In this article, Dheerajendra Patanjali who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses How Can PIOs’ and NRIs’ Invest In an Indian Business: Regulations and Best Practices.

“Non-Resident Indians (NRIs) may, purchase on repatriation basis, shares and convertible debentures of Indian companies under the FDI scheme … NRI may also purchase shares and convertible debentures of Indian Companies through stock exchange under Portfolio Investment Scheme,… Except few prohibited sectors as notified in FDI policy, a NRI may without any limit purchase on non- repatriation basis, shares or convertible debentures of an Indian company issued whether by public issue or private placement or right issue”[1].

Introduction

Investment by Non-Resident Indians (NRI)  and Person of Indian Origins (PIO) is a critical driver of economic growth, as well as major source of non-debt financial resource for the economic development of India. NRI and PIO invest in India to take advantage of relatively lower wages, special investment privileges such as tax exemptions, etc. Post liberalisation, Indian government has provided a conducive environment and supporting regulatory regime to NRI’s and PIO’s for investment in India. It has put in place an investor-friendly policy under which FDI up to 100% is permitted under the automatic route in most sectors/activities including investments from Non-Resident Indians.

It is interesting to note that the total FDI investments India received during April – December 2016 was $ 35,844.32 million[2] which aptly demonstrate the importance of India as investment destination. NRIs/PIOs are allowed to invest in the primary and secondary capital markets in India and their activities, with respect to investment in Indian market, are primarily regulated by the Reserve Bank of India, subject to fulfilment of requirement of other sectoral regulators. Additionally, the Reserve Bank of India also monitors the ceilings on NRI/PIO investments in Indian companies on a daily basis.

Who is NRI/PIO

Non-Resident Indian (NRI) means a “person resident outside India” who is a citizen of India or is a person of Indian origin. An Indian citizen who is ordinarily residing outside India and holds an Indian Passport[3]. All benefits as available to Indian citizens subject to notifications issued by the Government from time to time are available to NRI. Further, he does not require visa for visiting India and can undertake all activities permissible under Indian Laws.

At the same time, a person who or whose any of ancestors was an Indian national and who is presently holding another country’s citizenship/ nationality i.e. he/she is holding foreign passport is considered as Person of Indian Origins (PIO). It is important to note that he is required to register with the local police authorities in India, if the period of stay in India is for more than 180 days. Further he can undertake only those activities in India which have been mentioned in the visa obtained. However, as per Citizenship Act, 1955[4], he can acquire Indian Citizenship but for the same, he has to be ordinarily resident in India for a period of 7 years before making an application for registration[5].

Further, Government has recently extended the definition of NRI by notifying that “Non-Resident Indian (NRI) means an individual resident outside India who is citizen of India or is an ‘Overseas Citizen of India’ cardholder within the meaning of section 7 (A) of the Citizenship Act, 1955”[6]. The aforesaid decision of the Government including OCI cardholders as well as PIO cardholders in the definition of NRI is meant to align the FDI policy to provide PIOs and OCIs parity with Non-Resident Indians in respect of economic, financial and educational fields vis-a-vis investment opportunity.

Avenues of Investment For NRI/PIO in Indian Business

NRI/PIO has several mutually beneficial options available for becoming part of the economic development of the Country. In this regard, Reserve Bank of India has granted general permission to NRIs/PIOs, for undertaking direct investments in Indian companies, under the Automatic Route, purchase of shares under Portfolio Investment Scheme, investment in companies and proprietorship/partnership concerns on non-repatriation basis (that is NRI cannot convert Invested money back to foreign currency ) and for remittances of current income[7]. Further, NRI/PIO are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis (that is, invested money can be converted to an investor’s home country), subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels[8].

To invest on a repatriable basis NRI must have an NRE account or FCNR account with a bank in India. In this case the investment money should be remitted through usual banking channels or from the NRE/FCNR account of the NRI investor. Investment in India can be made on a non-repatriation basis as well with investment funds being provided from NRO account or NRE/FCNR account of the investor.

Here it is important to understand that a Non-Resident External (NRE) account is a bank account that’s opened by depositing foreign currency at the time of opening a bank account. This currency can be tendered in the form of traveler’s checks or notes. Whereas a Non-Resident Ordinary (NRO) account, is the normal bank account opened by an Indian going abroad with the intention of becoming an NRI. NRO account can also be opened by sending remittances by NRI from his residing country or by transferring funds from his other NRO account. It offers the same facilities as an NRE account, except that any repatriation done through this account should be reported to RBI by filling up prescribed forms.

Portfolio Investment Scheme (PIS)

Portfolio Investment Scheme (PIS) is a scheme of Reserve Bank of India which provides NRIs an opportunity to purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under this Scheme.  The scheme lays down detail terms and conditions required to be fulfilled by NRI/PIO to invest under this scheme, eg the NRI/PIO has to apply to a designated branch of a bank, which deals in Portfolio Investment and all sale/purchase transactions are to be routed through the designated branch.

Investment by Non-Resident Indian (NRI) on a Stock Exchange in India on Repatriation basis[1]

A Non-resident Indian may purchase or sell shares, convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, on repatriation basis, on a recognised stock exchange, subject to the following conditions:

• NRIs may purchase and sell shares /convertible preference shares/ convertible debentures /warrants and units under the Portfolio Investment Scheme through a branch designated by an Authorised Dealer for the purpose;
• The paid-up value of shares of an Indian company purchased by any individual NRI should not exceed five percent of the paid-up value of shares issued by the company concerned;
• the paid-up value of convertible preference shares or convertible debentures of any series purchased by any individual NRI on repatriation basis should not exceed five percent of the paid-up value of convertible preference shares or convertible debentures of that series issued by the company concerned;
• the paid-up value of warrants of any series purchased by any individual NRI on repatriation basis should not exceed five percent of the paid-up value of warrants of that series issued by the company concerned;
• the aggregate paid-up value of shares of any company purchased by all NRIs on repatriation basis should not exceed ten percent of the paid-up value of shares of the company and the aggregate paid-up value of each series of convertible preference shares or convertible debentures or warrants purchased by all NRIs should not exceed ten percent of the paid-up value of that series of convertible preference shares or convertible debentures or warrants;

Provided that the aggregate ceiling of ten per cent referred to in this clause may be raised to twenty-four per cent if a special resolution to that effect is passed by the General Body of the Indian company concerned;

• The NRI investor should take delivery of the shares/convertible preference shares/ convertible debentures /warrants and units purchased and give delivery of the same when sold;

Investment by Non-Resident Indian (NRI), on Non-Repatriation basis[1]

A Non-resident Indian (NRI), including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, which will be deemed to be domestic investment at par with the investment made by residents. It is further provided that-

• An NRI may acquire, on non-repatriation basis, any security issued by a company without any limit either on the stock exchange or outside it.
• An NRI may invest, on non-repartition basis, in units issued by an investment vehicle without any limit, either on the stock exchange or outside it.
• An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.

Steps that an NRI has to follow for equity trading

NRI who wishes to invest in shares in India through a stock exchange need to approach the designated branch of any authorized dealer (bank) authorized by reserve bank to administer the PIS (Portfolio Investment Scheme) and to open a NRE (Non Resident External) /NRO (Non-Resident Ordinary) account under the scheme for routing Investments. These steps can be summarised as under –

• Open a bank account with approved designated bank branch
• Take approval of designated bank for investment in Indian Stock Market.
• Open a Demat Account with a Depository Participant
• Open a Trading account with a SEBI registered broker to execute trades on its behalf on the Exchange

Investment in Mutual Fund

An NRI can invest in mutual fund both on a repatriable or on a non-repatriable basis, as preferred by the investor.

Repatriable Basis[1]

To invest on a repatriable basis, NRI is required to have an NRE or FCNR Bank Account in India. The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on repatriation basis, subject to the following conditions:

• The mutual fund should comply with the terms and conditions stipulated by SEBI.
• The amount representing investment should be received by inward remittance through normal banking channels, or by debit to an NRE / FCNR account of the non-resident investor.
• The net amount representing the dividend / interest and maturity proceeds of units may be remitted through normal banking channels or credited to NRE / FCNR account of the investor, as desired by him subject to payment of applicable tax.

Non-Repatriable Basis[2]

The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on non-repatriation basis, subject to the condition that funds for investment should be provided by debit to NRO account of the NRI investor. It is important to note that no permission of Reserve Bank either by the Mutual Fund or the NRI investor is necessary.

Investment by NRI/PIO in Government securities

On non-repatriation basis NRIs can freely purchase Central and State Government securities (other than bearer securities) and National Plan/ Savings Certificates by remittances from abroad through normal banking channels or by withdrawing funds from their non-resident accounts with banks in India. Such investments should be made through the banks maintaining their non-resident accounts. The banks have been permitted to credit the dividend/ interest and sale or maturity proceeds of the units/ securities to Ordinary Non-resident accounts of NRI[1].

They can also invest on non-repatriation basis, in bonds issued by public sector undertakings provided they have secured RBI permission to seek investments from Non-Residents. The dividend and interest income from the investment as well as the sale proceeds/ maturity proceeds of securities purchased by remittances from abroad or by withdrawing funds from NRE/ FCNR accounts can be remitted outside India or may be credited to the investor’s NRE/ FCNR accounts[2].

NRI have also been permitted to invest in other sector eg real estate etc, subject to certain conditions. A Non-Resident Indian can also invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

1. Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers/Authorized banks.
2. The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
3. Amount invested shall not be eligible for repatriation outside India.

Taking into account the facilities that are already available, it can aptly be concluded that the areas in which facilities available to NRIs/PIOs are the same as available to domestic residents except relating to investment by NRIs/PIOs in real estate/agriculture and plantation business, Chit Funds, 10 Nidhis etc.

Entry Routes for Investment[3]

Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares of an Indian company, through the Automatic Route or the Government Route.

Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment. Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB.

Foreign investment in sectors/activities under government approval route will be subject to government approval where:

• An Indian company is being established with foreign investment and is not owned by a resident entity or
• An Indian company is being established with foreign investment and is not controlled by a resident entity or
• The control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc. or
• The ownership of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares and/or fresh issue of shares to nonresident entities through amalgamation, merger/demerger, acquisition etc.
• Investment by NRIs under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.
• A company, trust and partnership firm incorporated outside India and owned and controlled by non-resident Indians will be eligible for investments under Schedule 4 of FEMA (Transfer or issue of Security by Persons Resident Outside India) Regulations and such investment will also be deemed domestic investment at par with the investment made by residents.

The above list is inclusive one and the entiries of this list may change from time to time as per the extant policy of government prevalent at that time. At the same time, it is important to note that the investments can be made by non-residents in the capital of a resident entity only to the extent of the percentage of the total capital as specified in the FDI policy prevalent at that time. Investments by non-residents can be permitted in the capital of a resident entity in certain sectors/activity with entry conditions. Such conditions may include norms for minimum capitalization, lock-in period, etc.

Prohibition on foreign investment in India

Foreign investment in any form, including by NRI, is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities[4]

• Business of chit fund, or
• Nidhi company, or
• Agricultural or plantation activities, or
• Real estate business, or construction of farm houses, or
• Trading in Transferable Development Rights (TDRs).

( It is clarified that “real estate business” means dealing in land and immovable property with a view to earning profit or earning income therefrom and does not include development of townships, construction of residential / commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure, townships.)

It is further clarified that partnership firms /proprietorship concerns having investments as per FEMA regulations are not allowed to engage in print media sector.

In addition to the above, Foreign investment in the form of FDI, including investment by NRI, is also prohibited in certain sectors such as:[5]

1. Lottery Business including Government/ private lottery, online lotteries, etc.
2. Gambling and Betting including casinos etc.
3. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
4. Activities / sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations.

Regulations dealing with NRI investment

NRI investments are governed under the Foreign Exchange Management Act, 1999 (FEMA), regulations specified by the Securities and Exchange Board of India (SEBI), the Foreign Direct Investment policy of the ministry of commerce (the FDI Policy), and the regulatory framework and instructions issued by the Reserve Bank under FEMA. The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000).

The main regulatory and facilitation agencies involved in the matters related to NRIs investment are Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Authority for Advance Rulings (AAR), Secretariat for Industrial Assistance (SIA), Ministry of Commerce & Industry; and Office of the Chief Commissioner (Investments & NRIs). Briefly their areas of activities are as under –

1. Reserve Bank of India (RBI) – Reserve Bank of India regulates the investment by persons resident outside India. In order to simplify the regulations and procedures they issue ‘general permission’ from time to time so that no specific permission are required for the activities covered under the ‘general permission’. The specific permission as required under Foreign Exchange Regulations are granted by Foreign Investment Division, Foreign Exchange Department or the concerned Regional office of RBI depending upon the nature of permission required.
2. Securities and Exchange Board of India (SEBI) – The Overseas Investor Cell of SEBI provides answers to queries on registration procedures, formalities and other investment related issues pertaining to SEBI to all overseas investors including NRIs through its website at sebi.gov.in/.
3. Authority for Advance Rulings (AAR) for Income Tax – The Authority for Advance Rulings enables non-residents to obtain, in advance, a binding ruling on the issues that could arise in determining their Income Tax liabilities. The Authority is empowered to determine any question of law or of fact as specified in the application made before it in respect of a transaction, which has been undertaken or is proposed to be undertaken, by a non-resident. Any Non Resident person, company, firm, association of persons or other body corporate, can make an application for seeking an advance ruling. The Authority is a high level quasi-judicial body to be headed by a retired judge of the Supreme Court and two Members of Additional Secretary level, experts in technical and legal matters. The process of seeking a ruling is very simple, inexpensive, expeditious and transparent. All accepted judicial norms are followed before a ruling is given.
4. Secretariat for Industrial Assistance (SIA) – SIA has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Govt. decisions on applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison with other organisations and State Govt.) and in monitoring implementation of projects.
5. Foreign Investment Implementation Authority (FIIA) – Foreign Investment Implementation Authority (FIIA) was established in Department of Industrial Policy & Promotion, Ministry of Commerce & Industry on 09.08.1999, to assist the foreign investors in getting necessary approvals and thereby facilitating quick translation of Foreign Direct Investment (FDI) approvals into implementation.

Conclusion

To be part of growth story of one of fastest growing economy of world, NRI has several mutually beneficial options available to invest in Indian business. NRIs has got option to make investment under Portfolio Investment Scheme, in companies and proprietorship/partnership concerns on non-repatriation basis. Further, NRI are also permitted to invest in shares and convertible debentures of Indian companies on repatriation basis. They can freely purchase Central and State Government securities (other than bearer securities) and National Plan/ Savings Certificates. They can invest in mutual funds. That is to say that facilities available to NRIs/PIOs are the same as available to domestic residents except relating to investment by NRIs/PIOs in real estate/agriculture and plantation business, Chit Funds, 10 Nidhis etc.

Further, their investment in well regulated in India and subject to compliance of different rules which includes sectoral rul compliance. Primarily, their investment is governed under the Foreign Exchange Management Act, 1999 (FEMA), regulations specified by the Securities and Exchange Board of India (SEBI), the Foreign Direct Investment policy of the ministry of commerce,and the regulatory framework and instructions issued by the Reserve Bank under FEMA.

References

[1] International Research Journal of Social Sciences, 37-40, November (2013)

[2] International Research Journal of Social Sciences, 37-40, November (2013)

[3] Consolidated FDI Policy Circular of 2016, http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf

[4] ‘Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000’, https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=155, retrieved on 11.04.2017

[5] ‘Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000’, https://www.rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=155, retrieved on 11.04.2017

[1] http://www.tatamutualfund.com/investor/nri-corner/overview, retrieved on 28.04.2017

[2] http://www.tatamutualfund.com/investor/nri-corner/overview, retrieved on 28.04.2017

[1] Schedule-4,Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[1] Schedule-3,Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[1] LOK SABHA, UNSTARRED QUESTION NO:4465,ANSWERED ON: 08.08.2014 on “NRI INVESTMENT IN FDI”

[2] LOK SABHA, UNSTARRED QUESTION NO:2922,ANSWERED ON: 20.04.2017 on “Foreign Direct Investment”

[3]Ministry of Home Affairs, Government of India, http://mha1.nic.in/pdfs/oci-chart.pdf, retrieved on 10.04.2017

[4] section 5(1)(a) & 5(1)(c) of the Citizenship Act, 1955

[5] Ministry of Home Affairs, Government of India, http://mha1.nic.in/pdfs/oci-chart.pdf, retrieved on 10.04.2017

[6] Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Amendment) Regulations, 2016

[7] READY RECKONER FOR NON-RESIDENT INDIANS INVESTMENT, INVESTMENT PROMOTION & INFRASTRUCTURE DEVELOPMENT CELL, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, MINISTRY OF COMMERCE & INDUSTRY GOVERNMENT OF INDIA, Page no -9.

[8] RBI/2014-15/6 Master Circular No. 15/2014-15, https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9006#f4,  retrieved on 10.04.2017

In this article, Charmi Sanjay Chhadva who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Can private colleges charge capitation fee?

Can private colleges charge capitation fee

Talking about education, it plays an important role for the development of every country. With education, a fee for the education comes hand in hand. In India, free and compulsory education is made available for children between 6 years and 14 years under Article 21A of the Constitution of India as per ‘The Right of Children to Free and Compulsory Education Act’ or ‘Right to Education Act which is also known as ‘RTE’ and enacted on 4 August 2009.

Free education is for those children, other than those who have been already admitted by his or her parents to a school which is not supported by the appropriate Government and thus, for such children, the education fees shall be paid by the government. Compulsory education is to ensure admission, attendance and completion of elementary education by all children in the 6-14 age groups. With this, India has moved forward to make this framework to ensure that this fundamental child right is practiced in the country.

Moving forward to talk about the college fees, the question of whether or not the tuition fee should be paid by the government remains controversial. Majority of people are not able to pay their amount of fee because the studies of universities / colleges are too much expensive. People who belong to poor families cannot afford the expenditure of the college studies including fee, accommodation rent, and examination fees and so on and so forth. But, education is the back bone of every materialistic as well as the modern society. Hence, it is almost mandatory to provide education to a child apart from the basic education to ensure mental growth of the child and which would ultimately lead to the growth of the society and our country.

The most important point here is that further education is not easy because of several reasons one of them being the ‘capitation fee’. Students who are academically excellent and who are worth receiving further education and learning from a prestigious college/university also cannot be provided with such an education because of this big hurdle known as ‘capitation fee’. It is the amount paid in excess of the fee prescribed.

Understanding the term ‘Capitation fee’

Capitation fee refers to an illegal transaction wherein an organisation that provides (or supposedly provides) education / educational services collects a fee that is more than what is approved by regulatory norms. In the layman language, we know this kind of illegal transaction as donation.

Capitation fee is that fee which is not included in the prospectus of the institution. Such extra amount of amount of money is paid to secure a place in the institutions. This is commonly done at the renowned universities wherein seeking admission is not easy. And therefore, people from the elite class tend to pay extra amount of money in exchange of admission in such institution/colleges/universities. Such activities are illegal in nature because when students who do not deserve get admissions in such institutions by way of the capitation fee, students who deserve cannot secure a place at such institutions.

The Prohibition of Unfair Practices in Technical Educational Institutions, Medical Institutions and Universities Bill 2010 defines it as any amount that:

• Demanded or charged or collected, directly or indirectly, for, or, on behalf of any institution, or paid by any person in consideration for admitting any person as student in such institution; and which is in excess of the fee payable towards tuition fee and other fees and other charges declared by any institution in its prospectus for admitting any person as student in such institution; or
• Paid or demanded or charged or collected, by way of donation, for, or, on behalf of any institution, or paid by any person in consideration for admitting any person as a student in such institution.

Repercussions

Capitation fee has been one of the major contributors to corruption in education and society. It is also not easy to recover the amount which is paid as a capitation fee as it is a huge amount in nature and therefore to recover the amount, students might indulge in wrongful activities. The capitation fee is also not shown for the income tax and hence, it leads to hike in corruption. Some institutions also add the capitation fee along with the fee approved by regulatory norms and this combined fee is presented as the actual fee to the students.

Disputes

We have come across various well known and renowned and prestigious private schools, institutions and colleges all over India wherein such schools, institutions and colleges have been found charging capitation fees from the students to secure a place in such schools, institutions and colleges because of its renowned and prestigious name in the society. It was found that sum of Rs 5,00,000 (Rupees five lakhs) was allegedly paid by a student through a demand draft to Sri Venkateswara College of Engineering (SVCE), a private college in Pennalur, Sriperumbudur, near Chennai. A student had paid such a huge amount of money to the college just because it is a renowned college and the student wanted to secure a place in the college. It has been a very common trend by most of the private colleges to accept such capitation fees due to its renowned name and thus such colleges uses its name and a huge amount of fees is taken by the people who are powerful amongst the management committee. The incident came into light through a surprise check drive initiated by the government in Tamil Nadu at 142 self-financing engineering colleges in the said state.

Another popular scam exposed by a popular news channel, ‘Times Now’ suggested that Information and Broadcasting Minister for State Jagathrakshakan was allegedly associated with the Shree Balaji Medical College in malpractices in admissions. However, the minister totally denied all the allegations or the fact that the minister was having associated with the college.

In February 2002, some students filed a case against Mercedes Benz International School, a prestigious school in Pune for allegedly collecting ‘capitation fees’ under the guise of a building donation fund.

Income Tax Department has been conducting raids on some of the organisations that take capitation fee. Arrests have been made related to cheating associated with admissions.

Here are some of the instances wherein we have come across some private colleges charging capitation fees. Students and others must collectively fight against such malpractices happening in the country in the name of education.

Capitation fee charged by the private colleges is illegal

Capitation fee charged by the private colleges is illegal can be seen in a recent Supreme Court judgment in the case of Modern Dental College and Research Centre vs. State of Madhya Pradesh [Medical Council of India]. On 2nd May 2016, a five judge Constitution bench comprising of Justices A R Dave, A K Sikri, R K Agrawal, A K Goel and R Banumathi in the said case held that education is a noble profession. It was held in the judgment that the fee taken by the institutions shall be on a no profit – no loss basis. The capitation fees collected by the institutions lead to profiteering and commercialising education. The admissions must be based only on merit and it is impossible to control profiteering/charging of capitation fee unless admissions are done on merit.

It was clearly stated that every demand of capitation fee by educational institutions is unethical & illegal. It was held that

‘Though education is now treated as an ‘occupation’ and, thus, has become a fundamental right guaranteed under Article 19(1) (g) of the Constitution, at the same time shackles are put in so far as this particular occupation is concerned, which is termed as noble. Therefore, profiteering and commercialization are not permitted and no capitation fee can be charged. The admission of students has to be on merit and not at the whims and fancies of the educational institutions’

In the case of TMA Pai Foundation case, it was held that there shall not be any profiteering or acceptance of capitation fee. But we continue to see such malpractices happening in the country and thus it is very important for each citizen to carry out their duties and responsibilities and fight against such malpractices deteriorating the standards of education in the country.

It was held in the judgment that the educational institutions can charge fees that would take care of the various expenses incurred by them and also the provision for the expansion of education for future generations. But fees shall not be taken for their personal expense.

The bench said “The object of setting up educational institutions is not to make profit. For admission, merit must play an important role. The state or the university could require private unaided institutions to provide for merit-based selection while giving sufficient discretion in admitting students”.

The Supreme Court has clearly stated that such demand of fee is illegal and unethical. And it has also asked the Centre to make laws to put an end to such practices which ultimately deny admission to the meritorious students who cannot afford to such demands. “Central Government, Ministry of Health and Family Welfare, Central Bureau of Investigation or the Intelligence Wing have to take effective steps to undo such unethical practices or else self-financing institutions will turn to be students financing institutions,” it said.

Some other judgments

The Supreme Court Judgement in the year 1993 in the Unni Krishnan Case clearly said that charging capitation fees was illegal in nature. According to the definitions stated in the Karnataka Educational Institutions  (Prohibition of Capitation Fee) Act 1984:

Be it enacted by the Karnataka State Legislature in the Thirty-Fourth Year of the Republic of India as follows, Clause (b) of Section 2 defines the expression ‘Capitation fee’ in the following words: “Capitation fee means any amount, by whatever name called, paid  or collected directly or indirectly in excess of the  fee prescribed under section 5, but does not  include the  deposit  specified under the proviso  to section 3.” These statements were mentioned in the judgment.

Another Supreme Court Judgement in the year 2001 quotes the definition stated in the Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987:

Maharashtra Educational Institutions (Prohibition of Capitation Fee) Act, 1987, Section 3(a) states that ‘The expression “capitation fee” is defined in Section 2(a) of the Act. Capitation fee means “any amount, by whatever name called, whether in cash or kind, in excess of the prescribed or as the case may be approved, rates of fees regulated under Section 4.”

And hence, we can come to a conclusion that the capitation fees which are charged in excess of the approved fees are illegal and not acceptable.

The Supreme Court in its judgement in October 2002 in the TMA Pai Foundation vs the State of Karnataka case stated that:

57. We, however, wish to emphasize one point, and that is that inasmuch as the occupation of education is, in a sense, regarded as charitable, the government can provide regulations that will ensure excellence in education, while forbidding the charging of capitation fee and profiteering by the institution. Since the object of setting up an educational institution is by definition “charitable”, it is clear that an educational institution cannot charge such a fee as is not required for the purpose of fulfilling that object. To put it differently, in the establishment of an educational institution, the object should not be to make a profit, inasmuch as education is essentially charitable in nature. There can, however, be a reasonable revenue surplus, which may be generated by the educational institution for the purpose of development of education and expansion of the institution.

It was therein held that in such professional unaided institutions, the Management of the college shall have the right to select teachers as per the qualifications and eligibility conditions laid down by the State/University subject to adoption of a rational procedure of selection.  A rational fee structure should be adopted by the Management, which would NOT be entitled to charge a capitation fee. Appropriate machinery shall also be devised by the State / University to ensure that no capitation fee is charged and also see to it that there is no profiteering. It is the welfare of students and teachers that is important and without any unfair means in the country for the growth of the students and teachers.

Fair means of education is very important to ensure fair means of trades and practices in any industry in the future. Fair means must start from the education itself for a better future. Few of these remarkable judgments have been passed by the Hon’ble Supreme Court of India to tackle the practices and seize the charging of capitation fees by the professional private colleges in the country.

The judgment also make clear statements on the point whether capitation fee can be charged by the private colleges or no and the question was whether the statutory provisions which regulate the facets of administration like control over educational agencies, control over governing bodies, conditions of affiliation including recognition/withdrawal thereof, and appointment of staff, employees, teachers and principals including their service conditions and regulation of fees, etc. would interfere with the right of administration of minorities? And the answer which was given by the Hon’ble Court was “ Fees to be charged by unaided institutions cannot be regulated but no institution should charge capitation fee”.

Steps taken by the government

To keep a check on the illegal and unfair practices by the professional colleges by charging capitation fee and in accordance with the Supreme Court of India’s directions, the Government has come up with a print release dated July 18, 2016 http://pib.nic.in/newsite/PrintRelease.aspx?relid=147178 wherein a National Fee Committee under the chairmanship of Justice B. N. Shrikrishna was constituted for fixing some fixed norms and guidelines for charging of the tuition and development fees in case of professional courses to avoid practices charging capitation fee. The Committee therein submitted its report recommending upper limits of fee that can be charged by the professional colleges, which shall not include capitation fee. This was one of the important norms required to be taken by the Government to put a cap on the unfair practices. Any Institution who charges capitation fee shall be strictly liable for punitive action under the AICTE Approval Process Handbook.

To bring the higher education within the reach of deserving students, apart from implementing the recommendations of National Fee Committee, the following measures have been taken:

1. Under the Pragati Scholarship scheme – Providing scholarships for girl students
2. Under the SAKSHAM scheme – Scholarships for the differently-abled
3. Scholarships for the post-graduate engineering education through the GATE exam
4. Various research fellowships for pursuing PhD programme.
5. Tuition fee waiver for economically backward students. In this way, students are not held back from studying due to lack of funds.

This above information was given by the Union Human Resource Development Minister, Shri Prakash Javadekar in a written reply to a Lok Sabha question.

Therefore, we can see that the Government is trying to take interest in such illegal practices for a better future of the young and also for our country and therefore the above mentioned tasks shall be taken by the Government against the unfair.

Also, The Prohibition of Unfair Practices in Technical Educational Institutions, Medical Institutions and Universities Bill 2010 was introduced as a strict measure to bring about the transparency in the educational system regarding the fee structures and other crucial issues. Charging or accepting capitation fee is considered as violation of Provision 6, which prohibits any institution from demanding or accepting capitation fee, directly or indirectly. If found guilty, the institution would be strictly punished with a penalty of up to Rs.5,000,000 (Rupees five lakhs) and a maximum imprisonment for three years. The bill has been criticized by various private institutions. However, this bill lapsed, before it became a law.

Media reports indicate that black money in education in India is generating more than 40,000 crores, while black money generation in medical education would be more than 10,000 crores. The Special Investigation Team (SIT) probing into black money practices in India has started its probe into the area, which was outside the ambit of SIT.

Conclusion

Collection of large and huge amounts of money by the mode of charging capitation fee by the private colleges runs into crores of rupees for courses like MBBS, engineering and other such post-graduate courses to secure a seat in the renowned colleges of the country and therefore such an exorbitant fee and donation etc. is charged. And due to such activities by many of such self- financing institutions, the meritorious and deserving students who are economically poor are kept away from such opportunities of learning from the best colleges in the country. It is also seen that such activities are being held by various institutions, for the additional intake of students, not always for the benefit of the student community and thereby serve the community, but for their own betterment. Such institutions do such activities for their own good and which is profitable to them in some way or the other. This was mentioned by a bench of Hon’ble Justice KS Radhakrishnan and AK Sikri. The court said that quality of education has gone down in private colleges which are turning into students financing institutions.

We cannot lose sight of the fact that these things are happening in our country irrespective of the constitutional pronouncements by the Hon’ble Court in the TMA Pai Foundation case that there shall not be any profiteering or acceptance of capitation fee etc. Therefore after the case of Modern Dental College and Research Centre vs. State of Madhya Pradesh [Medical Council of India], we see a ray of hope that the government shall again work against the practice of charging capitation fee by the private colleges which is shown that it is illegal in nature and thus we can have better growth for the society.

References

https://en.wikipedia.org/wiki/Capitation_fee

http://pib.nic.in/newsite/PrintRelease.aspx?relid=147178

http://timesofindia.indiatimes.com/india/Capitation-fee-is-illegal-rules-Supreme-Court/articleshow/52083382.cms

https://indiankanoon.org/doc/93572510/

http://www.hindustantimes.com/india/special-team-probing-black-money-set-to-crack-down-on-unaccounted-funds-in-education-sector/story-GwCtCVZOVQSTwA7JqG4blK.html

 

In this article, Atipriya Gautam who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Criminal Liability on Officers and Directors for running an illegal Collective Investment Scheme.

The Securities and Exchange Board of India (SEBI), the Indian market regulator has been making huge strides in the course of the recent few years by ensuring the interests of retail investors because of their failure to take a well-informed decision about investing in various securities. For this, SEBI has escalated its investigation over various companies. From taking action against Sahara Group to unfurling Saradha Scam, SEBI has represented the benefit of such investors.

To direct such conduct and clamp down elements running illicit schemes, the market regulator introduced the Securities and Exchange Board of India (Collective Investment Schemes), Regulations, 1999 (“Regulations”). These Regulations, in addition to other things, manage the enlistment and commitments of the Collective Investment Management Company. In the first place, it is helpful to look at the meaning of “Collective Investment Scheme” and “Collective Investment Management Company”.

The expression “Collective Investment Scheme” (CIS) is defined under section 11AA of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). As the name suggests, it is an investment scheme or arrangement where several individuals come together to pool their money for investing in a particular asset(s) and for sharing the returns arising from that investment as per the agreement reached between them. In order to be a CIS, it ought to fulfil the accompanying conditions:

1. The payments or contributions made by the investors are pooled and utilized solely for the purpose of such arrangement or scheme.
2. The payments or contribution are made by the investors with a view to receive income or profits from such scheme or arrangement.
3. The payments, property or contributions forming part of such scheme or arrangement is managed on behalf of the investors.
4. Investors do not have control over the day-to-day management of such scheme or arrangement.

Moreover, by the Securities Laws (Amendment) Act, 2014 a proviso was inserted to section 11 AA stating that any pooling of funds under any arrangement or scheme, which is not registered with SEBI, involving a corpus of Rs.100 crores or more, shall be deemed to be a CIS.

Any arrangement or scheme made or offered by a Co-operative society or under which deposits are accepted by, non-banking financial companies (NBFCs), or being a contract of insurance, or under which deposits are accepted by a company declared as a Nidhi Company or falling within the meaning of Chit Business shall not be a CIS.

A Collective Investment Management Company (Company) has been defined under regulation 2 (h) of the Regulations as a company incorporated under the Companies Act, 1956 and registered with SEBI, whose object is to organize, operate and manage a collective investment scheme.

SEBI has made it mandatory for every entity that is running the CIS to register itself under section 12(1B) of the Act and Regulation 3 of the Regulations. However, if any person is operating a CIS before the commencement of the regulations, such person shall make an application to SEBI for the grant of registration certificate^[1].

A Company shall launch only close ended CIS for a minimum period of three years^[2] in the form of a trust^[3], appraised by an appraising agency^[4] and obtain rating from a credit rating agency^[5]  with no guaranteed or assured returns^[6]. The Company shall also obtain adequate insurance policy for the protection of the Scheme’s property^[7].

Criminal Liability Provisions Provided Under the Act

In the interests of the securities market and the investors, SEBI shall initiate criminal prosecution under Section 27^[8], Section 24^[9]  and Section 26^[10] of The Securities and Exchange Board of India Act, 1992.

Section 24 of the Act provides for the punishment for the contravention of the provisions of this Act. It states that if any person contravenes the provisions of this Act then that person shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to rupees twenty-five crore, or with both.

Going through the combined provisions of sections 24 and 26, it is clear that prosecution for offences can be initiated by SEBI and the power to launch such prosecution is not in any way circumscribed by any of the provision of the Act.  It is the discretion of SEBI to decide whether to launch or not to launch prosecution proceedings under the Act.  It is also pertinent to mention that no order as such is required to initiate prosecution keeping in view the clear provisions of Section 26 of the Act because only SEBI which is competent to file prosecution and no one else.  It is made clear under the Act that SEBI has uninhibited power to initiate prosecution against persons contravening the provision of the Act, regulations or rules made there under.

Section 27 provides that when an offence is committed under this Act by a company, every person who was in charge at the time the offence was committed and was responsible for the conduct of the business of the company shall be deemed to be guilty of that offence and liable to be punished and proceeded against accordingly. It is also provided that no person shall be held liable for any punishment under this Act if he successfully proves that such an offence was committed without his knowledge and that he had taken proper care and exercised all due diligence to prevent such an offence from occurring.

On a bare perusal of Section 27, it is clear that for an offence committed by a company its directors/officers are not automatically punished along with the company. The Section provides for safeguards by giving an opportunity to the directors/officers to prove their non-involvement in the commission of the offence, to escape the penal consequences. As per the provisions of section 27 only those persons who were in charge and responsible at the relevant point of time for the conduct of company’s business shall be deemed to be liable for such contravention. Thus, only on establishment of facts, the legal fiction shall come into operation against the persons. Such people can effectively oppose the prosecution by establishing want of knowledge about the contravention or activities of due diligence to prevent the same.  Such an onus on any person is not a heavy one, and can ordinarily be discharged.

Case Law Dealing With Collective Investment Schemes

1. Maitreya Services Pvt. Ltd. Case (2013)

SEBI started the probe against Maitreya Services Pvt. Ltd. (“Maitreya”) after a reference from the Income Tax office in September 2010 affirming infringement of SEBI directions by Maitreya. Amid the inquiry, Maitreya presented that it carries out the business of real estate and its business incorporates purchasing and selling of land, development of the land, construction and other land related activities. SEBI found that Maitreya had propelled different schemes under which cash was gathered from the general population. These schemes varied on the basis of the instalment to be made by the investor, and the time period for which such investments were to be made. During the course of its inquiry, SEBI found that the Company had launched and operated Collective Investment Schemes without getting registered under Section 12(1B) of the Act and Regulation 3 of the Regulations and an amount of Rs. 804 crores was outstanding with it was to be reimbursed to the investors. In perspective of the same, a show cause notice was issued to Maitreya and its executives asking them to show cause for what valid reason suitable action should not be taken against them for the infringement of Regulation 3 of the Regulations read with section 11AA of the Act.

While answering the show-cause by SEBI, Maitreya denied being in CIS operations and invalidated all charges leveled against it and asked for the procedures be terminated and released from the show-cause notice. In 2012, Maitreya sought to settle the proceedings through a consent procedure, however, that was dismissed by SEBI. SEBI’s probe found that Maitreya had mobilized Rs. 1,332 crores from public as “advances” as on March 31, 2011 and had reimbursed Rs. 538 crores as “reimbursement” to investors, resulting in an amount of Rs. 794 crores as outstanding to be reimbursed as on that date. SEBI likewise found that the assests were deficient to meet the liabilities and its repayment obligations were almost double the value of its total movable and immovable assets.

Therefore, SEBI ordered for winding up of the CIS being run under the disguise of real estate business, asking the concerned authority to refund the money to the investors within a period of three months. SEBI additionally banished Maitreya, and its directors from accessing the securities market till all its collective investment schemes are wound up and decided to initiate prosecution proceedings against them. SEBI also made a reference to the police to register a civil/criminal case against Maitreya and their Directors and people responsible for the Collective investment scheme business for “offences of fraud, cheating, criminal breach of trust and misappropriation of public funds”.

Alchemist Infra Realty Ltd Case (2013)

During the initial inquiry, the company refused to provide details which were sought by SEBI, stating that the regulator did not have jurisdiction and the company was not running any collective investment scheme. Although later, Alchemist Infra did provide some details to SEBI after continuous reminders and show cause notices issued to the company and its Directors. In the meanwhile. The company tried to settle the case through SEBI’s consent mechanism, but the plea for the same was rejected by the regulator. However, the regulator later found that the company was running CIS in the name of real estate business and had generated Rs.1087 crores as on March 31,2011 from the people. It was also revealed that in the Investment Application Forms the company had mentioned that it was a part of Alchemist Group, which was engaged in diverse activities such as steel, hospitality, food, tea estate, beverages, IT, education, healthcare, aviation and media, among others, with assst base of over Rs.5000 crores. Thus, an investor was misled into believing that the company, Alchemist Infra Realty Ltd, was part of the Alchemist Group, whereas the company had contended that it was not associated with that group. SEBI ordered Alchemist to wind up all such illicit activities and refund the money of public investors within a period of three months. The SEBI also warned the company and its directors that it will initiate prosecution proceedings and criminal case for “offences of fraud, cheating, criminal breach of trust and misappropriation of public funds” if the orders of SEBI were not complied with.

BPL Limited v. SEBI^[11](2001)

Large volumes of money coupled with abnormal price movements were observed in the stock exchanges in respect of the shares of the company, specifically during the period between April and May, 1998. Suspecting price manipulation, SEBI initiated investigate and based on those findings spanning over a period of approximately 18 months, on 20.12.1999, show cause notices were issued, asking them to explain their conduct with regard to the prima facie finding that the company had indulged in market manipulation, thereby violating regulation 4(a) and (d) of the 1995 Regulations read with section 11(1) and 11(2)(e) of the Act, and also to show cause as to why directions prohibiting it from dealing in securities and accessing the capital market and any other suitable direction in the interest of investors and securities market under section 11 read with section 11B of the Act and regulation 11 of the 1995 Regulations, should not be issued and proceedings under section 24 of the Act should not be initiated for such above violations made by the company.

The show cause notice was answered by the company and it was adjudicated by the Chairman of SEBI and in exercise of the powers conferred by sub section (3) of section 4, read with sections 11 and 11B of the SEBI Act, the company was barred from accessing the capital market for a period of four years. It was further directed that prosecution proceedings under Section 24 of the SEBI Act for violation of clauses (a) and (d) of regulation 4 of the said Regulations shall be initiated against BPL through its directors/officers.

Powers conferred Upon SEBI

In India, SEBI itself is furnished with powers to take actions against defrauders in absolute terms and not just as interim measures. On an everyday schedule, SEBI issues directions under Sections 11 and 11B of the SEBI Act asking people not to deal in securities or to access capital markets or to be associated with capital markets. Utilizing this power, final orders have also been passed against people accused of defrauding the investors and to disgorge the profits made out of the alleged wrong-doing.

SEBI is empowered under Chapter VIA of the Sebi Act, 1992 to directly inflict monetary penalties without the intervention of any court. The adjudicating officers are the employees of SEBI, who act as quasi-judicial officers and have the power to impose civil monetary penalties. Such penalties can be as high as Rs.25 crore or three times the benefit gained due to the violation of the provisions.

Without the intervention of the court SEBI does not have power to send people to jail and this is the only area where it does not have powers for direct action. Section 24 of the SEBI Act requires it to file a complaint before a criminal court to get an accused convicted for contravention of any provision of the Act, Regulations or Rules made thereof. For all other regulatory action, it has powers to act independently and without having to knock the doors of a court or any other judicial body and thereafter present convincing evidence to make such a move. The main check and balance on SEBI’s power is the Securities Appellate Tribunal, which is empowered to hear appeals from any order passed by SEBI. It is to be noted that judicial intervention of any sort can come up only after SEBI has taken action.

An Analysis

SEBI has played an important role in protecting investors against such schemes and tightened the noose around people running such illegal collective investment schemes. SEBI has also notified new norms to classify certain activities as fraud and impose penalties of up to thrice their profits. Moreover, the new rules have expanded the list of activities which shall come under fraudulent and unfair trade practices to hold companies as well as individuals equally guilty for illicit activities and manipulations.

The rules and regulations were amended to plug the loopholes predominant in the existing laws which were misused by the companies blatantly. However SEBI has also come across several cases where it has been claimed that the rules do not explicitly allow penal action against people for certain ‘fraudulent and unfair trade practices’ like front running, withholding of essential information from the investor, misrepresentation and making false promises.

SEBI has already taken action against several so called collective investment schemes that were in violation of the regulatory norms. SEBI had ordered Sahara group entities to refund approximately Rs.24,030 crores along with 15% interest to around 30 million investors and in April 2013, SEBI ordered Kolkata based Saradha to close all its collective schemes and refund the money collected from investors within three months. It also threatened to initiate criminal proceedings against the entities who did not comply with its orders. In a recent case, SEBI asked Capacious Farming to refund the money of the investors within a period of three months. The company and its directors were asked to abstain from collecting money from the investors and carry out any collective investment scheme. The regulator had also warned the company and its directors for registering a civil as well as criminal case for non-compliance of the orders.

However, at the same time, it is also important for the investors to be vigilant of such schemes and take significant steps in protecting their investment funds. Therefore, investors should apply proper due diligence and take informed decision while investing in such schemes.

References

[1] Regulation 5 of the (Collective Investment Schemes) Regulations, 1999.

[2] Regulation 24(4) of the (Collective Investment Schemes) Regulations, 1999.

[3] Regulation 16 of the (Collective Investment Schemes) Regulations, 1999.

[4] Regulation 24(3) of the (Collective Investment Schemes) Regulations, 1999.

[5] Regulation 24(2) of the (Collective Investment Schemes) Regulations, 1999.

[6] Regulation 25 of the (Collective Investment Schemes) Regulations, 1999.

[7] Regulation 24(5) of the (Collective Investment Schemes) Regulations, 1999.

[8] Section 27. Offences by Companies.—

(1) Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accord­ingly: Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. Explanation.—For the purposes of this section,—

(a) “company” means any body corporate and includes a firm or other association of individuals; and

(b) “director”, in relation to a firm, means a partner in the firm.

[9] Section 24. Offences.—

(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provi­sions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to 2[ten years, or with fine, which may extend to twenty-five crore rupees or with both].

(2) If any person fails to pay the penalty imposed by the adjudi­cating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to 3[ten years or with fine, which may extend to twenty-five crore rupees or with both.

[10] Section 26. Cognizance of offences by courts.

(1) No court shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, save on a complaint made by the Board.

(2) No court inferior to that of [a Court of Session] shall try an offence punishable under this Act.

[11] (2001) 32 SCL 95.

In this article, Arunava Bandyopadhyay who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses the duties of directors under the new Indian Companies Act, 2013.

Introduction

A director is “bound to take such precautions and show such diligence in their office as a prudent man of business would exercise in the management of his own affairs.” – Trustees of the Orange River Land & Asbestos Company vs King (1892)

 

Well, the reference may be very old but it still beautifully summarizes the duties of the Director of a company in a simple sentence. Gone are the days when some family driven organizations used to call them monopoly of the market while doing as they wish to shame Corporate Governance and ethics to the largest extent possible. The modern shareholders are more aware of their responsibilities than ever and more powerful than anyone can imagine. With Shareholders revolution, it is a democracy in company affairs and the shareholders are the supreme power which appoints its ministry in the form of directors to run the show and make money for them. In the process the Directors are given necessary powers but obviously more responsibility. The Companies Act 2013 has ensured this balance of Power vis-à-vis responsibilities is maintained to most benefit to the Shareholders and ensure Corporate governance to the maximum extent possible. It utilizes both regulatory measures as well as penal measures including stringent judicial measures to ensure the regulations are properly followed and to avoid any mishap in corporate governance and to maintain the legal sanctity of the organization.   Let us explore the uniqueness of this new era of corporate governance and create awareness of the duties of the Directors.

History of Indian Companies Law

The concept of regulated companies ushered from the “Merchant Guilds” of England. The notorious East India Company, established through a Royal Charter in the year 1600, may be the first of the well-known surviving company having its presence established in India. Registration of companies can be traced back to 1844 in England when the Joint Stock Companies Act was passed, which got established in India in 1850 and further the Joint Stock Companies Act got passed in India in 1857. This Act brought the concept of Limited Liability for the first time in India. In 1866 the first Companies Act was passed in India to regulate registration, regulation and wind up of companies and its associations. The Indian Companies Act got established in 1913 in line with the English Acts and as such the decisions of the English Courts were closely followed.

Post-independence, in the year 1956, the committee under the chairmanship of H C Bhaba recommended the Companies Act 1956 in the parliament, which came into effect from 1^st April 1956. This Companies Act got amended a few times since then, the final amendment being the Companies Act 2013.

Director & the Board in Companies Act

The term “director” in Companies Act 2013 under Section 2 (34)  is defined as “a director appointed to the Board of a company”., wherein ―Board of Directors‖ or ―Board‖, in relation to a company, means the collective body of the directors of the company. As per Chapter XI, Section 149 of the Companies Act 2013, it is mandatory for every company to have a Board of Directors, the composition should be as follows:

1. Public Company: Minimum 3 and maximum 15 nos. of Directors; at least 1/3 rd number of Independent Directors
2. Private Company: Minimum 2 and maximum 15 nos. of Directors
3. One person Company: minimum 1 director
4. At least 1 woman director
5. At least 1 Director who has stayed in India for minimum 182 days in the previous calendar year.

The Companies Act 2013 gives recognition to the idea of Independent Director, which was earlier part of the listing agreement only. It means a director other than a whole time director or the Managing Director or a nominee director who fulfills the criteria’s mentioned in Section 149.

As per section 266A and 266B of the Companies Act, 1956 Director Identification Number (DIN) is a unique identification number issued to existing and/or potential directors of any incorporated company. As per Companies Act provisions every director shall be appointed by the company in general meeting, provided they have been allotted the Director Identification Number (DIN) and on submission of a declaration that he/she is not disqualified to become a director.

An additional director is appointed by the Board of Directors through the Boards vested power to hold office till next general meeting. An alternate director may be appointed by the Board of Directors to act as a Director in absence for a period of not less than 3 months and not more than the allotted period for the director for whom the replacement is.

The Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or any government regulation or shareholdings, such directors are known as Nominated Directors.

As per Principle of Proportional representation the articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company, and such appointments may be made once in every three years and casual vacancies of such directors shall be filled as provided in sub-section (4) of section 161.

People of unsound mind, undischarged insolvent, convicted by a court of any offence and either / or imprisoned for a period of 7 years or more, convicted of the offence dealing with related party transactions under section 188.

Duties of Director

Major Corporate Debacles of recent times like Kingfisher, Sahara, Satyam etc has again and again proved the inability of Company Act 1956 to be ineffective in upholding Corporate Governance. Every time it is the Directors who are responsible in breaking Shareholders expectation and sometimes betraying the sentiments of stakeholders under a false veil of charisma, while using the corporate mechanism to fulfill personal welfare. To meet this challenge Companies Act 2013 has been enacted almost 50 years after the last amendment. It is built on the principles of responsibility of the Board, protection of interests of the Shareholders, self- regulation and openness through disclosures. The 2013 amendment has ensured several effective measures through clearly defining liabilities and responsibilities of the Directors and penal actions on failure to follow the same.

The Duties of the Directors has been ensemble under Section 166 of the 2013 Act and applies to all types of Directors including Independent Directors. The Duties and Responsibilities can be broadly classified into two categories:

• The duties, liabilities and responsibilities which promotes corporate governance through the sincerest efforts of directors in efficient management and swift resolution of critical corporate issues and sincere and mature decision making to avoid unnecessary risks to the corporate entity and its shareholders.
• Keeping the interests of company and its stakeholders ahead of personal interests.

Now let us delve into the Section 166 of the 2013 Act that stipulates the Duties of the Directors as follows:

1. A director must act in accordance with the Articles of Association of the company
2. A director must pursue the best interests of the stake holders of the company, in good faith and to promote the objects of the company.
3. A director shall use independent judgement to exercise his duties with due and reasonable care , skill and diligence.
4. A director should always be aware of conflict of interest situations and should try and avoid such conflicts for the interest of the company.
5. Before approving related party transactions the Director must ensure that adequate deliberations are held and such transactions are in interest of the company.
6. To ensure vigil mechanism of the company and the users are not prejudicially affected on account of such use.
7. Confidentiality of sensitive proprietary information, commercial secrets, technologies, unpublished price to be maintained and should not be disclosed unless approved by the board or required by law.
8. A Director of a Company shall not assign his office and any assignment so made shall be void.
9. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one Lakh Rupees but which may extend to five Lac Rupees.

To ensure independence and equitableness of the Board, the Companies Act 2013 also casts various responsibilities on the Independent Directors. An Independent Director is a member of the Board of Directors, but doesn’t owns any share of the company nor does have any financial relationship with the company other the sitting fees it receives. As per Schedule IV of the Companies Act 2013

1. Protecting and promoting interests of all and specially for Minority Stakeholders
2. Acting as a mediator in case of Conflict of Interest amongst the stakeholders
3. Assistance in forwarding independent and equitable judgement to the Board of Directors
4. Adequate attention towards related party transactions
5. Honest and impartial reporting of any unethical behavior, violation of code of conduct or any suspected fraud in the company.

Penal Provisions

The Companies Act has various penal provisions to ensure proper adherence to the Duties and Responsibilities laid out. In Companies Act 1956, the concept of “Officer in Default” was inclusive of the Board of Directors. Under Section 2 (60) of Companies Act 2013 the idea of “Officer who is in Default” has been stipulated under lapse in duty in the circumstances that the officer is in default  for any provision of the act and is part of such contravention either self or participation without objection shall be liable to penalty or punishment including imprisonment. The Director under scrutiny here can also include Nominee Directors. The matter is very sensitive as even if the Director is not part of such meeting , but has received the information of contravention in any form is liable and can be held party to such act. Hence it is important that the voice of objection of the Director needs to be mandatorily recorded to avoid any such implication on innocent person.

The penalty amounts applicable under Companies Act 2013 are more higher in denomination and very stringent compared to the 1956 amendment. The minimum fine applicable is INR 25,00/-, whereas can be even more than INR 25 Crore. Proven Defaulter on Section 166 (codified duties) can be fined anything between 1-5 lakhs. Some examples of violations which can attract penalties of 1 crore and above are violations for provisions under

• Section 8 : Not for Profit companies,
• Section 42: Subscription of securities on Private Placement
• Section 46: Duplication and issuance of share certificates with intent to defraud
• Section 74 (3): Failure in repayment of deposits within specified time
• Section 195 (2): Insider Trading

According to Section 149 (12) of Companies Act 2013, an Independent Director is similarly liable for such acts which is attributable through Board processes with the Director’s knowledge and with his consent or where the Director has not taken action diligently. Hence it is extremely important for Independent Directors to give consent to any Board proposal only with due caution. Although in case of such act of default is noticed by law the summons are issued irrespective of the category of Director and it lies with the Director to prove its innocence.

Under the Companies Act 2013 certain defaulters can attract imprisonment, mostly non-cognizable. However offences connected to fraud or intent to fraud are cognizable (no warrant required for arrest).  Like suppressing any material information or furnishing false information is cognizable under Section 7 (6), providing misleading statement in the prospectus under Section 34, inducing fraudulently for investment is cognizable under Section 36, transfer or transmission of shares with intent to defraud under Section 56 and offences related to reduction of share capital under section 66.

In Companies Act 2013, under Section 245 , Shareholders or group of minimum 100 Shareholders on behalf of all affected parties can bring “class action suit” against the Company and the Directors for any wrong doing. This will be taken up by National Company Law Tribunal for expedited resolution for the shareholders. In addition to Companies Act 2013, lots of other acts are interrelated and can attract penal action based on multiple conflicts. So , the Director needs to be aware of the interdependencies of different laws and how they can influence the decisions they are going to implement.

Liability of Directors

The Liability of the Directors can be both joint or collective for any and every act prejudicial to the interests of the company. Though the Director and the Company are separate entities, under the following cases the Director may be held liable on behalf of the Company:

• Tax Liability: Unless a Director or any Past Director can prove that the non-recovery or non-payment of Taxes are attributable as gross neglect or breach of duty, then any present or past Director (pertaining to the time period of defaulter) will be liable to pay the shortfall in tax amount and any penalty associated.
• Refunding of share application or excess in share application money
• To pay for qualification shares
• Civil Liability in case of misstatement in Prospectus
• Fraudulent Business Conduct and all associated debts and contracts executed
• Failure in making disclosures as stipulated SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992 by the directors may attract legal proceedings by SEBI

Some criminal liabilities associated with a Directors conduct are as follows:

• Cheques Bounced or dishonored: Under Negotiable Instruments Act 1881, signing of dishonored by a Director may lead to prosecution along with the company
• Offences under Income Tax Act, 1961
• Offences under Labour Laws, specifically in case of Employees Provident Funds and Miscellaneous Provisions Act, 1952 and Factories Act, 1948

Derivative action is defined as an action by one or more shareholders of a company where the cause of action is vested in the company and relief is accordingly sought on its behalf. Though it must be brought in a representative form . A shareholder may bring an action against the company and its Directors in respect of matters which are ultra vires the Memorandum or the Articles of the company and which no majority shareholders can sanction. Directors and the company would also be liable if the conduct of the majority of the shareholders constitutes a “fraud on minority”, i.e., a discriminatory action. To safeguard the interests of the company, any member or members may bring a derivative action.

The Liability of any or all the Directors of a limited company can be unlimited if so specified in the Memorandum or approved through a Special resolution authorized by Articles of association. Any and all provisions provided in Article of Association to indemnify directors against default, negligence, breach of duty or trust is void as per Companies Act. However in case innocence of the director is proven such indemnity can be enforced. Hence this is a very important clause for Directors and one should always be aware of and try to utilize this to the maximum benefit possible. The Companies Act allows a company for taking insurance for protection against loss caused to it by Directors, also the Director can take insurance policy to compensate for loss incurred due to liability to the company for which premium can be paid by company itself.

Conclusion

The analysis above is daring enough for someone to opt for becoming a Director, however it is not that difficult to adhere to if the Directors are fulfilling their duty in the best interest of the stakeholders. The Directors needs to be more prepared now than before to avoid any grave circumstance against them or against the company. They should attend as many board meetings as possible and should be fully aware of the company’s business. They need to come very much prepared and alert before joining a board meeting. Only participation in meeting is no more enough, it also needs to be ensured all questions or expressed dissents are properly recorded in the minutes of the meeting, this is extremely important and is a pertinent evidence avoid the legal hassles at a later date. Proper training for directors on Corporate Governance is necessary and will equip them to work in the best interest of the organization. It needs to be ensured by self that the Directors are not remaining unadvised, however knowledgeable or experienced someone may be it will be prudent practice to legal advice in case of doubts or critical situations. Directors Liability Insurance is very important for Directors now.

The Companies Act 2013 has very well played its role in enacting Corporate Governance in the very core of the companies system. However, more than adherence to purpose its relies on adherence for survival which may fail it someday like all previous amendments. It needs to be more straight forward while assuring shareholders interest. Fear may allow necessary shield to hold the corrupt people for some time however it will not be long that bypass to such rules are already being invented. Corporate Governance needs to be imbibed into the soul of the system through tangible benefits to the followers , only then it will become the goal of the companies and will be followed religiously. The best thing is all stakeholders and shareholders of the companies have faith in the Companies Act and it will keep enlightening the path to universal Corporate Governance.

 

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:  

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References:

1. Companies Act 1956
2. Companies Act 2013
3. http://vle.du.ac.in/mod/book/view.php?id=8158&chapterid=9463
4. http://www.mondaq.com/india/x/154260/Directors+Officers+Executives+Shareholders/Liabilities+Of+Directors+Persons+Who+Can+Bring+Actions+Against
5. Corporate Governance – Directors’ Duties and Liabilities under Companies Act, 2013 by Rabindra Jhunjhunwala & Stuti Galiya
6. http://www.mondaq.com/india/x/329264/Directors+Officers/DUTIES+OF+DIRECTORS+UNDER+THE+NEW+INDIAN
7. https://www.icaew.com/en/technical/business-resources/legal-regulatory-tax-governance/directors-duties/the-icaew-guide-to-the-duties-and-responsibilities-of-directors

In this article, Aparna Ravulavaru, discusses Legality of waiver/release forms in adventure sports.

There are many adventure sports activities, otherwise called as Extreme sports being conducted in the country for the youth in which there are elements of risks to body involved. The expectation is that persons with strong mind and sound body can only undertake to participate in the adventure sports.

Legality of waiver/release forms in adventure sports

Where there are fitness, recreation, and the extreme sports activities, there are injuries. And where there are injuries, there are lawsuits, resulting in financial loss to the providers of these activities. Therefore the activity-providers must take care to manage risk in two ways. First, they should take steps to reduce as much as possible the likelihood of injury. Secondly, they should do everything possible to protect themselves and their business entity from the risks involving financial loss.

In order to safeguard the interests of organizer(s) from any legal actions that may be initiated by the participants arising out of accidents during the adventure sport(s) and to make participants aware, the organizer(s) would require the participants to execute a participation form containing terms & conditions of participation. They shall include terms regarding the assumption of risk, release of liability, indemnifying, participants’ sole responsibility for their own conduct and actions while participating in the adventure sport(s). This is a covenant in which the participant agrees to absolve the provider of any fault or liability for injuries resulting from the ordinary negligence of the provider and its employees or its agents. The agreement relieves the provider from liability for injuries resulting from mistakes, errors, or faults of the provider. This agreement usually goes by the name ‘a waiver’ or ‘a release’ and it is contractual in nature and is governed by the law of contracts. It sometimes goes by the name disclaimer, and exculpatory agreement (with minor differences). It is signed between the service provider and the participant prior to participation. Therefore, a valid release/ waiver must exhibit all the ingredients of a valid contract with the release being the relinquishment of a right or claim, or privilege by a person in whom the right, claim, or privilege exists to the person against whom it might have been demanded or enforced.

Sample Adventures Liability Waiver Form

A waiver can protect the provider from liability for injuries caused by provider’s negligence. A waiver generally does not protect the provider from liability for extreme actions. Here is a model Liability Waiver/Release format.

“IN CONSIDERATION of being permitted to learn or practice Snorkeling and related activities, hereinafter referred to as ‘Activities’ conducted by M/s Hyderabad Fun Equips., having its registered office at No 3B, Srinidhi, T37 A&B, 16th Cross Street, Hyat Nagar, Hyderabad represented by its partner Joseph Nordan, (Hereinafter referred to as the “Conductor”, under the guidance of Joseph Nordan, Avinash Singh Thapa, Manik Teja, Naveen Pandey and Varun Nayyar hereinafter jointly referred to as the “Instructors”, I the undersigned for myself, my representatives, assigns, heirs, and next of kin do hereby:

1. Acknowledge and agree that I am aware of the risks involved in the Activities and have also been apprised by the conductor through his instructors of the inherent risks and dangers associated with Snorkeling in flat and white waters and having understood the risks associated with the sport I have willingly agreed to learn and participate in the sport of Snorkeling;
2. Assure that I am in proper and good health and I am physically fit to learn and also participate in the sport of Snorkeling and represent that I am not suffering from any disease which might remotely either put myself or the other participants to any risk or danger;
3. State that I am not suffering from hydrophobia and I know how to swim and I am comfortable swimming in flat and moving water.
4. Agree to comply with the stated terms and conditions of participation; further agree and warrant that if at any time when I believe and think that any conditions to be unsafe, I will discontinue further participation in the Activities immediately thereon ’
5. Shall not hold the conductor, instructors, employees, other participants, owners, lessors or anyone responsible for any injury that might happen to me in the course of my journey to the venue and my journey backwards;
6. FULLY UNDERSTAND that: (a) Snorkeling and related activities involve risks and dangers of damage to one’s personal property and serious bodily injury including permanent disability, paralysis or death, hereinafter referred to as Risks; (b) these Risks may be caused by my own negligence, lack of skill, by my or other co-participants’ actions or inactions, the condition in which the Activity takes place, or the error in judgment of the Instructors named above; (c) there may be other risks together with economic and social losses known to me or not, readily foreseeable at this time; (d) injuries caused by attacks of wild animals which may occur when close to the river or forest environment and I fully accept and assume all such risks and all responsibility for any losses, costs, and damages that I may incur as a result of my participation in the Activity;
7. HEREBY release, discharge and agree not to sue the conductor, Instructors, employees, any sponsors, advertisers, other participants, and if applicable, owners and lessors of premises on which the Activity takes place, from all liability, claims, demands, losses, injuries, damage to property or other damages caused or alleged to be caused on my account in whole or in part by the bonafide errors of the “Releases” or otherwise, including error in judgment in rescue operations; and I further agree that if, despite this release and waiver of liability and indemnity agreement myself or anyone on my behalf, makes a claim against any of the Releases, I will indemnify, save, and hold harmless each of the Releases from any expenses on litigation, attorney fees; or loss, liability, damage, or cost which any may incur as the result of such claim;

I have read this agreement and I fully understand its terms; I also understand that I have given up substantial rights by signing the agreement and have signed it freely and without any enticement or assurance of any nature and intend it to be a complete and unconditional release of all liability to the largest extent allowed by law and agree that if any portion of this agreement is held to be not valid, the balance shall continue in full force and effect.”

Legal aspects involving Waiver/Release form

Generally speaking, the participants of adventure sport(s) are divided into two age groups, i.e. one as the ‘kids group’ with persons in the age of 8 to15 years and another age group as the ‘adult group’ of persons with the age of 16 years and above. In the adventure sport(s) for ‘kids group’, one parent/guardian will accompany the child on the course in order to monitor them, viz. they are merely there to cheer their children on and ensure that they follow the rules of completing the adventure sport(s) safely;

This part of the article discusses certain broad legal issues involved in the Waiver / Release / Participation Form which is signed by the participants or their parents/guardians, as the case may be, to enter into adventure sports/games.

Legality of Contract by Guardian related to Minor participation

1. When the age of majority has been provided by law to be 18 years, any person less than that age would be a minor in law. [See: Bhim Mandal v. Magaram Corain (AIR 1961 Pat 21)]
2. A minor has no legal competency to enter into a contract or authorize another to do so on his/her behalf. A guardian therefore steps in to supplement the minor’s defective capacity. The guardian can only function within the doctrine of legal necessity or benefit and the validity of the transaction is judged with reference to the scope of power of the guardian to enter into a contract on behalf of the minor. [Vadakattu Suryaprakasham v. Ake Gangaraju (AIR1956AP33)]
3. Under the Hindu Law, the natural guardian has the right to enter into a contract on behalf of the minors and the contract would be binding and enforceable if the contract is for the benefit of the minors concerned. (Manik Chand And Others vs Ramachandra Rao 1981 AIR 519 & Roomal And Ors. vs Siri Nivas AIR 1985 Delhi 153)
4. The provision of sub-section (1) of Section 8 of the Contract Act makes it expressly clear that no personal covenant of the guardian shall be binding on the minor. (Darbara Singh Vs Karminder Singh and Ors. AIR1979P&H215)
5. It is well settled in law that the guardian can in no case bind the minor by a personal covenant. It means that a covenant that creates a personal right or obligation enforceable only between the covenanting parties is not binding on the heirs or assigns of the parties.

Waiver under Law

1. A waiver amounts to the abandonment of a right and is either express or implied. A person who is entitled to the benefit of a statutory provision may waive it and allow the transaction to proceed as though the provision does not exist. {Gangadhar Vs. Election Tribunal, Vindhya Pradesh and others (AIR 1954 VP 44)}
2. Waiver is a voluntary and intentional relinquishment or desertion of a known existing legal right, advantage, benefit, claim or privilege, which except for such waiver the party would have enjoyed. Waiver is express or implied; it is said to be express, when the person entitled to anything expressly and in turn gives it up, in which case it nearly resembles a release; but it is implied, when the person entitled to anything does or consents in something else which is inconsistent with that to which he is entitled so. (Badri Narayan Harnand Roy Vs Jawahar Singh Maniram and Anr. (AIR1961MP29))
3. It is settled in law that as per Section 63 of the ICA, it is open to a promissee to dispense with or remit, wholly or in part, the performance of the promise made to him or instead of it he can accept any satisfaction which he thinks fit. Waiver is the abandonment of a right which normally anybody is at liberty to waive. “A waiver amounts to a release. It signifies nothing more than an intention not to insist upon an extant right.” (Jagad Bandhu Chatterjee vs. Smt. Nilima Rani and Ors. [(1969 3 SCC 445] and Shrinivas Kini v. Ratilal Bhagwandas & Co. [1959 Supp. 2 S.C.R. 217]

Negligence & Right to Sue

1. The principle of “negligence” means failure to observe that degree of care, precaution and vigilance which the circumstances rightfully demand for the protection of the interests of another person, whereby such other person suffers injury. The test of negligence lies in default in exercising the ordinary care and caution which is expected of a prudent man in the circumstances of a given case. [M.N. Rajan and Ors. Vs. Konnali Khalid Haji And Anr [III (2004) ACC 273]
2. While deciding whether the organizers of an air show had taken reasonable care in conducting the air show, the observation of the Court was that the organizers of the air show had no previous experience in arranging such events in the past and no written procedures on operation of aircraft during the show were neither laid down nor circulated to the participants. Based on the above observations, the Court held that the organizers were reckless in conducting the air show and liable for the compensation to the petitioner-participant. [Sudha S. and Others Vs. Union of India and Others ILR2013(3)Kerala245]
3. Keeping in view of the above stated precedents, if a person gives consent that he or she will not take any action against the other party for occurrence or non-occurrence of any specific event(s), such person cannot initiate any action against for occurrence and non-occurrence of such specific event(s), unless If any such specific event(s) is occurred/not occurred due to negligence of the other person (i.e. the organizer) and where such other person (the organizer) owes a duty to take care of the safety of the person who provided his consent, and the person (who provided his consent) shall be entitled to claim the cost/damages/ compensation for the negligence of such other person.

When shall the waiver fail

1. A number of factors can cause a waiver to fail. Some of these are: a) when the service is an essential service (e.g., medical care, electric or water service); b) when one party has superior bargaining power over the other (for example, employer and his employee); c) when the conduct is beyond ordinary negligence (e.g., gross negligence, reckless conduct, intentional acts); d) when the waiver is to relieve one of a statutory duty; e) when the waiver is not clear and unambiguous in its intent; f) when fraud or misrepresentation is involved.
2. The most common reason that waivers fail is because they are poorly or badly written. A key guideline required is that the waiver language must be clear and unambiguous. If the waiver form does not clearly specify the intent of the parties to release the provider from liability for negligence, the court may not enforce the waiver. It is likely that what is considered clear and explicit varies from state to state. For instance, some states require the waiver to affirm that the signer is releasing the provider from the negligence and must include the word “negligence.” Some other states simply say that as long as the intent is clear, the specific language is unimportant and such language can be accepted as “release from any of or all claims.”
3. Courts in many states enforce waivers of liability only for “ordinary negligence.” Courts in these states hold that enforcement of a waiver when the action results in the injury due to gross negligence; reckless conduct, willful or wanton conduct, or an intentional act is against public policy.
4. Waivers are not generally enforced if one of the parties is clearly in a dominant bargaining position. Examples would include a coach requiring a waiver from his players, a teacher from a student, and an employer from an employee. Courts generally hold that recreation, fitness, and adventure sport waivers do not involve a clearly dominant position. Courts generally hold that such activities are optional, the participant can shun to participate, or can participate in another activity, or can go to another provider — here, there is no advantage in bargaining position for the provider.
5. Most courts feel that it is important that the waiver language be obvious to the signatory; the waiver should be on a sheet to itself. This curtails the argument that the signer did not know what he or she was signing. On the other hand if the waiver is included in the membership contract or in the entry form containing other information, the signer is entitled to claim he or she failed to realize that he or she signed away important legal rights. This problem gets compounded when the waiver section of these documents is not highlighted and set off. Using larger print size, a subheading, bold print, or placing it in a box will help in removing hidden ambiguities and failure to do this can result in an unenforceable waiver.
6. Waivers sometimes fail when the inherent risks of the activity are not listed and so Courts sometimes insist on such requirement. This would then work to the advantage of the provider because including the inherent risks in a waiver provides evidence that the signatory was aware of the inherent risks of the activity and assumed those risks. One caution that is suggested is to keep all discussion related to the inherent risks separate so that the signer will not confuse inherent risk with negligence risks.

Conclusion

Based on the legal provisions, precedents and analysis made herein above, a Participation/Waiver/Release Form which is duly signed by the participant (competent person) shall bind such participant with the terms and conditions of the Contractual Form. Organizer(s) should make aware all the participants of the rules, regulations, procedures, safety instructions, methods, and course of action, policy, guiding principles and such other instructions how-so-ever named, in relation to the adventure sport. Organizer(s) has a duty to take care towards the safety of the participants of the adventure sport(s). Whenever there is damage, injury, disability, harm, liability, loss, or expense caused to any participant(s) due to negligence of Organizer(s) in organizing the adventure sport(s), in such cases the concerned participant may initiate civil and / or criminal action including claim for damages / compensation against Provider(s).

In this article, R. Anupam Pillai who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Board meetings and secretarial standards.

Introduction

Companies play an important role in growth and development of the economy. With upcoming increase in industrial growth there has been an exponential growth in number of companies setting up in every nook and corner of the company. At this juncture it is very necessary to understand the role of how companies manage their routine affairs. Thus, meetings play an important role to keep a note of managerial decisions and agendas proposed to attain respective goals set by the companies.

Generally, meetings under the corporate law regime are segregated in two manner, firstly, meetings held by shareholders or general meetings, which may be further classified as annual general meeting and extraordinary general meeting and secondly, meetings held by board of directors or also known as board meetings.  This paper shall give a brief overview about the board meetings, how it functions and what are the statutory prescriptions for holding the same. Further the paper shall explain the necessary implications of board meetings and provisions which need to be adhered under the secretarial standards.

Board Meetings under Companies Act, 2013

1. Board Meetings

Every company constitutes a board of directors who are instrumental in governing the affairs of the company. Articles of association of every company mentions the board meeting to be convened if it is not mentioned therein, then the meeting can be convened as per Table-A of Company Rules. Every company shall hold at least four board meetings every year, where there shall be a gap of 120 days between two meetings. First such board meeting shall be held within 30 days from the date of incorporation of the company. For small companies and one person company with more than one director shall have at least one board meeting for every half of the calendar year with a gap of 90 days between two consecutive board meetings.[1]

2. Notice

Notice for board meeting shall be served either by hand delivery, post or by electronic means, to registered address of the director before at least 7 days from the date of convening such meeting. For meeting at shorter notice, at least one independent director shall be called for the same and in case of his absence, the decision shall be circulated within the directors and at least one independent director shall ratify the same. Every person who shall be responsible to give notice under Section 173 if fails to do so, shall be liable to a penalty of twenty-five thousand rupees.

3. Quorum

The majority for a meeting is 1/3^rd of aggregate number of directors, whichever is higher, unless articles change this necessity. Directors taking an interest through video conferencing are meant majority and furthermore the independent directors after divulgence of their interest. On the off chance that there is no majority, the meeting must be dismissed. Such suspended meeting must be held in the meantime, place and day in the following week. In the event that there is no majority at the dismissed meeting, it will stand drop. Facilitate, majority should be available all through the meeting. A director may disappear of non-attendance from a meeting yet inability to go to a solitary meeting in twelve months, despite allow of time away, is a ground for disqualification.[2]

If the there is any reduction in number of directors such that the quorum is low then the remaining directors may hold the meeting, to either increase the number or directors or else hold a general meeting instead.

In case of absence of quorum the meeting shall stand automatically adjourned for the same day at the same time for next week provided that such next date shall not be national holiday, further which the next date to such national holiday shall be considered for the board meeting.[3]

4.Meeting through Video Conferencing

With the advent of technology, there has been shift in holding meeting at conference halls to that of video conferences at a distant location. This has been made possible by including the role of electronic media as means for holding board meeting. Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 describes the manner in which the meeting through audio video means can be convened.

The Company needs to make arrangements for video conferencing to be conducted. The Chairperson and the company secretary shall take due care to conduct the meeting via video conferencing. All the notices for the meeting shall be sent as per Section 173 of Companies Act, 2013. Further the option of attending meeting via video conferencing or other audio visual means shall be made available to the director.

Further the director shall intimate the chairman about the intention to participate in the board meeting via video conferencing. Attendance shall be given by directors and such attendance shall be referred by roll call by the Chairperson for participation of the director in such meeting. The director shall ensure that he has received all the necessary agenda and relevant material for the said meeting via audio-video means. All the minutes of the meeting and the proceedings shall be duly recorded.

As per Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 there are following matters which shall not be dealt through video conferencing or audio visual means;

1. Approval of board’s report;
2. Approval of the prospectus
3. Approval of the matter relating to amalgamation, merger, demerger etc.
4. Approval of annual financial statements.[4]

5. Agenda

Companies should prepare an annual timetable of Board and related Committee meetings, built around key events in the business cycle (including consideration of and approval of strategic plans, consideration and approval of detailed budgets, approval of annual report and accounts etc). It is important to design an agenda carefully and then closely facilitate to that agenda. The agenda should:

1. List the topics to address in that meeting.
2. Specify how each topic should be addressed in the meeting (for example, to make a decision or undertake further research etc.).
3. Specify the time to address each topic. Adequate time and importance should be assigned to the most important topics. These timings should be adhered to and if further discussion is required on any topic, it should be handled separately. The agenda should take account of the issues and concerns of all Board members.

6. Decision and Action points

The chairman should summarize decisions and action points at the end of each matter–what has been decided, what has to be done, who will do it and when will it be done. The chairman should ensure that everyone present is aware and understands at the meeting. Votes at a board meeting are normally one for each director present, with the chairman having a casting vote in the event of a tie; unless the articles provide for anything different. A director with a personal interest in a matter that is subject to a vote will usually be excluded from voting; unless the articles provide for anything different. These action points should be clearly documented in the minutes of the meeting.

7. Power of Board of Directors exercised during Board meetings

The Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board:-

1. the power to make calls on shares holders in respect of money unpaid on their shares
2. the power to issue debentures
3. the power to borrow moneys otherwise than on debentures
4. the power to invest the funds of the company
5. the power to make loans

However, the Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e), to the extent specified in the resolution and subject to such conditions as may be imposed.

Acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise or the placing of moneys on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be borrowing of moneys or making of loans by a banking company for the purpose of these provisions. These provisions also do not apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State Bank of India or any other banks.

In respect of dealings between a company and its bankers, the exercise by the company of its powers to borrow money otherwise than on debentures shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation of overdrafts, cash credit or other accounts.

Every resolution delegating the power referred to in clause (c) ( the power to borrow money otherwise than on debentures ) shall specify the total amount outstanding at any one time up to which money may be borrowed by the delegate.

Every resolution delegating the power referred to in clause (d) (the power to invest the funds of the company) shall specify the total amount up to which the funds may be invested, and the nature of the investments which may be made, by the delegate.

Every resolution delegating the power referred to in clause (e) (the power to make loans ) shall specify the total amount up to which loans may be made by the delegate, the purposes for which the loans may be made, and the maximum amount of loans which may be made for each such purpose in individual cases. The abovementioned powers shall not affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified above.[5]

Upon understanding the essential provisions of Companies Act, 2013, it is important to know the secretarial standards that define the procedural aspects of board meetings.

Board meetings and secretarial standards

Section 118(10) of Companies Act, 2013 mentions the companies to follow secretarial standards as prescribed by ICSI constituted under Section 3 of Company Secretaries Act, 1980 and approved by Central Government.

Secretarial Standards on Meetings of Board of Directors (SS-1) has been notified vide ICSI Notification No. 1 (SS) of 2015 dated 23.04.2015. SS-1 is applicable for all kinds of companies except One Person Company where there is only one director on the Board. Following are the standards laid down in the SS-1:

1. Convening a meeting

Any director may summon a Board Meeting at any time. Such meeting shall be bearing a serial number and also mention time and date of meeting. Notice to be given for conducting such meeting as required prior to 7 days before date of meeting. Further agenda/notes on agenda shall be given prior 7 days to the meeting unless the AOA prescribes longer duration.

In case of Unpublished Price Sensitive Information (UPSI) there shall be a shorter duration of serving notice than that of mentioned herein above. Quorum to be decided as discussed above wherein the majority for a meeting is 1/3^rd of aggregate number of directors, whichever is higher, unless articles change this necessity.

2. Frequency of Meeting

There shall be at least one board meeting in every quarter with a gap of 120 days between two consecutive board meetings. For independent directors to meet there shall be at least one board meeting in a calendar year.

3. Role of Chairman

The Chairman heads the board and that in case of any company which doesn’t have a Chairman then in that case the directors have to elect a chairman amongst themselves. Further in case of any chairman being interested party in any agenda/matter then he shall appoint someone else for the specific matter.

4. Attendance Register

The Act does not endorse the way of keeping up participation enlist. SS-1 commands upkeep of isolated enroll which ought to contain the serial number, date, put, time of meeting, names and marks of the directors, CS and invitees show. The pages must be serially numbered and bound occasionally relying upon its size, on the off chance that it is in free leaf frame. It ought to be confirmed and safeguarded for no less than eight monetary years by the CS or any approved director, if there is no CS. If there should arise an occurrence of participation of directors through video conferencing, insignificant taking note of their names in the registers expressing that they were available through video conferencing would be tantamount to their signatures.

5. Passing Resolution by Circulation

The Act allows circulation resolutions which ought to be noted at the following board meeting. Be that as it may, if 1/3rd directors require any determination to be passed at a physical meeting then it can’t be passed by circulation. SS-1 has supplemented the arrangements for passing circulation resolutions in passage. The chairman or managing director (“MD”) or whole time director or some other director, other than an independent director ought to choose that a specific resolution will be passed by circulation or not. The draft resolution is to be flouted to all directors by hand, post or email with a note expressing the points of interest, nature of interest of the interested directors, strategy for giving assent and other material facts. On the off chance that the company sends it by post, it should essentially keep up receipt of dispatch. The company can settle any date as the last date for getting directors’ consent or dispute which can’t be past seven days from the date of circulation and independent directors can’t vote. The viable date of circulation would be the last date for giving assent or the date on which assent of two-third directors is given, whichever is prior.

The Act particularly disallows around 13 matters which can’t be passed by round determination and should essentially be passed at a physical meeting. Among others, these incorporate profiting on shares; approving purchase back; issuing securities incorporating debentures in or outside India; acquiring monies and so forth. SS-1 has enlarged this rundown by including seven more items which incorporate considering the consistence endorsement to guarantee consistence with every single pertinent law; supporting compensation of managing director, whole time director, director; concurring endorsement for related gathering exchanges outside the common course of business or not on an arm’s-length manner and so on.

6. Minutes

Companies are required to keep up minute books. SS-1 has included certain timetables for conclusion of minutes. It is presently required to course draft minutes (by hand, post or electronically) to all directors for their remarks within fifteen days from conclusion of the meeting. The directors must convey their remarks within seven days from the date of meeting. Chairman ought to sign the minutes once they are concluded. The CS or any person authorized by Chairman, if there is no CS, must ensure to sign the minutes and circulate it to all directors within fifteen days of signature. The director of a similar meeting or the following meeting needs to give introductory for each page and sign the last page of the minutes. The minutes ought to be entered in the minutes book inside thirty days of the meeting and no change is permitted from there on.

SS-1 has supplemented some more arrangements for support of minutes, for example, (i) meetings, resolutions and minute sheets ought to be serially numbered; (ii) loose leaf minute sheets ought to be bound and kept in the protected guardianship of CS at the registered office or at whatever other place with boards’ approval; (iii) minutes must contain company’s name, serial number, type, day, date, venue and time toward the start and end of the meeting; (iv) director’s name will start things out took after by the names of different directors in sequential request; (v) unambiguous language and reasonable and remedy wrong notings and resolutions passed.

The auditors, directors, CS shall access the minutes as well as extracts of minutes to be given only once it is duly entered in the minutes book. Later on once the certified copies of the resolution is passed at a meeting then such resolution replaces the minutes of the meeting.

Minutes of all the meetings shall be preserved permanently in physical or in electronic form with timestamp and the office copies of all the notices, agenda, notes on agenda and all other papers shall be duly preserved in good condition.

7. Disclosure

Annual report and Annual return of the company shall disclose the number and dates of meetings of board and committees held during the financial year.

Role of SS-1 in Board Meetings

SS-1 applies to board and panel gatherings of all companies independent of their size, sort and posting status unless particularly rejected. Inability to conform to SS-1 will prompt a punishment of INR 25,000 on the organization and each officer-in-default might be subject to a punishment of INR 5,000. In the event that a specific standard or any part thereof ends up plainly conflicting with the Act because of any changes, the arrangements of the Act might win. SS-1 does not try to substitute any arrangements of the Act be that as it may, means to supplement it.

It is clear from the over that the methodology for board meetings has turned out to be more stringent and awkward. There is no adaptability for even firmly held privately owned businesses and unlisted companies with respect to the way of directing the meetings. Then again, despite the fact that, the procedure is made long and arduous, it will ideally prompt better divulgences, more procedural clarity, openness in board procedures and responsibility of the organization employees. It has evacuated numerous ambiguities; for instance, assembling meeting at a shorter notice with assent of larger part directors, arrangements as to the minutes and so forth. This thus will improve corporate administration gauges and speculators’ certainty. Despite many arrangements were deliberately honed by a few organizations, SS-1 has explicitly commanded them for all organizations now.

Conclusion

Board meetings are essential for better governance of the Company. The provisions concerning meetings enabled companies to follow varied and diverse secretarial practices. With introduction of SS-1, a uniform guide for companies to conduct meetings and maintaining corresponding records is put in place. Understanding the facets of board meetings comes with the role of director and CS who shall be pro-active while dealing with the routine affairs of the company.

Most intriguing question arises as to whether non-compliance with SS-1 will nullify board decisions taken in such meetings. It shall be kept in mind that the resolutions passed at such meeting as invalidated while a wide interpretation may vest the company with the power to ratify decisions taken in such a meeting. Since the fundamental objective is to put in place a uniform process, it will be necessary to adhere to the process supplemented by SS-1. Hence it is important to manage all the actors to be on the same footing while managing such routine affairs of the Company.

[1] Section 173Companies Act, 2013

[2] Section 174, Companies Act, 2013

[3] Section 174(3), Companies Act, 2013

[4] Rule 4, Companies (Meetings of Board and its Powers) Rules, 2014

[5] Section 179, Companies  Act, 2013

In this article, Anirban Deep Ghosh who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses TRANSFER PRICING IN INDIA.

Introduction

Transfer pricing (TP) regulations have been at the forefront of corporate headlines over the last few years due to the increasing number of controversies resulting out of tax structuring by multinational companies (MNE). What makes the topic both contentious and interesting is that regulators view the various techniques applied to intercorporate transactions as purportedly planned with the intent of achieving benefits of comparable labor cost and tax advantage at the cost of a countries tax revenues.

An example of the problem

Suppose a UK resident company X purchases goods for 1,000 rupees and sells it to its associated Indian resident company Y for 2,000 rupees, who in turn sells in the market in India for Rs. 4,000. Had X sold it directly in India to an unrelated party, it would have made a profit of Rs. 3,000 on the transaction. However, by routing it through Y, it restricted it to 1,000 rupees, permitting Y to appropriate the remaining balance. The transaction between X and Y is intentionally arranged and not governed by market forces. Hence, the profit of 2,000 rupees is shifted to the country of Y instead of accruing in country X. The goods are transferred on a price (transfer price) which is arbitrary (Rs. 2,000) and not on the market price (Rs. 4,000). The UK tax authorities in particular may raise a question as to why X sold the goods to Y for lower profits ¹. Sometimes, through books of accounts and records, these transactions are so manipulated that there is extra – earning of the parent company at the cost of some national treasuries. Transfer pricing has therefore become a global tax management technique. The organization structure taxes advantage of the business or part of it spread over different countries.

Off-course, there is two sides to an argument as taxpayers sometimes view this as a complicated process due to conflicting regulations across different countries that sometimes result in unreasonable demands by the regulators, that are hard to satisfy. While it is fair to say that no country should be deprived of its share of revenue, it is also important for companies to seek competitive advantage where the bottom line decides the fate of the business and its owners / investors.

In order to bring some balance to the expectations and best practices by various regulators, On June 27, 1995 the first draft of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”) was published. These Guidelines originate from the OECD Report on Transfer Pricing and Multinational Enterprises that was first published in 1979. Since then, the OECD Guidelines have been evolving continuously and are updated to the current form².

But what do these guidelines provide?

The OECD Guidelines provide guidance on the application of the “arm’s length principle” for the valuation, for tax purposes, of cross-border transactions between “associated enterprises”. In a global economy where MNEs play a significant role in the economy of various countries, governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdiction. This is to ensure that the tax base reported by MNEs in their country reflects the economic activity undertaken therein. For taxpayers, it is important to limit the risks of economic double taxation that may result from a dispute between two countries on the determination of the arm’s-length price for their cross-border transactions with associated enterprises.

There are therefore two key objectives for Transfer Pricing regulation are:

1. The transactional transfer and valuation is to be regulated that no country is deprived of its revenues to a reasonable extent
2. The regulation has to allow flexibility enough to further the reasonable interest of the entire organization (MNE) of the parent subsidiary bodies in the aggregative sense.

The Indian Scenario

In India, TP Regulations were first introduced in 2001, as a measure against tax avoidance. The Indian TP Regulations are largely influenced by the said OECD TP Guidelines, but they are modified to specifically meet the needs of the Indian tax regime. Two basic principles applied are:

1. Allocation of reasonable profits

Similar to the OECD Guidelines and TP Regulations of several other countries, Indian TP Regulations prescribe methods to compute ‘Arm’s Length Price’ for an ‘International Transaction’ or a ‘Specified Domestic Transaction’ entered into by a taxpayer with its ‘Associated Enterprise’.

Section 92 of the Income tax Act, 1961 provides for the authority to an assessing officer to determine the profit which may be reasonably be deemed to have been derived from a transaction. This would be applicable where controlled Companies (associated enterprises) arrange the business between them is a way that either no profit is earned from such transaction or profit earned is lower than what would be expected in a transaction between uncontrolled Companies (un related entities).

In order to better understand the terms, the following definitions may be of use:

Arm’s Length Price (ALP)

ALP has been defined to be the price, which is applied or is proposed to be applied in a transaction between persons other than Associated Enterprises, in uncontrolled conditions.

Associated Enterprises

Section 92A of the Income Tax Act, 1961 defines associated enterprise as, an enterprise which:

• Participates directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
• In respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management, control, or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. ⁴

The Regulations further provide specific conditions and circumstances under which two entities are deemed to be Associated Enterprises.

Computation of ALP

The Indian TP Regulations require computation of ALP based on the prescribed TP methods. The Regulations have prescribed the following five methods for determination of ALP —

Price Based Methods

1. Comparable Uncontrolled Price Method (CUP) :
   • Compare the prices charged for property or services for controlled transactions vs. uncontrolled transactions.
   • The basic tenet is to compare close similarity in products, property or services that are involved
   • Timing of the transactions are relevant where prices of the product fluctuate regularly
2. Cost Plus Method (CPM)
   • CPM determines ALP by adding Gross Profit Margin (mark-up) earned in comparable transaction(s) / by comparable companies to the cost incurred by Tested Party under controlled transaction
3. Resale Price Method (RPM)
   • RPM computes purchase price paid to related party based on its resale price to unrelated party
   • RPM is typically useful to determine ALP of purchases made by the distributor (trader) from related party ⁵

Profit Based Methods

4. Profit Split Method (PSM):
   • PSM determines arm’s length profit based on combined profits derived by related parties
5. Transactional Net Margin Method (TNMM).
   • TNMM tests the net margins of the tested party as oppose to gross margins in case of RPM or CPM ⁵

The TP Regulations also provide for use of any other method, which takes into consideration a price charged in a similar transaction between unrelated parties in uncontrolled circumstances.

In cases where there is more than one price determined using the most appropriate from the above methods, ALP shall be taken to be at arithmetic mean of such prices. Where the transfer price differs from ALP, no TP adjustment is made where the arithmetic mean falls within the tolerance range of transfer price. Currently, the tolerance range available for wholesale traders is 1%, while that for other taxpayers is 3% of the value of International Transaction/ Specified Domestic Transaction.

Use of Range Concept

The Central Board of Direct Taxes (CBDT), the regulatory body responsible for tax administration in India, has also notified the concept of ‘arm’s length range’ for computation of ALP for transactions after April 1, 2014. Under this concept, data points lying within the 35th and the 65^th percentile of a data set constructed using comparable data would constitute the arm’s length range. Accordingly, transfer price falling within the arm’s length range would be considered to be at arm’s length.

A minimum of six comparable entities are required for application of the range concept. In cases where the number of comparables in a data set is less than six, the arithmetic mean would continue to be considered as the ALP. Where the arithmetic mean is considered as the ALP, the benefit of a tolerance range continues to be available. ⁴

Use of Multiple Year Data

Originally, the TP Regulations did not provide for using data of years other than the year in which transactions were undertaken (except in certain specific cases). The CBDT has amended the Rules and now permitted use of ‘multiple year data’ while performing a benchmarking analysis. If certain conditions are satisfied, the taxpayer shall be permitted to use comparable data of 2 years preceding the relevant fiscal year along with that of the relevant fiscal “current” year.

Prevention of tax Avoidance

Although Tax avoidance is not unlawful, tax evasion certainly is. Section 93 of the Income Tax Act provides for various methods to prevent avoidance of tax legally, which would otherwise be levible on an taxpayer. Some of the critical provisions are:

1. Income in the hand of the non-resident if enjoyed by the resident on account of any transfer of assets, the income is deemed to have been earned by the resident
2. Income originating due to transfer of asset to the non-resident, if results in the receipt of a capital sum by the resident, the income is deemed to be of the resident company itself.

Assuming that tax is levied on such deemed income in a year, the concern shall not be charged again on that income when it is subsequently realized. Section 93 shall not apply I the resident shows to the satisfaction of the assessing officer that:

1. The avoidance of tax was not the purpose of the transaction
2. The transfer was a bonafide commercial transaction

Reporting needs

Taxpayers in India by law have an obligation to report compliance to the requirements under the act of entering into any international or specified domestic transaction. This is done by obtaining a certificate from an accountant that needs to be furnished before the due date of filing of income tax return.

The accountant is required to certify on two key points:

1. The ALP computed by the tax payer is correct and in line with the regulations; and
2. Appropriate documentation has been maintained by the tax payer, as per the regulatory requirements

This is reported along with specific details of the international / specified domestic transaction, how ALP has been determined, the value of the transaction etc. ⁴

Three tiered Documentation

Documentation is known to be one of the foremost requirements. The OECD has come up with a recommendation under Base Erosion and profit shifting (BEPS) action plan, which prescribes a three-tiered approach to maintenance of documentation. This requires the taxpayer to maintain:

1. A master file
2. A local file
3. A country by country report

The union budget of India for 2016 provided for a similar convergence with the OECD recommendation, and it is therefore now a mandate for Companies in India to align their documentation in line with the OECD recommendations, as listed above.

1. The master file is required to include global information about the multinational corporation group, including information on intangibles and financial activities, to be made available to the local regulations.
2. The local file must contain all relevant information for material intercompany transactions of the group entity, in each separate Country
3. Country-by-country report (CbCR) must contain details on income, earnings, taxes paid and measures of economic activities. ⁶

This is a game-changing move that increased the burden of compliance for MNEs, as they will now need to provide a lot more granular level information to the tax authorities, as compared to the past.

Penalties for Non-Compliance ⁷

The Income Tax Act, 1961 provides for various penalties under Alternate pricing scenarios.

Some of the critical provisions indicating Penalties are as follows, for the following violations

1. Concealment of income or furnishing of inaccurate particulars of Income,
   • Section 271(1)(c) provides for 100%-300% of tax sought to be evaded due to Transfer pricing adjustments
2. Failure to maintain documentation prescribed under section 92D of the Act, report a transaction or maintaining / furnishing incorrect information
   • Section 271AA provides for 2% penalty on the value of international transaction or specified domestic transaction
3. Failure to furnish Accountant’s Report in Form 3CEB
   • Section 271BA provides for Rs. 100,000 as penalty
4. Failure to furnish Master file when called for by the Indian tax authorities
   • Penalty of Rs. 500,000
5. Providing inaccurate information in CbCR
   • Penalty of Rs. 500,000

Transfer pricing disputes

While the initial years of transfer pricing regulations saw a slow rise of TP adjustments being proposed by the tax officers, soon the adjustment volumes increased considerably and reached an epic proportion of Rs. 70,000 crores by FY 2013. After a huge pushback from foreign investors, this number has come down but continues to generate a lot of heat for the taxpayers.

A recent study by Deloitte and TaxSutra for FY 14-15 ³ reveal some interesting statistics around the trends of TP disputes:

• 50% of the cases selected for TP audit went through adjustments by tax officer
• 500+ court rulings with a distribution of:
  • 4 by Supreme Court,
  • 41 by High court,
  • 486 by tribunals
• 45% of the cases relate to IT and ITES sector
• Delhi, Mumbai and Bangalore have the highest number of cases contributing to 69% of all cases in a year.

In this same report ³, it was further revealed that the most common causes of transfer pricing disputes were for the following:

• Selection of appropriate Comparables – 38%
• Computation of Profit Level indicator (PLI) – 13%
• Selection of the most appropriate method – 9%
• Intra group services and commercial expediency – 8%

Resolution by Government

In order to curb this problem, the Indian Government has responded with several measures in the recent years to address the increasing volume of TP litigation. Some of these measures so introduced are as follows ³:

• Issuance of internal guidance notes to Transfer Pricing Officers (TPOs) for consistent application of Tax Department’s views across India;
• Issuance of clarificatory circulars on critical TP matters;
• Introduction of safe-harbor guidelines;
• Introduction of range concept and allowing use of multiple years data;
• Dedicated DRP charge for commissioners;
• Introduction of APA (along with rollback provisions);
• Introduction of risk based approach for manual selection of TP cases instead of compulsory audit of cases selected based on criteria of threshold limit

Advanced Pricing Agreements (APAs)

Finance Act, 2012 introduced Advanced Pricing Agreement (APA) in India. The primary objective of APAs is to overcome the issues due to transfer pricing between related parties and bring tax certainty in international transactions. To avoid uncertainty, principle of arm’s-length price is used to decide what price should be charged by associated enterprises, that is, the price two unrelated parties / non-associated enterprises would charge under similar circumstances. Although there are various methods to determine ALP, yet, there is no scientific way to calculate an exact one, as explained in the earlier sections of this article. Further, the countries involved often take the benefit of a provision in the double taxation avoidance agreements called mutual agreement procedure (MAP). Competent authorities of India and the foreign Country would negotiate how much of total profit would be taxable in India and how much in the foreign country, to avoid double taxation.

However, as mutual agreement procedure (MAP) is a post-assessment process and may take considerable time, some countries have advance pricing agreement/arrangement scheme (APA scheme). Under this scheme, the two competent authorities from different countries will negotiate in advance to determine the ALP of the future international transaction. This helps in bringing tax certainty, reduce litigation expenses and avoid risk of double taxation.

APAs may be bilateral or unilateral. When the competent authorities of two countries negotiate in advance to determine the ALP of the future international transaction, it is called bilateral APA. However, if taxpayers intends to have tax certainty in just of the two countries, they would go for unilateral APA and it is generally done when there is no DTAA/DTAC between the two countries or that the taxpayer. ¹

An APA can be executed for a maximum period of 5 consecutive years from the year in which such APA has been entered into. Recently, the APA rules were amended to provide for roll back of the APA to 4 years prior to the year in which the same was entered into.  Therefore an APA can provide certainty to a taxpayer for up to 14 years (i.e., 4 years rollback + 5 years under APA + 5 years renewal) which takes the focus away from worries of aggressive taxation, to being able to think and concentrate on the business. This also enhances the overall environment of Foreign direct investments (FDI) favorably for India and avoids long audits and prohibitive litigation cost. However, taxpayers should evaluate their APA strategy in detail based on the nature of the international transaction, risk of TP adjustment, FAR analysis, corporate action plans, etc. Additionally, taxpayers should thoroughly understand the entire specified procedural requirements involved in the process as any lapse on their part may put the entire APA programme under jeopardy. ⁴

As at October 2016, more than 700 APA applications have been filed by taxpayers in India. Of this, 44 APAs were concluded since the beginning of April 2016 and taking the total concluded APAs to 108 since inception. ³

Conclusion

With the speed at which globalization is affecting the business world and the way countries are competing with one another for foreign direct investments, it may be safe to conclude that the world of transfer pricing is only going to get more interesting by the day. It is quite apparent that the view of the regulators are also evolving, as there is a clear demonstration of intent to simplify the processes. However, only time will tell if they are able to keep pace with the dynamic changes in the business models and structures being formed with the advent of technology, free market economy and aggressive investment vehicles coming into play.

Reference

1. http://www.gktoday.in/advancepricingagreements/
2. http://www.transferpricing.wiki/general-transfer-pricing-information/oecd-transfer-pricing-guidelines/
3. http://www.tp.taxsutra.com/tptrendsreport2015.pdf
4. https://www.bdo.global/en-gb/insights/bdo-india/bdo-india-transfer-pricing-prism-2017
5. http://www.kcmehta.com/pdf/transfer_pricing_methods.pdf
6. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-new-transfer-pricing-landscape-practical-guide-to-beps-changes-secure.pdf
7. http://tp.taxsutra.com/experts/column?sid=23

 

In this article, Akshita Rishi who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses enforceability issues in Option Contract.

Introduction

Amongst most popular exit mechanisms in India and foreign countries, put option and call option are very important and commonly found in different types of transaction structures like private equity, angel investors, joint venture, venture capital. [1]

Let us try to understand option contract in layman’s language. There are two people Mr X and Mr Y. Mr X has right to sell predetermined number of securities to Mr Y at a certain agreed price on a future date which means that a put option is enjoyed by Mr X against Mr Y. In the same way, a call option enjoyed by Mr X against Mr Y means Mr X can compel Mr Y to sell predetermined number of securities to Mr X at a certain agreed price on a future date.

However, many disagreements and conflicts are there while enforcing these options under various circumstances which we will discuss in detail later in this article.

Let us first understand the basics of option contracts, types, it’s working, various investment strategies and much more

Option Trading Mechanism

An option is a contract between two parties in which the maker of the option (option writer) agrees to buy or sell a specified number of shares at later date for an agreed price (Strike Price) to the holder of the option (Option Buyer) on a due date and time, when and if the latter so desires, in consideration of a sum of money (Premium). The premium is the price which is required to be paid for purchase of right to buy or sell. [2]

It is important to note that the terms of contract allow only the holder to cancel the contract and not the maker of the contract.

Types Of Options

There are two types of options:

1. Call option

• It means that the investor has a right to buy
• An investor will opt for call option if he is expecting that the market price will be higher than the strike price so that he can earn a difference which will be his profit.

2. Put option

• The investor has a right to sell
• The investor selects put option if he is expecting the market price to be lower than the strike price in the coming days. The lower is the market price than the strike price, the higher will be the profit for the investor.

NOTE: An investor has the option to simultaneously exercise both, the call option and the put option if he is uncertain about the future market conditions. [6]

Let us understand this with an example

Call Option

• Mr X purchased are lot of say Reliance May 3000 call and pays a premium amount of ₹ 250. At this point of time the share price was ₹ 2900. Now, in this situation if the spot exceeds ₹3250 i.e. 3000 call plus 250 premium , then he will exercise the option but if the spot price remains under ₹3250 on expiry then he will let the option expire i.e. he will not exercise the option.

Put option

• In this case Mr X feels that the price per share will decrease, in say Reliance Ltd. So, he decides to buy company’s 1070 put having spot price of ₹1040 per share. He also pays a premium of ₹30 per share on 1000 shares i.e. total amounting to ₹30,000. Now, in this case if the spot falls below the spot price i.e. Rs1040, then Mr X will exercise the option but if the spot price remains above Rs1040 then he will not exercise the option and will let it expire.

Working of Option

 It is the right of the option buyers and not the obligation to buy (call) or sell (put) the stock or we can say future contract at a predetermined price before the 3^rd Friday of their respective expiration month. [3]

Investment Strategies

1. Straddle

It is a combination of one put option and one call option. In this case, the investor is insured with respect to any movement on either side and has 50% minimum sure shot opportunity to gain from either upmove or downmove.

2. Strap

Combinations of one put and two calls is known as strap. Any investor opts for strap only if he is confident that the scrip price will change and there are more chances that it will go up and not down.

3. Strip

It is a combination of 2 put options and are call option. In this case, the investor is confident that the scrip price is more likely to go down than go up.

Pre-requisites for option trading

Proper infrastructure and writer of option are the most important pre-requisites at the initial stage of option trading. Proper infrastructure implies that the institutional infrastructure must be developed. This will require the writers of the options, who are also the speculators willing to take risks, for great and higher rewards. They generally meet commitments and have sufficiently large resource base if the buyer of the option wants to exercise his right.

For successful functioning of options trading, the following are required: –

1. Terms of contract

The terms of contract should be standardised as this will decrease the cost of transactions and will make the development of the secondary market in options easier.

2. Selection of underlying assets

The selection of all the underlying assets should be careful. These selected securities must be registered and listed on all major stock exchange.

3. Engagement of market makers

Majority of market- makers who possess sound financial base, are required to give trading in options on a regular basis.

4. Setting up of clearing house

To collect fees from each buyer and to create guarantee fund for the insurance of future performance of all the contracts will require a competent, well organised and well planned clearing house. In case of default by a future party, the clearing house is liable to pay all the cost to carry out the contract.

5. Establishment of a central market

Proper establishment of a central market necessarily want regulation, vigilance and price circulation.

Enforceability of call option and put options

These options are commonly found in commercial practical situations.

For Example: – As we know Alternative Investment funds (AIF) are created with a definite life cycle in which they are required to return the principal amount as well as all the return amount collected on their investment to the investors at the end of the tenure of AIF. Due to this reason, during formation of AIF, the exit mechanism is well taken care off in the shareholders agreement entered with portfolio companies and promoters. These mechanisms include, Initial Public Offerings, tag along and drag along rights, pervasive call and put options. These options are specifically directed against the promoters.

Regulatory Framework

The following take care of the rules and regulations with respect to the option trading in India. [1]

1. The Securities and Exchange Board of India(SEBI)
2. The Reserve Bank of India (RBI)
3. The Ministry of Finance
4. The Ministry of Corporate Affairs

The SEBI is responsible for following

• Regulation and growth of securities and securities market
• Protecting the interests of the investors.

Reserve Bank of India (RBI)

• It is India’s Central bank which is responsible for all monetary policies which includes foreign exchange regulations.

 

Option Contracts: Enforceability Issues

Past scenario regarding the regulatory framework

Securities and Contracts Regulations Act, 1956 (SCRA) originally Prohibited option trading in securities (which defined to include puts and calls) calling these transactions as undesirable in securities. [4] This ban on options was discarded by government of India by 1995, but SEBI took a different way. According to SEBI, option trading is illegal because: –

• These options do not capacitate as an authenticate derivative contract.

According to SEBI, derivative contracts cannot be traded through private contracts, but can only be traded on recognised stock exchanges.

• The second reason was that, a privately contracted option which permits the contracted parties to execute a right to put or call at a specific future date does not qualify as a valid ‘spot delivery’ contract.

At first, government of India vide its notifications dated 27 June,1961 exempted specified contracts for pre-emption in Articles of Association of limited company, in promotion or in the collaboration agreements. But Government under Section 16 of the SCRA vide notification dated 27 June 1967 prohibited all types of contracts apart from spot delivery contracts in any security under SCRA. An amendment was made by SCRA in the year 2000 that any derivate contract, if settled outside the stock exchange, would be termed as invalid.

NOTE

Spot delivery contracts are those contracts in which the parties entered transfers money and share on the same day of contract. Therefore, according to SEBI, privately contracted options breach the SCRA provisions and also suggested that other than spot delivery, all other options are species of ‘deliveries’ which are not recognised under SCRA.

Relevant Case

Cairin- Vedanta deal and Diageo and United Spirits merger

In both cases, there was a lot of debate on the decision of SEBI to prohibit the use of call or put options in their contract. This problem arose due to a relevant section of the securities contracts (Regulation) Act, 1956 which gives an exclusive right to government, RBI or SEBI to ban certain contracts in securities. As discussed above, SEBI banned trading through options other than spot delivery and this notification thus had a significant impact on these contracts as well.

Important Points

• An informal guidance was released in May 2011, which was issued to Vulcan Engineers Limited. In this case, SEBI clearly specified that no option contract would meet the basis or benchmark of a spot delivery contract under section 2 of the SCRA, and under Section 18A of SCRA. It will never be taken into consideration as a valid derivative contract.
• SEBI further issued a notification on October 3, 2013 authorising validity to contracts which provide pre-emptive rights, tag along and drag along rights and call and put options.

While SEBI focuses on the regulation of securities market, RBI’s paradigm is of FDI i.e. Foreign Direct Investment into India.

The Initial concern of RBI is regarding the use of options in foreign investment by foreign investors which may lead to volatility. The reason behind this is outflow of foreign exchange. RBI has clearly stated the various instruments to be classified as FDI and debt with respect to various separate and rigorous rules. Fully, compulsorily and mandatorily convertible instruments into equity shares are covered under foreign direct investment and the other instruments are considered as debt as issued vide circular dated Jan 09,2014. This rule has been included by the Ministry of Commerce in a well-established way in its annual FDI policy.

However, the above-mentioned circular stated that any guarantee should not be provided to the investor at the time of withdrawal or exit but subject to certain conditions such as: –

• Lock in period of minimum one year from the date of contract or agreement.
• Buy-back of securities at the amount which was determined while exercising such option or at an existing price etc.

Relevant Cases

1. Vodafone International Holdings Vs Union of India and Anr.

In this case, Supreme Court perceived that all the provisions included in investment agreements regarding pre-emptions or call/ put options etc. may administer and regulate the rights between the parties. These rights should be purely contractual and should be owned by the parties. It was also stated that if mentioned in the Article of Association, then the shares can be freely transferred in any manner.

2. Nishkalp Investments and Trading Co. ltd vs Hinduja TMT Ltd.

In this case, Bombay High Court observed that a contingent contract is within the scope of SCRA and is also lawfully applicable under it. The problem with respect to this case was related to buy back agreement. In this case, there was repurchase of certain number of shares and these shares were unlisted on the stock exchanges by a certain agreed date.

Bombay high court concluded the contingent contract as invalid because the setup of buy back of shares as mentioned above, were not covered under the provisions of SCRA.

Option Contracts are different from forward contracts

Let us understand this with the help of a case: –

Stock exchange limited Vs SEBI

This case dealt with enforcement of option contracts in which Bombay High Court clearly stated that forward contracts are different from option contract and these forward contracts are prohibited under SCRA.

1. Takeaways for arbitration

   According to various news reports, there were some major highlights in the case of “The Indian Government and Aluminium Refiner Sterlite”. Sterlite was to exercise option to call the Indian Government’s stake of 49% in Bharat Aluminium Company. The arbitral tribunal found that the above-mentioned options of Sterlite are opposed to the public policy of India. The reason behind this was violation of free transferability of shares of a public limited company under Company Law Act. Arbitral award though is not public but it is important to understand that this provision of transferability of shares is a matter of controversy under Indian law which gives rise to a serious question as to whether the shareholders of public company can bind themselves to relinquish their shareholder’s rights in a stipulated way. Thus, the arbitral awards which enforce options can always be challenged in our Indian courts on the basis of violation of Indian public policy. However, under certain cases arbitrators can grant interim relief in cases of call and put options. In exit related disputes, exit routes are seldom restricted only to options. The freezing of assets of the promoter company or of the investee company is one such example.

Current scenario regarding the regulatory framework

On 3^rd October 2013, SEBI issued a notification in which it validated option contracts but with a condition that the title and the ownership of the underlying securities should be perpetually held for a minimum period of one year by the party selling it, from the date of entering in the contract. The contract will be settled by the actual delivery of those underlying securities. Earlier SEBI had a clear stance on the non-enforceability of option contracts but in this notification, it clearly mentioned that “nothing contained in this notification shall affect or validate any contract which has been entered into prior to the date of this notification”.

After the above notification, on 30^th December 2013, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Seventeenth Amendment) Regulations, 2013 (“Seventeenth Amendment”) notified on the pricing of optionality clauses. Soon after on 9^th January 2014 RBI issued a circular which dealt with the pricing of optionality clauses. This seventh amendment if read with the circular meant that “shares or convertible debentures containing an optionality clause but without any option/right to exit at an assured price shall be reckoned as eligible instruments to be issued to a person resident outside India by an Indian company.” Thus, we can say that the above-mentioned amendment and circular is not applicable to “call option” which can be exercised by an Indian promoter or a put option which is bestowed with the Indian promoter but all this is not at all free from ambiguity.

This seventh amendment also mentions the procedure and conditions of pricing optionality clauses. In case of equity shares of unlimited company, the price of the options shall not exceed the amount concluded on the basis of Return on Equity derived on the latest audited balance sheet. Now, in case of dentures or preference shares options can be exercised on a price which is calculated as per any internationally accepted pricing methodology at the time of exit which is duly certified by a qualified chartered accountant or a merchant banker registered with SEBI. A principle which guides regarding convertibles state that there is no guaranteed exit price for non-investors at the time of making such agreement or investment and will exit at the current price prevailing at that time, however, lock in period should be taken care off.

The above stated circular and amendment also imposed a lock in period of one year from the date of allotment on such instruments. However, still a point of conflict persists as to whether this circular and amendment is applicable to foreign investors covered under Schedule 6 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (“FEMA 20”) is permitted to “acquire by purchase or otherwise or sell shares / convertible debentures/units or any other investment held in the IVCU or VCFs or Schemes/ Funds set up by the VCFs at a price that is mutually acceptable to the buyer and the seller / issuer”.

Conclusion

After understanding above mentioned cases, various provisions and amendments we can conclude that in case of pure private companies, the call option and put options will be enforceable as per RBI’s pricing guidelines reason being that the Securities Contract (Regulation) Act is not applicable to pure private companies and arbitral tribunals will confirm the same. In case of listed companies and public unlimited companies, various difficulties may arise in the process of enforcement of exchange options and the investors will explore various other exit routes. [5]

Also, we must note that SEBI (Alternative Investment Funds) Regulation, 2012 is silent on all permissible exit mode of portfolio companies which govern Alternative Investment Funds. If SEBI would have cleared the distinction between call and put option and derivative contracts and also would not have prohibited AIFs looking for exit options, our lot of confusion would have been solved.

However, after the introduction of amendments by RBI and notifications by SEBI, various investors have re-negotiated their option contracts so as to act in accordance with the regulatory framework. This is relevant and important because the existing put options are not protected by regulatory changes.

References

[1] Introduction, enforceability of call option, put option and regulatory framework –
Singapore International Arbitration Centre – http://www.siac.org.sg/2013-09-18-01-57-20/2013-09-22-00-27-02/articles/197-enforceability-of-put-and-call-options-in-india-in-the-current-regulatory-environment

[2] Option trading contracts, types of contract, investment strategies, Pre-requisites for option trading – Capital Market and Securities law book by Sangeet Kedia

[3] Google Search – https://www.google.co.in/?gfe_rd=cr&ei=-zbeWMmLKujs8AefxaDYCw&gws_rd=ssl#q=working+of+options+&*

[4] Economic times official website –

http://economictimes.indiatimes.com/markets/stocks/news/vedanta-cairn-merger-offer-sweetened-for-shareholders-nod/articleshow/53338804.cms ,

Samvad partners – http://www.samvadpartners.com/wp-content/uploads/2014/04/Option-Contracts-in-India_April-2014.pdf  ,

Ara law advocates and solicitors – http://www.mondaq.com/india/x/488800/Securities/Option+Contracts+Enforceability+Issues ,

Singapore International Arbitration Centre – http://www.siac.org.sg/2013-09-18-01-57-20/2013-09-22-00-27-02/articles/197-enforceability-of-put-and-call-options-in-india-in-the-current-regulatory-environment

[5] Samvad partners – http://www.samvadpartners.com/wp-content/uploads/2014/04/Option-Contracts-in-India_April-2014.pdf

Singapore International Arbitration Centre – http://www.siac.org.sg/2013-09-18-01-57-20/2013-09-22-00-27-02/articles/197-enforceability-of-put-and-call-options-in-india-in-the-current-regulatory-environment

[6] kotak securities official website – www.Kotaksecurities.com

In this article, Apoorav Arya put forth the legal steps one can take if they are served a notice of non-payment of a disputed bill.

Non-payment of disputed bill

Despite not making much telephone calls, is your telephone bill sky high? Were you out of town and still, electricity bill is touching the sky? Having issues with your credit card bills? Are, the service providers overcharging you? What to do when you are overcharged for your telephone, electricity, water or any other bill. Here is a detailed solution to such problem of non-payment of dipsuted bill.

Matters relating non-payment of disputed bill will be covered under the provisions of Consumer Protection Act, as a bill amounts to either purchasing of some goods or availing of services. Therefore, one can approach the consumer forum in such cases. A detailed procedure of proceeding in Consumer forum followed with case study on nonpayment of disputed telephone and electricity bill.

Approaching the Consumer Court on non-payment of disputed bill

Step1 Approaching the right court

• Electricity’ being one of the services covered under the CPA, the consumer has power to file complaint against any kind of deficiency in service on the part of Electricity Board.
• There are two ways of deciding which court to appear.
• First is the place where the service was obtained or the territorial jurisdiction. Deciding on the basis of area where the services was availed is not the sole criteria for deciding the court.
• On the basis of cost of service is the second criteria. If the cost of service availed is upto 20 lakhs, one will have to approach District consumer forum, or, if the price of the good bought is above 20 lakh but below 1 crore then State consumer forum, and, if the price of the good bought is above one crore the National consumer forum.
• The two criteria have to be kept along together for deciding which court one has to appear.

Step 2: Drafting of Consumer complaint.

For this purpose one should consult a lawyer as it would be more effective rather than drafting on your own. Here are few key points which must be in your draft complaint:

Introduction: Introducing yourself in 2-3 lines.

Transaction: Detail of service availed, electricity bill number, other such details.

Defect: In this complain about the deficiency in the services, in the above cases, deficiency of services arising out of excessive bill.

Rectification: In this complainant should rectify what steps were taken by him to redress the matter before approaching the court. Example could be, approaching the electricity  board several time, informing them about the defects over phone and letters, etc.

Jurisdiction: Here is where a lawyer will come handy. If complaint is made to court with no jurisdiction over the matter, complaint will outrightly get rejected.

Relief claimed: It is here all the relief which one wants as a compensation should be mentioned. An example could be, settlement on disputed electric bill. Along with this, one should always demand for litigation expenses incurred while fighting the matter in the court as a relief.

Step3 Payment of court fee

If one is approaching district forum, the court fee is INR 100 (upto 1 lakh rupees), 1-5 lakh INR 200, 5-10 lakh INR 400, 10-20 lakh INR 500. When matter concerned with is above 20 lakh then matter will be with state commission, for matters between 20-50 lakh INR 2000, 50 lakh- 1 crore INR 4000 and matters above 1 crore is dealt by National consumer forum and the court fee in such cases is INR 5000.

Step4 Arguing the case 

One can argue the case on their own or may hire a lawyer. If one is arguing on their own, here are few points to be kept in mind-

Dress code → Person arguing must not necessarily be in lawyer’s attire. Decent formal dressing will suffice the situation.

Copies of complaint → three set of copies if the matter is in District forum or State forum and four set of copies if the matter is in National forum.

What will be the complainant called in the court →  A complainant will be referred to as Consumer Complaint (C.C.) and

After result → Free certified copy will be given to the litigants.

Within how many days should a complaint be filed in the consumer forum?

The complaint must be filed within two years from the date of receipt services availed. If the limitation time has exceeded then an additional time might be granted on providing with sufficient reason which will be subject to the understanding of the court.

What to do If you get a notice of non- payment of disputed telephone bill?

Regional offices of Telecom Regulatory Authority, are filled with such complaints. The dimensions of the problem can be calculated from the fact that the problem of excess billing even had its echo in the Parliament of the country. On 31st March, 1987 there was a complaint in the Parliament that even the Members of Parliament were subject to excess billing. It was alleged that when they were out of station their phone bills in Delhi went up.

The problem of excess billing, its causes and the remedy available to a subscriber who is a victim of such excess billing.

In general excess billing complaints arise from telephone having STD facility. They arise because of-

• The subscriber, his family, friends and employees having used STD and not being conscious of the extent to which they used it, or
• A fault in the metering circuit, or some transient fault in the system, and
• Possible deliberate mischief by other subscribers in league with staff of telephone department.

What to do when the telephone bill is unreasonably high

1. First things first, file a complaint at the telephone office.
2. Immediately on receipt of complaint regarding excess charge for local calls where the calls are found to exceed the highest one obtaining during the six preceding quarters by more than 100% at STD stations, the officer concerned is required to defer enforcement of recovery of the amount of the disputed bill till investigation of the complaint is completed, and a decision as to whether some rebate for the excess charge is justified or not, is taken.

Cancellation of disputed bill.(SPLIT BILL) There is also provision for cancellation of the disputed bill and preparation of two bills–

1. One to include charges which are correctly payable by the subscriber including local calls, local call charge being computed to be equal to the average number of calls metered during the six bi-monthly periods (one year) immediately preceding the disputed periods plus 10% over the average.
2. Another bill may be prepared for the balance and marked as “part local call bill (disputed)”. Though the subscriber is required to pay the first bill within 7 days, the officers have been directed not to insist on the payment of the second bill till final decision is taken on the complaint lodged by a subscriber after making proper investigation on the lines indicated in the Manual and in the circular.

Then onus of proving that bills are not exorbitantly high is on the telephone service provider. The meter can record exorbitantly high number of calls even without the subscriber making any such calls due to technical fault.

When can a subscriber be called a defaulter? Whether telephone connection can be disconnected for alleged non-payment of a bill?

The power of disconnection of telephone is a very drastic power and it should not be exercised lightly. It should not be forgotten that telephone service is one of the most essential services today and disconnection thereof may put a citizen to extreme hardship and inconvenience and cause irreparable harm and injury. It may have far-reaching ramifications on his day to day living as well as on his means of livelihood.

1. Before exercising the drastic power of disconnection of telephone the authority concerned must ensure that the bill and / or notice is served on a subscriber and the period of 15 days has expired and the subscriber has failed to make the payment within such period.
2. On being satisfied, then as per the rules, it has to give a notice to the subscriber about the alleged nonpayment and the proposed disconnection thereby giving opportunity to put forward his case, if any, against proposed action.
3. Defaulter may be informed by any of the two modes of notices. One is telephonic notice and other is notice by registered post.

What to do when findings of the Telecom service provider still sounds unreasonable to you?

In such cases, one can approach the court. The Telecom Disputes Settlement and Appellate Tribunal (TDSAT), adjudicate disputes and dispose of appeals with a view to protect the interests of service providers and consumers of the telecom sector and to promote and ensure orderly growth of the telecom sector.

What to do If you get a notice of non-payment of disputed electricity bill?

In these following cases, electricity service provider might disconnect an electric connection-

1. Where any person neglects to pay any charge for electricity or any sum other related charge for electricity due from him to generating company the generating company may, after giving not less than fifteen clear days’ notice in writing, to such person and without prejudice to his rights to recover such charge or other sum by suit, cut off the supply of electricity and for that purpose cut or disconnect any electric supply line.
2. Where it comes to notice of electricity service provider that, theft of electricity is being carried anywhere, they have the authority to disconnect such connections which are established by means of theft. Further, the service provider might lodge a complaint in writing relating to the commission of such offence in police station having jurisdiction within twenty four hour from the time of such disconnection.

There are situations where electricity bills are exhorbitantly high. Situations where homes are locked for months but still bill is excessively high is often.

The problem of excess billing, its causes and the remedy available to a subscriber who is a victim of such excess billing.

Before taking any legal step, assure these things

• Improper or old wiring
• Old appliances, especially with heating elements like Water Geysers, Irons, Electric Stoves etc.
• Theft of Electricity
• Incorrect reading by the BEST
• Faulty meter or Meter display broken
• Mistake by BEST in processing the bill
• Past outstanding bills accumulating
• Revised tariff

These are prime reason for outstanding high electric bill.

Legal steps to be taken when someone gets a notice over a disputed electric bill

Step1 Before starting anything, one must go and lodge a formal complaint with the local electricity board office about the issue. Chances are, most probably things will get resolved at this stage only. When matter over the disputed bill is not resolved and the notice stays, approaching court is the right decision.

Step2 Applying for injunction (stay) on the notice. Filing for injunction before the court to pass a decree of temporary injunction in favour of the plaintiff and against the defendant from disconnecting the electricity of the plaintiff at the plaintiff‟s.

Step3 Under matters related with electricity services, courts jurisdiction is barred. No one can go directly to court. (There are certain exception where one may file for an injunction as done in step2)

Step4 An assessing officer of State electricity board looks into these matters. Aggrieved person is entitled to file objections against the provisional assessment before the assessing officer, who will, after affording a reasonable opportunity of hearing to such person, pass a final order of assessment within thirty days from the date of service of such order of provisional assessment, of the electricity charges payable by such person.

Step5 After hearing the party if the assessing officer still thinks the party is guilty of such unauthorised use, then an extra tariff for those 30 days will be charged.

Step6 Aggrieved after the final order can appeal to State Commission.

In this article, Pallavi Tiwari of Dr. Ram Manohar Lohiya National Law University discusses controversies around the legality of Aadhaar Card.

The UIDAI issues Unique Identification Card to provide a unique identity to an individual and recording his information in the form of iris and fingerprints patterns which is the biometric system, and there has been an increasing use of the same over the years.

The Supreme Court’s observation that Aadhaar is not mandatory on August 11, 2015, in the same judgment it was made necessary to use Aadhaar for LPG and PDS systems. Making Aadhaar so important explicitly raises concerns over the effectiveness of these old identification norms.  Here we shall be discussing two major concerns pertaining to Aadhaar controversy,

• First being the involvement of biometric system and its repercussions causing an infringement of privacy of an individual and,
• Secondly the presenting of Aadhaar card obligatory in the filing of tax returns which highly being supported by the government.

The biometric system of Aadhaar Card

The biometric data system of Aadhaar Card Scheme involves a collection of fingerprints with iris scans, which is claimed by UIDAI to be safe and secure. Although this being a misleading concept as disparities also evolve here, where the biometric information is involved in some unlawful use, leading to infringement of privacy.

• There are many problems associated with the biometric system as Section 6 of the Aadhaar Act says that the Aadhaar Number holders need to update their biometric data once in a while following the rules and regulations mentioned in the Act.
• Also, in section 31(2), there is provision for alteration of the biometric data if it is lost or changed. Thus, these sections in toto deny the claims of Aadhaar scheme that it is a once done, totally done scheme. The other issue is when should a person go for an update or when can he realise that shape of his fingers and iris is changed due to some bodily changes.
• Also, there is no proper method defined to make these changes as section 19 is totally vague in this aspect.

These were some problems associated with the biometric system of Aadhaar Scheme the other issues are about the violation of the right to privacy and what happens when someone steals your identity, which shall be discussed further.

What if someone steals your identity from UIDAIs server

• Hacking is quite prevalent so hackers could have access to such biometric information of citizens and can also alter the image. Small and minimal changes can be done to fool and the UIDAI’s specially designed technology cannot save it.
• The faking of biometrics is very easy as fingerprints can be obtained in any manner by extracting it from anywhere the person has touched and then preparing a dead replica of the finger and once used in an unauthorised manner they cannot be used again.

Aadhaar scheme creates a question mark on the laws of privacy of citizens in India.

A recent issue regarding the illegal use of biometric involved three firms Axis Bank, Suvidha Infoserve in Mumbai, and eMudhra in Bengaluru, where a FIR has been lodged by UIDAI to bring their illegal activities under the light. The problem here was that the authority found that there was an exactly similar biometric match for many transactions in these three firms, which only can be accomplished if there is some unauthorised use, giving a hint of illegal transactions. This means a single person registering as different people all together at these firms.

Sections 4, 7 and 8 ask for authentication of Aadhaar to be done through biometric processes which depend on a pattern matching method, does not result in an exact matching system. The biometric information recording depends on various factors as the method of recording the fingerprint or image of the eye, the devices used for these purposes and their credibility and also the physical status of a person, thereby being uncertain and very probable to be wrong. Due to these uncertainty issues, there are many authentication failure issues and thus places where it has been made mandatory for welfare schemes the people suffer a loss due to great delays caused.

Also, you cannot access your biometric information in the Aadhaar database as section 28(5) prohibits it and thus no citizen can verify it. All the power now lies with the enrolment authorities and they can make any changes as they like or collect the biometric information under section 2, 3 and 5 of the Act, keeping the people in the misconception of their details to be true.

Infringement of Right to privacy

Discussing how can it lead to a violation of privacy is by providing such information to many governmental and non-governmental organisations which then receive the biometric information of an individual which can further be exploited for any purpose.

In 2010, sharing of biometric information was allowed for purposes of national security. Thus, in 2011 came up a committee which looked into the principles of violation of Right to Privacy and its connection with Aadhaar.

The sharing of biometric information of a person leads to an infringement of privacy as the biometric data contains information relating to a person’s’ iris and fingers and any such sharing would result in the sharing of DNA information of a person. Such personal information can always be used against a person by other organisations to authenticate things in the name of people who do not possess those physical features. Every person has a right over his body and distribution of the information of his eyes and fingers can lead to duplication and fatal results for the individual also causing an infringement of Right to Privacy.

This was brought up by Justice Puttaswamy in a case, where he along with three other petitions claimed that the very collection of such biometric data is violative of the “right to privacy” coming under Article 21 of the Constitution. But the Attorney General, in this case claimed that there has been no infringement of any right as the right to privacy is not a part of Fundamental Rights and thus not a guaranteed right. The final order was that the UOI has to make wide publicity that Aadhaar is not mandatory and also use of Aadhaar can only be done for welfare schemes like PDS and LPG and no distribution of the same for illegal purposes shall be appreciated.

There is a great threat to identity because sim card operators are using Aadhaar as their basis and a single touch of finger approves the identification.

Such finger imitations can also be produced if someone takes information about a person’s finger and its details and produces a dummy finger to authenticate any sim service and thereby leading to fraud. Thus, this is taking away the right of a person to keep the information of his body parts private from other people.

Although sections 29 and 30 along with section 8 pose some restrictions on the publication of the biometric information and it should not be shared with anyone. If the information about a human’s body part recorded in biometrics of Aadhaar authentication is leaked the Aadhaar Act only authorises the UIDAI authority under Section 28 and 54 of the Act to take legal actions against such misuse. This concept of infringement of privacy of an individual for some official purposes is a great threat to democracy and the common man is a victim to this.

But the Modi government overlooks all these flaws and favours the Aadhaar Policy indiscriminately and now the issue has come up as the government mandates Aadhaar for tax return filings.

The spree to make Aadhaar Mandatory for tax returns

There is an ongoing news that the BJP’s new motive is to make from 1st July 2017, Aadhaar Mandatory for tax returns, in violation of the Supreme Court Judgment declaring it to be non-mandatory. This has been deemed to be achieved by amending the Finance Bill 2017. If this is not followed the government can cancel the allotment of PAN.

What is the exact logic behind merging the already existing identity source in the form of PAN with Aadhaar and making extraordinary identification backgrounds? All this amounts to waste PAN has been already existing since a long time for income returns and tax filings and adding Aadhar creates redundancy. The supposed reason behind this is linking of Aadhaar with bank accounts gives the government that to sneak into the person’s bank accounts and thus to analyse his income and tax filing as now everything revolves around digital transactions and it is important for the government to keep a track.

It was not considered as an infringement of Right to Privacy as it was argued by the government that it is not a fundamental right and thus no violation. Also, the government’s stand is to create and join the databases for maintenance of all the records like the bank, health, education and much more to ease the information gaining activities pursued by public officials.

Suggested Readings.

Recent Judgement Related To The Legal Validity Of Aadhaar Card

Here’s Why You Should Have a Pan Card