In this blogpost, Komal Rastogi, Student, Nirma University, Ahmedabad, writes about the misuse remedies and also the consequences of social media in India.

From the past six to seven years, Social Media have become increasingly popular in our day to day lives. It provides a forum not only to the students but also to the businessman where they can communicate with each other irrespective of the distance that separates them. “The “social” part refers to interacting with other people by sharing information with them and receiving information from them. The “media” part refers to an instrument of communication, like the internet.”[1]  From these two separate terms, we can pull out the definition of social media. Social Media is a phrase dealt with the collection of online communication channels that enables people to interact, share and exchange information, pictures, videos, etc. through the virtual networks. To be precise, social media connects people regardless of the geographical boundaries. It ties an individual with the different people of different cultures. Sites like Facebook, Twitter, have created online communities where people can share their personal information as they desire. Other websites like Digg, Reddit, makes it easier to find specific information, images etc. Earlier social media was the platform to learn about their countries or to maintain certain relationships. But now social media becomes a medium to share information or to communicate with a blink of an eye. For example Facebook- purpose is to help an individual communicate. Social media has influenced our lives.  Due to social media, people have an opportunity to express their opinions to others through a common medium.

Social media can be used for many reasons. First, people can interact and communicate to others.  Second, to gain or to provide knowledge about issues, events through different sites. By now it is clear that social media has a tremendous impact on our business, culture, and also the world at large. “Social media websites are some of the most popular haunts on the Internet. They have revolutionized the way people communicate and socialize on the Web.”[2] The constant use of this kind of technology is harmful to us because it is limiting ourselves to only one group of people who are not friends but are supposed to be friends. The social media is not only affecting the people but also affecting the politics, business as well as cyberbullying in a negative sense.

Misuse of Social Media

In spite of the fact that social media is a great tool for information but have been misused by people at large. This technology is doing more harm than good. Social media is not only misused or abused by students but are also by businessmen, employees, etc. While talking about the abuse, politics comes into mind. Social media is as prone to misuse as your computer is to the virus.”[3] Justice Katju stated in the letter to the broadcasting ministry that a new practice has been started to defame people, community, religion, etc. through social media.

Some misuses that are associated with the social media are:

• Defamation: The most affected people through social media are politicians and celebrities. They are the breed which has been punished brutally by social media. People got another medium to express their anger and to defame them through tweeting or by other social networking sites. The click of the like button on the Facebook can lead your action as absurd, and this can make you liable for the crime of social media abuse.
• False and unreliable information: Apart from defamation, there is increasing misuse of the social networking sites. People make fake email accounts of celebrities and spread untrue stories about them. In fact, people hack the accounts of different users at homes and “accessing the private life of others, leading to the relationship woes and divorce.[4]”
• Sexual Predators: The social media is an open door to predators, it means that through social media, an individual can do anything to harm others. For example, the most common scenario when a man of 42 years make an email account using fake name and picture of 16 years old boy, communicate to others and ask them to meet in person. Due to this kind of predators, many of the children are victims of online sexual solicitation. Other than sexual predators, there is another kind of social abuse that is cyber bullying.
• Cyberbullying: Cyberbullying is the act of bullying by harming or harassing using electronic technology. There are many ways of cyber bullying but the most common way to bully a person is to add users to the bullies account and begins to bully in the way of harassing the user through teasing, derogatory remarks, etc.  The other way to bully a person is to write defamatory remarks on Myspace, Facebook, Twitter, etc. bullies on the internet are less likely to get into trouble as there can be fake name and picture on the bullies on the playground.
• Loss of Privacy: Social media can easily be misused by employees. The employees make awful remarks and post inappropriate material in anger if the employer is over-react and dismiss the employees. Even the employees’ comments damage the reputation of the company so disciplinary action can be taken against the employees for the breach of social media policy. When it is clear that the employers are becoming aware of these situations, then it is not possible for the employees to complain that the material was private and is infringing their right to privacy. The survey was held, and it showed the area where misuse of social media had taken place:

Firstly, misuse of confidential information (80%)

Secondly, misrepresenting views of the employer (71%)

Thirdly, inappropriate non-business use (67%)

Fourthly, disparaging remarks about the employers or other employees (64%)

Fifthly, harassment (64%)

• Fraud: Another consequence of the misuse of social media can be buying a product which does not exist. The recent example of such a misuse was the smartphone named Freedom 251. Many people bought the phone online and later found out that the company was fraud and does not exist in real.

Further, in 2012, the misuse of social media came to the attention of government when the morphed videos and picture of an earthquake began to go viral. “Miscreants were morphing these images to show that these were Muslim victims of civil riots in Assam and Burma.”[5] This was done to provoke the riots by vested interest. This provocation leads to hate and revenge messages against Hindu Migrants.

Another effect of the misuse of social media is that even the minors have easy access to all types of porn sites which results in the rapid change of behavior in the young generation.

Remedies for the misuse of social media

Remedy: “You can report to the Cyber Crime department if you have a case which is related to Cyberstalking, cyber harassment, Online harassment, unsolicited calls, pornographic MMS, online fraud, phishing, or even threat mails.”[6] Toll-free number for Indian Cyber Crime: 1800 209 6789

Consequences

Due to misuse of social media, it leads to many consequences:

• Future can be affected: When one posts something online it will be there forever, if one is planning to go to a college, it may be possible that the college authorities may access to your account, if they don’t like it they may hold back from accepting.
• Writing down all your personal information on social networking sites will be dangerous because it can be used against you as people may stalk you and blackmail you.
• The misuse of social media can lead to hampering the security of a country. One can hack the security system of any country and can take and leak any secret information of that country. Example: Edward Snowden gave all the secret information of America to Russia.

Conclusion

The use of social media is growing day by day. Now it is important to keep the pace with the rapidly changing society. Even today the society is not prepared to bear the consequences of the misuse of social media which will result in the unacceptable and unfamiliar social behavior.  “[7]If there are no regulations or limitations on social media, the repercussions will accumulate. People need to change the destructive patterns of social media use before it destroys society.” 

Nowadays one of the main reason for increasing the gap between older generation and the younger generation is social media. “The power it has over people is dangerous and often goes unnoticed. People should care because if not addressed, or taken care; social media could cause national and international problems.”[8] Social media can help us, but it can blind us also. So turn off the account and leave the world behind and look up for your future.

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[1] Retrieved on http://webtrends.about.com/od/web20/a/social-media.htm

[2] Retrieved on http://www.business2community.com/social-media/impact-social-media-truly-society-0974685#y6q7uz5K7jo15AMH.99

[3] Retrieved on http://www.thesundayindian.com/en/story/the-use-and-misuse-of-social-media/77/35886/

[4] Ibid

[5] Retrieved on http://www.mapsofindia.com/my-india/society/undue-use-and-misue-of-social-media

[6] Retrieved on http://scamsters.blogspot.in/2008/07/report-online-fraud-at-indian-cyber_10.html

[7] Retrieved on http://socialmediasimpactonamerica.weebly.com/counter-argument-and-conclusion-paragraphs.html.

[8] Ibid

In this blog post, Harsha Asnani, student, NIRMA University, Ahmedabad writes about the rules governing inheritance under Muslim law.

The Muslim Law of Succession is a combination of four sources i.e. the Holy Quran, Sunna (practice of prophet), Ijma, (Consensus of the learned men of the community over the decision over a particular subject matter), Qiya (deductions based on analogy on what is right and just in accordance with good principles). Muslim law recognises two types of heirs, firstly, sharers, the ones who are entitled to certain share in the deceased’s property and secondly, Residuaries, the ones who would take up the share in the property that is left over after the sharers have taken their part.

Under the Indian legislative scheme, the rules that govern inheritance under the Muslim law depend on the kind of property involved. In cases of Non testamentary succcession, the Muslim Personal Law (Shariat) Application Act, 1937 gets applied. On the other hand, in case of a person who dies testate i.e. one who has created his will before death, the inheritance is governed under the relevant Muslim Shariat Law as applicable to the Shias and the Sunnis. In cases where the subject matter of property is an immovable property which is situated in the state of West Bengal or comes within the jurisdiction of Madras or Bombay High Court, the Muslims shall be bound by the Indian Succession Act, 1925. This exception is only for the purposes of testamentary succession.

It is noteworthy that the Muslim law does not make any strict distinction between any two or more type of properties such as movable and immovable, corporeal and incorporeal etc. Since there is no such distinction between different kinds of properties, therefore, on the event of death of a person, every such property which was within the ambit of ownership of the deceased person shall become a subject matter of inheritance. The amount of property that shall become the subject matter of inheritance and is made available to the legal heirs to inherit shall be determined after making certain appropriations. Such appropriations may include expenses paid in lieu of funeral, debts, legacies, wills etc. After making all these payments, the left over property shall be termed as the inheritable property.

Principles governing rules of inheritance of joint or ancestral property

Unlike Hindu law, there is no provision of distinction between individual i.e. self acquired or ancestral property. Each and every property that remains within the ownership of an individual can be inherited by his successors. Whenever a Muslim dies, all his property whether acquired by him during his lifetime or inherited from his ancestors can be inherited by his legal heirs. Subsequently, on the death of every such legal heir, his inherited property plus the property acquired by him during his lifetime shall be transferred to his heirs.

Birth right

The principle of Hindu law of inheritance of Janmaswatvad does not find place in the Muslim law of inheritance. The question of inheritance of property in Muslim law comes only after the death of a person. Any child born into a Muslim family does not get his right to property on his birth. In fact no such person holds becomes a legal heir and therefore holds no right till the time of death of the ancestor. If an heir lives even after the death of the ancestor, he becomes a legal heir and is therefore entitled to a share in property. However, if the apparent heir does not survive his ancestor, then no such right of inheritance or share in the property shall exist.

Inheritance on the basis of Doctrine of Representation

Doctrine of representation states that if during the lifetime of an ancestor, any of his or her legal heirs die, but the latter’s heirs still survive, then such heirs shall become entitled to a share in the property as now they shall be representing their immediate generation. Doctrine of Representation finds its recognition in the Roman, English and Hindu laws of inheritance. However, this doctrine of representation does not find its place in the Muslim law of inheritance. For example, A has two sons B and C. B has 2 children i.e. D and E and C also has two children F and G. During the life time of A if B dies, then on the event of death of A only C shall be entitled to inherit A’s property. B’s children D and E shall not be entitled to any share in A’s property. Between C and B’s children D and E, C would totally exclude D and E from inheriting the property. Therefore, it is said that the nearer heir excludes the remote heir from inheritance.  The Muslim jurists justify the reason for denying the right of representation on the ground that a person has not even an inchoate right to the property of his ancestor until the death of that ancestor.[1] It is further argued that a right which was not vested in any possibility cannot give rise to claim through a deceased person.

Manner of Distribution

Under the Muslim law, distribution of property can be made in two ways, firstly per capita or per strip distribution. Per – Capita distribution method is majorly used in the Sunni law. According to this method, the estate left over by the ancestors gets equally distributed among the heirs. Therefore, the share of each person depends on the number of heirs. The heir does not represent the branch from which he inherits.

On the other hand, per strip distribution method is recognised in the Shia law. According to this method of property inheritance, the property gets distributed among the heirs according to the strip they belong to. Hence the quantum of their inheritance also depends upon the branch and the number of persons that belong to the branch. For example, if A has two sons i.e. B and C. B has two children i.e. D and E. C has three children F, G and H. Suppose on the death of A his property’s worth is estimated to be about 12000. B and C would be entitled to an equal share of 6000 each. . In case if B and C both die, then the extent of their children’s share shall be in following manner.  B’s children D and E can only inherit the property to the extent of B’s share. Their share shall be 3000 each. As far as the children of C are concerned the extent of property that they can inherit shall extend to 6000. Their respective shares shall be equal i.e. 2000 each. Hence, it can be said that the share of each person in this method of distribution varies.

It is noteworthy that the Shia law recognises the principle of representation for a limited purpose of calculating the extent of share of each person. Moreover, under the Shia law this rule is applicable for determining the quantum of share of the descendants of a pre-deceased daughter, pre-deceased brother, pre-deceased sister or that of a pre-deceased aunt.

Right of Females in inheritance of property

Muslim does not create any distinction between the rights of men and women. On the death of their ancestor, nothing can prevent both girl and boy child to become the legal heirs of inheritable property. Preferential rights do not exist. However, it is generally found that the quantum of share of female heir is half of that of the male heirs. The justification available to this distinction under Muslim law is that the female shall upon marriage receive mehr and maintenance from her husband whereas males will have only the property of the ancestors for inheritance. Also, males have the duty of maintaining their wife and children.

Rights of inheritance of a child in womb

Under Muslim Law, a child in the womb shall only be entitled to the share in property if he or she is born alive. In case if he is born dead then the share vested in him shall cease to exist and it shall be presumed that it never existed.

Rights of a childless widow and widow

Under the Shia law, a Muslim widow who does not have any children shall be entitled to inherit one – fourth share of the movable property belonging to her deceased husband. However, a widow with children or childless widow is entitled to one – eighth of the deceased husband’s property. In cases where a Muslim man gets married during a period when he is suffering from some mental illness and dies without consummating the marriage, the widow shall not be entitled to any right over her dead husband’s property.

Rights of the step children

The rights of the step children do not extend to inherit the property of their step – parents. However, the step brother can inherit property from their step sister or brother.

Escheat

In cases where a person dies without any heir then, the property of such a person shall go to the government. The state is considered as the ultimate heir of every deceased.

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[1] Retrieved from http://www.shareyouressays.com/117457/13-general-principles-of-inheritance-under-muslim-law-in-india

In this blogpost, Pramit Bhattacharya, Student, Damodaram Sanjivayya National Law University writes about the scope and purview of RTI Act, and whether or not the RTI Act applies to private entities. The post also highlights the fact that how the private bodies can be brought under the ambit of the RTI Act, through legal interpretation.

The Right to Information Act was introduced in the year 2005 and replaced the Freedom of Information Act, 2002.[1] The RTI Act was introduced to set up a regime which provided information to the citizen of the country and was in furtherance to the right to information. Under the RTI, any citizen can seek information from a public authority, and the public authority is required to provide the information within thirty days. The RTI also requires the public authority to maintain a computerized record so that it is easier to provide information to anyone who is seeking it. Talking about the earlier times, the disclosure of information was restricted in India by the Official Secrets Act, 1923 and some other laws. These restrictions were loosened up by the introduction of the RTI Act. The RTI Act was passed by the Parliament in June 2005 and came into force from October 2005. This was a central Act. RTI at State level was already in force before the RTI Act was introduced. It was enacted successfully by Tamil Nadu and Goa in 1997, Karnataka and Rajasthan in 2001, Delhi in 2001, Maharashtra and Assam in 2002, MP in 2003, Jammu and Kashmir in 2004, and Haryana in 2005.

The Legislature has supported the right to freedom of information very vehemently in the recent years. Freedom of information can be defined as the freedom to seek, receive and impart information through any form of media regardless of the boundaries.[2] According to a survey, nearly 70 countries had adopted the Freedom of Information Act, till 2006.[3] Out of these 70 countries, 19 countries had adopted a very comprehensive law which brought under its purview, both public and private bodies. In other countries, the law only applied to public bodies.[4]

In the era of globalization and liberalization, public bodies have also spread their wings to become global brands. In such a scenario, many private bodies are also involved in a lot of public functions, and it is vital to fix their accountability.

Private Bodies and the Right to Information

The Indian Legislature did not include private bodies under the RTI directly. But in the landmark judicial pronouncement of Sarabjit Roy v. Delhi Electricity Regulatory Commission,[5] it was reaffirmed by the Central Information Commission that privatized utility companies are also included under the umbrella of the RTI Act, regardless of their privatization. One of the common misunderstandings among the general public is that only those entities which are a subsidy to the government or are funded by the government are under the purview of the RTI Act. But the fact is that private bodies also falls under the RTI whether or not they are substantially funded or aided by the government

Where are Private Entities Covered?

Private entities are not covered under Section 2 (a) of the Act according to which “appropriate government” refers to a public entity which is constituted, owned, established, substantially financed (directly or indirectly) or controlled by the-

• Central Government
• State Government
• Union Territory Administration

But private entities are covered under Section 2 (f) of the RTI Act which states that information means any material in any form including any document, form, memo, email, logbook, circular, sample, contracts, models, papers or any data help in electronic form and any information related to a private body which can be accessed by a public authority under any law in force for the time being.

Reading it with Section 8 (1) (j) of the Act which states[6] that information which can’t be denied to the State Legislature and the Parliament can’t be denied to any person, it can be interpreted that private bodies also falls under the RTI Act, albeit indirectly.

Therefore, reading between the lines, it is evident that private entities also fall under the range of the RTI Act through any public authority with which they are registered. In case an individual wants to gain some information from a private body, it becomes crucial for him to identify the Public Authority with whom the private entity is registered. For instance, banks register themselves through the Reserve Bank of India and Co-operative Societies register themselves through Deputy Registrar of Co-operative Societies. The information Commissioner of the Central Information Commission,[7] M M Ansari has also stated that as long as the private bodies and companies were answerable to a regulatory body or any department of the government, they also fall within the purview of the law. The Commission also stated that the private bodies and companies are not under the obligation to appoint an Information Officer to deal with the right to information applications, unlike the public entities. For instance, if a person wants any information about the telecom companies, they can access the information through the Telecom Regulatory Authority of India, [8] and any information relating to the banking sector can be accessed through the RBI.

The Commission opined that every citizen has the right to seek information from private bodies, as long as they reported to a government body. But it was also made clear by the Commission that only such information which served the public interest could be asked or, and not that information which disintegrated the competitive position of the company in the market. For example, a company who is manufacturing soft drinks may be asked to provide how much water they used in their soft drinks and what is the source of the water used, but they can’t be asked to disclose the formulae of the soft drink. It can be said that the RTI Act is underutilized when it comes to seeking information from private entities, because of the misconception among the public, but nevertheless, the provision exists in the act.

Purview of the RTI Act with regards to the Private Sector

While the RTI Act states that only those private entities can be compelled to disclose information which are funded substantially by the government, those companies who are in partnership with any public body can also be asked to disclose any information, if such information is essential. In today’s world, when many public and private bodies are entering into collaboration for the development of the society, private bodies can use the provisions of the RTI Act as a shield. In such a scenario, transparency could be hampered. The Act states that only private bodies which take substantial funding from the government can be considered to fall under the RTI Act, but nowhere has been “substantial funding” defined. Who decide what is substantial funding?

Taking advantage of this loophole, private bodies refuse to give information to people those who are seeking it. For instance, the case of Ideal Road Builders (IRB) can be mentioned here. The IRB is a private body which collects toll on most of the highways in the state of Maharashtra. But it is not possible to get information from them about the amount of toll collected by them. But since they are in partnership with the government body, a citizen can get the required information from the concerned Government Department, which the Maharashtra State Road Development Corporation (MSRDC) in this case. Earlier, citizens asked for information from the IRB, but were they refused. The applicants then approached the MSRDC, and they were compelled to request IRB to provide the information to the applicants.

Similarly, in the case of Delhi Metro Rail Corporation, the DMRC is also considered as a private entity and any query under the RTI from the DMRC is denied.

But in a public-private partnership, where both types of entities are there, the applicants can get access to information and public documents by approaching the public partner.

The Delhi High Court has stated[9] that even in those companies and private entities, where funding by the government is not substantial, can be brought under the purview of the RTI Act.  Interpreting the Act, Justice S. Muralidhar said there is no need to have deep or pervasive government control over an institution to bring it under the ambit of the transparency law.[10]

Extension of RTI Laws on Private Sector

With regards to the private sector, it is important to maintain a balance between information and trade secrets. To make it easier for both the information seekers and the private entities, the exceptions should be narrowed down so that there is clarity.

Many times, private bodies resist providing information because it may reveal some wrongdoing on their part, which will spoil their reputation, ruin their business, and provide an opportunity to its competitors an opportunity to overtake them. One of the criticisms which is leveled against the extension of the law to the private sector is that it’ll increase their operating cost as they’ll have to create a separate database for collecting and storing the data.

Concluding Remarks

The RTI has developed as a tool for maintaining transparency in the overall functioning and governance of the nation. While the right to seek information from public information can’t be questioned, the right to seek information from private bodies have been a difficult issue to the vagueness of the law. Specific rules should be made with regards to the application of RTI to private entities. The law should also specify that which kind of information can be demanded from a private entity. With rapid globalization and deregulation, private bodies also play public functions. Private Banks, private telecom companies, and healthcare sector can be given as examples of public entities who play a public role in the society. Bringing such private entities under the law is necessary to maintain a certain level of transparency.

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[1] This Act never came into effective force

[2] Article 19 of the Universal Declaration of Human Rights (United Nations, 1948)

[3] (Banisar, 2006: 6) ; http://www.freedominfo.org/documents/global_survey2006.pdf

[4] ibid

[5] Application No: CIC/WB/A/2006/00011 (Right to Information Act – Section 19). 2006

[6] https://indiankanoon.org/doc/223928/

[7] Oversees the implementation of the Right to Information Act, 2005

[8] Established under Telecom Regulatory Authority of India Act, 1997

[9] http://rtiact.hpage.co.in/private-orgs_38455804.html

[10] http://www.lawctopus.com/academike/extension-right-information-private-sector/#_edn26

In this blogpost, Pramit Bhattacharya, Student, Damodaram Sanjivayya National Law University, writes about, basic concept of Insider/ Price Sensitive Information. The post also touches on the subject that what should be done in various scenarios where some Insider/ Price Sensitive Information is leaked.

Introduction

Knowledge is the key to being successful in any walk of life. This is true for trading and business too. In every company, there exist some piece of information which if made public will have an effect on the value of securities of the company. Such information should be released in the market in such a way that it is not prejudicial to the interest of a particular section and is beneficial for all. Anyone who leaks out such information for acquiring personal gains is guilty of insider trading.

Unpublished price sensitive information means any information which relates to the internal matter of a company and is not disclosed by the company in the regular course of business. If such information is leaked, it affects the price of securities of the company in the stock market.[1]

Insider trading means entering into a transaction with regards to the securities of the company by the insiders of the company such as the employees or the associates, based on the information which they have derived within the company. Insiders are those whose association with the company gives them the access to information about internal information of the company.

Trading by insiders is not totally restricted. Insiders such as employees, associates, directors, etc. can trade as long as they are not using the information which relates to the internal affair of the company and is not present in the public sphere. This type of trading is also regulated through reporting and monitoring.

Securities Exchange Board of India (SEBI) is the regulatory bodies of stocks and securities present in the Indian Capital Market. There are other regulatory bodies also like Central Electricity Regulatory Commission (CERC) and Telecom Regulatory Authority of India (TRAI), but SEBI is one of the prime regulatory body. Functions[2] of SEBI includes-

1. Development of Market
2. Protection of Investors
3. Proper Regulation on Security Markets

In order to fulfill these functions, the regulators must be given genuine powers through various legislations.

One of the most important aspects of “corporate governance” is the concept of insider trading. It has to be made sure that insiders who possess the knowledge about internal matters do not exploit their positions and take undue advantage of that knowledge. To prevent this from happening, companies should publish and circulate sensitive information in proper and suitable manner. They should also make sure that insiders of the company do not enter into transactions based on such information, till the information is made public. For this, the company should have an internal system of regulation that discloses information sufficiently and at the opportune moment, maintain confidentially norms, report in a proper manner and come up with specific rules or code of conduct for the insiders. Insider trading is not trading with the knowledge of market regulators but trading with the knowledge of unpublished and undisclosed information.

What is Insider/ Price Sensitive Information?

Any matter which is unpublished and is not available in the public domain, and relates to internal matter is known as insider information. This information might have a material effect on the price of the securities if disclosed. Any information regarding public matters can’t be called sensitive information, because, without any specific information, the price of the securities will not be affected. In accordance with the Regulations provided by the SEBI, no insider (including employees, directors or associates of the company) shall either on his own behalf or on behalf of any other person deal in securities of the company on the basis of such price sensitive and insider information.[3]

Section 15G of the SEBI Act, 1992 states the penalty for insider trading. An issuer of securities may face unexpected events or situations which will have an impact on the price of the securities and the business activities. It is very crucial that the issuer of securities makes a proper assessment to decide what information can turn out to be price sensitive and needs to be disclosed. The company may also go for suspension of its securities, if necessary, till a formal step can be taken. Some examples[4] can be given of such events-

• The signing of important deals and contracts.
• Entering into a crucial joint venture with some other company.
• Exceptional matters such as merger, acquisition, etc.
• Fund-raising campaign.
• A significant amount of loss relating to foreign exchange.
• Cancellation of an agreement with any party which may affect the business operations.
• Any significant change in the accounting policy of the company which will affect the business activities.
• Comments on potential future earnings by the company.
• Premature removal of any Chief Official of the company before their term ended.

There cannot be a definite list of events which might impact the price of securities if disclosed. It depends on case to case. What may be price sensitive for one may turn out to be irrelevant for the other. An example of this can be given. A fundraising campaign will be considered material for a company which is facing insolvency. But the same thing will become relevant when the company starts functioning properly.

The Listing Rules ensures that the market functions properly and efficiently through timely and competent disclosure of insider information. They also make sure that any information which is being disclosed is done in a general manner, and it is not disclosed only to a particular section. Clause 32 (b)[5] of the new listing puts the issuer under a duty to keep the Stock Exchange, holders of their listed securities and their shareholders informed about price sensitive information as soon as it is reasonably practicable. This is often known as the general disclosure obligation. The principle behind this policy is to set out practices and policies in relation to-

• Administration of the company policies;
• Monitoring of any event so that any information which has the potential to become insider/ price sensitive information is identified and the Board of Directors can take decisions regarding such information.

Disclosure of Information

The guiding principle relating to insider/ price sensitive information is that it should be announced and disclosed in a proper manner without any delay after it becomes known to the management of the company. Until any such disclosure is made, the management of the company should ensure that the information remains strictly confidential, and no insider of the company trades on the basis of such information.

The issuer company may consider implementing additional means of broad communication such that the news will be disseminated to the shareholders and the public in a timely and uniform manner.

Unusual Movement in Trading Volume and Prices of the Securities

The Stock Exchange usually informs the issuing company if they see any unusual and eccentric movement in the trading volume or price of its securities. In such circumstances the issuing company should respond immediately to the Exchange, and if practicable, issue a statement through the Board of Directors, as to whether the company is aware or not about the reasons for such unusual movement in the trading volume and price of securities.

Guidance in Particular Situations–

1. Unintended Publication of Insider Information– If the company comes to know that some information, which might affect the price of its securities has been published inadvertently to a third party, the issuer should make an announcement and disclose the information to the general public so that the third party isn’t able to take advantage of the information. If necessary, they should suspend the trading of their securities till the information is properly disclosed.
2. Profit Warning Statement– where the company gains the knowledge that the actual results may be significantly worse than what they estimated, the company should publish a “profit warning” statement as it may impact the price of the securities in the market.
3. Profit Forecast- If the company makes a public forecast and later realizes that the basis on which the forecast was made may not be correct, it should make an announcement, as soon as possible and should disclose the impact of the incorrect estimates. They should also disclose how the actual outcome will differ from the previous forecast.
4. Incomplete Negotiations- If a company has entered into any discussion and negotiations which related to some price sensitive or insider information, sometimes it becomes difficult to maintain the confidentially as a lot of parties are involved in the discussion and negotiations. In case the discussion or the negotiation has reached a delicate stage, where any information related to it will affect the securities of the company or if major elements of the negotiations are yet to be finalized, the company should consult with the Exchange as soon as possible and if necessary suspend trading of securities until such negotiations are finalized.
5. Annual Report and Meeting- A Company should always communicate with the investors. A company can strengthen its goals and provide indications about the future to its investors through the annual reports. Such arrangement should be made by the company so that they can aptly disclose and discuss price-sensitive information in the meetings with the investors.
6. Making a party an “Insider”- Sometimes, it may happen that a Company is compelled to give confidential information to some parties, for example, to potential business partners, financers, parties with whom they are negotiating, or underwriters. Before a meeting, a proper procedure should be followed where the opposite party should be told that whatever information is being provided to the party is strictly confidential, and the party wouldn’t be able to trade in the company’s security using the provided information before it is made public. The party should give consent to become an “insider” which should be recorded.
7. Employees- many employees have access to insider information because of the nature of their duty. The employee should be made aware that they are under the obligation to keep the information confidential. There should be an internal policy in place that restricts the access of an employee to price sensitive information. Also, strict action should be taken against any employee who leaks such information.

Conclusion

It can be very easy for a person with insider information to take advantage of the fact that he has got a piece of information about which others have no knowledge and engage in deals which will benefit him personally. But business ethics calls for prudence and that such information shouldn’t be used for trading.

[1] S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of … on 22 June, 2004

[2] http://www.lawctopus.com/academike/price-sensitive-information/#_ftn1

[3] Dsq Holdings Limited vs Securities And Exchange Board Of … on 15 October, 2004

[4] Supra 2

[5] http://www.corporate-cases.com/2013/01/clause-32-of-listing-agreement.html

In this blogpost,  Abhishek Khandelwal, Student, Institute Of Law, Nirma University, Writes about, a comprehensive understanding of the ‘Start-up India, Stand up India’ campaign by discussing how the fledging Start-up ecosystem of India has given hopes to the government as well as the entrepreneurs, the policies that form the backbone of this campaign and loopholes that need to be plugged seeing the market responses.

Introduction

On 69^th Independence Day of India, standing at the historic Red Fort, Mr. Narendra Modi announced the much needed ‘Start-up India, Stand up India’ campaign which is being welcomed by conglomerates like Soft Bank by identifying it as the beginning of Big Bang for Indian Start-up ecosystem. Does claims like this have any basis in reality ?   Give 2 minutes to this blog post and you’ll form an opinion of your own.

What is Start-up India, Stand up India ?

A start-up ecosystem comprises of entrepreneurs, different kinds of financial support such as debt financing, equity investments, grants, and non-financial support including incubation, acceleration support, mentoring and technical experts. It also includes the government policies and programmes relevant to start-ups, academia and other organisations and firms that in different ways interact with or support start-ups. The kinds of new start-ups that offer an opportunity for growth and employment generation are considered to be those that are innovating, driven and looking to scale. Cash flow, creating a capacity to scale and finding the right people have always posed to be major challenges for India start-ups and these are the issues that ‘Startup India, Stand up India’ campaign is aimed at addressing.

The event that witnessed the inauguration of this scheme by Mr. Arun Jaitley on 16 January 2016 was attended by top notch 40 CEOs, start-up founders and investors from Silicon Valley, including Masayoshi Son, CEO of Soft Bank , Sachin Bansal, founder of Flipkart and  many others. The event was a huge success as it was for the first time when two lakh passes were sought to attend the Start-up India workshop at Vigyan Bhavan, New Delhi which has a total seating capacity of only 1,350 individuals.

According to the scheme that is announced, a start-up is an entity that is headquartered in India, which was opened less than 5 years ago and have an annual turnover less than Rs. 25 Crore  (US $ 3.7million).

Primarily, ‘Startup India’ campaign is based on an action plan aimed at promoting bank financing for start-up ventures to promote entrepreneurship and encourage start-ups with jobs creation whereas ‘Stand up India’ initiative is aimed at promoting entrepreneurship among SC/STs, women communities.

If we look back to the times before liberalisation, there was no such climate for a startup ecosystem to thrive. Even after the establishment of  National Science and Technology Entrepreneurship Development Board (NSTEBD) in 1982, there was no such ecosystem even in a far sight. It was only in 1995-1996  that the startup ecosystem started to develop. It was possible because India started gaining a lot of experience and expertise in IT sector as more and more young boys and girls started moving to U.S and Europe as IT professionals. That’s how sometimes the evil of ‘brain drain’ helps in disguise.

Major Action Plan

Prime Minister, Mr. Narendra Modi while addressing the first conference of start-up entrepreneurs introduced the action plan to foster the new start-ups. Here are the major key points of that action plan aimed at reviving the ecosystem of Indian Start-ups:

1. To reduce the regulatory burden on start-ups, self-certification option will be provided, and it will apply to laws like payment of gratuity, contract labour, employees provident fund, water and air pollution acts.
2. Creation of start up India Hub for easy access to knowledge and funding at one spot.

3.Ease of registration by filling up a short form through a mobile app.

4.Legal Support for fast-track patent examinations at lower costs. ( 80 % rebate in fees for filing patent applications)

5. In order to provide the infant start-ups with funding, the government will set up a fund with an initial corpus of Rs. 2500 crore and a total corpus of Rs.10000 crore over four years. This credit guarantee fund for start-ups would help the flow of venture debt from the banking system to start-ups by standing guarantee against risks.
6. Exemption from Capital Gains Tax on investments made by incubators in start-ups.
7. Income tax exemption for first three years.
8. Innovation core programmes for students in 5 lakh schools
9. The launch of Atal Innovation Scheme for encouraging innovation among people.
10. Establishment of 35 incubators and 31 innovation centres at national institutes on PPP model.
11. Establishment of 7 new research parks with an investment of Rs.100 crore each.
12. Promotion of entrepreneurship in biotechnology by establishing 50 bio-incubators, 150 technology transfer offices and 20 bio connect offices.
13. Faster exit option for start-ups in the case of bankruptcy or closure (within a period of 90 days).

Possible Hiccups

Although the scheme looks promising for the initial boost, still there will be some hindrances which should be looked into. In India, Startups have always faced snags like corruption and government indifference, and the fear of giant corporates that might oppose or kill the start-ups which challenge them. The author is of the opinion that as far as government indifference towards policy making in this regard is concerned, the clouds seem to be clearing but the blight of corruption, and anti-competitive practices still looms over the budding saplings of start-ups. The setting up of ‘inter-ministerial board’ led by the Department of Industrial Policy and Promotion to decide on the ‘innovative nature’ of a enterprise in order to qualify the same as a start-up is also not a laudable step under this scheme because it is quite evident from past experience that the direct involvement of government is not desirable for the unbiased growth of start-up ecosystem. The author would like to recommend that it is a regulation which must be done away with if the government doesn’t want new start-ups to register in a foreign land like Flipkart ( a company whose founder is an Indian citizen) did in 2007 by registering itself in Singapore.

Conclusion

The action plan unveiled by Mr. Modi is a wave maker, but to make it a radical stimulus for the growth of start-ups, it is very much necessary that the power to decide the viability and existence of start-ups is taken away from the  ‘inter-ministerial board.’ It is recommended that instead of ‘inter-ministerial board,’ a board of  ‘professional experts’ should be set up to decide on the viability of start – ups. Further, to make sure that this board of ‘professional experts’ takes unbiased decisions on the applications received, a conclusive set of regulations should be made to regulate its conduct while making any decision on the ‘existence and viability’ as well as ‘eligibility for tax benefits’ of new start-ups. In the case of any conflicts arising out of bigoted decisions, one should be given an option to approach the Indian Judiciary.

Other than this board of  ‘professional experts’, we need some effective structural reforms that permit free and fair competition’. For example, Net neutrality is a policy requirement that will determine the future for tech start-ups or any other startups which want to float themselves on the net.  The author is hopeful that if the above-mentioned policy and structural reforms are done, then this campaign of Government of India will prove to be Big Bang for the Indian start-up ecosystem.

If anyone wants to assess the current ‘Net Neutrality Status’ of India after the TRAI passed its regulations on ‘Net Neutrality’ on 8^th February 2016 , read the blog post ‘Net Neutrality In India’  by the same Author at : http://blog.ipleaders.in/net-neutrality-india/  

References

1. www.profitbooks.net/startup–india/
2. http://www.indiatoday.intoday.in/education/story/start-up-india-stand-up-india/1/573128.html
3. http://www.startupindia.gov.in/registration.php
4. http://www.pc-tablet.co.in/start-india-stand-india-program-government-india/21165/

In this blogpost, Neil Lopez, Student, O.P. Jindal Law School and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, types of PIPE, benefits of PIPE deal, drawbacks of PIPE deals and the 5 biggest pipe deals in the year 2015.

Private Investments in Public Equity (PIPE) transactions involve private investments made by investment firms, mutual funds, and other qualified investors. It is sold by the company at a discount rate in the current market value. The investments may be in shares, stock or convertible security of the listed company.

Types of PIPE

Traditional: common or preferred stock sold at a fixed price.

Structured: Preferred stock or debt securities sold which are convertible into common stock.

They are medium to long term investments with average holding period exceeding three years. Preference is for convertibles and to lesser degree convertible bonds followed by warrants and registered direct equity.  In PIPE deals, the primary objective is capital as it has potential to give instant returns

Benefits of a PIPE deal

A PIPE deal allows a company to avoid the complexity of selling shares through a fresh public issue. Instead, the company sells newly issued shares at an agreed price or debt which can be converted later on into shares to an investor. The PIPE process is simple, fast, and inexpensive.

Due to the difficulty of exits, private equity firms have progressively begun to invest in listed companies for better returns.

Some of the advantages of a PIPE deal are as follows:

1. There is no fear of under subscription as it is fixed beforehand between the investor and investee.
2. A PIPE fund raising process is much faster than a fresh public issue of shares which involves a lot of compliance formalities and is an arduous process.
3. The due diligence is quick because target company is in public domain, therefore time and cost are saved for the investor
4. Since it is a private placement, the information of raising capital can be kept confidential;
5. There is less equity dilution since the issue is made to private investors

Drawbacks of PIPE deals

1. Control- Unlike private equity investments, PIPE investors will not have a seat on the board or have a say in the business strategy of the company.
2. Liquidity- In most instances, PIPE investments offer short-term liquidity through the resale registration process but in some sponsored PIPE deals the investors are restricted from selling for a specified period.
3. Transaction Fee -Sometimes transaction fees are paid to the investor from the proceeds of the financing which may be around 1% of the gross proceeds.

Regulatory framework

A PIPE transaction in India has to comply with the conditions stipulated under SEBI guidelines for preferential issues.

Further, the SEBI Insider Trading Regulations has restricted share trading by the investor or his advisor if they have clandestinely utilized any unpublished price sensitive information during the PIPE transactions.

PIPE Deals in India

Since 2007, the banking and financial services sectors have mostly constituted a majority of the PIPE deals. For example, in 2015, banking and financial services had comprised over 45% of the total PIPE investments. However, in 2012, IT and ITES (Information Technology Enabled ServiceS) accounted for 45.5% of the PIPE investments.

PIPE deals had crossed the $1-billion mark in the first half of the calendar year 2015. This was higher than the total PIPE investments in 2013 and 2014. Private investment in public equity has increased 40% in 2015, according to data available from VCC Edge, a database of PE deal activity, and JM Financial Ltd[1]

According to Sanjeev Krishan, leader of private equity and transactions at Pricewaterhouse Cooper, a majority of PIPE deals are led by a handful of large private equity funds which invest in financial services firms as well as healthcare sectors.

5 Biggest PIPE deals for the year 2005

1. Apax Partners buys a 20.4% stake in Shriram City Union Finance for $383 million.

Apax bought the stake from TPG Capital while TPG made a bumper exit with returns of close to 4.5 times[2].   The purchase was transacted through its subsidiary, Dynasty Acquisition (FPI) Ltd. TPG had originally picked the stake in Shriram City in August 2013. The deal was valued at Rs 1,207.29 crore (about $180 million)[3].

2. Kuwait Investment Authority invested 300 million in GMR Infrastructure Ltd for 18% stake.

GMR Infrastructure Ltd had raised $300 million by selling foreign currency convertible bonds (FCCBs) to Kuwait Investment Authority (KIA), a sovereign wealth fund[4].  KIA had agreed to subscribe to a 60-year-long FCCB issued by GMR, the flagship company of the GMR Group.  The rationale for this investment was to improve the financial health of the target and to repay outstanding obligations of the target.

3. Temasek’s $150 million investment in drug maker Glenmark Pharmaceuticals Ltd

The third largest PIPE deal this year has been the Singapore government-owned investment firm Temasek’s $150 million investment in Glenmark Pharmaceuticals Ltd. This investment was also executed through its subsidiary Aranda Investments (Mauritius) Pte Ltd[5]. This gave it a 3.8 per cent stake in the Indian drug maker, making it the single-largest institutional investor in the company.

4. KKR, Leapfrog, IVFA invested 80 million for 19.56% stake in Magma Fincorp.

Magma Fincorp Ltd, a non-banking financial company (NBFC) backed by a clutch of private equity funds had raised Rs 500 crores ($80 million) through a preferential allotment of equity shares to India Value Fund Advisors (IVFA) and LeapFrog Investments[6].  The company has issued 46.3 million equity shares at a price of Rs 108 per share to all three investors.  Post allotment, IVFA would own 8.6 percent, LeapFrog would get 7.82 percent while KKR would retain its 16 percent holding. [7]

5. Cartica Capital invested 50 million for 3.88 % stake in PI Firms.

Cartica Capital invested in 5.29 million shares, representing 3.88% stake in PI Industries at a price of Rs 605 per share on the BSE, according to bulk deal data available with the stock exchange[8].

Conclusion

As the PIPE market continues to grow, there are multiple opportunities for private equity investors to invest in a range of companies. PIPE deals give access to capital at a lower cost to finance growth and working capital requirements.

PIPE investments offer investors a chance to acquire a block of shares in one go coupled with the prospect of profitable exits with high gains as seen in the above examples.

As the government pushes its agenda of foreign investment and ease of doing business in India as well as abroad availability of good companies available in the listed space and access to foreign funds, PIPE deals offer a plethora of funding opportunities for large as well as SME companies.

[1] . Pooja Sarkar, ‘PIPE Deals Up 40% So Far This Year’ (http://www.livemint.com/, 2015) <http://www.livemint.com/Companies/HGElLKXTdpZSSg1qg3YTvL/PIPE-deals-up-40-so-far-this-year.html> accessed 31 March 2016.

[2] ‘Apax Partners Buys 20.37% Stake In Shriram City Union Finance; TPG Capital Exits | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/finance/2015/05/13/apax-partners-buys-2037-stake-shriram-city-union-finance-tpg-capital-exits> accessed 31 March 2016.

[3] ‘PE Firm Apax Buys TPG’S 20.3% Stake In Shriram City Union Finance’ (timesofindia-economictimes, 2015) <http://articles.economictimes.indiatimes.com/2015-05-13/news/62124062_1_apax-partners-shriram-city-union-finance-scuf> accessed 31 March 2016.

[4] P.R. Sanjai, ‘GMR Raises $300 Mn By Selling Fccbs To Kuwait Investment Authority’ (http://www.livemint.com/, 2015) <http://www.livemint.com/Companies/Cn1HHekVPvt7cSM9Bcy0bJ/GMR-raises-300-mn-by-selling-FCCBs-to-Kuwait-Investment-Aut.html> accessed 31 March 2016.

[5] Temasek had subscribed to 10.8 million shares valued at Rs 875 each.  ‘Temasek To Invest $151M In Glenmark Pharma | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/pharmaceuticals/2015/04/17/temasek-invest-150m-glenmark-pharma> accessed 31 March 2016.

[6] ‘Magma Fincorp To Raise $80M From IVFA, Leapfrog & KKR | Vccircle’ (Vccircle.com, 2016) <http://www.vccircle.com/news/finance/2015/03/30/magma-fincorp-raise-80m-ivfa-leapfrog-kkr> accessed 31 March 2016.

[7] idem

[8] SI Reporter, ‘PI Industries Surges Post Stake Buy By Cartica Capital’ (Business-standard.com, 2016) <http://www.business-standard.com/article/markets/pi-industries-surges-post-stake-buy-by-cartica-capital-115061600207_1.html> accessed 31 March 2016.

In this blogpost, Mudrika Mathur, Student, University of Rajasthan and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, what is limited liability partnership, Director Identification Number Or Designated Partner Identification Number, Taxability of partners of LLP under IT Act vis-à-vis Double Tax Avoidance Agreement and remuneration to the partners.

A Limited Liability Partnership is a hybrid structure between a company and a partnership which delivers the benefits of limited liability and allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.

Partners are persons (whether natural or artificial) who have subscribed their name to the Incorporation document and further any new partner can be admitted to LLP as per provisions of LLP agreement. The LLP Act 2008 defines the term partner under Sec.2 (q) as ‘Partner’ in relation to an LLP, as any person who becomes a partner in LLP in accordance with the LLP agreement. The LLP Act, 2008 empowers Individuals, Foreign Nationals, Indian Companies, Foreign Companies, Foreign LLP and Foreign LLC to be partners in an LLP. (However, the Foreign LLP would have to comply with FEMA rules).A minimum requirement while incorporating an LLP is two partners(individuals or body corporate )and two designated partners and out of which at least one of them should be an Indian Resident.[1]

Director Identification Number Or Designated Partner Identification Number

All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN).” The partners need to file E-Form DIN-1 in order to obtain DIN or DPIN. In case, the partners already possess DIN (Director Identification Number), the same can be used as a DPIN. DIN / DPIN is a unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as a director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006) / or a Designated Partner of a LLP under section 7 of the Limited Liability Partnership Act, 2008. Income-tax Permanent Account Name (Income-tax PAN) is mandatory as identity proof in case of Indian nationals and such case applicant details should be as per Income-tax PAN. In the case of foreign nationals, Passport number is required. In the case of Foreign Partner, the Passport copy is a mandatory requirement as a proof of identity. The address proof should not be older than 1 year from the date of filing of the E-Form. The Passport copy and address proof should be notarized by the Consulate of the Indian Embassy, Foreign public notary or Company Secretary in full-time employment / CEO / Managing director of the Indian company in which the partner proposed to be a director.[2]

Taxability of partners of LLP under IT Act vis-à-vis Double Tax Avoidance Agreement

Under the ambit of section 2(23) of the IT Act, a partner of an LLP is included in the definition of the term “Partner” under the Indian Partnership Act, 1932. It means that, for tax purposes, partners (including foreign partners) of LLPs are co-terminus with partners of a partnership. An LLP is chargeable to tax in India under section 167 A of the IT Act at 30%, consequently, under section 10(2A) of the IT Act, a partner’s share of income from a firm is exempt from tax in the hands of the partner. In the Indian context, a partner in an LLP would principally earn these sets of income:

1. Share of profits in the LLP
2. Interest on capital contributed by partner; and
3. Remuneration in share of profits in the LLP, including a foreign partner’s share, in the profits of an LLP, is exempt in their hands under section 10(2A) of the Act as an LLP is a taxable entity under the Act and pays tax on profits earned by it.

Remuneration to partner

Remuneration paid by an LLP to a working partner is taxable as business income under section 28(v) of the IT Act. It means, for Indian income tax purposes all the sets of income derived by a partner including a foreign partner from an LLP is taxable (except for the share of profit) as business income of the partners.

Remuneration to foreign partner

The moot point is whether the payment by LLP to foreign partner should be characterized as “Independent Personal Services” (Article 14) /”Dependent Personal Services”/ “Business Income”. Under the India – UK treaty income derived by an individual as a member of a partnership for professional services is specifically characterized as “Independent Personal Services”. However, there are treaties which only include professional services by an individual in their independent capacity as “Independent Professional Services”. Taxability of such income in India is based on either number of days the individual is present in India or availability of fixed base in India to such individual for performance of his services. For remuneration to be regarded as “Dependent Personnel Services”, the existence of an employer or employee relationship between the payer and payee is a must. However, in the case of the partners of an LLP, they are considered as owners of the LLP and consequently the payment may not be characterized as income from “Dependent Personal Services”. If the rationale followed under the IT Act is applied to the tax treaty and remuneration paid to a foreign partner is regarded as “business income” of this foreign back to top partner, the same may still not be taxed in India under article 7 of business profits read with article 5 of the various tax treaties, unless the foreign partner has a permanent establishment in India. The rate of withholding tax on payments to the foreign partner would depend on the characterization of income. For the taxability of such payments, the provisions of the IT Act or the treaty, whichever are more beneficial to the foreign partner, should be applied.

[1] Rule 10(2) of LLP Rules,2009 (as amended by Rule 2 of the Limited Liability (Amendment)Rule,2010.

[2] Faq’s on Revised DIN Process (w.e.f,27 March’11),available at http://www.mca.gov.in/MCA21/dca/din/DIN1-4_faq1.html,last seen on 30/01/2016.

In this blogpost, Prerna R Saraf, Property Lawyer, Bangalore, writes about, national bankruptcy law,  law Present until now for Insolvent Companies, conflict in the laws governing bankruptcy/insolvency, direction given by the Supreme Court and the institutions which need to be set up.

National Bankruptcy Law

India finally passed the much-awaited national bankruptcy law in order to allow banks to recover their debts in a timely manner from insolvent companies.

Law Present until now for Insolvent Companies

Until now, Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was one of the laws that came to the rescue of industrial companies. The Act defines sick company under Section 3(o) as ‘Any industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.’

However, the Act was ineffective due to its inefficient enforcement and court delays.

There were also other laws such as the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).

However, this multiplicity of laws itself was a problem as banks failed to recover loans. There is a  heavy backlog of cases under each of this law. For instance, Rs. 4 trillion worth of cases are pending before Debts Recovery Tribunal (DRT). In the last three years, only 20% of the cases taken up by DRTs, SARFAESI and Lok Adalats have been resolved.

Conflict in the laws governing bankruptcy/insolvency

In fact, the provisions of the legislations were contrasting bringing up new questions of law leading to further delay in proceedings. For example, in M/S Madras Petrochem Ltd v BIFR, the question that was brought up before the Supreme Court was, whether ‘the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act override the Sick Industrial Companies (Special Provisions) Act.’

This is because SARFAESI Act refers to creditor’s interest and SICA refers to the ‘interest of the debtor company.’ In such cases, the court held that SARFAESI Act would override SICA. It would be unhindered by Section 22 of SICA that provides for the suspension of legal proceedings, contracts etc.

Supreme Court Direction and the Ineffectiveness

In May 2002, an amendment was suggested to the Companies Act, 1956 that entailed the establishment of National Company Law Tribunal. (NCLT) The aim was to allow the rehabilitation process to start much before the company reached the difficult to redeem stage. Also, to make rehabilitation, liquidation or winding up a quicker and time bound process.

NCLT was to replace Board for Industrial and Financial Restructuring (BIFR) that administered Sick Industrial Companies Act. Since, the BIFR-SICA regime, allowed companies misuse the law in order to avoid repayment of debts.

However, much to the dismay of the creditors, the establishment of NCLT was challenged before the Supreme Court. The court upheld the constitutional validity of NCLT. It directed that transfer of powers from the corporate benches of high court and company law board to the tribunal could only be made after rectifying certain defects.

The direction was not incorporated in either the 1956 Act or the 2013 Act. Hence, NCLT is not established yet, and sick industrial companies continue to be governed under SICA-BIFR.

National Bankruptcy Law

The aggravated focus on the debt worth $1.3 billion created by the collapse of Vijay Mallya’s Kingfisher Airlines and the tormenting effect it has had on the Indian Banking system has paved the way for the new law.

The new Bankruptcy Code aims to make the winding-up process faster. As of now the process in India typically takes 4 years, twice as much as time taken in China or Russia. 

With the suggestion of the Committee headed by former law secretary, T.K.Vishwanathan, a timeline of 180 days has been provided to resolve cases of bankruptcy or insolvency which is extendable by 90 days.

Debt Recovery Tribunal is the adjudicatory authority over individuals and unlimited liability partnership firms. National Company Law Tribunal is the adjudicatory authority over companies and limited liability partnerships.

The new law would mean timely resolve of bankruptcy cases in the absence of continuous delays in hearings. However, it will take some time before the process is as effective as the provisions lay down. This is because the Code provides for various institutions to be established in order to create a favourable and systematic infrastructure.

Some of the institutions to be set up are

• Insolvency Professionals to conduct insolvency resolution process, take over the management of the company, assist creditors and manage the liquidation process.
• Insolvency Professional Agencies who will examine and certify these professionals.
• Information Utilities that shall collect information related to debtors.
• Insolvency and Bankruptcy Board of India, a regulator that will oversee all the above entities.

The new bankruptcy code has been welcomed by cheery investors as the legal system till now was heavily in favour of businesses and reviving them for the sake of the workers. Here’s hoping that the Indian legal system succeeds in implementing the new law effectively!