the consumer along with interest when the end-of life electrical and electronic equipment (EEE) is returned to the producer thus increasing the consumer interest in recycling the end-of life electrical and electronic equipment (EEE) in a proper manner;
9. The manufacturer is also made responsible to collect e-waste generated during the manufacture of any electrical and electronic equipment (EEE) and channelize the same for recycling or disposal and seek authorization from State Pollution Control Board.
10. The dealeris also made responsible for collection of the E-waste on behalf of the producer by providing the consumer a box and send it to Producer for disposal.
11. The roles of the State and Central Government have also been introduced for the effective implantation of the E-waste Management Rules, 2016.

References:

[1] Act as defined in the E-waste (Management) Rules, 2016

[2] Bulk Consumer as defined in the E-waste (Management) Rules, 2016

[3] Consumer as defined in the E-waste (Management) Rules, 2016

[4] Component as defined in the E-waste (Management) Rules, 2016

[5] Consumables as defined in the E-waste (Management) Rules, 2016

[6] Dealer as defined in the E-waste (Management) Rules, 2016

[7] Disposal as defined in the E-waste (Management) Rules, 2016

[8] End of Life as defined in the E-waste (Management) Rules, 2016

[9] EEE as defined in the E-waste (Management) Rules, 2016

[10] E-waste as defined in the E-waste (Management) Rules, 2016

[11] Extended Producer Responsibility as defined in the E-waste (Management) Rules, 2016

[12] Manufacturer as defined in the E-waste (Management) Rules, 2016

[13] Producer as defined in the E-waste (Management) Rules, 2016

[14] Recycler as defined in the E-waste (Management) Rules, 2016

[i] Reference from the E-waste (Management) Rules, 2016, the E-waste (Management and Handling) Rules, 2011 and the Environment Protection Act, 1986 has been taken for preparation  of this document.

In this article, Milind Talegaonkar who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Abridged Prospectus: Change in Law related to Disclosures.

Background

It will be useful to understand the basic concept of an abridged prospectus before we begin to analyse the recent changes in the law pertaining to the disclosure requirements. Section 2(1) of the Companies Act, 2013 (“Companies Act”) defines an abridged prospectus as a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations in this behalf. The Companies Act stipulates, by way of section 33(1), that No form of application for the purchase of any of the securities of a company shall be dispensed unless such form is accompanied by an abridged prospectus. Two notable exceptions have been provided to the aforementioned stipulations with a view to (a) enabling the issue of bonafide invitation to any person to enter into an underwriting agreement in respect of purchase of securities and (b) enabling the issuance of application form(s) in respect of securities that are not offered to the public. The present definition of an abridged prospectus has been brought into force w.e.f. 12^th September 2013 and, as can be seen from the definition, leaves the specifics pertaining to its contents on the Securities and Exchange Board (“SEBI”).  The SEBI had issued the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDRs“). The ICDRs lay down the requirements for disclosures that are to be made in relation to an abridged prospectus. Notably, Regulation 58(1), when read with the Schedule VIII of the ICDRs, identify the disclosure related requirements for an abridged prospectus.

Necessity for Change in Law

SEBI had come to form a view, based on the practical filings of abridged prospectuses by the issuers of securities, that the abridged prospectuses have themselves become bulky. The underlying intent behind stipulation of this requirement, of providing a concise document that captures in outline the most important details pertaining to any issue, was getting defeated. Therefore, with a view to making abridged prospectus less voluminous and more reader friendly, SEBI issued a notification dated 27 October 2015 issued the SEBI (Issue of Capital and Disclosure Requirements) (Seventh Amendment) Regulations, 2015 (“Amendment Regulations“) to amend the disclosures mandated from an abridged prospectus. The requirements were contained in Regulation 58(1) read with Schedule VIII of the said ICDRs[1].

A structure/format has been mandated by SEBI requiring the disclosure of ‘information’ which is material and appropriate to enable the investors to make informed decisions. Further, pursuant to the Amendment Regulations, SEBI also issued a circular dated 30 October 2015 providing the revised format of abridged prospectus to make the abridged prospectus less bulky and to contain only relevant information for the investors to make well-informed investment decisions. A copy of the abridged prospectus confirming to the newly prescribed norms would need to be filed with SEBI. This revised requirement applies to all issues opening for subscription on or after 1^st December, 2015.

The presently valid format of the abridged prospectus now includes

1. Brief details related to the top 5 material outstanding litigations against the company and the amount involved;
2. Any disciplinary action taken by SEBI or stock exchanges against the promoters/group companies in the last 5 years (including any outstanding action); and
3. Details of outstanding criminal proceedings against promoters.

What is more striking is that besides the disclosures there are general instructions which prescribe, inter-alia, the format (like suggested font type, the font size, line spacing and paper size) and a restriction on the number of pages which now cannot exceed 5 sheets (to be printed on both the sides). The format may be amended by SEBI from time to time.

It is also pertinent to note that any information which is of generic nature and not specific to the issuer would only require mention in the form of a General Information Document (GID) as specified by SEBI.

How did the amendment come about?

The SEBI gathered that there is a perception that the information contained in the abridged Prospectus has become rather voluminous and unstructured. It was also felt that the potentially material disclosures/risk factors were not getting the required priority. The same was also true in respect of the Application Form which too was considered to be unwieldy and non-investor friendly.  Therefore, SEBI decided to set up a committee for reviewing the Disclosures and Application form in Public Issues.

The committee had the following terms of reference:

1. Revisiting the adequacy and quality of disclosures made together with the application form (covering the Prospectus and Abridged Prospectus).
2. Revisiting the structure, design, format, contents and order of information. This was to be done with the intent of ensuring that materially important information is provided in a structured and user-friendly manner for aiding the investor in making his investment decision.
3. Consider the introduction of application forms in other languages and suggest an implementation strategy and schedule.
4. Identifying the legal and other constraints in improving the said disclosures and their formats and devising ways to address the same in a time-bound manner.

The said committee comprised of representatives of investor associations, merchant banking/stock broking community, legal fraternity, market professionals, industry chambers and SEBI itself. The committee gave its interim report in June 2011.

While the other suggestions are out of the scope of the present analysis, the recommendations pertaining to abridged prospectus[2] are discussed hereunder,

1. The strict relevance of information is the basic test to which all contents must be subjected before they find a place in the Abridged Prospectus. Information of generic nature can be moved out of Abridged Prospectus and into a General Information Document.
2. Times New Roman 10 (or equivalent) font was recommended as the font to be used. Exceptions to be made only for information which is in a tabular form and hence cannot fit on the table.
3. The sequence of information groups was recommended thus: (a) section on history, promoters and management, (b) details of business, financial information, (c) basis of the issue price, (d) regulatory and statutory disclosures and (e) details of bidding centres. All other information such as bidding procedure, basis of allotment procedure, payment instructions, Do’s and Don’ts, etc. that are presently contained in the Abridged Prospectus should be shifted to ‘General Information Document’ for the applicants in public issue and these will have to be printed in English and in Hindi or Regional Language of the state. This has been done considering the readers perspective in mind and intends to impart logical presentation.
4. The section on risk factors to be placed after the financial information of the company and not in the beginning of the document (as a departure from the current practices).
5. The Association of Merchant Bankers of India (AMBI)/SEBI were called upon to issue Guidance notes regarding what should be included in the Risk Factors, Litigations & Related Party Transactions in the Abridged Prospectus.

Some of the noteworthy points appearing in the Interim report of the committee are being mentioned hereunder which will throw more light on the intent and purpose of the recommendations made by it[3]:

1. Disclosures made during public issuance of capital play a critical role in enabling the investors to take well-informed investment decisions;
2. Most new retail investors in India enter the securities market through the IPO/FPO route;
3. Presentment of information in an appropriate manner is imperative to draw a larger number of investors and also for enabling better decision making by the existing investors;
4. SEBI ICDR Regulations mandate that the Offer Document must contain all material disclosures which are true and adequate for enabling all potential investors to take an informed investment decision;
5. In attempting to exercise abundant caution, the issuer companies often adopt an approach of providing extensive and exhaustive disclosures, disregarding their materiality or relevance. This results in an oversupply of information for the investors;
6. Committee went on to observe that over the years, the Prospectus, as well as the Abridged Prospectus, have become very cumbersome and the potentially material disclosures and the risk factors are not being suitably prioritised;
7. Disclosures made in the abridged prospectus often appear to be unstructured and cluttered for investors to read and understand. This document was especially found to contain a lot of general information about SEBI guidelines, policies, and processes which were not strictly specific to an issue and could, therefore, be removed therefrom and incorporated in a new General Information Document;
8. The committees guiding factor during the redesign exercise was not just to make the offer document and the bid‐cum‐application form easy‐to‐read, look better but that it must contain only information of relevance (without compromising on the disclosure requirements) and ensure a flow of information in a desirable format as also in a logical order with a view to making it investor‐friendly;
9. The Committee decided to recommend the shifting of all issue related information, instructions, confirmations for the investor and any issuer related information from the Application form to the Abridged Prospectus.
10. It is notable that the portion of the report reviewing the abridged prospectus describes it in parenthesis as “Company‐Specific Information Document” which itself throws much light on the expectations from the contents of this document;
11. The committee rightly focussed on developing a new model Abridged Prospectus which must be devoid of immaterial and routine information that is not pertinent to take an investment decision, as also to provide for rightly placed focus on the important information; to add certain critical information, make changes to the order of information, and its structure such that the entire document acquires an investor‐friendly look;
12. The Committee decided to rework on the existing tables and rationalised the information items. It also recommended the introduction of some new tables that would facilitate the capture of information appropriately. This was done based on its observation that some pieces of information make an impact only when presented in a tabular form;
13. With the objective of improving the adequacy and quality of disclosures, the committee focused on providing relevant financial information and a meaningful analysis of the peer group companies.
14. The committee members agreed that an investor would be in a position to better appreciate the risk factors after having gained some knowledge about the Issuer Company and its business. It, therefore, proposed to shift the risk factors to a more appropriate place in the document while bearing the international securities’ laws practices in mind so that Indian security issuing entities are not put to any disadvantage;

Discussion on the key changes recommended

1. The committee recommended the inclusion of a cover page to the abridged prospectus which, inter-alia, provides:
2. for statutory details, general risks;
3. for disclosing that the issue is 100% Book building Issue or otherwise;
4. for disclosing the number of pages in the booklet;
5. including company logo, company name, incorporation details and the changes therein, Corporate Identity Number (CIN), the Registered Office Address, Phone Numbers, Fax Numbers, Website, for any pre‐Issue or post‐Issue related problems, contact details of the Compliance Officer (Name, Phone Number, Fax Number, Email, IPO Grade and disclaimer of IPO grading agencies;
6. bid/issue opening and closing dates;
7. The committee further recommended the following deletions in the inside cover:
   1. Addresses of BRLM, SEBI Registration Number;
   2. Addresses of Co‐BRLM, Email ID, Investor Grievance ID, Contact Person, SEBI Registration Number;
   3. Syndicate members’ Head Office Address, Phone Number, Fax Number, Email ID and SEBI Registration Number;
   4. IPO Grading Agencies address, phone number, fax number, email address and contact person of IPO Grading Agencies;
8. The committee recommended the inclusion/deletion(as the case may be) of the following matters:
   1. Inclusion of the History of the company and details of any demergers, mergers and acquisitions;
   2. Where promoter is individual some additional details e.g. name, experience in the business or employment and in the line of business proposed in the RHP, positions/posts held in the past, their business and financial performance to be provided and where promoter is a company, details of history of company and promoters of such company should be included;
   3. Board of Directors: Name, Designation, Date of Appointment, Occupation, Age and a Brief Profile of each Director (one paragraph on each Director), a note to draw attention of the investors to the RHP for more details, resignation of Directors in past 3 years, A confirmation with regard to compliance with provisions of Corporate Governance, (New) Shareholding Pattern – in consonance with the categories in the form prescribed in Clause 35 of the Listing Agreement in the prescribed format;  Details of Top 10 Shareholders as on the date of filing of RHP in the prescribed format; Non‐promoter Shareholders holding more than 1% of capital as on date of filing of RHP in the recommended format; Sale or Purchase/Subscription of Company’s securities by promoters/ directors which in aggregate is equal to or greater than 1% of pre‐issue capital of company, in preceding 3 years from date of RHP in the prescribed format; Top 5 Group Companies in the prescribed format; Subsidiaries/Joint Ventures” Total number of subsidiaries and joint ventures to be indicated and the details of Subsidiaries/Joint Ventures (which contribute more than 5% of revenue/profits/assets of the issuer company on the basis of consolidation in the previous financial year or the last period of audited financial statements included in offer document) in the prescribed format; Penal Actions/ Litigations, Material Related Party Transactions; Details and reasons for non‐deployment or delay in deployment of proceeds or changes in deployment of issue proceeds of past public issues/rights issues, if any, of the Company in the preceding 10 years;
9. The committee recommended the reproduction of the entire “Our Business section” as per Red Herring Prospectus considering its importance. Significant Government approvals pending have also been recommended for inclusion.
10. The committee recommended the elaboration of “Our Financial Information” section. Summary Statement of Assets and Liabilities was recommended to be re-positioned. For IPOs, details of bonus issues were recommended to be included. For FPOs, details of dividends and bonus issues were recommended to be included. Management’s Discussion and Analysis of Revenues and Profits/Losses (previously Management’s Discussion and Analysis of Financial Condition and Results of Operations) was recommended. This change of nomenclature apparently brings the focus back to the key material and relevant issues i.e. revenues and profit or loss from the more abstract and subjective concepts like financial conditions and results of operations. Material Developments since the Last Balance Sheet Date has also been recommended since it is significant. For the same reasons Capitalization of Reserves or Profits in the last 5 years and Revaluation of Assets in the last 5 years has been recommended. Changes in Auditors and capital structure has been recommended for disclosure in prescribed format. Notes to the capital structure have been recommended for deletion.
11. The committee has made recommendations in respect of “Risk Factors” which ­­are discussed in this paragraph. A classification of risks into three heads viz. (a) Risks arising out of Offences/Litigations/Losses Etc. (b) Company/Group Specific Risks and Project/Objects specific risks (c) Industry Specific Risks. It has also been recommended that materiality policy must be determined for which a Guidance Note shall be issued by BRLMs. The committee took note of existing practices wherein the risk factors are disclosed in the RHP in an attempt to limit the liabilities of the issuer and the merchant bankers/underwriters.  It was also noted that a very large number of generic risk factors have started finding a place in the disclosures, which typically relate to the geo‐political situation, government policies and the capital market. In the process, not only a large space is occupied by the risk factors in the Abridged Prospectus, the critical risk factors especially those specific to the issuer, get lost.  The para preceding the Risk Factors has been recommended for deletion as the abridged prospectus is any way required to be read together with the offer document.
12. The committee has made some recommendation in respect of the “Issue Section” which are discussed here in this paragraph. Important portions namely “Cost of Project”, “Means of Financing”, and “Schedule of Deployment of Issue Proceeds” has been recommended to be disclosed in full due to its significance to the investors.
13. The committee has made some recommendation in respect of the section that discloses “BASIS OF ISSUE PRICE” which are discussed here in this paragraph. Quantitative factors like Earnings per share on a consolidated basis, Return on Adjusted Net Worth (“RONW”) ‐on consolidated basis and Comparison with Industry Peers‐on consolidated basis have been recommended for inclusion in a prescribed format. Moreover, in order to save space and improve readability, some Quantitative Factors which are related to the Issue Price have been recommended to be dropped from disclosures since the critical data is still not available at the time of printing of the AP namely Price/Earning (P/E) ratio in relation to the Price Band, Minimum Return on Total Net worth after Issue needed to maintain Pre‐issue EPS for the year ended, and Net Asset Value per Equity Share. Further, the first para under the Basis for the Issue Price has also been recommended for deletion in view of its redundancy. IPO grading in a prescribed format summarising the rationale of grading has been recommended for disclosure. Special Tax Benefits, (if any) available to the Company/project and only the Section Numbers need to be cited. Disclosure of general tax benefits is not required.
14. The committee has made some recommendation in respect of the section that discloses “OTHER REGULATORY AND STATUTORY” which are discussed in this paragraph. It has been recommended that the Expert Opinion, if any, except those of Auditors and IPO Grading Agencies should be disclosed. The reason for exclusion of opinion of Auditors and IPO grading agency is that their opinion is already captured elsewhere.
15. The committee has also suggested the deletion of some details from the abridged prospectus which essentially captures the company specific information. The specific deletions (and their rationale) is discussed hereunder:
    1. Deletions for lack of relevance:

• Underwriting Commission, brokerage and selling commission on Previous issues;
• Previous Issues of Equity Shares otherwise than for Cash;
• Names and Addresses of Domestic Legal Counsel to the Issuer;
• Names and Addresses of Domestic Legal Counsel to the Underwriters;
• Names and Addresses of International Legal Counsel to the Underwriters;
• Names and Addresses of Advisors to the Company;
• Names and Addresses of Bankers to the Issue;
• Names and Addresses of Refund Bankers;
• Names and Addresses of IPO Grading Agencies;
• Underwriting Agreement, underwriting Commission, brokerage and selling commission on Previous issues;
• Previous Issues of Equity Shares otherwise than for Cash;
• Names and Addresses of Domestic Legal Counsel to the Issuer;
• Names and Addresses of Domestic Legal Counsel to the Underwriters;
• Names and Addresses of International Legal Counsel to the Underwriters;
• Names and Addresses of Advisors to the Company;
• Names and Addresses of Bankers to the Issue;
• Names and Addresses of Refund Bankers;
• Names and Addresses of IPO Grading Agencies;
• Underwriting Agreement.
  1. Items to be moved to General Information Document:
• Mechanism for Redressal of Investor Grievances;
• Disposal of Investor Grievances by our Company.
  1. Items not being practically disclosed and, in any case, irrelevant:
• Issue Related Expenses
• Fees, Brokerage, and selling Commissions Payable to the Book Running Lead Managers, Co‐Book Running Lead Managers and Syndicate Members
• Fees payable to the Registrar to the Issue

Conclusion

An internet search conducted in respect of issues opening after 1^st December 2015 reveals that compliances in respect of new laws are only gradually catching up. The abridged prospectus documents confirming to the new requirements were found to be lot more readable when compared with those confirming to the erstwhile requirements. The comfortable font size and font type further encourages readers to go through the details available in the abridged prospectus and thereby base their decisions based on their assessment of the information provided therein. IPO subscribers, especially the retail investors, who had begun considering the issue related documents to be full of bulky legal disclosures and hence unhelpful, were turning to other sources of information (of dubious repute or reliability) for making their investment decisions.  It is expected that with the passage of time the abridged prospectus will not just regain its deserved importance but will start gaining lot more attention from the perspective of all stakeholders involved in the securities offer exercise considering its improved readership.

References:

[1] Retrieved on February 25, 2017, from http://www.mondaq.com/india/x/504328/Securities/Abridged+Prospectus+Change+In+Law+Related+To+Disclosures

[2] Retrieved on February 25, 2017 from http://www.sebi.gov.in/boardmeetings/138/issuecapital.pdf

[3] Retrieved on February 25, 2017, from http://www.sebi.gov.in/boardmeetings/138/interimannexure.pdf

In this article, Kanishka Chakrabarti who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Fixed term employment contracts in India.

Fixed term employment contracts in India

The fact that India has a plethora of laws is well documented, and laws in relation to employment are no different. India has as many as 165 laws relating to the same, covering almost every aspect of employment.

In a broad sense, the category of employees in India can be divided into two, workmen and non-workmen.

Workmen (or blue collared employees) fall under the purview of the definition of workmen under the Industrial Disputes Act, 1947. The other kind, that is, those who fall under management, administrative or supervisory roles, their employment contracts principally governs the relationship between the employer and the employee.

While the Industrial Disputes Act, 1947 primarily relates to workmen, its provisions and content have been reproduced in other statutes, whose scope are wide enough to cover non-workmen as well.

In this assignment we will be primarily dealing with workmen while elaborating on employment on fixed term – this is because the provisions pertaining to fixed term employment so far as employees in managerial or supervisory capacity depends on the individual agreements they execute with the employer. It is legal to the extent the employee agrees to its terms and conditions.

However, so far as those who fall into the ambit of workmen are concerned, there are relevant statutes and provisions that govern the same.

Fixed-term employment contracts in the context of workmen are allowed in India, provided that the  employer hires such persons only a requirement that is short term in nature. The same has been construed to mean an arrangement that lasts for a maximum of 7 (seven) years.

The courts have long held the view that successive fixed-term agreements cannot be used as a substitute for employing a workman on a “permanent” or “unlimited term” basis merely to bypass the statutory provisions and to get benefits out of them. The courts have also ruled that fixed term employment is not meant to be permitted in roles that are permanent by the very virtue of their nature, as far as the particular employer or industry is concerned.

 Fixed-term employment agreements can be signed between the employer and employee, or such relationship may be established through the use of a contractor as envisaged under the provisions of the CLRA Act. While employees on fixed-term employment agreements are not entitled to all the benefits given to permanent employees, such as gratuity, leaves, Provident Fund, etc. (unless such employees are engaged through contractors – in which case it is the responsibility of the said contractor to ensure the same) they are not however assured of other benefits under the act, such as retrenchment among others. These have been dealt with in further detail in the present assignment.

Recognition of fixed-term employment contracts and reasons behind the same

The Industrial Disputes Act, 1947 legitimises fixed term employment of workmen under Section 2 (oo) pertaining to retrenchment. Under the sub-section (bb)[1], the provision states that retrenchment does not include non-renewal of contract owing to its expiry or the said contract being terminated by virtue of a stipulation contained therein.

Further, the definition of ‘workman’ under the Industrial Disputes Act, 1947 provides for a set of exceptions and exclusions, such exceptions do not specify ‘temporary workers’.

Industries may need to streamline operations and cut down on surplus labour owing to factors such as increased costs, low profitability, etc. The same is done through ‘retrenchment’ as laid down under the Industrial Dispute Act. The law mandates that the that the company terminating employment adhere to the relevant provisions such as providing the workmen being downsized are provided adequate compensation and sufficient notice so that they can look for alternate employment, etc.

In an amendment that took place in the year 1984, a new exception was added to the ambit of retrenchment, viz. Section 2 (oo) (bb). The same reads as under ,

“Termination of service of the workman as a result of the non-renewal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein”.

Thus, legitimacy to fixed term employment contract was born – so far as workmen were concerned.

India is a welfare state, and strives to provide employment of the permanent and continuing kind to its citizens, in light of the same the question arises if legitimising Fixed Term Employment Contract is counterproductive?  Especially since the benefits associated with retrenchment is not available to the workmen who are working on a fixed term basis.

The fact is, while in an ideal situation enduring employment is the idea, there are various industries and kinds of jobs which are seasonal or temporary in nature.  The aim is to provide employment during the time they are available – to people who otherwise would have been unemployed. [2]

If the workmen appointed for fulfilling the requirement of temporary projects or schemes were to become a burden on the employer by liberal interpretation of the laws, then the said employers, (including the state) may avoid initiating such schemes or projects in the first place, even though there might be an urgent requirement for the same. Therefore the intention of the legislature was to balance the interests and welfare of the industries, and the workmen.

Brief summary of obligations and rights

• Under a fixed term employment agreement, the employee concerned is entitled to all the statutory benefits otherwise accruing to a salaried employee, this includes among others leave, overtime, provident fund, gratuity, bonus etc. as per the applicable laws.
• Similarly, deductions go towards Provident Fund contributions, insurance amounts, labour welfare funds, canteen facilities etc.
• TDS is deducted from salary as per section 192 of the Income Tax Act. [3]
• The employee is taxed accordingly as per his taxable income slab.
• On termination of a fixed term contract though, no severance dues become payable which would otherwise have been applicable, and no conditions precedent are required to be fulfilled as contemplated under Section 25 F of the Industrial Disputes Act.

Soon after the notification of Section 2 (oo) (bb) of the ID Act, people began to rampantly misuse the provision – employers started exclusively hiring on the basis of fixed term contracts and started shying away from providing regular employment. One particular practice that gained traction was showing a   gap of a couple of days before renewing the temporary agreement. Needless to say, these were, for all purposes actually permanent jobs.

Judicial activism and interpretation of law: Important judicial pronouncement

The judiciary was forced to interpret the law after employers misused the provisions for their selfish advantage instead of benefitting the industries engaged in work in passing phases.

If an employee works under an employer for more than 240 days in a year, even the exception stated under Section 2(oo)(bb) does not entitle the employer to treat such employee as a temporary workman.

This is because one of the prerequisite conditions under Section 25F of the Industrial Dispute Actis that,

“no workman employed in an industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until …. “.

In turn, the phrase ‘continuous service’is defined under Section 25B – stating (among other, more specific conditions) where the employee had completed service of 240 days, the provisions of Sec. 25F would be attracted and the exception cannot be claimed.[4]

In the case of Mahindra Co-Op Sugar Mills Ltd. Vs. Ramesh Chandra Gouda[5], the Supreme Court held that in interpretation of sub-clause (bb) the most important factor that has to be looked into is if the nature of work is temporary or for a specific timeline.

In the above mentioned matter, the sugar factory used to hire workmen only during the crushing season and at the end of the same their employment used to conclude. The Supreme Court opined that in spite of the fact that the workmen were employed continuously for almost 240 days[6]per year, the expiry of their employment each year does not come under the ambit of retrenchment owing to the very nature of the job.

The Supreme Court re-enforced its stance in Haryana State Agriculture Marketing Board vs. Subhash Chand[7].

It was contended that as the workman was appointed three times, he was entitled to retrenchment, however the court took note that the recruitment had been made during paddy season for fixed durations on fixed term basis. The Court observed the said patterns and concluded that there were no artificial gaps for the sake of gaps, rather the breaks in between were for considerable durations. The Court held that the employers did not have mala-fide intentions and held that the circumstances warranted exception from retrenchment.

The Court discerns genuine fixed term employment from those trying to pass off as fixed term employment contract – by looking at the times when the employment is made, and how long the gaps are.

The Courts, while sympathetic to such employees, have ruled in favour of the employers time and again in bona fide cases. For example, in Director, Institute of Management Development, UP Vs. Smt. Pushpa Srivastava[8], the Supreme Court held that when an appointment is purely on ad-hoc basis and is contractual and expires by efflux of time, such appointment comes to an end and the workman concerned has no right whatsoever to remain in the post, even though if he was employed on ad-hoc basis for more than one year – such workman’s right to claim service with the employer would not hold ground. The Court did however ask the management to consider the possibility of regularization of such workman to permanent employee.

While it might appear that the courts are lenient towards interpreting workmen to mean permanent employees, particularly owing to attempts to bypass the law on part of the employer, the Courts have time and again been strict in reading the statutes as is.

In State of Gujarat Vs. PJ Kampavat[9],  the Chief Minister and other Ministers appointed people in certain establishments and the order appointing the employees explicitly mentioned that their services could be terminated at any time without notice or reason, and that the appointment is co-terminus with the Minister’s tenure. The employees were also required to give an undertaking agreeing to the said contentions.

The said employees were held to be not temporary government servants as understood under the Bombay Civil Service Rules as the terms of their appointment clearly specified otherwise.

In Surinder Prasad Tiwari vs. UP Rajya Krishi Utpadan Mandi Parishad[10] the Supreme Court held that the courts cannot stand forappointments to public office which has been made against what has been envisaged by the Constitution. It would be improper for the courts to give directions for regularisation of employees who are, as per the law – temporary workers. Such workers, who have not been appointed as per the procedure established under Article 14, 16 and 309 do not have any scope for being recognized as permanent employees.

In Salt Commissioner vs. Central Salt Mazdoor Union, the Supreme Court held that the government is not bound by acts of its officers in contravention to statutory rules and any breach by said officers can not result in the benefit of a temporary employee.

In RBI vs. Gopinath Sharma, the Supreme Court dismissed the order of the High Court, which had directed to regularise the appointment of a workman who was hired as a temporary worker and did not work on a regular basis. Likewise, the Court did not stand for the regularisation of daily wagers who did not fulfil the criteria of recruitment as per the statutory rules but were hired nevertheless owing to needs of administration[11].

Another factor that the courts regularly look into while ascertaining if an employee amounts to a temporary workman or not is to observe that if during the said period, any other employee with similar nature of work was appointed in permanent capacity.

In a matter, a workman was appointed as a typist and worked for roughly six years, his appointment was on temporary basis and he was given breaks during the said term, after which his contract was again renewed. The labour court ruled that he ought to be reinstated. While The Allahabad High Court[12]held that the labour court was wrong in logic, but nevertheless modified the order and directed reinstatement of the typist as during the interim period, other typists were appointed – which amounts to discrimination.

In Pramod Kumar Tiwari Vs. Hindustan Fertilizer Corporation Ltd[13], the High Court of Madhya Pradesh opined that termination of a of a workman who was appointed for a fixed term (and renewed thereafter) would not be covered by retrenchment, as it fell under the exceptions stated in Section 2(oo)(bb) of the Industrial Disputes Act.

However, it is generally accepted that any person who has been working for an employer for more than 7 years, albeit through renewals and by way of fixed term contracts – would be interpreted as a permanent worker, and such practice should be avoided.

The Supreme Court’s opinion in Deepa Chandra Vs. State of UP &Ors[14] Is also worth looking into.The workman raised the matter stating that in spite of him putting in more than 240 days in each year of service for a period of six years, he was retrenched without fulfilling the criteria as prescribed under Section 25F of the Industrial Dispute Act. The Labour Court arrived at the conclusion that the termination was illegal as people who were appointed subsequent to him were still continuing in service. The Labour Court ordered reinstatement of the worker. The High Court however overturned the Labour Court’s order, on which the Workman appealed to the Apex Court. The Supreme Court held that the High Court did not take into account the fact that the Workman had been in service more than 240 days every year, and thus his services could not be terminated without following the prescribed procedure under Section 25F.

The Ahmedabad High Court, in Keshod Nagarpalika Vs. Pankajgiri Jhavergiri[15]  has held that Sec. 25F of the Industrial Disputes Act lays down the conditions precedent for retrenchment of workman. If a Workman claims to have worked for 240 days, and the management was unable to show evidence to the contrary, or did not challenge such a claim, any order for granting such workman reinstatement cannot be set aside.

The Supreme Court in Jacob M. Puthuparambil and others, Vs. Kerala Water Authority and others,[16] has however held that such appointments that were intended to be interim measures to serve the purpose and not long term ones. The provisions were put in place not to fill a long list of vacancies but those that could remain vacant till long term appointments could be made. But, if these appointments continued for too long, the same had to be regularized, so far as the appointees qualified the requirements. These employees,who have been employed and working at the establishment for a long duration must be allowed to avail all the benefits associated with a permanent appointment and ought to be permitted to continue with their jobs in a regularized manner. It is unreasonable, unfair and against the principles of natural justice to terminate such people who have been rendering their work satisfactorily, and these can go on to have serious consequences. Not only for him, but for his family, who have also settled down and become used to and accommodated their needs along with the bread winner, who is often the sole earner in his family. The family may suffer economic loss of the worst kind if his source of income is suddenly taken away. Further, he may be barred from securing a job elsewhere owing to his age, and his lack of skills in different vocations.

The Court went on to say that such a move is against the principles of the constitution and the philosophies it stands for, particularly ‘the right to work’ as enshrined in Article 41. “Therefore, if interpreted consistently with the spirit and philosophy of the Constitution, which it is permissible to do without doing violence to any rule, it follows that employees who are serving on the establishment for long spells and have the requisite qualifications for the job should not be thrown out but their services should be regularized as far as possible”.

Conclusion

We have, during the course of this assignment, understood the legalities of fixed term employment contracts in India, and have seen how the laws have evolved in this respect. While initially the employers tended to misuse the provisions for their benefits, thanks to the activism on the part of our courts, occurrences of the same have substantially come down. The current government in particular have brought new industries under the scope of fixed term employment agreements and promises to do further in this aspect to aid in further job creation and fuel new industries in our country. However, the nature of the jobs aside, we ought not to forget our roots, India is a welfare state, and we have to ensure that our citizens be given permanent employment in conditions suitable to them and in terms of work environments that lead to their further growth. The government has also simultaneously commenced the ‘skill India’ movement, and we can hope that in the times to come, provisions such as this will be used only in such cases that there are no alternatives.

This was all on Fixed term employment contracts in India. What are your views on Fixed term employment contracts in India? Comment below and let us know. Do not forget to share.

References

[1] Coming into effect from 1984.

[2]S.M. Nilajkar vs. Telecom District Manager (AIR 2003 SC 3553)

[3]http://www.businesstoday.in/moneytoday/cover-story/different-types-of-employment-contracts-benefits/story/192008.html

[4]Krishna Kumar Vs. UP SFEC Corporation (1994) III LLJ (supp.) 254 (SC)

[5]AIR 1996 SC 332

[6]A requirement under Section 25F of the Industrial Dispute Act for retrenchment flowing from Section 25B of the same Act.

[7]AIR 2006 SC 1263

[8]AIR 1992 SC 2070

[9]AIR 1992 SC 1685

[10] (2006) 7 SCC 784

[11]Yogesh Chandra Dubey Case.

[12]2000 LLR 56

[13]1994 LLR 465

[14]2001 LLR 312

[15]2000 LLR 416

[16]AIR 1990 SC 2228

In this article, Jisnu Dutta who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Compliance, best practices, and structuring of a company which holds IP of a business group.

Related concepts

Holding Company

• A holding company is to hold subsidiary companies and generally not to directly participate in manufacturing or production of goods or delivering services by its own. It controls the subsidiary companies by appointing board of directors and aims to act as overall administrator. Holding company can also hold asset on its own, though it’s rare and mostly it administers the company affairs of subsidiary companies.
• Holding company holds more than 50% paid up capital of subsidiary company. A 100% holding company will have all the shares of subsidiary companies.  TATA Investment Corporation and Bajaj Holding & Investments are the example of holding Company. In the case study of Apple, Apple Inc,US is the holding company.

Definition of IP

• Intellectual property (IP) are the new creations which were not existing before and would have some application irrespective of whether commercially prudent or not. IP may be developed in the field of inventions, literary work, symbols, names, images, and designs which would have commercial value. If appropriate legal monopoly is created in and around the intellectual property, then it would become a source of continuous wealth.
• IP is divided into two categories. Patents, trademarks, industrial designs, geographic indications of source relate to business sector and Copyright for literary and artistic works relate to domain of art .Both have practical applications. IP law envisages to protect the legal right of original contributor for a defined period of time and prevents unauthorized copying.
• Effective Protection of intellectual property is central to the success of technology driven businesses.
• Intellectual property is a type of intangible property from accounting view point which have finite approved period of legal monopoly. For example, patent holder in India has exclusive right to make, use and sell of patented product for 20 years.

IP holding Company

A holding company which was primarily created for owning group IP other than holding subsidiary company or companies is called IP holding Company. In consolidated balance sheet of IP holding company, one can see the valuation of IP provided in intangible asset which may be directly indicated or may be written in accompanying notes.An IP holding company may directly sell the commercial rights of IP to interested parties or may further incorporate a special subsidiary to manage It.In the second case it sells the whole economic right of IP to subsidiary company through cost sharing agreement and the subsidiary company further redistribute the economic right to interested parties.

Advantage of IP Holding Company

• When main business activity is accomplished by the activity of subsidiary company, an IP holding company ensures the IP rights are financially protected from being sued by third party, supplier, employer or any other aggrieved party who have business relation with subsidiary. A non trading Holding company cannot be sued in business disputes even though subsidiary company can be sued and made insolvent.
• Economic rights of IP can be sold to third party while retaining the legal right centrally by the IP holding company.
• IP can be centrally managed and protected by a holding company more effectively by monitoring the products or services delivered by competitors, arranging periodic IP audit and suing the parties trying to infringe its IP rights.
• IP based holding company structure can create a sophisticated hi tech business image which helps to get easy finance from market, banks, venture capitalist or private equity investors.
• Creating IP holding company provides opportunity to minimize tax liability through cost sharing agreement.

Disadvantage of IP Holding Company

In case of patent infringement the company which have economic rights of IP can not sue the illegal user.The legal IP holder or original holding company has the right to sue. This was determined in the case of Poly America, L.P. v GSE Lining Technology, Inc. (2004). Therefore subsidiary companies who have economic right over IP are not protected from loss by infringement of IP.

IP Audit

IP holding company shall require to protect their IP right as well as to manage the conversion of new IP development activities to successful registration of IP. Accordingly a systematic review of IP assets owned, their market utilization and need for developing additional IP is done. This is commonly known as IP audit. The IP audit also provide for comprehensive advice on IP management by IP holding Company.

The audit covers all aspects of IP like patents, copyright,  trademarks and designs which are well known and  also the informal IP areas which includes trade secrets & technical know-how.The IP audit will also disclose the infringement prone areas to mitigate future business risks. IP audit can also be done while entering into licensee agreement or right sharing agreement or cost sharing agreement.

IP audit may be done once in a year. Since these businesses are highly dependent on proper utilization of IP rights and continuous development of IP, they require appropriate management attention. It is also desirable to act on the finding of IP audit and to strategize further.

Tranfer Pricing

One important point which is pivotal to the idea of IP holding company is transfer pricing and cost sharing agreement.This needs to be discussed at length.

Transfer price is the notional price for the goods and service exchanged between different units/establishments of the same entity. This is not easy to determine transfer price for tangible assets exchanged within a boundary of a country and most difficult for intangible asset like IP when they are exchanged between subsidiaries situated in distant countries.

This type of transaction is measured by three ways. Transaction based method, Cost sharing method and profit based method. Transaction based method states to determine the cost by comparing the price of similar arm length transaction between unrelated knowledgeable and willing parties.

In Cost sharing method patent holder receives portion of development cost of patent in accordance with anticipated future benefit by the subsidiaries. An agreement for cost sharing is signed between patent holding parent company and its subsidiary company.

There is tax advantage associated with cost sharing agreement. In a cost-sharing agreement, the legal holder of patent allows a subsidiary company to use the commercial or business rights in exchange of sharing of cost or royalty.

In the first case, cost, ie in share cost, the subsidiary company agrees to pay fraction of development cost determined by relative benefit of present and future earnings.

Lets assume a hypothetical case involving one parent holding company and its single subsidiary company .The holding company does the business in US where the tax rates are 35% and earns a profit 50 Million dollar where as the subsidiary situated in a low tax country where tax rates are 15% does the business in rest of the world and earns a profit of 100 million dollar. Also lets assume that the earnings just mentioned were perpetuities. Development cost of IP is $30 Million and interest rates are 10%.

So present value of subsidiary company’s earnings will be 100/0.1=$1000m.IP holding Company’s income will be =50/.1=$500m.

As per earning estimation the subsidiary has to pay 1000/1500=2/3 of development cost=$20m

In absence of cost sharing agreement the subsidiary has to pay the total $1000m .

The impact of worldwide tax benefits of cost-sharing agreement can be as follows

The subsidiary’s $20 m payment to the holding company will result in an additional 0.35 x $20m = $7m in tax payment by the parent in the United States. This will be offset by a 0.15 x $20m = $3m tax reduction for the subsidiary company operating in low tax country yielding $4m = $7m — $3m incidence of total tax payments .

If we compare that to what would have happened in absence of cost-sharing .The subsidiary had to pay in present value terms which is  $1000m to the parent, which will be attributable to the earnings of patent. The parent has to pay tax @ 35% on $1000m = $350 m which would be offset by the subsidiary’s reduced tax bill of 0.1 x $1000m = $100m. Accordingly the company’s incidence on taxes would increase by $350m — $100m = $250m.

Thereby the firm can reduce its tax payments by $ 246m ($4m vs $250m) by adopting a cost-sharing scheme.

The third method provides that inter company fees or royalties can be allocated as per the profitability ratio. That is, in a combined profit if, subsidiary company has greater share it will pay higher fees.

IP laws in India

India has been a member of World Trade Organization (WTO) since 1995. As a WTO member nation, India incorporated IP related acts to prevent infringement of IP rights. India also signed international IP treaties such as Paris Convention, Berne Convention and Patent Cooperation Treaty. As per Paris Convention any person from a signatory state can also apply for intellectual property (a patent or trade mark) in other signatory states, and he will have same enforcement rights as may be exercised by a national of that country.

Under Berne Convention, India recognizes copyright of authors from other member states exactly equal footing as the copyright of Indian nationals.

India’s patent law recognizes the principle of ‘first to file’. As per this method, if more than one people apply for a patent on same invention, the first person to file the application shall be awarded the patent.

Enforcing IP rights in India can be enforced by civil courts or through criminal prosecution.

IP Legislation in India

• The Patent Act, 1970 as amended by the amendment Acts of 1999 and 2002 and 2005.
• The Copyright Act, 1957 as amended.
• The Trade Marks Act, 1999
• The Semiconductor Integrated Circuits Layout Design Act, 2000
• The Geographical Indications of Goods (Registration and protection) Act, 1999
• The Protection of Plants & Varieties and Farmers Rights Act, 2001

Important tax laws in India

A company incorporated as per the laws of India shall be considered as an Indian resident for tax purposes. A company which is wholly managed and controlled from India, even it is incorporated outside India shall be considered as resident in India for taxation purposes.

Income of an Indian company (which would include foreign company’s Indian subsidiary) is taxed in India at a rate of 30% and surcharge and educational cess thereon.

Tax on foreign company shall be imposed at the rate of 40% on its business income earned in India. India has entered into a tax treaty with the Government of other countries for granting tax relief or avoidance of double taxation. IT Act in Section 90(2) provides that in case of  taxpayers to whom such tax treaty applies, the provisions of the IT Act would be applied with modification to the extent they are more beneficial to the tax payer.

Fees for technical services (“FTS”) are taxable in India when they arise from sources within India. FTS and Royalties paid by a resident to a non-resident are also taxable in India. However, when such royalties/FTS are remitted with respect to a profession or business carried on by such resident outside India or for earning income from any source outside India, then such FTS and royalties are not taxable in India.

Further, even payments of royalties or FTS made by one non-resident to another non-resident are brought within the Indian tax net, if such royalties/FTS are payable with respect to any business or profession carried on by such nonresident in India or for earning any income from a source in India.

A case study on IP-based restructuring of Apple Inc, US

Apple is producer of discretionary digital gadgets including ipod, ipad and apple watch. Recently it has drawn much of media attention for its tax avoidance strategy and related disputes to government bodies. Apples engineer and technical staff are known to create premium gadget which has worldwide market.

Innovative technical ideas behind its technical gadgets are the source of Apple’s high demand among the customer .Intellectual property (IP) rights of apple is central to its value creation process which creates ideas, join together and implement those ideas in prototype design. Intellectual property rights are movable and can be transferred across national borders and oceans to different continents and foreign countries. This type of transfer in case of fixed asset or property is not possible.

Apple is a well recognized US success story, as its IP was created through Research and development in US. Apple also have presence in global markets other than US. So Apple Inc is a multinational company operating in different continents .The taxability of MNC is decided primarily based on the tax residency of the company. Tax residency in simple form says in which country the MNC’s income is taxable.

US tax law says the country where company’s registration took place shall be considered as company’s tax residence. Apple has successfully found one country which had contrary view on US definition of tax residency. Ireland considers a company as tax residence of Ireland if it is managed and controlled from Ireland. Taking the opportunity of these two contrary positions taken by Apples home country and one foreign country apple have created three subsidiary company  Apple Operations International (AOI), Apple Sales International (ASI), Apple Operations Europe (AOE) all registered in Ireland. Therefore for taxation purpose these three companies which are responsible for the global business outside the US are neither considered citizen of US nor considered the citizen of Ireland .Apple Inc is sole owner of AOI which directly or indirectly owns most of the offshore subsidiaries of apple. Second company is Apple Sales International (ASI) which has the economic rights to Apple’s valuable intellectual property in Europe, Asia, India, Middle East and Africa. Apple’s third subsidiary is Apple Operations Europe (AOE) which had about 400 employees ( in 2012 ) engaged in manufacturing a type of computers for sale in Europe. ASI made necessary Contract with third party manufacturers in China to make Apple products .ASI then sold these products to Apple Distribution International.

A pictorial of Apple’s structure is given below

Apple’s Irish subsidiaries own the economic/marketing rights of intellectual property for goods sold outside the US. Apple Inc. (the U.S.comapny) is the sole owner of the legal rights to Apple’s intellectual property.

The dividends from companies such as AOE, ASI and distribution companies flow to Apple operation international in Ireland where it was not taxed. Apple Inc get back some of revenue from AOI through cost sharing agreements in exchange of marketing right of IP in favor of the Ireland subsidiary. Pricing of cost sharing agreement depends on adopted transfer pricing mechanism.

Some of the important points may be noted from the above case study which are as follows,

• IP (intellectual property) is an important factor in achieving good business in technology sector. Holding the IP and managing it is the key in the sophisticated hi tech business activity.
• The holding company keeps the legal right of IP and provides economic right to subsidiary through a cost sharing agreement.
• There exists much difference in tax regulations worldwide. Here we find contrary tax residence definition in US and Irish tax laws.
• Singapore subsidiary of apple probably is incorporated to take tax advantage of low taxing Singapore. So there may be many countries with lower tax rate than home country.
• Manufacturing activity can be profitably done in a country such as china where skilled labor is available at cheaper cost.
• Complete Manufacturing activity can be contracted /outsourced to third party enabling the main company to hold lesser fixed asset and earn extra return on equity. This may also lead to negative cash conversion cycle.
• Separate subsidiary company can conduct operation, sales and distribution in which parent company keeps majority share holding.
• Company can successfully run business by giving prime importance to Research and development work which creates IP.

Restructuring process in IP based business groups

1. The first step will be drafting proper licensing agreement between subsidiary company and IP holding Company for economic usage rights of IP. The agreement should specifically provide wheather parent company is delegating full economic right or the right is specific to some geographical area. Further It also shall be clearly mentioned that wheather the subsidiary company purchasing the right can redistribute the right in the specified geographical area. The agreement may also specify who will have the legal responsibility to protect the IP rights in case any infringement to IP is noticed.
2. The agreement shall further provide for determination of fees or royalties associated with the use of IP considering relevant regulation of home and foreign country on transfer pricing mechanism and cost sharing agreement.
3. The agreement also requires to include the target area on which future IP shall be developed along with the arrangement of sharing associated development cost.
4. The subsidiary having economic right over IP is to be established in a low tax country.

Following table gives corporate tax rates at different countries.

Corporate tax rate in low taxing countries

• However this is very important to keep in mind that there can be several other taxes such as sales tax or service tax other than corporate tax. The low tax country must be economically and politically stable and strong enough to provide necessary protection in case of international infringement into IP rights. The total royalty payment shall be directed to the low tax country. The company may additionally collect the information whether double taxation avoidance treaties have been signed by the countries where subsidiary company will take tax residency.
• The detail process to take tax citizenship must be known to the strategist. Effort shall be made to find pair of countries which take counter view on the tax citizenship. If holding company and subsidiary company is established in such a pair of country, then the tax benefit will be maximum.
• Subsidiary company in possession of economic IP right can further sublet/redistribute the using right to other subsidiary company or third party.
• Manufacturing facility to be located in a country with cheap labour.However the skill set of the labours will also required to be at global level .Further this decision will be taken in consideration with imposable import, export duty. Manufacturing can be optionally fully outsourced to third party.
• Sales activity also could be undertaken from another low tax country because any significant change in legislation in low tax country where the subsidiary having patent right will be instituted may otherwise effect in revenue. The diversification of sales, IP management and manufacturing facility through formation of different subsidiaries at different low tax level countries makes sense. Due to political activism or international pressure from high taxing country, any of the low taxing country may increase tax rate. However it is less likely that all three low-tax countries would increase tax rates. Therefore this strategy reduces the effective tax rate, lowers manufacturing cost and manages the IP in a better way.

However to avoid criticism from taxing department of any of these country subsidiaries must have engaged some employee in their pay role with specific functions. These companies are also required to pay requisite tax in countries of tax residency and act in a socially acceptable way.

This was all on Compliance, best practices and structuring of a company which holds IP of a business group. What are your views on Compliance, best practices and structuring of a company which holds IP of a business group? Comment below and let us know.

In this article, Harshal Joshi who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses recent Insurance laws reforms in India.

Introduction

• Insurance sector is one among those sectors which have seen great growth since independence. Regulation of insurance business dates back to 1818 with establishment of Oriental Insurance Company.[1] At that time, the subject matters with which insurance sector dealt with were really restricted. Now the spectrum has expanded and various kinds of insurance like fidelity insurance, crop insurance, etc have added to the list.
• This industry has developed gradually from being a nationalized industry to allowing involvement of private players and foreign direct investment. In order to regulate the insurance business, Insurance Regulatory and Development Authority (hereinafter to be referred as “IRDA”) was established.
• In this article, the researcher has dealt with the reforms which the Insurance Laws (Amendment) Act has introduced. In March 2015, Insurance Laws (Amendment Act) was passed. This amendment act amended the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999.
• The first part of the article briefly deals with the journey which the amendment bill has traversed in order to get passed by both the houses of the parliament, get the assent of the president and become an act.
• The latter parts deal with the various provisions it has amended like raising the cap on foreign direct investment, substantial increase in the penalties, making SAT the appellate tribunal, etc. The researcher has tried to provide a holistic view of these reforms.

Journey of passing the Amendment Act

This amendment act has brought out the reforms which had been almost waiting for a decade. While discussing the 2004-05 Union Budget, Mr. P. Chidambram, finance minister in UPA government, announced the plan to increase the foreign direct investment cap in insurance to 49% from 26%.[2] In 2005, a committee headed by Mr. KP Narasimhan was formed in order to suggest amendments to existing insurance laws. Finally, in December, 2008, the Insurance Laws (Amendment) Bill, 2008 was introduced in the upper house by the UPA government. The Bill was referred to the Standing Committee on Finance. Post general elections in September, 2009, the bill was once again referred to a newly constituted Standing Committee. This committee took almost two long years to submit its report on the matter concerned. This committee led by Yashwant Sinha (former finance minister) recommended that raising FDI limit in insurance sector was not a feasible idea.[3]

In July, 2014 with the new government at the center, the entire process of bringing in reforms in insurance sector started again. In July, 2014, NDA government after making certain amendments in the 2008 Bill circulated it in the Parliament, with raising FDI to 49% as a crucial part of the Bill. In August, the Bill was referred to the Select Committee of Rajya Sabha. Due to certain reasons, the report which was to be submitted in first week of the winter season got delayed. As the Bill was taking considerable amount of time to pass due to strong opposition in Rajya Sabha, the Union Cabinet approved the ordinance to pass the insurance law reforms. With the President’s sign, the cap of foreign direct investment in the insurance sector was raised to 49%. On March 4, 2015, the Lok Sabha passed the Insurance Laws (Amendment) Bill, 2015[4] and around a week later on March, 2015, the Rajya Sabha also passed the bill, with which the parliament passed the bill and became an act by getting president’s assent on March 20, 2015.

Foreign investment in Insurance sector

• The act increases the cap on foreign investment in insurance companies from 26% to 49%.[5] This foreign investment can include both foreign direct investment and portfolio investment.[6] The justification which is provided for increasing the allowed foreign investment is that “Insurance is a capital-intensive industry.
• The insurance companies need to provide for future claims. If we provided legislative assurance and stability, foreign capital will come in which will help in expanding the insurance coverage in the country,” as per Jayant Sinha (then Ministry of Finance, State).[7]
• It has been pointed out by various analysts that this 49% composite cap (FDI and portfolio) will have threefold benefit, firstly, in case of joint ventures, it will allow the foreign partners to increase their stake.
• Secondly, it will open the insurance sector to new insurance companies.
• Thirdly, will help the domestic promoters who have been restricted by cash consideration to trade-off their stake to private equity or in favor of other investors.[8] The amendment has been brought in a manner that the company still needs to be owned and controlled by Indian.
• The control here denotes what is meant by control in general parlance in corporate field that is control over appointment of majority of directors, policy or management decisions, etc.[9] On October 19, 2015, IRDA issued guidelines to clarify the meaning of the phrase “Indian owned and controlled”.[10]

Health Insurance

• Health insurance is one of the crucial sub-set of the insurance sector in India but it was not defined uptil now.[11]
• The amendment act has carved it out as a special category and has provided it a separate definition which is “the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover”.[12]
• The amendment act also specifies that as in case of life insurance or general insurance, the requirement of minimum paid up equity share capital for the purpose of running health insurance business is also INR 1 billion. Earlier, when 2008 Bill was introduced, the minimum paid-up equity share capital was supposed to be INR 50 crores.[13]
• But in order to bring the health insurance business at par with life and general insurance, it has been increased to INR 100 crores.

Shareholding pattern

The bill brings in a huge change by vesting power with IRDA to allow the insurance companies to raise capital through other forms (in addition to equity share capital) as per the approval of the authority. Prior to the amendment, only equity share capital were allowed to be issued by the insurance companies. Keeping in consonance with the basic fundamentals of companies law, the voting right (even after the amendment) will be only given to the equity shareholders.[14]

The amendment act has omitted section 6AA of the Insurance Act, 1938. Section 6AA(1) stated that,

“No promoter shall at any time hold more than twenty-six percent or such other percentage as may be prescribed, of the paid-up equity capital in an Indian insurance company.”.

Beyond ten years from the date of commencement of business, no promoter was allowed to keep a shareholding of more than 26%. The amendment act has omitted this section which means that even after ten years of commencement of business; a promoter can hold more than 26% (even upto 100%) of shares in the business. When this amendment was proposed in 2008 Bill, the standing committee had recommended against the omission of this section as according to the standing committee, this section allows (rather mandates) diversification of ownership of business.[15]

Restrictions on sanction of loans and advances by insurers

Prior to the amendment, Section 29 of the Insurance Act, 1938 prohibited loans or any kinds of advances to the insurance agents (other than a highly restricted list) which did not exceed  previous year’s renewal commission, “with the overall ceiling of loans or advances restricted to a very nominal sum of One hundred rupees”. In addition to this, any other kind of loans was also generally prohibited. This section came as an obstruction in general process of doing business as it prohibited even general loans to vendors or agents who were required as part of the functioning of business.

The 2015 amendment act has substituted Section 29 with a new section which provides for approval of loans and advances but as per the norms which can be or are to be specified by the Insurance Regulatory and Development Authority and on the basis of the scheme which needs to be duly approved by the board of directors of the insurer.[16] This amendment provides for liberalization of the highly restricted section and provision.

Enables partial assignment of policy

The Insurance Laws (Amendment) Act, 1938 has amended the Section 38 of the Insurance Act, 1938. Prior to amendment this section only allowed the transfer of policy in toto. The amended section allows partial assignment which means “assigning a part of interest in a life insurance policy”. This partial assignment comes with the restriction that the holder of this partial assignment “won’t be entitled to further assign or transfer the residual amount payable under the same policy”.[17]

Foreign re-insurer

Section 2(9) of the Insurance Act, 1938 has been amended and the definition of insurer includes “(d) a foreign company engaged in re-insurance business through a branch established in India. Explanation.—For the purposes of this sub-clause, the expression “foreign company” shall mean a company or body established or incorporated under a law of any country outside India and includes Lloyd’s established under the Lloyd’s Act, 1871 (United Kingdom) or any of its Members”. The amendment act allows the foreign re-insurance companies to directly operate their re-insurance business in India through branch offices registered with Insurance Regulatory and Development Authority. Qualification, as provided in the explanation, will be applicable.[18]

Insurance agents and commission

The amended Section 40 of the Insurance Act, 1938 provides that,

“Insurers are prohibited from paying any remuneration to any person other than an insurance agent or an intermediary for soliciting or procuring insurance business in India and outside of the prescribed manner”.

In addition, the intermediaries or the insurance agents and intermediaries are mandated to ensure that the commission they receive and the contracts pursuant to the policies should be as per the regulations promulgated.[19]

The amendment act has omitted Section 44 which provided that “an insurance company cannot deny payment of renewal commission after termination, if an insurance agent has served for five years with an insurer. If the agent has completed 10 years, such entitlement to renewal commission after termination vests only if the agent, after termination, does not work directly or indirectly with any insurer. Such renewal commission is payable to the legal heirs of deceased insurance agent after his death”. When this omission was suggested by the 2008 amendment bill, the standing committee proposed for retention of this section as according to it, it works for the interest of a large number of agents. But the section was finally omitted, because “while compensation is paid after termination, the policyholders are not serviced resulting in lapsation”.[20]

Section 45, policy not to be called in question on ground of misstatement after three years

Globally, insurance contracts are considered to be the contracts made in utmost good faith i.e. “uberimma fides”. What we mean by utmost good faith is that you won’t conceal anything and as a customer are obligated to disclose all the required details to the best of your knowledge, e.g., health condition, income sources, etc. The disclosure helps the insurance company in effectively assessing the risk involved under the policy cover and in consequently fixing the premium. Prior to the amendment, Section 45 of the Insurance Act, 1938 do not allow the insurance company to deny the claim made after two years from the date when the policy came into effect.

There are three exceptions to this policy which are

• such mis-statement or concealment was made on a material fact,
• that it was fraudulently made by the policyholder and that
• the policyholder knew at the time of making it that the statement was false or was material to disclose”.

The 2008 Bill recommended that the insurer should not be allowed to deny the claim if the claim was made after five years from the date of policy coming into effect, irrespective of the conditions involved. This means even if the fraudulent statement (or the other two conditions as mentioned above) was made by the policy holder, it won’t affect the claim, if the claim was made after five years from the date when the policy came into effect. The Standing Committee had recommended three years term instead of five years term. The 2015 amendment act has reduced it to three years. Therefore, now if a claim is made under an insurance policy after three years from the taking of policy, the insurance company won’t have the right to repudiate it under any condition whatsoever.[21]

Penalties for violations

The amendment act has considerably increased the penalties for violation of the provision of the Act. A few examples are, as per Section 102, if a company doesn’t comply with directions of IRDA, the penalty has been substantially increased from Rupees Five Lakhs to Rupees One Lakh for each day or Rupees One Crore, whichever is less.

A new section, section 2CB has been introduced which states that

1. No person shall take out or renew any policy of insurance in respect of any property in India or any ship or other vessel or aircraft registered in India with an insurer whose principal place of business is outside India save with the prior permission of the Authority.
2. If any person contravenes the provision of sub-section (1), he shall be liable to a penalty which may extend to five crore rupees.” The amount of penalty is substantially high.

For a lot of other provisions, the penalty for violation or non-compliance has been substantially increased. The Standing Committee had recommended to reduce the penalty but this suggestion has not been incorporated as higher penalties are considered to have more deterrent effect.

Appellate authority: Securities Appellate Tribunal

The amendment act has made Securities Appellate Tribunal (SAT) as the appellate authority to the Insurance Regulatory and Development Authority.[22] The issue which is required to be kept in mind is that the experts sitting at SAT should have sufficient knowledge about insurance sector so that they can deal with the issues in an effective fashion.

Insurance Regulatory And Development Authority

Earlier, Section 3A of the Insurance Act, 1938 required for annual renewal of registration of insurance company.[23] The amended section mandates just for annual fee and no annual renewal is required. Therefore, it provides for permanent registration of the companies. IRDA has the power to suspend or cancel such registration under certain stipulated conditions.

Section 3(2) of the Insurance Registration Act, 1938 has been amended and the requirement of depositing a certain amount with Reserve Bank of India for the purpose of the registration of the company has been removed. Now, they will just have to fulfill whatever will be prescribed by the regulations. Though this requirement has been removed, the company will have to maintain a solvency margin as provided by the IRDA.

The amendment act has added Section 32D which states that “Every insurer carrying on general insurance business shall, after the commencement of the Insurance Laws (Amendment) Act, 2015, underwrite such minimum percentage of insurance business in third party risks of motor vehicles as may be specified by the regulations”.  The act has given the power to IRDA to exempt any insurer who is primarily engaged in the “business of health, re-insurance, agriculture, export credit guarantee”.

The amendment act has substituted Section 40B and 40C of the Insurance Act, 1938 and the new sections provide that management expenses of any insurance company should not exceed the limits which would be prescribed by IRDA and the details of the management expenses will be provided to IRDA as per the regulations promulgated.

Conclusion

The process of amending the insurance laws started way back in 2008 with the introduction of Insurance Laws (Amendment) Bill, 2008. The process finally culminated with the passing of Insurance Law (Amendment) Act, 2015. This amendment act has raised the cap on foreign direct investment in insurance sector from 26% to 49% allowing for more capital flow in insurance sector which is a capital intensive industry. In order to make the sector more effective, a lot of procedure from the Insurance Act have been omitted and IRDA is given the authority to formulate regulations for the same. Provision for providing loans and advances to agents has been diluted a little and made less restrictive. By amending Section 45, it is mandated for the insurer to provide for the claim if it is made after three years from the date when the policy became effective. It has also allowed foreign re-insurers with their branches registered with IRDA to do business in Indian territory. It has substantially increased the penalties as higher penalty has more deterrent effect. In order to provide a better grievance redressal system, Securities Appellate Tribunal has been made the appellate authority to IRDA’s order. According to the researcher, these reforms will boost the insurance sector in India, will lead to effective regulation of the sector and hence, will be beneficial for both insurance companies as well as the customers taking insurance policies.

References

[1] Avinash Singh, History of Insurance Legislation in India, available at http://www.manupatra.com/roundup/338/Articles/HISTORY%20OF%20INSURANCE%20LEGISLATION.pdf (Last visited on March 28, 2017).

[2] Purabi Bora, Insurance Bill: Then and Now, the financial express (March 13, 2015), available at http://www.financialexpress.com/money/insurance/insurance-bill-then-and-now/53159/ (Last visited on March 28, 2017).

[3] Purabi Bora, Insurance Bill: Then and Now, the financial express (March 13, 2015), available at http://www.financialexpress.com/money/insurance/insurance-bill-then-and-now/53159/ (Last visited on March 28, 2017).

[4] Insurance Laws (Amendment) Bill, 2015 passed by Lok Sabha, the economic times (March 4, 2015),  available at http://economictimes.indiatimes.com/news/politics-and-nation/insurance-laws-amendment-bill-2015-passed-by-lok-sabha/articleshow/46457317.cms (Last visited on March 28, 2017).

[5] Vineet Ahuja and Uday Opal, India: Insurance Reforms Regulatory Update, (September 14, 2015), available at http://www.mondaq.com/india/x/426758/Reinsurance/Insurance+Regulatory+Reforms+Update (Last visited on March 28, 2017).

[6] Section 3(iv) of Insurances Law (Amendment) Act, 2015.

[7]  Remya Nair, Parliament passes insurance bill in a major boost to Modi’s reform agenda, livemint (March 13, 2015), available at http://www.livemint.com/Politics/p78kNkYr1XPA92LXLUwoBP/Insurance-Bill-passed-in-Rajya-Sabha.html (Last visited on March 28, 2017).

[8] Remya Nair, Parliament passes insurance bill in a major boost to Modi’s reform agenda, livemint (March 13, 2015), available at http://www.livemint.com/Politics/p78kNkYr1XPA92LXLUwoBP/Insurance-Bill-passed-in-Rajya-Sabha.html (Last visited on March 28, 2017).

[9] Haigreve Khaitana and Anuj Shah, Insurance Reforms Notified (January 20, 2015), available at http://www.mondaq.com/india/x/367122/Insurance/Insurance+Reforms+Notified (Last visited on March 28, 2017).

[10] Phoenix Legal, Insurance Newsletter-October, 2015, (July 6, 2016), available at http://www.mondaq.com/india/x/505580/Insurance/INSURANCE+NEWSLETTER+OCTOBER+2015 (Last visited on March 28, 2017).

[11] Jyoti Srivastav, New Amendment Bill in Insurance Sector, XVI PSALEGAL 1, 1 (January 2014).

[12] Section 6, Insurance Act, 1938.

[13] The Insurance Laws (Amendment) Bill, 2008, available at http://www.prsindia.org/billtrack/the-insurance-laws-amendment-bill-2008-78/ (Last visited on March 28, 2017).

[14] Section 6A, Insurance Act, 1938.

[15] CL Baradhwaj, Key Changes Proposed by the Insurance Laws (Amendment) Bill, 2008, available at http://www.indiainfoline.com/article/news-top-story/key-changes-proposed-by-the-insurance-amendment-bill-2008-113110106176_1.html  (Last visited on March 28, 2017).

[16] Section 29, Insurance Act, 1938 (post amendment).

[17] Section 38(11), Insurance Act, 1938 (post amendment).

[18] Phoenix Legal, Insurance Newsletter- April, 2015, (June 30, 2016), available at http://www.mondaq.com/india/x/504704/Insurance/insurance+newsletter+april+2015 (Last visited on March 28, 2017).

[19] Section 40, Insurance Act, 1938 (post amendment).

[20] CL Baradhwaj, Key Changes Proposed by the Insurance Laws (Amendment) Bill, 2008, available at http://www.indiainfoline.com/article/news-top-story/key-changes-proposed-by-the-insurance-amendment-bill-2008-113110106176_1.html  (Last visited on March 28, 2017).

[21] Diwya Baweja, Insurance in 2016, india today money (December 17, 2015), available at http://indiatoday.intoday.in/money/story/insurance-in-2016/1/549520.html (Last visited on March 28, 2017).

[22] Press Information Bureau, Major Highlights of the Insurance Laws (Amendment) Bill, 2015 Passed by Parliament, (March 13, 2015), available at http://pib.nic.in/newsite/PrintRelease.aspx?relid=117043 (Last visited on March 28, 2017).

[23] Section 3A, Insurance Act, 1938.

In this article, Gourav Khatri who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Motor Vehicles Amendment Bill, 2016.

Motor Vehicles Amendment Bill, 2016

The present era is the era of Motor vehicle and motor vehicle has become one of the important factors for an individual to fulfil their essential needs. Due to this the use of motor vehicle is increasing day by day. Likewise, everything has pros and cons in the same way motor vehicle on the one hand is one of the essential need of an individual and on the other hand it is becoming a man-made disaster day by day with the increase in accidents due to those motor-vehicle.

Due to increase in accidents day by day the number of people being killed in those accidents are also increasing and due to the death of people from accidents the dependents of those people are suffering and therefore, with an aim to decrease the number of road accidents caused by motor vehicle the Government of India passes an amendment bill 2016 in MV Act.

The amendment bill in MV Act aims to impose strict and heavy fine on the offenders of the traffic rules which in result will decrease the road accidents in India. The amendment bill in Motor-vehicle Act proposes 68 amendments to 223 sections and 28 new sections. The following are the amendments that are proposed in the bill.

Limit on insurer’s liability

The motor-vehicle amendment bill lays down the maximum liability in case of third party insurance that is Rs.10 Lakh in case where there is death and Rs.5 Lakh where there is an injury. The proposed bill limits the liability in respect of third party claims which was unlimited as per the Motor-vehicle Act. With this the liability of the insurance company will be limited to Rs.10Lakh in case of death and Rs5 Lakh in case of injury which was decided by the courts as per Motor-vehicle Act. If this particular provision is critically analyzed than it may in actual hampers the rights of an individual as it is indirectly calculating the value of a human’s life and the other factors which usually courts consider while deciding the compensation that is age, dependents, responsibilities, earning etc., of the person who died in the accident. These factors are the basic factors which need to be there while giving the compensation to the family/dependents of the person died in road accident. The proposal of max. Rs.10Lakh for death is practically does not fulfil the purpose of the Motor-vehicle Act; as, how Rs.10 Lakh as compensation would be justified in case where the person died in road accident was earning Rs.1 Lakh/month (for example)? The liability of the insurance company in case of third party insurance must be unlimited as it depends on facts of the case which differs in every accident and that can only be determined by applying the judicial mind. The act of legislature of generalizing the amount (Rs.10 Lakh and Rs.5Lakh) may be sufficient but they may also be insufficient in few case and the instance they are insufficient it will be injustice to the general public and the very purpose of the Motor-Vehicle Act will be nullified.

Safety of pedestrians and non-motorised transport

At present under Motor-vehicle Act, there are no provisions regarding safety of pedestrians and non-Motorised road users. In the amendment bill of 2016 in Motor-Vehicle Act the Government of India proposes to amend Section 138 of Motor-Vehicle Act which talks about ‘Power of State Government to make rules’ (for e.g. prohibiting the use of path made for pedestrians). As per the proposal in the bill there is an insertion of new sub-section (1A), under which the power has been given to the State Governments to monitor and regulate the activities of Non-Motorised road users and pedestrians in public places. By virtue of this section the State Governments would be able to rules in their state in order to regulate the use of road by children, cyclists (for example) etc. like, special lanes which can only be used by the cyclists or special zones for Vulnerable road users(VRUs). This amendment may help the VRUs in protecting themselves against the road accidents. As creating a special zone by State Government for the use of VRUs like children will stay them away from traffic which may result in an effective way to reduce accidents cause by VRUs as they are not well aware of the road and traffic rules.

Safety of children during commute

At present there is no such provision under Motor-Vehicle Act which makes it mandatory for every child to be secured by safety/seatbelt or a child restraint system. The amendment bill of 2016 in Motor-Vehicle Act proposes to insert Section 194B which will make it mandatory for the vehicle owner to ensure that the children sitting in the car is being secured by the safety seat belt or a child restraint system and violating seating of children in safely manner would attract the fine, for an adult in that vehicle/vehicle owner, of Rs.1000/-. Further the amendment bill in Motor-Vehicle Act also proposes amendment to Section 129, which provides for wearing of headgears for two wheelers. As per the proposal of this insertion of Section 129 in the amendment bill, it will be mandatory for child above the age of four years to wear headgear/helmet while being carried on two-wheeler.

The above mentioned proposals in the Motor-Vehicle Act are clearly proposed to ensure the safety of children who are being carried on vehicle and the adult is held responsible for ensuring the seating of child in the vehicle. However, the responsibility of adult for not ensuring that the child on two-wheeler has not wear the helmet is not there and it has also not been mentioned about the minimum age limit up to which it is mandatory for children to wear the seat belt in the vehicle. Further, vehicle like school bus are also frequently used by the children and at that stage how it can be assured that every child sitting on such type of vehicle is secured by seat belt as till now the vehicle like bus does not provide seat belts in the seats which are used by children and the purpose of this amendment is nullified if we consider that the children uses vehicle like auto-rickshaws in which the option of seat belt is not there even for the driver. Further the amendment in the Motor-Vehicle Act is silent on the minimum driver experience of the driver of the vehicles in which the children are usually carried, or the capacity of the vehicle in which children are being carried so that there is no situation in which any of the children has to sit on lap of anyone.

Robust Scientific and standardized accident investigation and data collection system

At present under Motor-Vehicle Act, in case of accident, the investigation is not done scientifically and the data is obtained from the FIR only which is prepared by the police under Section 154CrPC and the format of FIR is same for all type of offences. With the Amendment Bill 2016, it is proposed through amendment in Section 135 that the power has been given to the Central Government to make schemes according to which the investigation should be conducted in case of road accidents which will be in-depth investigation.

With this proposal to amend the process of investigation there will be a uniform manner in which investigation will be done in case of road accidents which are done by the State Government, at present. At present, the information is being recorded by the police officer in case of road accidents and the information is limited to the details of the parties involved in the accident. With this proposal, the investigation will be done in the manner specified by the Central Government, which will be uniform, and the investigation will be scientific and every aspect of road accident will be ascertained by the investigation authority.

Stringent punishment for faulty road design, engineering, and maintenance

At present, there is no provision in the Motor-Vehicle Act, which make the road contractors or the civic agencies liable for road design which are not adequate or up to the standard and non-maintenance of the road which are responsible for road accidents. In the Amendment Bill of 2016, there is no such proposal by which the road contractors could be held liable for non-maintenance of the road or faulty road design.

There is a need for such amendment in the Motor-Vehicle Act, as, the faulty roads or non-maintenance of roads is one of the major causes of road accidents. According to a report of 2015, there were approximately 10,000 road accidents due to faulty roads. There must be a section which would make the road contractors liable for faulty roads as this will also help the investigation authority to complete their scientific investigation efficiently and effectively.

Stringent punishment for drunken driving, over-speeding, violation of helmet and seatbelt laws

The amendment in the Motor-Vehicle Act, proposes strict and stringent penalties for the offences like drunk driving, over-speeding, etc. The list of those strict and stringent penalties is as follows:

The strict and stringent penalty has been proposed so that this could make general public to think once again before violating the traffic rules and therefore, the hazards on road could be minimized. On the other hand, this might increase the corruption too, as, such high amount of fine/penalty would force people to take another method rather than paying such high amount as fine, which may lead to increase in corruption. As the increase in penalty will lead to chances to compromise and settlement with the enforcement agencies. Therefore, this proposal of imposing such high fine would only be useful in reducing the accidents only if the enforcement agencies act strictly. And the time enforcement agencies are acting strictly, there will be no need of imposing high fine. The proposal of increasing penalty cannot be said to be a wise proposal as it is dependent on the enforcement agencies and the point where enforcement agencies are not working efficiently, the very purpose of this proposal will be nullified.

Electronic monitoring and enforcement of road safety

At present, the monitoring and enforcement of road safety is the State subject and therefore, electronic monitoring and enforcement of road safety varies from state to state and there no provision for electronic enforcement for road safety. With Amendment Bill of 2016 in Motor-Vehicle Act, which made proposal for insertion of new Section 136A under which the responsibility is now on the Central Government. The Central Government will make the rules regarding the electronic monitoring and enforcement of road safety. The robust electronic enforcement system incudes cameras like (speed cameras, speed guns, etc.)

With this proposal there will be uniformity of the rules and regulations regarding the electronic monitoring and enforcement of road safety. Further, with this uniformity there will be reduction in the human intervention and which further will help in reducing the corruption.

Offences by Juveniles

At present, if the vehicle is used by an unauthorized persons than the penalty of Rs.1000/- and/or imprisonment of up to 3 months are attracted and the provisions of IPC like Section 109(Abetment) read with Section (304II/ 304A)IPC in case of death or Section (109) IPC read with Section 337-339 IPC in case of injury are attracted.

The Amendment Bill of 2016, proposes, under Section 199A, the responsibility on the owner/guardian of the vehicle in case the vehicle is used by Juveniles or the offence committed by Juveniles. In such cases the owner/guardian of the vehicle will be liable for fine of Rs.25000/- and/or imprisonment up to 3 years and the Juvenile will be entertained by the Juvenile Justice Act; along with this the registration of the vehicle will be cancelled.

With such strict proposal the guardian/owner will understand their responsibility towards their vehicle and won’t allow their vehicle to be used by any unauthorized persons; due to which there will be less number of road accidents.

Dangerous driving

At present, the definition of ‘Dangerous Driving’ is very narrow under Motor-Vehicle Act and it does not include common traffic offences, like use of mobile phones while driving, jumping traffic lights, etc., which are one of the major reasons for the road accidents.

The Amendment Bill of 2016, proposes, other than extending the fine, amendment to section 184, under which the scope of ‘Dangerous Driving’ has been extended and now it includes the acts which are dangerous to the public like jumping traffic lights, using mobile phones while driving, driving wrong way, driving the vehicle in the manner which is not allowed as per law.

With this amendment the traffic rules violators will be more careful and may think twice before breaking the traffic rules and due to that the road accidents could be reduced. Also, the enforcement agencies will be able to penalize the traffic rules violators efficiently and effectively with uniform penalty for the offences committed by the violators.

Protection of good Samaritans

As per the judgement of Supreme Court in the case of ‘Safe life foundation v. Union of India’ where the Supreme Court held that the person who brings the injured person to the hospital in accident cases will not be having any civil or criminal liability. This judgement had given as force of law to the guidelines issued by the Ministry of Road Transport and Highways which is binding across all states and UTs.

The Amendment Bill of 2016, proposes, insertion of new section i.e. Section 134A under which the protection has been given to the Good Samaritans. Good Samaritans are those people who help the victims of road accident by taking them to the hospital. This new section provides the protection to those people from civil and criminal liability. Also, this section lays down the procedure/rules that the Central Government has to make in order to examine the Good Samaritans.

With this amendment, the people who witness the road accidents will be willing to help the victims as, the fear of civil or criminal liability will not be there. Also, since the

Central Government has to make rules regarding the examination of Good Samaritans, therefore, the people with bad intention will be identified during investigation, which will ultimately help the victims and the investigation agencies along with this the loss of life in road accidents may be reduced as, the victims may get proper medical care ASAP.

Penalty multiplier (Power of the state governments to increase penalties)

At present, under Motor-Vehicle Act, there is no provision which provides the power to state government to increase the penalty/fine which is already provided in the Act.

The Amendment Bill of 2016, proposes, insertion of new Section i.e. 210A, under which the power has been given to the State Government to specify a multiplier, which shall not be less than 1 and shall not be more than 10, to be applied to every fine.

With this amendment, the State government will be able to increase fine in their respective states and the areas where the fine proposed in the present amendment is not sufficient in achieving the purpose, for which the present amendment bill is proposed, those areas may increase the fine up to a certain limit in order to reduce the road accidents in that area. For example the proposed fine for overloading of two-wheelers is Rs.1000/-, the State Government will be able to increase the fine from Rs.1000/- to maximum Rs. 10,000/- in their respective state.

In this article, Gautam Kumar Swain who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Law related to Indemnity in India.

The Phrase Indemnity means “Security against loss or damages”.

Section 124 of the Indian Contract Act’1872 defines Contract of Indemnity as a contract by which one party guarantees to save the other person from loss caused to him by the action of the guarantor himself, or by the action of any other person.

For, e.g. X can agree to stand as a guarantor for his son Y, a student so that if Y is unable to pay his monthly expenses and rent to Z(a PG); X will be required to pay on behalf of Y, thereby compensating for the losses that Z acquired because of action of Y.

The Example of an indemnity clause for the above consideration would read as follows: “Mr. X agrees to indemnify and hold harmless Z against loss or threatened loss or expense because of the liability or potential responsibility of Z for arising out of any claims for damages.”

Nature of Contract of Indemnity

Indemnity clauses are very common in accords between dwellers and property owners. Dwellers agree to indemnify the property owners from costs or damages associated with being injured on the property while the property owners take the responsibility to anything which could probably be hazardous or troubling. For e.g, the property owner stands indemnified from damages if the dweller gets injured in the property accidentally but if some part of the property is dangerous and is quite probable to cause some damages and injuries to the occupant and the owner is intimated time to time about the same; a minor indemnity clause will not prevent the dweller from suing if such disrepair caused the mishap.

Definition of a contract of indemnity sets out both express promises as well as implied promises. Indian Contract Act’1872 bargains with cases of implied indemnity under Sec. 69, Sec. 145 and Sec. 222.

Some special cases of implied indemnity

1. Under Sec.69 if a party who is interested in payment of money which another is destined by law to pay and therefore himself pays it, he is designated to be indemnified.
2. Under Sec.145 a party is provided with the right of the surety to claim indemnity from the principal defaulter for all sums which he has lawfully paid towards the guarantee.
3. Section 222 provides for liability of the principal to indemnify the agent in respect of all amounts paid by him during the legitimate exercise of his power.

Judicial pronouncement on Indemnity

Implied Indemnity was identified in the case of ‘SECRETARY OF STATE vs. THE BANK OF INDIA’ [1938] where an agent presented a government promissory note in his custody to a bank with a false presentation. The bank in good trust put into use the promissory note for a refurbished promissory note which was issued from the Public Debt Office. In the interim time, the real owner of the note sued the Secretary of State for conversion. The Secretary of State, in turn, prosecuted the bank on the basis of implied indemnity where it was held that the express indemnity clause is not necessary for face of implied right to indemnity which is beforehand existing under the Indian Laws.

A contract of indemnity recognizes the parties, and it characterizes the types of losses or damages covered and explain whether legal expenses in the filing of the suit or contesting the suit are included or not. Generally, the contract also specifies the “triggering event”; happening of which will make the indemnifier responsible. The “triggering events” are defined with aids of terms like “arise out of”, “in connection with”, or “occasioned by”, “acts or omissions” or “negligence”.

A Contract of Indemnity is required because a party may not be able to command all visible features of the performance of a promise. The party can be sued for the actions of another where the circumstances of performance were out of his authority and control.

Indemnity is considered as a sub-class of compensation and Contract of Indemnity as a class of contracts. The responsibility to indemnify is a willing responsibility taken by the indemnifier.

The contract of indemnity is an actionable claim provided it is not against public policy or unlawful to be valid.  A right of indemnity lies where one party is required to make good certain losses experienced by the other party. No third person or an intruder to the agreement of indemnity cannot bring legal charges against the indemnified due to the standard of secrecy of contract as settled in the case of NATIONAL PETROLEUM COMPANY vs. POPAT LAL by the Bombay High Court.

Mostly, a contract of insurance is not treated as a contract of indemnity in India. But agreements of marine insurance, fire insurance or motor insurance are regarded to be contracts of indemnity as in a life insurance, the agreement offers a particular sum of money upon the death of policy holder but where a policy is taken by a creditor on the principal debtor, he becomes entitled to a precise amount of money.

IN ‘GAJAN MORESHWAR vs. MORESHWAR MADAN’ 1942 case G.Moreshwar got a piece of land in then Bombay at lease for a long period. He transferred the lease to M.Madan  for a limited period. M.Modan started development over the above-mentioned plot and ordered his supplies from K D Mohan Das. When Mohandas asked for the payment for the material he provided, the accused could not pay up. Upon request of M Madan, G Moreshwar prepared a mortgage deed in favour of K.D. Mohandas. The Interest rate was agreed upon, and G. Moreshwar put a charge over his possessions. A date was pre-decided for the return of principal amount. M. Madan had decided to repay the principal amount along with interest and to get the mortgage deed released before a particular date. But M. Madan as per his assurance did not pay anything to K.D. Mohan Das, and G. Moreshwar had to pay some interest. When after several requests and intimations, M. Madan did not pay the principal amount along with interest and also didn’t get the mortgage deed released, G. Moreshwar legally prosecuted M. Madan for indemnity. The Privy Council held that if indemnity holder has incurred responsibility and the responsibility itself is absolute and without limits, the indemnity holder can ask the indemnifier to take care of the liability and pay it off. Thus, G. Moreshwar was designated to be indemnified by M. Madan against all debt under the loan agreement and deed of charge.

Legitimacy of Indemnity Agreements

A contract of indemnity is one of the varieties of contracts. The principles appropriate to contract in general are also pertinent to such contracts so that rules like free approval or consent, the legality of object, etc. are equally relevant. As in the case of general agreement consent to an agreement shouldn’t be by coercion, fraud, misrepresentation otherwise the contract will voidable at the option of the party whose consent was so caused; the same applies to contract of indemnity also. As per the need of the Contract Act, the element or object of the agreement must be legitimate.

Consequential or remote/indirect losses coverage under Indemnity

A demand for damages under the Contract Act only allows looking for compensation for any loss or damages ‘which the parties knew; when they made the contract, to be likely to result from rupture or breach of it’ at the time of formation of contract; which is usually termed as the ‘Principle of Contemplation of Damages’ between the parties. Reasonable foreseeability is deduced as the genuine possibility of happening of loss and is frequently used for the test for damages or losses. Additionally, the damages claimed should be moderate, and thus damages may not be tenable for loss of profit or opportunity costs.

But, an indemnity claim is not bounded by such limits. Section 124 of the Indian Contract Act specifies that a request for damages or losses is accountable to the ordinary rules of remoteness mentioned above, but a claim for indemnity is not subjected to same rules. So all consequential, remote, indirect and third party losses can be claimed by the indemnified party until and unless notably excluded from the indemnity clause.

Fundamental essentials of Contract of Indemnity

• It is an absolute promise to reimburse for defined loss or injury used to ensure that an aggrieved party has a precise remedy to correct bugs or defects in goods or services delivered under the Contract.
• It is an assurance to make restitution for or safeguard against damage, loss or injury.
• Broadly it includes all contracts of protection, security, guarantee, etc. It is not a secondary but an independent contract.
• It is a tool for assigning risks contingent responsibility.
• Indemnity clauses must be clear, to the point, wherever possible it should impose the circumstances under which the compensation will arise. It should be considered in light of any expulsion of liability clauses found anywhere in the agreement and should state what damages will be payable in the occurrence of the clause being favorably conjured.

Enforcement of Contract of Indemnity

• A contract of indemnity can be invoked according to its terms like the express promise.
• Damages, legal costs of judgement, the amount paid under the terms of the agreement are some of the claims which Indemnity holder can include in its claims.
• A Portion of losses or injuries is the extent to which the promise has been indemnified.
• Indemnifier should ideally be informed of the proper account.
• There is no burden to show breach or actual losses or damages.

SITUATIONS WHEN CONTRACT OF INDEMNITY CAN BE ENFORCED

In the United Kingdom, under common law, it is necessary for an indemnity holder to first pay for the losses, injuries or damages and then claim for the indemnity. But in India, there is no clear-cut provision which states that when a contract of indemnity is implemented. There have been conflicting legal conclusions throughout. First Indian case where the right to be indemnified was identified was of OSMAL JAMAL & SONS LIMITED vs. GOPAL PURUSHOTHAM [1728]. But at present, a general agreement is formed in favor of the opinion of the equity courts. In K. BHATTACHARJEE vs. NOMO KUMAR [1899], SHYAM LAL vs. ABDUL SALAL [1931] and G. MORESHWAR vs. M. MADAN cases, it was decided that the indemnified can constrain the indemnifier to place him in a position to meet liability that may be built upon him without waiting until the indemnified has cleared the same.

Indemnity requires that the party who will be indemnified shall not at any time be called upon to pay. Therefore, the liability of the indemnifier starts the moment the loss or damages in the form of liability to the indemnified becomes absolute and without limit.

Losses or damages on the breach of contract of indemnity holder or rights of the indemnity-holder under Sec.125 of Indian Contract Act’1872 are as follows,

• The Promisee in a contract of indemnity, acting within the capacity of his control, is designated to recover from the promisor all losses or damages which he may be constrained to pay in any suit in respect of any substance to which the promise to indemnify applies.

For e.g. if X contracts to repay or indemnify Y against the outcome of any proceedings which Z may take against Y in respect of a particular action. If Z does start legal proceedings against Y and as a result of outcome Y had to pay some damages to Z; X will be responsible for reimbursing the damages that Y had incurred in the case.

• All costs or expenses which he may be forced to pay in any such suit if, in bringing or protecting it, he did not contradict the orders of the promisor, and acted as it would have been sensible for him to act in the absence of any contract of indemnity, or if the promisor empowered him to bring or protect the suit.
• All sums which he may have paid under the terms of any agreements of any such suit, if the agreement was not in contradict to the orders of the promisor, and was one which it would have been sensible for the promisee to create in the absence of any contract of indemnity, or if the promisor empowered him to adjusts the suit.

Rights of Indemnifier

Rights of indemnifier were excluded from Indian Contract Act’1872. In JASWANT SINGH vs. SECTION OF STATE, it was concluded that the rights of the indemnified are akin to the rights of a surety under Section 141 where the indemnifier becomes entitled to the advantage of all securities that the creditor has against the principal debtor whether the principal debtor was apprehensive about the same or not. Where a person agrees to repay, he will, upon such compensation, be labeled to succeed to all the ways and means by which the person initially repaid might have secured himself against any loss or damages; or have arranged for compensation for his loss or damages.

Once the indemnifier pays for the losses or damages caused, he automatically steps into the shoes of indemnified and therefore, he will have all the rights with which the earliest indemnifier secured himself against loss or damage.

LIQUIDATED DAMAGES vs. CAPPED INDEMNITY CLAUSE:

Section 74 of Indian Contract Act deals with the idea of liquidated damages and states that , “If a sum is mentioned in the contract as the amount to be paid in case of such breach, or if the contract holds any other clause by means of penalty, the party objecting of the breach is designated, whether or not actual damages or losses is confirmed to have been caused thereby to receive from the party who has breached the contract, a justifiable settlement or compensation not surpassing the amount so decided or as the case may be, the penalty decided for”. In such a case, there is no need of leading proof for verifying the losses or damages, unless the Court arrives at the outcome that no loss or damage are likely to occur because of such breach or the happening of such an event. In Fateh Chand vs. Balkishan Das, the Supreme Court held that in all cases where there is a need in the kind of penalty, the court has jurisdiction to award such sum only as it accepts to be fair and reasonable, but not exceeding the amount mentioned in the contract.

But a capped indemnity clause functions on a different footing as the idea of reasonability, foreseeability, and remoteness relevant to a damage claim is not relevant to judgment of an indemnity claim. Therefore, the parties are more hopeful to claim more through a capped indemnity clause rather than a liquidated damage clause.

EXCLUSIVE REMEDY INDEMNIFICATION CLAUSE WITH LIMITATION OF LIABILITY

To legally decide the extent of liability, parties can agree to limit their disclosure to a well drafted and substantially finite indemnity provision largely invulnerable from the judgment of the courts. An illustration is as follows:

1. Exclusive Remedy Clause: It should state that “indemnity provided under this clause shall be its alone remedy in relation to the activities intended under this agreement to the exclusion of all other rights and remedies” ; and
2. Limitation of Liability: It states that the total liability under the agreement shall be limited to the amount and conditions mentioned for the indemnity.

At present, there is no clear law that exists on above points. But as per above construct, the courts are likely to hold that damages as a remedy is ruled out and the only solution is looking for indemnity subject to the limitations set out which becomes critical in situations where an indemnified party may try to demand for losses or damages, over and above the indemnity limit on grounds of equity or reasonableness.

NEGOTIATING AN INDEMNITY CLAUSE

• FROM AN INDEMNIFIED PARTY’S OUTLOOK

1. It is substantial to avert usage of terms “make good” or “compensate” as the courts can depict it as covering claims only due to actual loss or damages suffered by the indemnified party and not cover situations where the liability was accrued, but no payment has been made. Therefore using the term “Hold Harmless” will cover both the cases. Also, use of term “protect from liability” guarantees that the indemnifier has and added the responsibility of duty to defend cast upon him which needs the indemnifying party to protect the indemnified against covered third-party claims and likely first party claims depending on the language included in the provision.
2. Indemnification is a decent cure, and it should not be merely used as a sword but should also include the responsibility to protect the indemnified party. Therefore, the clause can provide that the right to defend the indemnified party by the indemnifying party shall be invoked at any time when any third party makes any claim.
3. The term “Losses includes” should replace the term “Losses means” as all consequential, indirect and remote losses can be claimed under the indemnity clause.
4. Terms like “result of” and “connection of” should be replaced by the term “arising out of” which is given a widespread perception by the courts.
5. As the indemnity payments are made due to the breach of representations and promises or breach of covenants in agreement, it can be arguably stated that the indemnifying party absorbs the tax outcomes of any indemnifiable loss. Indemnity payments are assumed as other income and are subjected to 30% tax. Therefore, the indemnity payments should be made in such a way that the actual payment should equal payment due under indemnity claims plus the amount of taxes payable.
6. It is important for an indemnity clause to be drafted in a way so that an indemnity payment claim gets automatically triggered on the issue of a claim notice. Further, it should also be stated that any late in making any claims or giving a notice does not let free the indemnifying party of such responsibility.
7. It can be stated that in case the claim amount is conflicted by the indemnifying party and arbitration or any other method of resolving dispute as mentioned in the agreement is called upon by the indemnifying party, then the claim amount should be deposited forthright with the arbitrator which in turn only ensure that the indemnifying party has the ability to pay if a successful award is decided in favour of the indemnified party.
8. Any wilful carelessness, breach or fraud committed by the indemnifying party can be considered to be expelled from the indemnity cap if the same is pre-decided.

• FROM AN INDEMNIFYING PARTY’S OUTLOOK

1. Baskets or deductibles are drafted to support an indemnifying party with a promise that it will not be troubled by impractical claims. Generally, in case of a deductible, the indemnifying party is only responsible for the amount over and excess the deductible limit whereas, in the case of a basket, the indemnifying party is liable for the full amount once the basket limit is hit.
2. Limitations of liability clause are given intensely strict meaning since it is an excusable clause. Some of the exclusions which can be considered by the parties are as:
3. Actual or Constructive knowledge qualifier: The indemnifying party can acknowledge forbidding claims for breach of the agreement to the magnitude the facts, matters, information or conditions relating to the claim is known to the indemnified party.
4. Net Financial Benefit: The indemnifying party can consider etching out a specific exclusion that it will not be responsible for any net quantifiable financial benefit that could arise to the indemnified party from any loss or damages suffered.
5. Contingent Liability exclusion: It should be clearly stated that the indemnifying party will not be responsible in respect of any liability which is contingent unless such contingent liability becomes due and payable.
6. As the indemnity is a continuity obligation, it should be clearly mentioned that the indemnified party is not designated to recover more than once in respect of the same matter or the same event which has promoted the loss. It should also be stated that the indemnifying party will not be liable in respect of any claim to the extent such losses or damages are covered by a policy of insurance or can be recoverable from a third person.
7. It can be mentioned that the indemnifying party shall not be held responsible in respect of any claim if proper allowance, provisions or reserve is made in the accounts.
8. Unless precisely mentioned in the indemnity clause, there shouldn’t be any particular responsibility cast upon the indemnified party to diminish losses. Therefore, the indemnifying party can discuss and provide for a duty to reduce in the indemnity clause.
9. It is recommended to include “limitation of remedy” clause which takes into its extent both the limitation of liability and exclusive remedy clause and leaves no scope for any uncertainty in interpretation as contracts have limitation of liability clauses which simply limit the liability of the indemnifier; but doesn’t rule out other legal solution to be followed against the indemnified.
10. Survival clause should be tailor made so that it can survive the termination of the agreement.

CONCLUSION

Indemnity is a legal discharge from the penalties or liabilities incurred by any course of action. In simpler words, indemnity needs that one party should indemnify the other if certain costs mentioned in the contract of indemnity are acquired by another party.  For example, car rental companies lay down that the person hiring the car will be responsible for the damage or losses caused to the car because of reckless or negligible driving by the person himself and he or she will have to indemnify the car rental company.

Recently, indemnity contracts are being executed quite frequently in the IT industry. There are some conditions or situations in which continuation of an indemnity does make a meaningful change for some whereas for other it does make little changes or no changes at all. A new concept known as “Indemnity Lottery” can be found in the law of contract that states that in civil cases of indemnity, results can never be predicted.

A simple indemnity clause can never be an answer to liability issues. The law leans disfavour ably towards for those who try to prevent liability or look for dispensation from liability for their actions. The fundamental reason is that a careless party should not be able to completely shift all claim and damages made against him to another, non-negligent party. For e.g. A ticket to an amusement park claims that a person entering into park can’t hold management responsible for any accident of his/her due to malfunctioning of rides or any other events. But seldom, such a defense works in the court of law because it is not based on a contract.

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5. Wikipedia

In this article, Eshika Phadke who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses How to know if your company is ready for an IPO.

The Companies Act, 2013 regulates the incorporation of a company in India. It also regulates the responsibilities of the company, its directors and its dissolution. There are primarily two types of companies in India- Private Limited Company and Public Limited Company- both limited by shares. With Limited Liability the legal responsibility for the debts of the company are limited to the extent of the face value of the shares held and therefore, the liability of the members in the case of winding-up is limited to the amount unpaid and due on the shares held.

Table1: Difference between a Public and a Private Company

Source: The Company Act, 2013

Advantages of a Private Limited company over a Public Limited company

As an entrepreneur or a start-up, working within the structure of a private limited company can yield several benefits. As can be seen in the table, there are several advantages to starting a company as a private company. It is said to be combining the privacy of a partnership with the permanence of the corporate constitution.

To begin with, it can be started with a minimum paid up share capital of Rs. 1, 00, 000, against Rs. 5 lakh for a Public Company. As against the requirement of a minimum of seven persons to incorporate a Public Company, a Private Company can be formed by just two persons. (Section 3(1)(iii))

According to Section 81, a Private Company can issue shares to any person, in any manner as it thinks best, in its own interest. This is especially relevant when Venture Capitalists invest in the company. This provision aids the investment as well as the divestment. As per Section 85-90 a Private Company may issue share capital of any kind, with no stipulations as to the extent of voting rights. A Public Company, on the other hand, has to adhere to provisions regarding the kinds of share capital, proportion of voting rights to paid-up capital, and restrictions on excessive voting rights.

A private Company can commence business immediately subsequent to obtaining the Certificate of Incorporation, which is issued by the Registrar of Companies. The Certificate of Commencement of Business, required by a Public Company is not needed.

Unlike a Public Company, a Private Company is not required to hold statutory meetings or to prepare any statutory reports. The Private Company can itself make provisions in its Articles regarding the length of Notice for calling a General Meeting, content and manner of Service of Notices, Explanatory statements, Chairman and Quorum for meetings, voting rights etc.

When these advantages start seeming like limitations or when the limitations outweigh the advantages-you know that it is time for your Private Limited Company to go public.

Is your Private Limited Company ready for the process required to go Public?

Why do you need an IPO?

When the company plans to acquire, expand or diversify it needs to raise capital. It may also need finances for working capital or to retire an old debt. It could need to give existing shareholders, including venture capitalists, a route to exit the company’s shareholding partially or fully. Or provide promoters an opportunity to dilute their holding.

In each of these cases, the company requires to raise capital by making a public offering. When a company that is not listed at any stock exchange makes a fresh issue of shares and/or makes an offer for sale of its existing shares, to the public, for the first time- it is called an Initial Public Offering (IPO). It is an offer for the sale of shares and for new investors to enter its shareholding family. This IPO is an invitation to offer, which is a precursor to a contract, and must meet the requirements laid down under S.11 of The Indian Contract Act, 1872.

The price of the share is determined, in consultation with its investment bankers, by the promoters of the company. The proceeds of the share issue go to the shareholders- often venture capitalists and promoters- if it is undertaken as a method to let them dilute their holding or to exit the company’s shareholding. If the share issue has been undertaken to raise finance- it is called a fresh issue of capital- and the proceeds of the issue go to the company. When the IPO is completed the company’s shares are listed. Which means that the securities are now admitted to dealings on a recognised stock exchange and can be traded at the designated stock exchange.

Listing has several benefits and it adds to a company’s prestige. It becomes an effective route for the company to raise more capital from both the domestic as well as the overseas markets. It simplifies the process of acquisition since the company can now use shares as currency. And, it lends liquidity to the stock, making it a more viable way to attract top talent by offering employee stock ownership plans. Apart from achieving these objectives of mobilising savings for economic development and providing liquidity met, it is imperative that the interests of the investors are also protected through full disclosures.

How to have an IPO

The Securities and Exchange Board of India (SEBI), established in 1992, was started ‘to protect the interests of investors in securities and to promote the development of, and to regulate the securities market’. The regulations governing the listing of securities are laid down in the SEBI (Disclosure and Investor Protection) Regulations, 2009. It has issued a set of guidelines applicable for public issues by listed and unlisted companies, all offers for sale and rights by listed companies, except rights issues where the average value of the shares offered does not exceed Rs. 50, 00, 000. (Clause 1.4 of the DIP Guidelines)

Your unlisted company is eligible for a public issue if its pre-issue net worth is above Rs. 1 crore in the last 3 years out of the last 5 years. With the minimum net worth having to meet the Rs. 1 crore requirement in the immediately preceding 2 years. And it should have had distributable profits for at least three out of the preceding five years.

As per Clause 1.2.1 of the DIP Guidelines, the net worth is the average value of the paid up equity capital and free reserves, not including the reserves created out of revaluation, minus the average value of the accumulated losses and deferred expenditure not written off.  Further, the offer size, through offer document, firm allotment, promoter’s contribution cannot exceed five times its pre-issue net worth.

If your unlisted company does not satisfy the criterion, the IPO can be made only through the Book Building process. In this process, sixty percent of the issue size must be allotted to the Qualified Institutional Buyers (QIBs)-which include public financial institutions, scheduled commercial banks, mutual funds, venture capital investors registered with the SEBI and foreign venture capital investors registered with SEBI. If this is not fulfilled the full subscription money will have to be refunded.

Book Building, as defined by the SEBI Guidelines, is the process undertaken by which a demand for the securities proposed to be issued by a corporate body is elicited and built up. Further, the price of such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.

The minimum post-issue paid-up capital will need to be Rs. 10 crores for IPOs and the minimum issue size would have to Rs. 10 crores. The market capitalisation, which is calculated by multiplying the post-issue paid-up number of equity shares with the issue price, would have to be at least Rs. 25 crores.

Regarding the paid-up capital and market capitalisation, your company would require to include a disclaimer clause which states that the securities would not be listed if the market capitalisation requirement is not met. This disclaimer needs to be part of the offer document.

Your company- the applicant, promoters and/or group companies- should be in compliance with all the requirements of the listing agreement. This will be in addition to compliance with the guidance and regulations applicable to listing from:

• Securities Contracts (Regulations) Act 1956
• Securities Contracts (Regulations) Rules 1957
• Securities and Exchange Board of India Act 1992
• Any other circular, clarifications, guidelines issued by the appropriate authority
• Companies Act 1956[i]

Your company also has to offer at least 20% of the post issue capital. In case of any issue to the public the minimum contribution of promoters will be locked in for a period of three years. And if the promoters’ contribution in the issue exceeds the minimum contribution, the excess contribution will be locked in for a period of one year.

If your company is seeking listing of its securities on BSE it is required to submit a Letter of Application to all the stock exchanges where it proposes to have its securities listed. This has to be done before filing the prospectus with the Registrar of Companies.

Your company is also required to complete the allotment of securities offered to the public within 30 days of the date of closure of the subscription list. Then, it has to approach the Designated Stock Exchange for approval of the basis of allotment.
It needs to be noted that in case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue. Failing this, interest at the rate of 15% shall be paid to the investors.

Your company will also have to get Trading Permission. As per SEBI Guidelines, your company should complete the formalities for trading at all the stock exchanges where the securities are to be listed within 7 working days of finalization of the basis of allotment.
Your company should scrupulously adhere to this time limit- as specified in SEBI (Disclosure and Investor Protection) Guidelines 2000- for allotment of all securities and dispatch of allotment letters/share certificates/credit in depository accounts and refund orders and for obtaining the listing permissions of all the exchanges whose names are stated in its prospectus or offer document.

If listing permission to your company had ever been denied by any stock exchange where an application for listing of securities had been made, your company cannot proceed with the allotment of shares. However, the company may file an appeal before SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956.

Your company would also have to be ready with paying 1% security fee, since companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange. This has to be done before the issue opens. In the event of the company not resolving the complaints of investors- regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc.- this amount is liable to be forfeited.

Your company would require to pay Listing Fees

One more aspect that your company would have to be ready for is of the Compliance with the Listing Agreement. Your company would have to enter into an agreement with BSE called the Listing Agreement. Under this you are required to make certain disclosures and perform certain acts, failing which your company may face some disciplinary action, including suspension/delisting of securities.

This Listing Agreement is of great importance and will be executed under the common seal of your company. Under this Listing Agreement, your company would undertake, amongst other things:

• to provide facilities for prompt transfer, registration, sub-division and consolidation of securities;
• to give proper notice of closure of transfer books and record dates,
• to forward 6 copies of unabridged Annual Reports, Balance Sheets and Profit and Loss Accounts to the stock exchange,
• to file shareholding patterns and financial results on a quarterly basis;
• to intimate promptly to the stock exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices,
• to comply with the conditions of Corporate Governance, etc.

The Listing Department of the stock exchange monitors the compliance by the companies with the provisions of the Listing Agreement. This is especially so with regard to timely payment of annual listing fees, submission of results, shareholding patterns and corporate governance reports on a quarterly basis. Do note that penal action is taken against any defaulting companies.

If you are a start-up, SEBI has shrunk the IPO timeline to 6 days and eased rules for start-ups. Now start-ups will be allowed to raise funds from institutional investors under new rules approved by the regulator. Applications Supported by Blocked Amount (ASBA) will be made mandatory for all classes of IPO investors.

 Now according to SEBI, only qualified institutional buyers and non- institutional investors will be allowed to invest in your company through institutional trading platform.

If your company is technology intensive such as intellectual property, biotechnology, nano-technology you will be allowed to list. This is provided 25 per cent of pre-issue capital is through QIB. In case of any other company at least 50 per cent of the pre-issue capital should be held by QIBs.

According to the SEBI rules, the lock-in for the entire pre-issue capital will be for six months. The minimum investment in such companies has been set at Rs 10 lakh.

Also, SEBI has introduced a policy framework which re-classifies promoters in listed firms to public shareholders. Now, if your company becomes professionally managed it will not need to have any identifiable promoter, and no person in the company can hold more than 1 per cent shares of the company. Moreover, an outgoing promoter cannot hold more than 10 per cent of the shares of the company or have any direct or indirect control over the company and possess any special rights.

In the case of an IPO, the promoters must contribute at least twenty percent (20%) of the post issue capital. The term promoter includes any such person(s) who are in overall control of the company; or any person(s) who are instrumental in the formulation of a plan or program pursuant to which the securities are offered to the public; and also persons named in the prospectus as promoters. It must be noted that any person acting as a director or officer of the issuer company merely in a professional capacity is not included in the definition of promoter.

Your company would also have to be ready to adhere to Prospectus Requirements. The offer, or prospectus document would have to contain true and sufficient information to enable the investor to make an informed decision while investing in the offered securities. This is as specified Clause 6.1 of the DIP Guidelines. The prospectus must, inter alia, provide information relating to risk factors, project costs, means of financing, appraisal, issue schedule, details of the managerial personnel, capital structure of the company, terms of the issue, financial information of company and group companies, basis for issue price and details of the products, machinery and technology.

Are you ready to make the IPO feasible?

The first thing any company should consider when thinking about an IPO is this: is an IPO even feasible?

Apart from regulatory guidelines, you must also consider good business sense. This is especially relevant to growth stage entrepreneurs. It must be kept top of mind that going public is by no means the final step to long term success, although it’s certainly a big step in the process.

Timing is key- completing an IPO too early can have disastrous effects on the future health of your business and waiting for too long can allow a competitor to steal your thunder.

Your business requires predictability so ensure that this predictability has been achieved. Although last year your venture capitalist may have been happy when your business hit 97% of the plan, it will be different after an IPO.  But when your company goes public if you fall short of analysts’ expectations by even a small margin, your stock will likely plummet. The stakes are higher when your company goes public.

Your business needs to be aware of its underlying growth potential. You should have a game plan for growth after the IPO, else the markets will respond negatively.

You should have undertaken a Risk Analysis and ensured that there is no single point of failure. Appropriate risk mitigation should be in place to ensure that threats, in the form of market forces that can upset the business, are addressed.

Going public can bring numerous benefits to your company. However, before a company starts to prepare for an IPO you should have considered to what extent your company is ready for an IPO.  Are there valid strategic objectives it wants to achieve upon choosing the IPO route? Is the company ready to undertake steps required to be perceived favourably by prospective investors? This is vital to be able to operate as a Public Company.

Consider how big the market for your product or service is.  The bigger the market, the more likely you are to make money. The more money you can make the faster you can grow. Your company must have a huge market and room to grow. You are answerable to your investors.

Also consider how disruptive your product is. If your product a new way of doing something? The more disruptive your product the better. It helps to make you stand out- to get a larger share of the market.

Consider how predictable your business model is. Public market investors are partial to predictable earnings. If you can prove to investors that your company will succeed, investors will buy your story, but more importantly, your stock.

Finally, consider how much competitive advantage you have.  Consider what asset your company controls that will afford it more leverage over rivals as it grows.  If you’ve got a real advantage, then you have the final solution to the IPO equation. The more leverage you have or can create, the better it is.

If you have considered all the above aspects and chosen to have an IPO you can be positive that the markets will respond also respond positively- in the short term, the medium term as well as the long term.

Bibliography

http://iepf.gov.in/IEPF/IPO_In_off.html

http://www.sebi.gov.in/faq/pubissuefaq.html

[i] http://www.bseindia.com/Static/about/listsec.aspx?expandable=2