In this blog post, Mithun Pillai, a Management Trainee at a Textile Company in Mumbai and a student pursuing his  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the role of the Chief Justice in the appointment of an Arbitrator.

The statute that governs arbitration in India is the ‘Arbitration and Conciliation Act of 1996 amended in 2015 to expedite the process. The aim of arbitration is to take dispute resolution outside the bureaucracy of our courts with time and cost savings being added benefits. However, court intervention cannot be fully done as at certain stages of arbitration the conflicting parties may need the laws to help them out which poorly constructed arbitration agreements cannot provide.

Many such intervention start from the Chief Justice (of high courts; of Supreme Court if one of the parties is foreign). The function of the Chief Justice would be administrative as well as judicial.

As mentioned above, most interventions are caused due to improper preparation of arbitration agreement or even lack of one. According to the arbitrator appointment provision of the agreement there shall be only one arbitrator jointly appointed by both parties and multiple arbitrators.  Most commonly, two would be separately appointed by each party and the third would be jointly appointed by the two arbitrators. As it often happens sometimes, arbitrators may not get appointed within the timeframe of 30 days (as required legally). In this case, on receiving a formal request from any party, the chief justice can himself/herself preside or as is common, appoint another arbitrator who is usually a retired judge. This is the administrative function of the Chief Justice. The format of request form is notified in Notification No. F22/I/95/SCA/Genl. The scheme officially titled ‘Appointment of Arbitrators by the Chief Justice of India, 1996’ has series of steps to be followed by the Chief Justice in exercise of the powers conferred on him under sub-section(10) of Section 11 of the 1996 Arbitration ordinance. A simplified version of the steps is as follows:

• Along with the arbitration agreement, the names and addresses of the parties and arbitrators, the qualification of arbitrators, a general note on the dispute and the justice/reward expected, and other relevant document as requested by the Chief Justice have to be submitted.
• The Chief Justice would decide to preside over the issue or designate it to someone else.
• If the decision is to designate someone, it is forwarded in writing to that person who later may refer/ask advice regarding the scheme. The interpretation of the Chief Justice would be final.
• The appointment made or solution advised by Chief Justice would be forwarded in writing to all parties involved.

Generally speaking, the decision making can be classified into three broad classes:

• Preliminary issues which the Chief Justice or his designate should decide. These include deciding their own jurisdiction e.g. whether the conflicting parties have approached the right high court (in case of domestic/national level dispute); whether an arbitration agreement was even drafted; to verify/confirm the details according to the agreement.
• Preliminary issues which are not compulsory i.e. optional and can very well be decided by the arbitration tribunal e.g. whether the claims made by the parties hold water (are alive or dead).
• Lastly, the issues which should be compulsorily done by the tribunal, i.e. the actual arbitration.

The Chief Justice should take care to ensure minimum intervention.

The Chief Justice, under section 9 of the Arbitration Act have been conferred with the power to pass orders for interim relief while dealing with the above mentioned scheme of appointment of arbitration. These orders are passed to maintain the integrity of the subject matter of the dispute while the appointment process is underway so as to not favor or negatively affect the prospects of the any party.
 

In this blog post, Mohammad Farooq, a fourth-year law student at Institute of Law, Nirma University, provides an overview of the Insolvency and Bankruptcy Code, 2015.

Introduction

The Indian Parliament passed The Insolvency and Bankruptcy Code, 2015 on May 12, 2016 which may prove to be the long awaited and much needed panacea for the banks ridden with Non-Performing Assets (NPAs). For quite some time now, Indian PSU Banks have been suffering with the malaise of rising NPAs and suffering from the inordinate delays in recovering their debts due to the multiplicity of laws governing the bankruptcy laws.

An asset becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ (NPA) was defined as credit in respect of which interest and/ or installment of principal has remained ‘past due’ for a specific period of time[2]. They are basically loans and advances on which the debtor has defaulted in repayment of loan.

Bankruptcy refers to legal process of liquidation of business entity which has not been able to repay its debts out of its current assets[3]. Insolvency on the other hand refers to a situation where individuals or companies are unable to repay their outstanding debt[4].

The Bankruptcy code was put forward by the Bankruptcy Law Reforms Committee (BLRC) in November 2015 headed by Dr. T K Viswanathan. The commission in its report identified that creditors in India are often powerless while trying to repossess their debts from the debtors.[5]The recovery rate in India is one of the lowest in the world i.e. just about 20% of the debt[6]. Under such circumstances, the lenders will not be willing to lend. As a result, most of the concentration of the lending is with only the huge corporate firms where probability of default is far lesser.

NON-PERFORMING ASSETS IN INDIA

Commercial banks are those institutions whose motive is to manage the business essentially on a profit basis. On one hand, banks accept surplus money from the people who are not using it. On the other hand, they lend to those who need it for productive purpose.[7]

The basic idea behind handing advances by banks is to generate income for the bank either through interest or installments. Hence, all advances are termed as “assets”. However, in certain instances a loan turns bad if the interest or a portion of it stays unpaid even after the due date — and transforms into a non-performing asset, or NPA, in the event that it stays unpaid for a period of more than 90 days.[8]

A standard asset is a performing asset. It regularly produces income for the bank. NPA are classified under the following heads:

1. Sub-Standard Assets : All those assets that is loans and advances which are considered as non-performing for a period of more than 90 days but less than 12 months are called as Sub-Standard assets. For less than 90 days, they are included in Special Mention Account.
2. Doubtful Assets: All those assets in the Sub-Standard Assets category which exceed the period of 12 months are called as Doubtful Assets.
3. Loss Assets: All those assets which cannot be recovered are called as Loss Assets.[9]

Further, because of the prevailing gloomy scenario in the public sector banks (PSBs), this sector, in the absence of debt secured by collateral, has become starved of credit. As of now, the banking system is under a lot of stress with 29 of the state owned banks writing off 1.14 lakh crore INR between 2013 and 2015[10]. According to the Financial Stability Report issued by RBI in December, 2015[11], the stressed assets of Public Sector Banks (PSBs) stood at 14.1% for September, 2015. The government estimated that around Rs. 1,80,000  crore is required over next four years up to FY 2018-19 to clean up the public banking system[12]. Needless to say, if there is a lack of cash flow or credit in the economy, it ultimately affects the overall condition of the economy. Robust credit financing is reflection of a healthy and thriving economy.

Financial Stability Report

As on March 31, 2016, the gross non-performing advances (GNPAs or bad loans) of banks stood at 7.6% of the loans that they have given out. It was at 5.1% as on September 30, 2016 and on March 31, 2015 it was at 4.6%.[13]

It shows that the banks especially the public sector banks have started recognizing bad loans. Till this time, they were merely postponing the recognition of bad loans as bad loans by passing them as restructured loans. Fundamentally a restructured loan means that the borrower has been given a relaxation in the original terms such as a moratorium during which he does not have to repay the principal amount. In some cases, the loans’ tenure has been increased.[14]

By restructuring of loans, banks have helped a large number of borrowers who were no longer in a position to repay the loans they had taken. Restructuring was just an activity to delay the recognition of bad loans. The condition of many borrowers was so severe that they could not repay their loans even after restructuring. A glance at the stressed advances ratio of the banks gives us the whole picture. The stressed advances figure is arrived at by adding the total bad loans to the restructured assets. This ratio has kept increasing at a fast pace as banks continue to restructure their loans time and again. A stressed asset ratio of 11.5% (March 31, 2016) was basically reached by adding bad loans of 7.6% to3.9% of restructured assets. The restructured assets had stood at 6.2% whereas there were 5.1% of bad loans, giving a stressed assets ratio of 11.3% (September 2015). This shows that banks are now being compelled to recognize bad loans as what they are that is bad loans and not disguise them as restructured assets like they were doing previously.[15]

This is a huge achievement for the RBI and the government. The crux of the problem lied with the public sector banks which handed out loans to various crony capitalists, which today they not in a condition to pay back.[16] The right step now would be to go after such borrowers and try and recover as much of the loans as they can. By ensuring more and more recovery of loans, the burden on government to provide capital to the banks to help them stand up on their feet would drastically reduce.

The Financial Stability Report suggests that “under the baseline scenario, the gross non-performing assets ratio may rise to 8.5 per cent by March 2017 from 7.6 per cent in March 2016. If the macro scenarios deteriorate in the future, the gross non-performing assets ratio may further increase to 9.3 per cent.”[17] In short, the worst is yet to come for the banks.

Inter alia, the financial stability report mentions the inability of large borrowers to repay the loans that they have taken on from banks. A large borrower is a borrower who has taken on a loan of Rs 5 crore or more as per the definition given by RBI. It is the large borrowers who are the major creators of NPAs and not the retail borrowers. Retail borrowers are the individual borrowers who take car loan, house loan, etc.

Asset quality in major sectors[18]

The above chart shows that the safest sector to lend is the retail sector which has only 1.8% of gross non-performing assets ratio. On the other hand, the riskiest is the industry sector with almost 12% of GNPA. This was the reason why 46% of lending carried out by banks between April 2015 and April 2016, has been retail lending. Between April 2014 and April 2015, 32.4% was retail lending of all the lending that took place.[19]

Further the stressed advance ratio of industry is almost 20% which means that approximately 1 out of 5 loans is a bad one. 58% of all the loans have been given to large borrowers but they are responsible for 86.4% of the bad loans. This shows the burden put by large borrowers on the banks. While recovering money from small borrowers is still possible and happens quite often, it is the big borrowers who escape the clutches of the law.[20]

It has now become imperative that banks go after the big fish that is the large borrowers as the major chunk of bad loans is due to their failure to repay. The need of the hour is to take strict measures and not give anyone any special treatment. Only when this happens can the recovery of NPAs be truly on track.

To make matters worse, earlier the resolution of insolvency process took several years because the courts took a lot of time in interpreting the laws like The Recovery of Debt Due to Banks and Financial Institutions Act, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBI Act), besides other provisions such as corporate debt restructuring and strategic debt restructuring. Furthermore, because of the inefficient implementation and court delays, under each of these laws, there was huge backlog of cases[21]. In fact, due to the inconsistencies in between these acts, courts had to involve themselves in settling the interpretation of law which further led to more delays[22].

Former governor of RBI, Dr. Raghuram Rajan in his speech on Saving Credit in Dr. Verghese Kurien Memorial Lecture cornered the reasons for delay in delivering judgment. According to him, it is the ignorance of the High Court, which continues to take up the matter before himself under article 226.[23] The aforesaid observation was made by the Supreme Court in the matter of Union of India vs. DRT Bar Association[24]wherein the court lamented –

“It is the matter of serious concern that despite the pronouncements of this Court, the High Courts continue to ignore the availability of statutory remedies under the RDDBFI Act and SARFAESI Act and exercise jurisdiction under Article 226 for passing orders which have serious adverse impacts on the right of banks and other financial institutions to recover their dues.”

It is not only the case lamenting on the role of DRT but the judgment of Standard Chartered Bank vs. Dharminder Bhohi[25] a crystal clear picture on the failure of DRT has been drawn. The court observed that the failure of timely disposal have the effect potentially of creating corrosion in the economic spine of the country. The other drawback witnessed is the Delaying Tactics adopted by numerous borrowers. The prime example of this is the debt racked up by Vijay Mallaya promoted Kingfisher Airlines. A consortium of banks, led by India’s largest lender State Bank of India, is fighting 20 cases across courts, including DRT.[26]The contention of delaying tactics have been taken in many cases that are – B. Shanmugam v. Union of India[27], Bishwanath Jhunjhunwala v. Bank of Maharashtra[28]. In Avtar Singh vs. Debt Recovery Tribunal[29] lamenting on the delaying tactics adopted by the borrower by asking remedy from high courts, the apex court observed –

“the high court should not exercise its discretion under Article 226/227 of the Constitution of India where an alternative remedy is available to the petitioner under the Act.”

The BLRC after having studied and identified these problems in their report stated out the objectives of the Committee which is to resolve insolvency with[30]:

1. Lesser time involved
2. Lesser loss in recovery
3. Higher levels of debt financing across instruments.

It is evident from the above that the basic purpose of this law is to strengthen the creditor’s rights in India. If the defaults are cleared to the creditors, then there is a complete balance in power between the equity holders and the debt holders.

This code seeks to do away with the inordinate delays, fast track the insolvency resolution process and facilitate the regulatory framework of bankruptcy laws. The major provisions of this code are[31]:-

1. The establishment of a Board as the Insolvency Regulator to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and informational utilities.
2. Insolvency Adjudicating Authority such as the Debt Recovery Tribunal and the National Company Law Tribunal.
3. Insolvency Professional specialized in the insolvency resolution process who would be taking over the management of the company and assist in the liquidation process.
4. A time period of 180 days, extendable by 90 days to deal with resolving cases of Insolvency and Bankruptcy with provisions for force majeure and 1 time extension of 90 days as well as a fast track option with 90 day limit and single extension of 45 days. If insolvency is not resolved in this time period, the company will go in for liquidation of its assets and the creditors will be repaid from the sale proceeds.
5. Information Utilities in order to collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies.
6. Bankruptcy and Insolvency Processes for Individuals and Unlimited Liability Partnerships
7. Transition Provision: Under this, the Central Government shall exercise all the powers of the Regulator till the time the Regulator is established. This transition provision will enable quick starting of the process on the ground without waiting for the proposed institutional structure to develop[32].
8. Transfer of proceedings:Any proceeding pending before the Appellate Authority for Industrial and Financial Reconstruction or the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies Act, 1985, immediately before the commencement of this law shall stand abated. However, a company in respect of which such proceeding stands abated may make a reference to Adjudicating Authority within 180 days from the commencement of this law.
9. Cross Border Insolvency : To redress the above issue of multi jurisdiction the Code tries to resolve by stipulating in the Code itself that there should be agreement entering by the Central Government with other countries for the compliance of the Code and further the Adjudicating Authority directs the Courts of other countries and aid with the information in relation with the assets of debtor outside India[33].

In addition to the above there are provisions to tackle cross-border insolvency so that repayment of debt can be considered with assets outside India if Indian property insufficient. Also, the creditors committee may choose to either revive a company or liquidate its assets for repayment of the debtor’s outstanding dues. In case of liquidation, the assets will be distributed based on an order of priority[34].

The code covers the scope of Corporate Insolvency and its Resolution Process, the Liquidation Process for both a corporate debtor and the individual debtor as well. Chapter IV of the code deals with the Adjudicatory Authority for the Corporate Persons wherein the corporate debtors would have to approach the National Company Law Tribunal for the matters relating to insolvency resolution and liquidation process.

The Bankruptcy Board will regulate insolvency professional agencies (IPAs). The primary function of the IPAs will be to regulate insolvency professionals (IPs) by conducting examinations to enroll them, and enforcing a code of conduct. The IPs will be responsible for carrying out the resolution process and managing the company during insolvency resolution[35].

However, certain issues still need ironing out for this code to be effective. The rationale behind multiple IPAs overseeing the functioning of their member IPs, instead of a single regulator is unclear. It may be argued that such a structure of regulation may lead to a conflict of interest for an IPA[36]. Further, the code provides for the creation of an Insolvency and Bankruptcy Fund[37] but it is unclear as to how this fund will be used. Also, since the DRT is already overloaded with thousands of pending cases, clarity is required about this additional burden will be carried under this code.

To conclude, The Insolvency and Bankruptcy Code 2015 is a welcome initiative for creditors, investors and debtors alike. The streamlining of procedures, simplification of the insolvency process and fast-tracking of recovery are hallmarks of the code which, if passed, will have a palpably positive affect on India’s lending climate[38]. The ease of doing business is one of the most important necessities in India and that India currently holds 130th position only. The new law also empowers the creditors to decide whether the said defaulter is declared insolvent or not. But such power is also controlled and governed by the courts in India. Ease of business and good governance are the two most business imperatives in the current situation of the state and this code goes a long way into achieving that.

[1] The author is 4^rd year student at Institute of Law, Nirma University.

[2]RBI Circular No. RBI/2010-11/45, accessed at https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5761, last seen on 14.05.2016

[3]Sonal Srivastava, An Overview of the Insolvency and Bankruptcy Code, 2015, accessed athttp://blog.ipleaders.in/overview-insolvency-bankruptcy-code-2015/, last seen on 13.05.2016.

[4]Sudipto Dey, The Insolvency and Bankruptcy Code 2015: A Primer, accessed at http://www.business-standard.com/article/economy-policy/the-bill-provides-for-a-time-bound-process-to-resolve-insolvency-116050700028_1.html, last seen on 14.05.2016.

[5]The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, 8 (2012), available at http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf, last seen on 14.05.2016

[6] Ibid

[7] Muneeb Jamal: Functions Of Banks: Primary And Secondary, available at http://www.business-science-articles.com/articles/business/76-functions-of-banks, last seen at 7/8/16 18:25.

[8] Sandeep Singh: Meaning: Non-performing assets, available athttp://indianexpress.com/article/explained/meaning-non-performing-assets/, last seen at 7/8/16 18:32.

[9]Definition of ‘Non Performing Assets’, available at http://economictimes.indiatimes.com/definition/non-performing-assets, last seen at 7/8/16 20:25.

[10] Deborah Manzoori, India’s Insolvency and Bankruptcy Code 2015, accessed athttp://www.natlawreview.com/article/india-s-insolvency-and-bankruptcy-code-2015, last seen on 13.05.2016

[11] RBI Press Release dated 23.10.2015, accessed at https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=35812, last seen on 13.05.2016.

[12]Abhirup Ghosh, Shoiab Qureshi, Bagful of reforms to bring out the economy from the clutches of bulging NPAs, https://www.taxmann.com/Budget-2016-17/budget/t206/bagful-of-reforms-to-bring-out-the-economy-from-the-clutches-of-bulging-npas.aspx, last seen on 13.05.2016.

[13]Financial Stability Report – June 2016 available at https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=852, last seen at at 7/8/16 23:07.

[14] RBI stiffens loan restructuring norms for banks, available at http://www.moneycontrol.com/news/business/rbi-stiffens-loan-restructuring-norms-for-banks_886207.html?utm_source=ref_article, last seen at 7/8/16

[15]Vivek Kaul, The Clean Up of Public Sector Banks is On, but the Basic Problem Still Remains, available at https://www.equitymaster.com/diary/detail.asp?date=06/30/2016&story=2&title=The-Clean-Up-of-Public-Sector-Banks-is-On-but-the-Basic-Problem-Still-Remains&utm_source=archive-page&utm_medium=website&utm_campaign=vivek-kauls-diary&utm_content=story, last seen at 7/8/16.

[16] Vivek Kaul, The one assurance that Narendra Modi needs to give bankers, available at https://www.equitymaster.com/dailyreckoning/detail.asp?date=01/03/2015&story=2&title=The-one-assurance-that-Narendra-Modi-needs-to-give-bankers&utm_source=VKD&utm_medium=website&utm_campaign=e-letter&utm_content=VKD, last seen at 7/8/16.

[17] Supra Note 4

[18] Vivek Kaul, The Recovery of Bad Loans from Large Borrowers Will Be a Big Challenge for Modi Govt, available at https://www.equitymaster.com/diary/detail.asp?date=07/01/2016&story=2&title=The-Recovery-of-Bad-Loans-from-Large-Borrowers-Will-Be-a-Big-Challenge-for-Modi-Govt&utm_source=archive-page&utm_medium=website&utm_campaign=vivek-kauls-diary&utm_content=story, last seen at 7/8/16.

[19]Ibid

[20] Ibid

[21]Prerna R Saraf, Analysis of the National Bankruptcy Law, available at http://blog.ipleaders.in/analysis-national-bankruptcy-law/, last seen on 13.05.206

[22] Ibid

[23] Speech by Dr. Raghuram G. Rajan, Governor, Reserve Bank of India, at the Third Dr. Verghese Kurien Memorial Lecture at IRMA on 25^th November, 2014.

[24]Unknown.

[25] (2013) 15 SCC 341.

[26]What Prevents India’s Debt Recovery Tribunals From actually recovering bad debts?, BUSINESS STANDARD, 14/6/2015,www.business-standard.com/article/finance/what-ails-the-debt-recovery-tribunals-116031400407_1.html.

[27] 2007 SCC Online Mad 995.

[28]2015 SCC Online Bom 7960.

[29] 2012 SCC Online P&H 21877.

[30]Vatsal Khullar, Report Summary Bankruptcy Law Reforms Committee, , accessed at http://www.prsindia.org/administrator/uploads/general/1448943398_Report%20Summary%20-%20BLRC.pdf, last seen on 13.05.2016

[31] Press Information Bureau, Summary of the Recommendations of the Bankruptcy Law Reforms Commission, 4^th November, 2015,accessed athttp://pib.nic.in/newsite/PrintRelease.aspx?relid=130208, last seen on 13.05.2016

[32] India Juris, The Insolvency and Bankruptcy Bill, 2015, accessed at http://www.indiajuris.com/newsletter/pdf/bankruptcy-bill-2015.pdf, last seen on 13.05.2016

[33] Supra Note 1.

[34] Clause 52, 52, The Insolvency and Bankruptcy Code, 2016

[35]The Insolvency and Bankruptcy Code, 2016: Issues for Consideration, PRS Legislative Research, accessed at http://www.prsindia.org/uploads/media/Bankruptcy/IBC%202016%20-%20Issues%20for%20consideration.pdf, last seen on 13.05.2016

[36] Clause 204 & 205, The Insolvency and Bankruptcy Code, 2016

[37] Clause 224, The Insolvency and Bankruptcy Code, 2016

[38]Jyoti Singh, Vishnu Shriram, India: Insolvency and Bankruptcy code :Well Worth the Wait, accessed athttp://www.mondaq.com/india/x/462788/Insolvency+Bankruptcy/Insolvency+And+Bankruptcy+Code+2015+Well+Worth+The+Wait, last seen 15.05.2016

In this blog post, Abhishek Tripathi, a NUJS graduate and an ex-AMSS Advocate describes the need for the regulation of the Internet and the impact of Internet Governance.

The 57^th Meeting of the Internet Corporation for Assigned Names and Numbers (ICANN) in Hyderabad is significant for India. It conveys our stand for a multi-stakeholder approach to the global internet governance. It also puts the spotlight on the need to have state protection of critically important facets, such as national security.

Internet is the backbone of ambitious government schemes and citizen outreach in India today. The National Optic Fibre Network (NOFN) aims to provide high speed broadband internet to India’s villages. Digital India, e-governance and other information and communication technology enabled platforms imply the significance of accessible internet in our democracy as well as the importance of access to internet governance architecture for India.

Two important components of internet governance emerge from the foregoing discussion. One is, at a macro-level, concerning internet as a whole. The second is at a micro-level, concerning the way internet impacts an individual nation and society. The former will work best when multiple stake-holders, including governments, private parties, and research and education institutions engage freely. The latter level calls for some introspection. The question to ask is whether regulating the internet in India in some way is necessary? Let us explore this tantalizing proposition.

In 2014, the Global Commission on Internet Governance was established to champion the cause of freedom of expression and free flow of ideas and thoughts over the internet. It has been working towards internet governance based on a multi-stakeholder model that does not harp only the hard law and regulatory enforcements. But is rather a non-hierarchical set up that encourages voluntary compliance with codes of conduct, industry best practices and technical criteria. Somewhere, the idea also resonates with the theme of net neutrality, first discussed by Professor Tim Wu, of the Columbia University, School of Law. In simplistic terms, net neutrality means that there should be no discrimination towards information flowing on the internet.

In 2014, the World Summit on the Internet Society Plus 10 was held in Sharm-al-Sheikh, Egypt with an aim to discuss the road beyond 2015, concerning internet governance globally. Internationally, there has been a consistent movement towards a deeper engagement with the issue of regulating internet, and an acceptable model of internet governance. Social media, e-commerce, increased access to the internet and increasing foray of technology into everyday life are primary factors that have necessitated a coherent vision for the internet.

But, alongside the positives, internet has also seen the rise of hitherto unthought-of of challenges. Cybercrime has been on top of the minds of most governments; more-so, as it is being increasingly deployed by some nations as part of their expanding contours of defense strategy.

The threat of religious fanatics fanning propaganda using the internet is real, and ever growing. The role that some popular websites play in expanding the ideological reach of international terrorist groups is well documented. It is not lost on anyone that internet also poses a threat to our social fabric and internal security. Communal and anti-secular views can be easily fanned using the internet. It is relevant to note that proactive government policy has ensured a steadily rising telecommunication and internet penetration. Bridging the cost divide by cell phone manufacturers implies that today, the internet reaches out to many sections of the population who may be vulnerable and gullible targets. Hence, the danger of a misrepresented propaganda leading to communal riots is indeed tangible.

The recent narrative on online information and the internet have recreated the theme of George Orwell’s disturbing, yet celebrated novel, ‘1984’, on a real scale and across geographies. Be it powerful nations ‘snooping’ on strategic information or governments imposing harsh content restrictions, the mind of the unsuspecting citizen is filled with the fear that “Big Brother is watching you”! In the case of Shreya Singhal vs Union of India the Supreme Court  has, inter-alia, struck down the provisions of section 66A, Information Technology Act, 2000. The reason being that this law was worded vaguely, resulting in arbitrary execution in many instances. By implication, this means regulation per-se, is not a taboo. It has to be reasonable and in compliance with the constitutional ethos and expectations of India.

Democracy means a country that is fair to all, and to ensure this, it could come down with a heavy hand on sections that incite enmity and hatred on others. If held otherwise, how would democracy be any different from anarchy? Judged from this perspective, some form of regulation may be necessary, and to a degree justified. The constitutional touchstone of ‘reasonable restrictions’ under Article 19 must also imply that should the government create a reasonable and fair means of regulating content, such a means would be justifiable.

Equipping the police and security forces appropriately is important. The scope of discretion of executing agencies has to be well defined for it to be well implemented. At every level, there must be stricter scrutiny, and an in-built mechanism to ensure transparency and accountability. At the same time, instances such as propaganda, fanning communal hatred, cyber crime and cyber terrorism must be dealt with an iron fist. Internet governance must ensure India has a say in the way the internet operates globally, to ensure  that our national priorities are not compromised. It should also be a means to manage the consequences of internet usage on the psyche of India’s society.

[1] Abhishek Tripathy graduated in law from the National University of Juridical Sciences, Kolkata. His interests lie in the interface of law, policy and governance. Views expressed are entirely personal.

   In this blog post, Rishabh Rai, a CS Executive an a 2^nd Year Law Student from National Law University Odisha provides a detailed analysis on the Taxation Law (Second Ammendment) Bill.

Introduction

Amidst the ruckus and sloganeering by the opposition parties, the government has passed the Taxation Law (Second Amendment) bill. Arun Jaitley, The Union Finance Minister has stated that the new bill aims to plug the loopholes existing in the current legislation and to ensure that the tax evaders will not be able to legalize their black money. The finance minister in his speech stated that the amendments in Income tax law has been made considering the fact that few people are trying to convert their black money into white even after the step of demonetization. He further stated that the aim of the bill is to ensure that the undisclosed money should come into mainstream which can be used for the welfare of poor people.

In a press release on 1^st December 2016 by Department of Revenue, Central Board of Direct Taxes it has been stated that The Taxation Law (Second Amendment) bill seeks to increase the existing tax rate under section 115 BBE of the act. The tax rate has enhanced the existing rate from 30 per cent to 60 per cent plus a surcharge of 25 per cent and cess. It has been clarified that the amendment section only provides rate of tax to be charged in case of undisclosed and unexplained investment in assets as it has been rumored that the amendment also includes provision for charging tax on jewelry. The chargeability of these tax is governed by Section 69, 69Aand 69B of the Income Tax act, 1961. However these Sections have not been amended by the Government. As per Section 68 of the act it has been stated that any sum which has been found credited in the books of the taxpayer, for which no explanation has been offered about the nature and source will be charged as the income of that year. Further if the taxpayer has informed about the nature and source of such credit and the Assessing Officer is not satisfied with the explanation, the income will be charged as per Income Tax act, 1961. Apart from the provision mentioned in section 68, there are also other sections which discuss similar provision. Section 69 discusses unexplained Investment, section 69A deals undisclosed money and Section 69B discussed amount of investment which has not been disclosed by the taxpayer. Similarly Section 69C and 69D deals with the undisclosed expenditure and amount borrowed or repaid on hundi.

What’s New?

The Taxation Law (Second Amendment) bill has proposed to amend the Section 115BBE of the Income Tax Act, 1961. The amendment seeks to provide for a punitive tax, penalty and surcharge on unexplained credit, cash investment, and any other assets. That taxpayer who has decided to disclose their stashed money will have to pay 30 per cent on their undisclosed income under Pradhan Mantri Garib Kalyan Yojna, 2016. Further a 10 per cent penalty will be charged on the undisclosed income and a surcharge of 33% in the name of PMGK cess. (33 per cent of 30 per cent undisclosed income). In addition to the above penalty there is a provision that that taxpayer who has decided to disclose their income will have to deposit 25 per cent of their undisclosed income with the Reserve Bank of India.  The money from this scheme will be used for empowerment of poor sections of society by providing housing, infrastructure, toilets, education, projects in irrigation, etc.

On the other hand, if those taxpayers who have not disclosed these cash and are caught, the provision has been made to charge 60 per cent of the undisclosed income. In addition to this a surcharge of 25 per cent will be levied on the 60 per cent of the undisclosed income, i.e. a total of 75 per cent of the amount will be levied.  Furthermore, the assessing officer can also charge an additional 10 per cent in addition to 75 per cent which has already been levied. Thus as per current provision, there is a 50 per cent penalty when the taxpayer has disclosed their income. In case of undisclosed income there is a penalty of 75 per cent and an addition of 10 per cent at the discretion of assessing officer. Thus, in cases of undisclosed income there is a penalty of 85 per cent.

In cases of disclosed income, in addition to 50 percent of the penalty, a quarter of penalty will be deposited under interest free scheme for four years in Pradhan Mantri Garib Kalyan Yojna. No question as to source of fund will be asked in case penalty is deposited under the Pradhan Mantri Garib Kalyan Yojna in the name of Garib Kalyan cess. There will be immunity to the taxpayers from wealth laws, civil law and taxation laws. However there is no immunity to the taxpayer in regard from Narcotics, black money act, FEMA and PMLA. It is to be noticed that no last date has been notified by the Union Finance minister regarding the voluntarily declaration. However it will soon be notified when it is reviewed by the Upper House.

The finance minister in his speech has stated that this step by the government is taken to curb the difference that exists between poor and the rich. Even after the step of demonetization it can be seen that people are trying methods to turn their illegal money to while thereby affecting the government policy. Before the policy of demonetization was implemented a scheme was introduced by the government giving a chance to all the tax payers who have not their income to disclose it. However less percentage of people participated in the policy whereby government has to come with a new plan. This step by the government of giving another chance to the taxpayers to disclose their income is a welcome step as it will encourage people to legally convert their black money into white. Government has stated that no legal action will be taken against black money hoarders if they validly come forward and pay the tax. It has been speculated that this time large number of people will come forward and disclose their income. However the opposition don’t seems to be very satisfied with the step of the government. Opposition has stated that government has amended the bill without even discussing the amended parts of the bill. Further they have stated that a proper debate should have taken place before amending the Income Tax. Leaders of opposite parties has also met President of India Dr. Pranab Mukherjee regarding  the amendment of bill claiming that no proper discussion was taken place before the amendment was passed.

Reference

1. http://www.prsindia.org/uploads/media/Taxation%20Laws/Taxation%20Laws%20(Second%20Amendment)%20Bill,%202016.pdf
2. http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/555/Taxation-Laws-Second-Amendment-Bill-2016-1-12-2016.pdf
3. http://www.incometaxindia.gov.in/tutorials/43-%20cash%20credit.pdf
4. http://indianexpress.com/article/india/india-news-india/income-tax-amendment-bill-tabled-in-lok-sabha-30-pc-tax-on-undisclosed-income-demonetisation/
5. https://www.taxmann.com/Budget-2016-17/budget/samd250/notes-on-clause.aspx
6. http://www.moneycontrol.com/news/economy/income-tax-amendment-bill-passedls-despite-oppn-protest_8034901.html

In this blog post, Mohammad Farooq from Nirma University describes how to get the right break into finance as a Lawyer.

When a law student graduates from a law school, he/she is armed with the knowledge of the law and certain skill sets typical to the legal profession. The common career trajectory for most law school graduates are litigation, law firms or pursuing masters from Indian or foreign universities.

Traditionally, corporate law firms have been considered to be the most lucrative career option, especially by fresh graduates across most NLU and law college campuses.

Lately, another area which has begun to gain the interest of law students is investment banking. A select few lawyers with a keen aptitude for finance have broken into this coveted field of finance even in the past regularly, but interest in investment banking has been growing in a wider section of law students in recent time. However, investment banking is extremely difficult to get into and very few ever get even close to breaking into the circle of investment bankers.

However, some of the most successful investment bankers in history are lawyers, and lawyers often have an unsaid advantage in this heavily regulated industry. Just to give you an idea, the current CEO of Goldman Sachs, the most well known investment banker ever, is a law graduate. Many dozens of American corporate law world worked as an investment banker at some point of their career, as few people get an inside view of the high finance and deal making world as well as investment bankers do, which can lay an amazing foundation to a corporate law career.

Yes, a lot of lawyers and law students will give an arm to break into investment banking, but what does it really take to get there?

What is Investment Banking?

Investment banking is a special area in banking segment which helps in raising capital and fulfilling the financial requirements including consultancy services to individuals or organizations. Investment bankers work for private as well as public companies.  The investment bankers act as intermediaries between security issuers and investors and help new firms to go public. They perform several functions like preparing disclosure documents, marketing materials for public and private offerings, buying and selling shares, giving mergers and acquisitions advisory, negotiating and structuring deals, restructuring businesses to make them efficient, etc. Most importantly, they act as an intermediary between potential investors and those seeking capital and identify and analyze potential M&A.

Usually, investment banks make money from raising capital by issuing equity (stock), debt (bonds), or through commissions on M&A.

To illustrate an example of how an investment bank earns money, let us suppose “A” is a company that is looking to buy another company “X” but is not aware or sure about the feasibility of the acquisition in terms of the worth of X, the long term benefits, costs, revenues, etc. Here, an investment bank comes into play and does the due diligence in order to determine the value of the company, prepare the necessary documents for the deal and further advise on the same. In this scenario, there will be investment bankers on both sides of the transaction. The bigger the deal size, the more commission (which is usually a percentage of the deal amount) the bank will earn.   

Major Areas of Investment Banking

Mergers and Acquisitions (M&A) – Bankers give strategic advice the corporations which intend to buy or merge with another company on the business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation. In cases of potential acquisition, investment bankers perform “due diligence” in order to reduce the risk and exposure of the acquiring company and evaluate the target company. They also provide “fairness opinions” which is basically an attestation as to the credibility and fairness of the transactions. The role of advisor played by an investment banker to an acquiring or buying side is called buy-side engagement and similarly for potential seller or target side it is called sell-side engagement. Other functions include joint ventures, takeovers, buyouts etc.

Raising Capital and Security Underwriting – When capital is raised for a company to fund any acquisition, investment banks act as middle men. It is done by issuing new securities, pricing, underwriting and selling new bonds for the purchasing public. In this regard, they act as intermediaries between the issuers of securities and the investing public.

Sales & Trading and Equity Research – The investment bankers buy and sell securities out of their own accounts as well as match up buyers and sellers in order to assist the trading of securities. They are also used by the institutional investors (mutual funds, university endowments, pension funds, hedge funds) in order to trade securities.

Front Office v Back Office – The investment banks are divided into sectors of front office, middle office and the back office functions. The critical functions like M&A form the part of front office functions. Other functions like compliance, risk management, financial control, corporate strategy, operations and technology are also important as they assist the front office functions therefore form the part of middle and back office functions.

Venture Capital – Some firms assist smaller companies or new startups with their capital requirements. They are called venture capital firms. Here, although there would be losses because many of these companies fail in their early stages, but the gains arising out of the successful ones offset all the losses.

What’s in it for the Lawyers?

The key attraction for lawyers is that while they are “driven by the process” in law, they are the ones “driving the process” in investment banking. They can actively take part in the negotiation process, impact the decision making and strategic business planning while working with the upper echelons of the company like the CFOs and CEOs. For those lawyers who complain of boredom or saturation with their work or lack of any excitement therein, investment banking can be exciting but something that takes extreme levels of hard work. Investment banking brings them closer to the real action as they are the ones putting together the entire deal.

The new associates in an investment bank begin to contribute right from the start and add value by attracting new clients and generating business and have greater responsibility as opposed to an entry level law firm associate. Apart from the incentive to make deals happen, there are various other tasks for an investment banker besides mere drafting and researching in a typical law firm. The financial incentive in this field is also greater for an entry-level associate and the pay rises steeply as compared to the corresponding rise in the legal profession.

How to Switch from Law to Finance?

Based on the lucrative benefits in investment banking, one may consider going for it straight after law school but most banks are more willing to recruit someone who has some transactional experience and who can show how their legal knowledge and experience is applicable to investment banking industry. Therefore, it’s better to work at a top corporate law firm and gain experience in financial transactions like M&A or capital markets and subsequently have a viable story to tell in the interviews as to why you want to shift to finance. Business schools also come in handy after law if you have had no related experience in corporate, M&A, securities, etc. In case you do not have an MBA degree, your interview becomes particularly important because this is where you can show that to the prospective recruiter that you have the prerequisite skills and brains and a good understanding of the markets and businesses in today’s economy.

Here are 5 things you need to do if you want to break into investment banking from a legal background:

1. Make sure your reasons for switching from law to finance are right. Mere lucrative attraction towards banking and finance is not enough because law and finance are two radically different areas requiring different set of skills and competence.  
2. You may begin by using your contacts amongst friends and relatives and ask for getting referrals across to recruiters and exploring your former clients who may set up informational meetings or prospective opportunities at their firms, etc.
3. You can use your prior experience of working with clients and industries. If they belong to any particular field, say technology companies, pursue investment banking in technology or if you’ve worked a lot on M&A, then pursue M&A departments at investment banks.
4. If you have been working at a big brand or popular law firm, you have an added advantage because the banks are aware of the top law firms. However, if you have been working at a smaller law firm, your ability to set yourself apart will depend on how much  sector expertise you have gained in a specialized area. Then, begin by targeting smaller banks.
5. Ace the Interviews – It’s particularly crucial for lawyers to present a viable story to convince the recruiters. Broadly, the interviewers wish to know how you would count as a lawyer in this challenging industry and whether you are prepared to throw away your career in law for investment banking. To tackle these questions, you need to show all the credentials you’ve got such as undergraduate courses in finance, self-study, any other classes you took besides work/study and the knowledge you acquired during law school. If you have experience of a few years of working in corporate or securities law, your case becomes even more compelling. Show them that you are absolutely certain of making this switch after having spoken to several bankers/investors and from your own experience of working on cases, that finance is more apt for you. They will test you even more if you do not have a finance background and would expect that you are just as learned as any new analyst or associate just out of any undergraduate finance or MBA program.  Leave them with an impression that you invariably had an inclination towards finance and deal making and hence decided to enter the investment-banking sector for these reasons.  

http://www.mergersandinquisitions.com/breaking-and-entering-into-finance-part-ii-the-lawyer/

http://www.mergersandinquisitions.com/law-to-investment-banking/

http://economictimes.indiatimes.com/definition/investment-banking

http://www.streetdirectory.com/travel_guide/190086/careers_and_job_hunting/how_to_get_an_investment_banking_job_as_a_lawyer.html

https://www.thelawyer.com/my-career-story-i-moved-from-law-into-banking-now-i-have-my-own-start-up/

http://www.businesstoday.in/magazine/cover-story/nalsar-university-of-law-hyderabad-best-business-schools/story/17924.html

http://www.careers-in-finance.com/iboptions.htm

http://www.investopedia.com/university/financial-careers/financial-careers3.asp

https://www.quora.com/What-are-the-different-aspects-of-Investment-Banking-Please-tell-in-detail

In this blog post, Harpreet Kaur, a blogger at laswschoolnotes, an Advocate at the Punjab and Haryana High Court, describes the responsibility of Auditors of a Company in reporting fraud.

“Doing right things and doing them in the right way is the essence of Corporate Governance”.

-Anonymous[1]

Introduction

“The statutory requirement as regards accounts is that books of accounts must reflect true and fair view of state of affairs of a company and its branches, if any, so that its financial position can be correctly assessed by directors, members, officers, investors and all those who transact business with the company”[2]. Because of this reason it is necessary that the accounts so prepared by company through its directors must be checked and scrutinised by some independent authority so that they can be relied upon by those who are interested in company’s affairs and business[3].

Hence, the role of Auditor/Audit Committee is very significant and their responsibility in corporate governance is to provide assurance that the corporation is in rational compliance with relevant laws and regulations, is conducting its affairs fairly, and is maintaining effective controls against employee conflict of interest and fraud[4]. An audit committee consisting independent directors can have control over management and can act as a sort of assurance to the shareholders that they will have full disclosure of correct information. To have good corporate governance, audit committee needs resource persons to act as independent directors on whose shoulders lay the responsibility to take the company in the right path[5].

Pointing on the importance and auditors, Chakarvati, then C.J. of Calcutta High Court in Deputy Secretary, Government of India, Ministry of Finance v. S.N. Das Gupta[6] observed[7]: “A joint stock company carries on business with capital furnished by persons who buy its shares. The owners of the capital are, however, not in direct control of its application which is left to the executive of the company, composed of the directors or superior officers. The Companies Act, therefore, provides for the employment of an auditor who is servant of the shareholders and whose duty is to examine the affairs of the company on their behalf at the end of a year and report to them what he has found. The examination of an independent agency such as the auditor is practically the only safeguard which the shareholders have against the enterprise being carried on in an unprofessional way or their money being misapplied or misappropriated without their knowing anything about it”.

Appointment of an Auditor

Section 139 of the Companies Act, 2013 deals with the appointment of Auditors. This section corresponds to the section 224 of the Companies Act, 1956[8]. It provides that a company shall appoint an individual or a firm as an auditor at Annual General Meeting (AGM) subject to his written who shall hold office till conclusion of sixth AGM. The manner and procedure of selection committee shall be prescribed by the Central Government. A notice of appointment should be filed with the Registrar. The section provides for rotation of auditors. The Central Government may prescribe the manner in which companies shall rotate their auditors[9].

In case of a Government Company, the auditor will be appointed by the Comptroller and Auditor General of India within 180 days from the commencement of the Financial Year, who shall hold office till the conclusion of the AGM. Even if the auditor is appointed for 5 years, then the members of the Company should ratify such appointment at every AGM[10].

Section 141 of Companies Act, 2013 deals with the eligibility, qualifications and disqualifications of an Auditor. It corresponds to sections 224(1B) and 226 of the Companies Act, 1956[11] and provides that a person shall be eligible for appointment as an auditor of a company only if he is a Chartered Accountant. It also provides for the persons who are not eligible for appointment as an auditor of a company and says that an auditor, who gets disqualified after his appointment as auditor, shall have to vacate office.

Responsibilities of an Auditor

Section 143 of the Companies Act, 2013 contains provisions relating to the powers and duties of auditors. It corresponds to section 227 of the Companies Act, 1957[12].  Main duties of an Auditor are:

1. Duty to make certain inquiries
2. Duty to make a report to the company on the accounts examined
3. Duty to make a proclamation in terms of the provisions set.
4. Detection and Prevention of Fraud
5. Duty to report fraud
6. Duty as to substantial precision[13]

Meaning and Definition of the term Fraud

According to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party”[14].

Explanation to Section 447(1) of Companies Act, 2013 defines fraud as: “fraud in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss”.  “wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled”; “wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled”[15].

Section 17 of Indian Contract Act, 1872 defines fraud as: “Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1) the suggestion as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech”[16].

Fraud Reporting under the Companies Act, 2013

Section 143(12) to 143(15) of the Companies Act, 2013 contains provisions relating to reporting of fraud. Section 143(12) reads:

“(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed”[17].

The term “sufficient reason to believe” has been defined[18] as: “To have knowledge of facts which, although not amounting to direct knowledge, would cause a reasonable person, knowing the same facts, to reasonably conclude the same thing”.

The reporting requirement under Section 143(12) is for the statutory auditors of the company and also equally applies to the cost accountant in practice, conducting cost audit under Section 148 of the Act; and to the company secretary in practice, conducting secretarial audit under Section 204 of the Act. However, the provisions of Section 143(12) do not apply to other professionals who are rendering other services to the company[19].

Also, “it may be noted that Section 143(12) includes only fraud by officers or employees of the company and does not include fraud by third parties such as vendors and customers”[20].

However, exception has been provided for acts done in good faith in Section 143(13) which provides that: “No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith”[21].

Moreover, similar provision is applicable to Cost Auditor and Secretarial Auditor as it has been provided in Section 143(14) which reads as: “The provisions of this section shall mutatis mutandis apply to- (a) the cost accountant in practice conducting cost audit under section 148; or (b) the company secretary in practice conducting secretarial audit under section 204”[22].

Manner of Reporting

The Companies (Audit and Auditors) Amendment Rules, 2015, issued by the Ministry of Corporate Affairs, on 14th December 2015, amended Rule 13 of the Companies (Audit and Auditors) Rules, 2014[23]. As per the amended Rule 13, if an auditor of a company, in the course of performance of his duties as statutory auditor, has reason to believe[24] that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government[25].

“The amended Rule 13 provides the following manner of reporting to the Central Government:

(a) The auditor shall report to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;

(b) On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;

(c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in confirmation of the same.

(e) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) The report shall be in the form of a statement as specified in Form ADT-4”[26].

Auditor shall report the matter to Audit Committee constituted under Section 177 of the Companies Act, 2013 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following[27]:

1. a) Nature of Fraud with description;
2. b) Approximate amount involved; and
3. c) Parties involved.

Punishment for default has been provided under Section 143(15) which provides that: “If any auditor, cost accountant or company secretary in practice does not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 25 lakh rupees”[28].

Punishment for Fraud

The Companies Act, 2013 has provided punishment for fraud under Section 447 of Companies Act, 2013 which provides that “Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years”[29].

The following table mentions some sections that attract liability u/s 447[30]:

Conclusion

The new law i.e. Amended Companies Act, 2013 read with Amended Companies (Audit and Auditors) Rules, 2014 will plug most loopholes of the old regime. It will improve corporate governance, protect the interest of minority shareholders and make it tougher for companies to hide illegal transactions or commit fraud[31]. Considering the number of corporate frauds that are surfacing in the country today, the old Act was evidently inadequate. Hence, it is anticipated that the new provisions of the Companies Act, 2013 would bridge the gulf between increasing corporate frauds and the statutory regime. “The new company law envisages the metamorphosis of the statutory auditors from being a watchdog to a whistle blower”[32].

The role of audit committee and auditors in current scenario has become very crucial. Stakeholders expect loyalty and trust from auditor and auditing committee while resolving financial facts and exposing at all fraud and fault in organization. If a company has an active and strong audit committee only then independent auditors’ working will be supported[33] and then transparency is bound to increase which would have a domino effect on corporate governance[34].

[1] Prof. Hetal Pandya/Vyas, Corporate Governance: Role of auditor and auditing committee, IPASJ International Journal of Management (IIJM), Volume 1, Issue 2, July 2013, available at http://ipasj.org/IIJM/Volume1Issue2/IIJM-2013-07-08-001.pdf

[2] Dr. N.V. Pranjape, The New Company Law, Central Law Agency, Allahabad, 6^th edition, 2014, p.368

[3] Ibid, at p. 381.

[4] Supra note 1.

[5] Ibid.

[6] AIR 1956 Cal. 414

[7] Dr. N.V. Pranjape, The New Company Law, Central Law Agency, Allahabad, 6^th edition, 2014, p. 382

[8] Ed: Ravi Puliani and Mahesh Puliani, Companies Act, 2013, Bharat Law House Pvt. Ltd., New Delhi, 20^th edition, 2014, p. 141

[9] Analysis of Companies Act, 2013, Published by Wolters Kluwers (India) Pvt. Ltd., New Delhi, ISBN-13: 978-93-5129-066-7, p. 363

[10] Prof Hetal Pandya/Vyas, Corporate Governance: Role of auditor and auditing committee, IPASJ International Journal of Management (IIJM), Volume 1, Issue 2, July 2013, available at http://ipasj.org/IIJM/Volume1Issue2/IIJM-2013-07-08-001.pdf

[11] Ed: Ravi Puliani and Mahesh Puliani, Companies Act, 2013, Bharat Law House Pvt. Ltd., New Delhi, 20^th edition, 2014, p. 145

[12] Ibid at p. 149

[13] Supra note 10.

[14]  Madan Lal Bhasin,  Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, Open Journal of Accounting, 2013, page 26-38 available at http://file.scirp.org/pdf/OJAcct_2013042509481787.pdf

[15] http://corporatelawreporter.com/companies_act/section-447-of-companies-act-2013-punishment-for-fraud/

[16] Bare provision is available at http://www.lawtimes.org.in/section-17-fraud-defined-indian-contract-act-ica-y1872-s-17.html

[17] Bare Act is available at http://www.indiacode.nic.in/acts-in-pdf/2015/201521.pdf

[18] Source: http://www.lectlaw.com/def2/q015.htm

[19] Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 (Revised 2016), The Institute of Chartered Accountants of India, Second Edition: February, 2016, ISBN No: 978-81-8441-741-8, available at http://www.ca-online.in/Media/Uploaded/41297aasb-gn-fraud-revised.pdf

[20] Ibid.

[21] Bare provision is available at http://www.mca.gov.in/SearchableActs/Section143.htm

[22] Ibid.

[23] Supra note 19.

[24] See note 18.

[25] Supra note 19.

[26] Supra note 19.

[27] Ibid.

[28] Ibid.

[29] Bare provision is available at http://www.mca.gov.in/SearchableActs/Section447.htm

[30] CA. Amit G. Chandani, Companies Act, 2013 : Fraud and Fraud Reporting, available at http://taxguru.in/company-law/companies-act-2013-fraud-fraud-reporting.html

[31] CA. Amit G. Chandani, Companies Act, 2013 : Fraud and Fraud Reporting, available at http://taxguru.in/company-law/companies-act-2013-fraud-fraud-reporting.html

[32] Ibid.

[33] Prof Hetal Pandya/Vyas, Corporate Governance: Role of auditor and auditing committee, IPASJ International Journal of Management (IIJM), Volume 1, Issue 2, July 2013, available at http://ipasj.org/IIJM/Volume1Issue2/IIJM-2013-07-08-001.pdf

[34] Navajyoti Samanta and Tirthankar Das, Role of auditors in Corporate Governance, 11 October, 2009 available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1487050