Sustainable development in India : Constitutional perspective

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October 5, 2023

This article has been written by Prasenjeet Kirtikar pursuing Diploma in Corporate Litigation and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Since the inception of industrialization and the modernization of human society, there has been vast exploitation of natural resources by means of deforestation, mining and animal slaughtering. It was realised at the global level that such exploitation of nature would lead the entire human race towards sheer disaster and not towards development. Thus, the need arose to achieve a balance between human social development and the protection of the ecosystem, which was reiterated at several international forums. The process of balancing human needs and environmental protection was termed “sustainable development.”

What is sustainable development

Background

In 1968, for the first time, the Swedish delegation proposed to the General Assembly of the United Nations a global conference on the human environment. Accordingly, the United Nations Conference on Human Environment was held in Stockholm (Sweden). The conference was the first major attempt to address issues of environmental protection at the international level. The main objective of the conference was to encourage and provide guidelines for governments and international organisations for the protection of the environment. The conference adopted 26 principles (popularly known as the Stockholm Declaration) as the Magna Carta on Human Development. The first few principles came together as the principles for sustainable development. Even in the 1992 Rio Declaration on Environment and Development (popularly known as the Earth Summit or Rio Summit), various principles were discussed related to sustainable development. Furthermore, in every international attempt to protect the environment, the principles of sustainable development were given utmost importance.

The concept

As per the Brundtland Report (1987), “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Thus, sustainable development demands the protection of natural resources for the next generation and not exploiting everything at once.

It mainly focuses on three areas:

Economic: By the production of goods and services for development.

Environment: Conservation of natural resources and preservation of biodiversity.

Social: Enhancement of quality of life by proper distribution of wealth and natural resources.

Principles of sustainable development

Salient principles that underlie the concept of sustainable development were recognised in the Rio Declaration of 1992 and Agenda 21. They are as follows:

1. Inter-generational equity.

2. Use and conservation of natural resources.

3. Environment protection.

4. The Precautionary Principle.

5. The Polluter Pays Principle.

6. Principal of liability to help and cooperate.

7. Poverty eradication.

8. The Principle of Public Trust.

A developing country like India largely depends on its natural resources for its growth through industrialisation and urbanisation. However, it has also become an obligation for our country to adhere to the international guidelines to achieve a balance between environmental protection and sustainable development. The Constitution of India and the apex judicial body in India, i.e., the Supreme Court of India, have provided guidelines from time to time in this regard.

Let us try to understand the evolution of sustainable development in India from both a constitutional and judicial perspective with the help of landmark case laws.

Constitutional guidelines for sustainable development in India

Preamble of the Constitution of India

The Preamble of the Constitution of India clearly mentions our country as “socialist,” where social concerns are of immense importance. It also signifies the responsibility of the state to provide a decent and pollution free standard of living to all. While achieving social development through industrialisation and urbanisation, it is also essential to look after a pollution free social life.

Fundamental rights

The right to life and right to live in a healthy environment

Article 21 of the Constitution of India guarantees all people a fundamental right to life and personal liberty.

R. L. & E. Kendra Dehradun and Ors. vs. State of UP and Ors., 1985 (popularly known as Doon valley case)

The first indication of recognising the right to live in a healthy environment as a part of Article 21 came from the landmark judgement in this case. R. L. and E. Dehradun wrote to the Supreme Court of India about the exploitation of the ecosystem and its devastating impact due to limestone mining in Mussoorie forest.

It was implied that the disturbance of ecology due to quarrying affects the lives of people and thus violates Article 21 of the Constitution. The Supreme Court of India entertained the petition under Article 32 of the Constitution of India. It is submitted that the order of the court is based on the “Principle of Polluter Pays,” which is one of the essential principles of sustainable development.

In M. C. Mehta vs. Union of India, 1987 (oleum gas leakage case), once again, the Supreme Court of India impliedly expressed the right to live in a pollution free environment as a part of the fundamental right to life under Article 21 of the Constitution.

Even in Charan Lal Sahu Etc. Etc vs. Union of India and Ors., 1989, the Supreme Court of India held that the right to life, liberty, pollution free air and water is guaranteed by the constitution under Articles 21, 48A and 51A(g). It is the duty of the state to take effective steps to protect its guaranteed constitutional rights.

In Vellore Citizens Welfare Forum vs. Union of India and Ors, 1996 (popularly known as the Tamil Nadu Tanneries case), the Supreme Court held that the “Precautionary Principle” and the “Polluter Pays Principle,” which are two basic principles of sustainable development, can be derived from various constitutional provisions such as the right to life under Article 21 of the Constitution of India.

By analysing the above observations of the Supreme Court of India, it can be inferred beyond doubt that the right to live in a healthy environment is our fundamental right under Article 21 and must be protected in the process of sustainable development.

Right to livelihood

In Olga Tellis and Ors. vs. Bumbai Municipal Corporation and Ors. Etc., 1985, the Apex Court held that the right to livelihood is a part of the right to life under Article 21 of the Constitution of India and thus protected while achieving the goals of sustainable development. In this case, the petitioners challenge government schemes that were removed from the Bombay pavements. The argument was that evicting dwellers results in depriving him of his right to livelihood. The petitioner also contended that the state is under an obligation to provide all citizens with the necessities of life. It was also held that environmental interests in social development should not conflict with the fundamental rights of citizens.

In Banwasi Sewa Aashram vs. State of U.P. and Ors., 1986, the petitioner, adivasis and other forest dwellers argued that they were using the forest as their habitat and means of livelihood and that part of the land was declared reserved forest and the other part was acquired by the government to set up a thermal power plant, which resulted in the removal of these people from their houses. The Supreme Court gave directions safeguarding the interests of the adivasis and other dwellers while permitting the acquisition of the land only after the state government agreed to provide certain facilities to these people.

In Pradeep Krishen vs. Union of India and Ors., 1996, the petitioner challenged the decision of the Madhya Pradesh Government to allow the collection of Tendu leaves from sanctuaries and national parks by villagers and tribals living around the boundaries. The grounds of the petition were that such intrusion is causing damage to the reserved territory of the ecosystem and resulting in the shrinkage of forest cover. While deciding the matter on the principles of sustainable development by keeping the balance between protection of the environment and protection of the fundamental right to live, the Supreme Court of India directed the state government to make sure that there should not be any damage or shrinkage of the forest cover due to forest dwellers.

Right to freedom of speech and expression and the right to know

Article 19(1) of the Indian Constitution guarantees every citizen the fundamental rights of freedom of speech and expression and the right to know. This article has played a significant role in the development of environmental jurisprudence in India, as most of the cases related to environmental protection and sustainable development are immersed in the form of PILs due to the exercise of this right by the people of India.

In Tehri Vidrohi Sangharsh Samiti and Ors. vs. State of Uttar Pradesh and Ors., 1990, the Supreme Court of India deeply scrutinised the decision of the government to construct the Tehri Dam and directed it to make a proper environmental impact assessment before starting the project. It was only because of public opinion and the media that the ecosystem was protected and the government was compelled to take proper measures. Any government project affecting the health of the ecosystem and social life must be widely known to the people of India as a fundamental right.

Right to carry on trade or business

In various cases where trade or business affects the ecosystem or human life, the Apex Court has always treated Article 19(1)(g) as secondary and preached the value of sustainable development as it encompasses more fragile fundamental rights, e.g., the right to live.

In M.C. Mehta vs. Union of India and Ors., 1987, the tanneries were discharging effluents from their factories in the Ganga river, resulting in water pollution. The Supreme Court ordered them to stop working immediately, stating that the closure of such tanneries may bring unemployment and a loss of revenue but health and ecology have greater importance.

In Sushila Saw Mill vs. State of Orissa and Ors., 1995, it was held that imposing a ban on sawmills within or near the protected area of forest was not violative of article 19(1)(g) of the Constitution.

Fundamental duties

As per Article 51A(g) of the Constitution of India, it is the duty of every citizen of India to protect and improve the natural environment and have compassion for all living creatures.

Also, as per the principles of sustainable development, such as conservation of natural resources, environmental protection and liability to help and cooperate, it is the obligation of every person to contribute towards achieving the goals of sustainable development. Thus, the fundamental duty enshrined in the Constitution of India strongly advocates the process of sustainable development.

Directive principles of state policy

As per Article 47 of the Constitution of India, the state is duty bound to improve the public’s health and the standard of living of its people. It directs the state to prohibit the consumption of toxic substances, which are harmful to health. This constitutional duty can be fulfilled only in a clean environment.

The 42^nd Amendment of the Constitution in 1976 added a new directive principle in Article 48-A which provides direction to the state to protect and improve the environment and to safeguard the forest and wildlife of the country.

In Indian Council for Enviro-Legal Action Etc. vs. Union of India and Ors. Etc., 1996 (popularly known as the BICHHRI village case), the writ was filed by environmentalists as the health of people in Bichhri village in Udaipur district of Rajasthan was getting affected due to the plant. A toxic slug from the plant percolated deep into the earth, polluting the water in the wells and streams and rendering it unfit for human consumption. The Supreme Court directed the government to issue remedial measures, asked villagers to claim damages and also directed the plant causing the pollution to be closed.

This landmark judgement followed the “Polluter Pays Principle” and emphasised the duty of the state to take care of the public’s health.

Public Interest Litigation

Article 32 and Article 226 of the Constitution of India confer writ jurisdiction on the Supreme Court and the High Courts, respectively. Under these articles, the Supreme Court and the High Courts have the power to issue any directions, orders or writs. In the Indian context, environmental jurisprudence is mostly developed by the judicial activism exercised through the writs. The relaxed rule of locus standi and the concept of public interest litigation (PIL) provide for the participation of individuals and organisations in matters of environmental protection and sustainable development. PILs through Article 32 and Article 226 have been proven to be a better remedy compared to the tort or public nuisance remedy, as they are relatively cheaper, speedy and provide direct access to the higher judiciary.

It is important here to note that most of the landmark case laws discussed in this article were born out of simple PILs requesting judicial attention and yet defined the course of development in India.

Conclusion

Sustainable development is a very simple phenomenon to understand, but still a very difficult one to implement. In a country like India, where there is tremendous diversity in every segment of life, it is indeed a challenging task to look after the nation’s growth to cope with international scenarios and to provide a healthy social life to its masses by protecting the environment.

By studying the directions of the apex court in various cases, we can attempt to understand the complexity of the situation our country is facing while achieving sustainable development.

References

Environmental Law: a book by P. S. Jaswal & Nishtha Jaswal
https://www.defactolaw.in/post/sustainable-development-in-india-evolution-and-legal-perpective#:~:text=Article%2048%2DA%2C%20which%20is,to%20the%20Constitution%20in%201976.
https://www.researchgate.net/publication/311922155_CONCEPT_OF_SUSTAINABLE_DEVELOPMENT_IN_INDIA_INCLUDING_CONSTITUTIONAL_PROVISIONS_AN_ANALYSIS
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3745341
Environmental Law: a book by Dr. V. N. Paranjape
https://indiankanoon.org

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Section 73 of Companies Act, 2013

By

Rachit Garg

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October 5, 2023

0

This article is written by Karanpreet Singh, a law student at Guru Nanak Dev University, Amritsar. It discusses the concept of deposits and its various aspects under the spotlight of Section 73 of the Companies Act, 2013.

Table of Contents

Introduction

For the smooth conduct of the business, a company requires capital. The most practised method of raising funds by the company is issuing shares and debentures. However, there is a third category of raising capital viz. ‘deposits’. A deposit is the amount lent to a company in the form of a short-term loan for backing any urgency in the company. The person who deposits the sum is known as the ‘depositor’. Lending the sum makes the depositor a creditor of the company. This article discusses the relevant rules, regulations, and provisions relating to deposits.

Furthermore, the invitation and acceptance of deposits are governed by Sections 73-76 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 made under Chapter V of the Act. It prohibits the acceptance of deposits other than those of members based on regular resolution or “eligible company” that must meet specific requirements outlined in the rules. Under the rules, eligible companies must have certain net assets and turnover. In contrast, public deposits significantly affect how companies process and accept deposits. This rule aims to strike a balance between:

Promote company financing.
To protect the interests of depositors against society.

Section 73 is the basis for scrutiny of how Indian companies raise their funds through public deposits while adhering to strict regulations. In order to ensure transparency and protect the rights of depositors, it defines specific conditions, eligible companies, exempted deposits, prohibition on acceptance, eligible depositors, punitive measures, and necessary compliance for receiving deposits from the public.

What is a deposit

According to Section 2(31) of the Companies Act 2013, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. In other words, any receipt of money by the company from a depositor is called a deposit. The deposited amount held by the company is always recorded on the liabilities side of its balance sheet. Besides, deposits are one of the sources of capital financing. Unlike equity holders, depositors neither have any ownership claim nor any voting rights in the management of the company. However, deposits can be converted into shares according to the company’s policies.

A company’s reliance on public deposits as a source of short-term financing is essential. These public deposits provide a practical means of addressing urgent financial needs without turning to debentures and shares. Moreover, deposits enable companies to diversify their funding sources and lessen their reliance on funding from financial institutions. To maintain stakeholder confidence and reduce financial risks, companies must follow regulatory guidelines and ensure transparency and prudent management of public deposits.

Types of deposits

There are two types of deposits:

Secured deposit: A deposit that creates a charge over any tangible asset of the company is known as a ‘secured deposit’. In any contingency, the depositor can claim this charge over the allotted asset to recover his deposited amount. In case, the company is unable to repay the amount, the depositor can dispose off that asset against the recovery of his sum.

Unsecured deposit: As the name portrays, a deposit that does not create any charge over the company’s assets is called an ‘unsecured deposit’. The depositor is not provided with security over his deposited amount. A depositor usually hesitates to invest in unsecured deposits. However, companies usually allow high rates of interest on such deposits to lure the public.

List of exempted deposits

Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 sets out a list of transactions which may be termed an ‘exempted deposits’:

Amount received from government – Funds received from the central government or state government, as well as amounts received from sources backed by guarantees from these governments, or funds received from local authorities, or statutory bodies established under parliamentary, or state legislative cannot be called deposits.

Amount received from foreign parties under Foreign Exchange Management Act, 1999 (FEMA) – Funds received from foreign sources, including foreign governments, international banks, multilateral financial institutions, foreign corporations, foreign citizens, and entities residing outside India, are not classified as deposits under Company Law. These transactions are governed by the FEMA and its accompanying rules and regulations.

Amount received as loan or facility – Companies often secure financial assistance through loans or credit facilities. Funds obtained from banking companies, including subsidiaries of SBI, institutions notified by the Central Government under the Banking Regulation Act, 1949, corresponding new banks, or co-operative banks as defined by the Reserve Bank of India Act, 1934, do not fall under the deposit category.

Amount received as loan or financial assistance – Loans and financial assistance received from public financial institutions, regional financial institutions, insurance companies, or scheduled banks defined by the RBI Act 1934, are not considered deposits under Company Law.

Amount received against issue of commercial paper – Companies can raise funds by issuing commercial paper or similar instruments following RBI guidelines or notifications. These funds received in exchange for such instruments are not classified as deposits.

Inter-corporate deposits – When one company receives funds from another company, it often falls under inter-corporate deposits. Such transactions are exempted from being categorised as deposits.

Advance securities application money – Companies often receive advance payments or application fees for securities like shares. These funds, which are held in anticipation of allocating the securities, are not categorised as deposits unless the company fails to allocate the securities within 60 days from receiving the application money and does not issue refunds within 15 days after that period.

Loans from directors & relatives of directors – Amounts received from a company’s director or a relative of a director are excluded from the deposit category. However, the director or relative must provide a written declaration confirming that the funds were not acquired through borrowing or accepting loans or deposits from others.

Acceptance of deposits from members (private companies) – Private companies are subject to specific rules governing deposits. These rules do not apply to private companies that meet certain conditions, such as restricting the acceptance of monies from members to specific limits based on share capital, reserves, and premium accounts.

Secured debentures or compulsorily convertible bonds – Companies may issue bonds or debentures secured by assets or bonds that are compulsorily convertible into shares within a specified period (not exceeding 10 years). These transactions do not qualify as deposits.

Unsecured non-convertible debentures listed on stock exchanges – Issuance of non-convertible debentures that do not constitute a charge on the company’s assets and are listed on recognized stock exchanges as per SEBI regulations are exempted from being classified as deposits.

Amount received from employees and non-interest bearing amounts – Funds received from employees as non-interest-bearing security deposits and non-interest-bearing amounts held in trust are not considered deposits.

Receipt of advance for supply of goods or services – Advances received for the supply of goods or provision of services, provided that these advances are accounted for and appropriated against the supply or provision within 365 days from acceptance, are not categorised as deposits. However, in cases involving legal proceedings, the 365-day limit may not apply.

Trade advances or business advances – Advances received in connection with immovable property, security deposits for contract performance, advances under long-term projects for capital goods, and advances for future services such as warranties or maintenance contracts (provided the service period doesn’t exceed common business practice or 5 years) are not considered deposits.

Promoter’s co-pay – Amounts brought in by promoters of a company as unsecured loans in compliance with financial institutions or bank stipulations are excluded from the deposit category. This exemption is available only until the loans from financial institutions or banks are repaid.

Amounts received by Nidhi companies, chit fund companies, CIS – Specific categories of companies, including Nidhi companies, those dealing with chit funds, and those involved in Collective Investment Schemes (CIS) under SEBI regulations, may receive amounts that are not considered deposits.

Amount received as convertible note – Start-up companies recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) can receive convertible notes, provided they meet certain conditions. These notes are not classified as deposits.

Amount received from AIF, DVCF, etc.– Companies may receive funds from Alternate Investment Funds (AIFs), Domestic Venture Capital Funds (DVCFs), Infrastructure Investment Trusts, Real Estate Investment Trusts, and Mutual Funds registered with SEBI under SEBI regulations. These transactions do not qualify as deposits.

Who is a depositor

According to Rule 2(1)(d) of the Companies (Acceptance of Deposits) Rules, 2014, a depositor is a person who has deposited a sum in the company. The depositor could be:

An individual,
a company,
a trust/firm,
any companies entity, or
any member of a private or public company.

In other words, it includes any people or organisations that give money or any other kind of financial benefit to a company in exchange for interest, repayment, conversion into shares or debentures, etc., as long as the company seems viable. Besides, depositors are considered creditors of the company and are recorded on the liability side of its financial statements. According to the deposit agreement, depositors are entitled to repayment of the principal amount and the agreed-upon interest.

Who is an eligible company

There are two different kinds of companies, i.e.: public and private. However, only publicly traded companies have the right to request deposits. Private companies are not eligible for this provision. The Companies Act 2013, specifies some requirements for a public company to be eligible to raise deposits. In accordance with the limitations outlined in Section 180(1)(c) of the Companies Act 2013, an eligible company may request public deposits.

It should be a public company.
It should have at least Rs. 500 crore in revenue or a net worth of Rs. 100 crore.
The company management must adopt a special resolution. The registrar must receive this resolution.

Section 73: Prohibition on acceptance of deposits from the public

Sections 73 to 76 of the Companies Act, 2013 mention the provisions related to the restrictions and prohibitions for the company while accepting deposits. However, according to Section 73(1) of the Companies Act, 2013, companies are generally not allowed to accept public deposits. This rule safeguards the interests of the public and prevents fraudulent proposals by companies that might dupe depositors. Any violation of these provisions required for accepting deposits might result in severe penalties. However, in Section 73, there are certain rules provided for deposits. Besides, only eligible companies can accept deposits and abide by these rules. However, Section 73(1) does not apply to:

A banking company;
A non-banking financial company (NBFC); or
Any other company as RBI or Central Government specifies.

Furthermore, Section 73(2) of the Companies Act, 2013, deals with the prohibition of accepting deposits from the public. The deposits cannot be raised by overlooking the following conditions:

There must be a submission of a detailed circular of the company within its members stating the financial statements, credit rating, number of depositors, and the amount due to previous depositors.
A copy of the circular and such statement must be submitted to the registrar of companies within a thirty-day period.
There must be a 20 percent submission of the deposited amount accrued in the upcoming financial year before April 30. However, these deposits must be held within a separate bank account.
There must be an insurance policy linked with those deposits.
The company has to make sure that there are no outstanding interests or repayments of deposits to the public. Besides, such a default can put a stay on the company for demanding deposits for the next five years.
There must be a separate account of charge over the company’s assets (against deposits). Such deposits are known as ‘secured deposits’. This provision also acts as a security against the deposited amount.

Status of deposits accepted before the commencement of the Act

Section 74(1) states that if a company had accepted any deposits, any outstanding interest payments, repayment of deposits in the future before the commencement of the act shall be deemed similar as if that were done after the act. All those transactions are meant to be paid in the future.

Section 74(1)(a) states that such a company has to submit a statement to the Registrar of Companies after the commencement of the act. The statement must include a detailed report of the company’s deposits including balance, accrued interests, and repayments.

Section 74(2) mentioned that the Tribunal has the power to extend the three-month period for repayments after considering the financial conditions of the company.

Section 74(3) is a punitive provision that states that if the company fails to repay the deposited amounts or interests linked to it in the specified time by the Tribunal, it may amount to a fine of ten crore rupees and a 7-year sentence.

From whom can a company accept deposits

In addition to the members of the company, only ‘eligible companies’ can receive deposits from the public. Therefore, not all companies can demand deposits from the public, although they can receive deposits from their members. Section 76 of the Companies Act 2013, and the Companies (Acceptance of Deposits) Rules, 2014 are held together while dealing with the cases of acceptance of deposits. The list of those entities are:

Members/Shareholders: Companies can demand deposits from their current members or shareholders. In contrast, the amount cannot be more than 25% of the paid-up share capital and free reserves of the company.

Directors: Depositors can also be directors of that company. To qualify the director as a depositor, the deposited sum must not exceed the annual salary held for the following two years.

Relatives of directors: Deposits are also permitted by the companies and relatives of the directors. The deposited sum cannot be larger than the amount of the loan or guarantee obtained by the director from the company.

Employees: Employees can also make deposits to the company. Their deposited amount cannot be greater than their annual salary.

Exemptions: The Central Government or the Reserve Bank of India (RBI) may give exemptions to certain individuals or legal entities.

Punishment for Contravention

If any company referred to section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act – The Company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000/- and where the contravention is a continuing one, with a further fine which may extend to Rs. 500/- for every day after the first day during which the contravention continues.

In contrast, Section 73(3) of the Companies Act, 2013 provides that any deposit accepted by the company under Section 73(2) must be repaid with interest according to the provisions of Section 73(4) of the Companies Act, 2013. This provides that if the company does not repay the deposit or the interest, a complaint can be filed with the National Company Law Tribunal (NCLT) mentioned in Section 408 of the Companies Act, 2013.

Repayment of deposits

Section 74: Under this section, companies are required to submit a declaration of receipt of the deposits to the Registrar. This provision also acts as a safeguard against deposit repayments. The condition linked to these deposits is that deposits must be made within a period of three months. To return the deposited sum to the public, usually, the time period allotted is one year to three years. Besides, if the matter is raised before the Tribunal, it can further extend this duration depending upon the financial condition of the company. Even if the company fails to return the money within the specified time period, members of that company can be imprisoned for seven years or be liable for Rs. 1 crore fine.

Damages for fraud

Section 75: This is also a justice-seeking provision under the Companies Act, 2013, as it can make the company liable for any financial damage incurred to the depositors by any act or omission on the company’s end. Nevertheless, the company can only be made liable if the mens rea is proven, i.e., the intention of the company was to dupe the depositors. This provision also attracts vicarious liability, as the employees of the company who have taken part in such deceiving can be personally made liable for the same. In other words, they would be facing legal consequences in his/her personal capacities according to the degree of offence.

Furthermore, the section mentions that in such a case a victim could initiate legal action against the company and its employees or any other group or individuals can plead on behalf of the victim. This provision encourages class action (a collective lawsuit on behalf of numerous plaintiffs against a single defendant) as individuals or groups can act on behalf of other victims.

Other protective measures provided under Companies Act, 2013

Pursuant to Section 245(1)(g), if a depositor believes that the management or actions of an enterprise are causing harm to the company, its directors or the depositors, can submit an application before Tribunal. This provision also comprises class action lawsuits. Various measures may be requested with this submission and declaration of damages or request for appropriate measures against:

The Company or its directors for any dishonest, illegal or wrongful conduct or any possible misconduct on their part.
The Company’s auditors, which include the accounting firm, for providing inaccurate or misleading information in their audit report or for engaging in dishonest, illegal or illegal activities.
Any expert, consultant, adviser or individual who has provided false or misleading information to the Company or has engaged in any dishonest, unlawful or unlawful activity or has been implicated in any possible wrongdoing on its part.
One may also seek any other remedy the court deems appropriate.

Section 245(2) states that if depositors seek compensation, damages, or any other appropriate action from an audit firm, both the firm and every partner who played a role in providing inaccurate or misleading information in the audit report or engaged in fraudulent, unlawful, or wrongful behaviour will be held vicariously liable.

Section 245(3)(ii) states that there must be either one hundred depositors or a percentage fixed under regulations, whichever of the two is lesser. Therefore, the company owes a percentage of total deposits as mentioned by the regulations to the depositors.

Other rules related to deposits mentioned under Companies (Acceptance of Deposits) Rules, 2014

In the Companies Act, 2013, Chapter V is dedicated to rules and regulations surrounding the acceptance of deposits by companies.

Rule 3: Rule 3 is a pivotal part of this chapter, and lays out essential terms and conditions regarding deposit acceptance. In essence, Rule 3 and its associated provisions are designed to ensure transparency, security, and fairness in the process of accepting deposits by companies. These regulations aim to safeguard the interests of both the company and its depositors, promoting trust and accountability. The provisions of Rule 3 are:

Deposit duration: Rule 3 strictly prohibits companies, both under sub-section (2) of section 73 and eligible companies, from accepting or renewing any deposit, secured or unsecured, with a repayment period less than six months or exceeding thirty-six months from the date of acceptance or renewal. There are conditions where companies can accept or renew deposits for repayment earlier than six months. The deposits must not exceed ten percent of the aggregate of the company’s paid-up share capital and free reserves. These deposits should not become due for repayment earlier than three months from the date of deposit or renewal.
Joint names: Rule 3 allows deposits to be accepted in joint names, not exceeding three individuals, with various clauses such as “jointly,” “either or survivor,” “first named or survivor,” or “anyone or survivor” to accommodate the depositors’ preferences.
Limit on deposits: Companies referred to in sub-section (2) of section 73 are subject to a limit on the acceptance of deposits. The total deposits, when combined with other outstanding deposits, cannot exceed 25 percent of the aggregate of the company’s paid-up share capital and free reserves.
Deposit limits: Eligible companies must adhere to deposit limits. Deposits from members should not exceed ten percent of the aggregate of the paid-up share capital and free reserves. For other deposits, excluding those from members, the limit is twenty-five percent of the aggregate of the paid-up share capital and free reserves.
Government companies: Government companies that are eligible to accept deposits under section 76, have their own ceiling. The total deposits, along with other outstanding deposits, should not exceed thirty-five percent of the aggregate of their paid-up share capital and free reserves.
Rate of interest and brokerage: Rule 3 establishes restrictions on the rate of interest and brokerage. Companies cannot invite or accept deposits carrying an interest rate or pay brokerage exceeding the maximum rate set by the Reserve Bank of India for non-banking financial companies. Only individuals who have received written authorization from the company to solicit deposits on its behalf are entitled to receive brokerage. Any payment of brokerage to unauthorised individuals is strictly prohibited.
Unalterable terms: To protect the interests of depositors, Rule 3 mandates that companies cannot reserve the right to alter any terms and conditions of the deposit, deposit trust deed, or deposit insurance contract in a way that prejudices or disadvantages the depositors after the issuance of circulars or advertisements.

Rule 4: Form and particulars of advertisements/circulars: In continuation of Chapter V’s regulations, Rule 4 focuses on how companies should communicate their intent to accept deposits to their members and the wider public. This rule aims to ensure that information about deposit schemes is effectively and transparently communicated to members and the public. The key elements of this rule are as follows:

Circular to members: Companies intending to invite deposits from their members are required to issue a circular in Form DPT-1. This circular should be sent to all members using a registered post with acknowledgment, speed post, or electronic means.
Newspaper advertisement: In addition to the circular, companies must publish their intent in English and a vernacular language newspaper, both with a wide readership in the state where the company’s registered office is located.
Website upload: To ensure transparency, companies accepting deposits from the public must upload a copy of the circular on their website if they have one.
Authority and registration: Circulars or advertisements must bear the authority of the company’s board of directors and must be registered with the Registrar at least thirty days before they are issued.
Validity: Circulars or advertisements remain in effect until one of the following occurs: the expiration of six months from the close of the financial year, the date of the financial statement presentation at the annual general meeting, or the date on which the annual general meeting should have been held.

Rule 5: Deposit Insurance: Rule 5 underscores the significance of deposit insurance in safeguarding the interests of depositors. Provisions mentioned in Rule 5 are put in place to secure the interests of depositors and ensure that companies have adequate insurance to cover potential defaults, fostering depositor confidence. The key elements of this rule include:

Contract for deposit insurance: Companies intending to accept deposits, whether under Section 73(2) or as eligible companies, must enter into a contract for providing deposit insurance at least thirty days before issuing a circular or advertisement.
Coverage: The deposit insurance contract should explicitly outline that, in the event of a default in repayment, depositors are entitled to receive the principal amount of deposits and interest up to the limit specified in the contract.
Premium payment: Importantly, the amount paid as insurance premium must be covered by the company itself and should not be deducted from the principal or interest payable to depositors.
Default resolution: If a company defaults in complying with the terms and conditions of the deposit insurance contract, making the insurance cover ineffective, the company must rectify the default promptly or enter into a fresh contract within thirty days. Failure to do so may result in penalties, and the company will be treated as having defaulted.

Rule 6: Creation of security: Rule 6 specifically addresses the creation of security for deposits, particularly for secured deposits. This rule ensures that assets securing deposits are of sufficient value to cover potential repayments, further enhancing the security of depositors’ funds. The key points are as follows:

Asset charge: Companies accepting secured deposits must provide security through a charge on their assets, excluding intangible assets. This charge is established to ensure the repayment of the deposit principal and interest. Importantly, the security amount must not be less than the amount not secured by deposit insurance.
Valuation: The valuation of assets securing deposits is critical. It is mandated that the market value of these assets must not be less than the value of deposits accepted and the interest payable. This valuation should be conducted by a registered valuer.
Valuation clarification: In cases where the qualifications and experience of valuers are pending finalisation, an independent merchant banker registered with SEBI or an independent chartered accountant with a minimum of ten years of experience can perform the valuation.

Rule 7: Appointment of deposit trustees: Rule 7 introduces the necessity of deposit trustees for securing deposits. Rule 7 establishes a structured framework for the appointment and regulation of deposit trustees, further safeguarding depositors’ interests. Key provisions include:

Consent requirement: A company must obtain written consent from deposit trustees before their appointment. This consent must be prominently mentioned in the circular or advertisement issued by the company.
Trust deed execution: The company must execute a deposit trust deed at least seven days before issuing the circular or advertisement, outlining the terms and conditions of the trust.
Ineligible appointments: Certain individuals or entities are ineligible for appointment as deposit trustees. This includes company officers, individuals indebted to the company, those with material pecuniary relationships with the company, and those who have entered into guarantee arrangements related to the deposits or interest.
Removal procedures: Deposit trustees cannot be removed after the issuance of the circular or advertisement and before the expiry of their term unless all directors, including independent directors, consent to their removal.
Duties of trustees: Deposit trustees have various responsibilities, including ensuring adequate security, compliance with deposit terms, and taking steps to protect depositors’ interests. They also play a role in calling meetings of depositors when necessary.

Rule 16: Return of Deposits to be filed with the Registrar

Annual Return Submission: Companies falling under these rules must submit, before the 30th of June each year, an annual return using e-Form DPT-3 to the Registrar of Companies. They should also include the necessary fee as specified in the Companies (Registration Offices and Fees) Rules, 2014. This return should contain information as of the 31st of March of that year, and it must be audited by the company’s auditor. The auditor must provide a declaration to confirm the accuracy of the information in Form DPT-3.
Clarification: It’s important to note that Form DPT-3 is exclusively utilised for submitting returns related to deposits or details of transactions not categorised as deposits. This requirement applies to all companies except those owned by the government.

In addition, Rule 16A addresses the need for financial statement disclosures:

For non-private companies: Publicly traded companies, excluding private ones, must include information in their financial statements, specifically in the form of notes, regarding funds received from directors.
For private companies: Private companies are required to disclose, via notes in their financial statements, any funds they’ve received from directors or the relatives of directors.

Deposit v Loan

Deposits

Acceptance of Deposits: Section 73 of the Companies Act, 2013, deals with the acceptance of deposits by companies. A deposit, in this context, refers to any amount of money received by a company from its members, including individuals and other companies, either as a loan or as an advance payment for goods or services to be provided in the future.
Regulation: Accepting deposits from members is subject to strict regulatory requirements, including the need to comply with the Companies (Acceptance of Deposits) Rules, 2014. Companies must also submit periodic returns and disclosures about deposits accepted from members.
Interest: Deposits may or may not carry interest, depending on the terms agreed upon between the company and the depositor. If interest is promised, it should be specified in the contract.
Repayment: Companies must repay deposits to the depositors as per the terms of the deposit, which may include periodic repayments or repayment upon maturity.
Use of Funds: Companies can use the funds raised through deposits for their operational or business purposes.

Loans

Borrowing of Loans: The borrowing of loans is governed by Section 180 of the Companies Act, 2013. Companies can borrow money by taking loans from banks, financial institutions, or other lenders. These loans are typically in the form of debt instruments like term loans, debentures, or bonds.
Regulation: While there are regulatory requirements for borrowing loans, they are generally less stringent compared to the rules governing the acceptance of deposits. Companies must follow their borrowing limits as specified in their Memorandum of Association and Articles of Association.
Interest: Loans almost always carry interest, and the terms, including the interest rate and repayment schedule, are negotiated between the borrower (the company) and the lender.
Repayment: Loans are typically repaid as per the agreed-upon terms, which may include regular instalments or a lump-sum repayment at maturity.
Use of Funds: Companies borrow loans for various purposes, including capital investments, working capital, and other financial needs.

Challenge to the constitutionality of Section 73

In the case of M/s. Nidhi Land Infrastructure Developers Pvt. Ltd. v. Union of India (2017), the plaintiff, Nidhi Land Infrastructure Developers Pvt. Ltd., raised an objection regarding the constitutionality of Section 73 within the framework of the Companies Act of 2013. This section explicitly prohibits companies from accepting deposits from the general public unless they adhere to specific formalities.

The plaintiff contended that this provision imposed disproportionate limitations on their capacity to conduct lawful businesses. This provision is encroaching upon their right to engage in legitimate commercial transactions.

Nonetheless, the Supreme Court affirmed the legality of Section 73 through its verdict. The Supreme Court said that the provision had been formulated with the primary intent of safeguarding the rights and benefits of depositors. Therefore, it cannot be said that this provision violates the right of free conduct of business.

Role of judiciary

Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India (SEBI) 2012

In the case of Sahara India Real Estate Corporation, the Sahara Group’s unlisted companies raised funds through Optionally Fully Convertible Debentures (OFCDs) without complying with Section 73 of the Companies Act and other regulations. SEBI alleged that Sahara raised large deposits without complying with regulatory norms. Sahara contended that OFCD is a focused issue and does not fall under SEBI’s regulatory jurisdiction. The Supreme Court of India ruled in favour of SEBI, stating that OFCDs are true “securities” under the Securities and Exchange Board of India Act, 1992. Sahara was ordered by the Supreme Court of India to return the collected amount to investors along with interest to protect their interests. This case set a precedent for SEBI’s mandate to regulate financial instruments and ensure investor protection.

State of West Bengal v. Kesoram Industries Ltd. (2014)

In the case of Kesoram Industries Ltd., Kesoram Industries Ltd., issued debentures while also looking for public deposits. There arose a lawsuit against them after the company ran into financial problems and failed to repay the deposits and unpaid debts. Initially, the question of whether the State of West Bengal was legally permitted to file a lawsuit against the company to recover the unclaimed deposits. Secondly, it is the obligatory nature of the deposit repayment for companies. However, the Supreme Court ascertained that the State of West Bengal is vested with the legal standing to institute legal proceedings against Kesoram company. Furthermore, The company was held liable for its failure to adhere to the court’s orders. SC ordered them to repay the deposits and take care of any unpaid debts. The Supreme Court’s verdict further reaffirmed the importance of abiding by deposit-related regulations. It emphasised the obligation of companies to fulfil deposit repayment obligations within the stipulated time periods, thereby ensuring the protection of the interests of depositors. This judicial ruling put the significance of upholding deposit regulations in the limelight as it safeguards the depositors.

Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. v. Assistant Provident Fund Commissioner (2016)

In the case of Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd., there was an issue regarding the consideration of the outstanding legal liabilities of Gwalior Rayon Silk Co. as deposits. The central question was whether these unpaid liabilities, including contributions to provident funds and state employee insurance, should be classified as public deposits. In its decision, the Supreme Court ruled that the company’s outstanding statutory obligations should indeed be considered as “public deposits.” In fact, this judgement set a precedent by extending the legal requirements of public deposits to the unpaid legal obligations of the company in question.

Nitin Rekhan v. Union Of India (2022)

In the case of Nitin Rekhan, the petitioner had filed a writ petition before the Delhi High Court under Article 226 of the Indian Constitution, along with Section 482 of the Code of Criminal Procedure, 1973. The petitioner’s primary request was for the court to compel the Registrar of Companies to take legal action against respondents under Sections 73 and 76A of the Companies Act, 2013. The background of the case involved the petitioner paying Rs. 40,00,000 to the directors of the respondent company for share issuance, with this amount later being refunded. However, the petitioner alleged that the interest on this sum, as per the Companies (Acceptance of Deposits) Rules, 2014, was not repaid. The petitioner had filed a complaint with the Registrar of Companies, but no action was taken.

The petitioner argued that the inaction of the Registrar amounted to a violation of the Companies Act, 2013, and sought penalties against the respondent Company and its auditors, (which are also respondents in this case). However, the court ruled that the sum in question could not be classified as a “deposit” under the Companies Act, 2013, or the Companies (Acceptance of Deposits) Rules, 2014. The court based this decision on the fact that the money had been given for share allotment in 2010 and was returned in 2018, making the 2013 Act and Rules inapplicable. The court also referred to a circular that clarified this position. Furthermore, the court stated that the dispute stemmed from a private contract and was beyond the scope of its jurisdiction. The petitioner was advised to pursue alternative legal remedies for recovering interest or dues from the respondent company. Therefore, the writ petition was dismissed as the court found no valid grounds for its consideration. The court emphasised that the issue was contractual and not within the purview of writ jurisdiction. The court also clarified that its observations would not impact any future proceedings related to the case.

Conclusion

Winding up, Section 73 of the Company’s Act 2013, and the Companies (Acceptance of Deposits) Rules, 2014 are vital in controlling how deposits are acknowledged by companies. As there is a hike of the corporate sector in the markets, special measures and provisions are made for depositors’ inclination. On the other hand, Section 73 of the Companies Act sets various standards regarding the acceptance of deposits and adherence to the rules by characterising the eligibility, accepted deposits, and permitted depositor entities.

To avoid legal repercussions and safeguard the funds of the depositors, compliance with the law is of significant importance. To acquire the trust and validity of their partners, companies should be mindful and use a reasonable level of raising funds while accepting deposits, keeping precise records, and guaranteeing convenient reimbursement. The legitimate arrangements of the Companies Act, 2013, cultivate an environment of monetary increment by finding some kind of harmony between security provisions and the company help section. This increases financial backer trust in the corporate area and advances a feasible and responsible company scene in India.

Frequently Asked Questions (FAQs)

Which companies can accept deposits under Section 73?

Certain classifications of businesses like non-banking financial companies (NBFCs), lodging money companies, and infrastructure debt fund NBFCs, alongside explicitly absolved elements, are qualified to get deposits under Section 73. In any case, most companies are not approved to gather deposits from the overall population.

What are the eligibility criteria for accepting deposits?

To be qualified for accepting deposits, companies should stick to laid-out measures, such as the creditworthiness of the company, dispensing a hold for deposit repayments, getting investors’ status, and sticking to straightforward exposure standards.

Is there any limit on the number of deposits a company can accept?

The acknowledgment of deposit is limited by a ceiling – covered at 25% of the company‘s share capital and free reserves. In specific cases, this limit can be raised for a qualified company, dependent upon the discretion of the directors.

What are exempted deposits under Section 73?

Section 73 includes specific transactions that cannot be called deposits, such as funds with governmental origins, any amount granted by foreign governments, and exclusions granted by the Central Government.

Can a company accept deposits from directors and their relatives?

Yes, companies can take deposits from their directors and their relatives if specific conditions are satisfied and requisite disclosures are made.

What are the consequences of not adhering to the regulations mentioned in Section 73?

Failing to comply with Section 73 can result in severe penalties, including substantial fines and the potential imprisonment of accountable employees.

Is it possible to demand deposits without observing the established conditions?

No, strict adherence to the specified terms and conditions stipulated in Section 73 is compulsory; disregarding these could lead to legal actions.

Can a private company demand deposits from the general public?

In most cases, private companies lack the authorization to demand deposits from the public. Yet, they might be eligible to obtain deposits from directors and members, subject to specific conditions discussed above.

What measures should a depositor adopt to ensure the safety of their deposits?

To safeguard deposited funds, individuals should affirm the company’s compliance with the requirements mentioned in Section 73 and validate its authorization status. Prudently assessing the company’s financial conditions and creditworthiness prior to depositing funds is recommended.

References

All about counter statements in a trademark infringement case

By

Vanshika Kapoor

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October 4, 2023

0

This article has been written by Aarshiya Punera, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Table of Contents

Introduction

The first half of 2023 saw a rise in trademark infringement cases in the courts. The famous coffee shop chain in Delhi, Sardar Baksh, changed its name to Sardar-ji-Baksh after being sued by Starbucks. Rajnigandha was awarded Rs. 3 lakh as damages when Rajnipaan tried to sell its flavoured pan masalas on the goodwill of the former. Recently, the Madras High Court dismissed the appeal of PhonePe in a trademark infringement suit against DigiPe. Trademark owners have time and again, and rightly so! ferociously protected their trademarks.

What is a trademark

Markets today are highly competitive; trademarks help owners promote and sell their goods and services. They establish a brand’s identity, ownership, and reputation. For consumers, trademarks help them determine the origin and quality of goods and services. They play a role in determining whether the consumer will buy the product or not.

Section 29 of the Trade Marks Act of 1999 defines a trademark as a mark capable of being represented graphically and that is capable of distinguishing the goods and services of one person from another. The mark may include the shape of the goods, colour combination, and packaging. The three stripes of Adidas, the red and white colour combination of Zomato, and the letter “M” in McDonald’s are all examples of trademarks.

What is trademark infringement

A trademark owner has the exclusive right to use his trademark. He can prevent his competitors from using his brand name, logo, and market reputation. He has a right to prevent others from using any mark that establishes his ownership. He is also entitled to relief when this exclusive right to enjoy his trademark is infringed.

A trademark is said to be infringed when a person other than the proprietor or person who is permitted to use it uses, in the course of trading, a mark that is identical with, or deceptively similar to, the trademark about goods or services in respect of which the trade mark is registered. Simply put, trademark infringement occurs when any entity, whether the owner or the licensee, uses a trademark similar or closely identical to the original trademark, thus creating confusion among consumers and benefiting from it, taking unfair advantage of the reputation of the original trademark

When is a trademark said to be infringed

A person is said to infringe the trademark of another when:

The trademark is identical or deceptively similar to the owner’s trademark and is used for the same goods and services.
The trademark confuses the public as being related to the owner’s trademark
The person uses the owner’s trademark for labelling or packaging other goods and services without due authorization.
The person uses the owner’s trademark as a trade name for his business or goods.
The person uses the owner’s trademark for advertising his goods and services and thus takes undue advantage of the registered trademark.

Counter-statement in a trademark infringement case

An entity is entitled to protect its trademark. If it feels that its trademark is being infringed, it can file a complaint with the concerned trademark registry, claiming infringement of its trademark by the other. The other party, against whom the allegation has been made, is liable for an injunction, damages, or cancellation of registration unless it proves non-infringement.

A counterstatement is a legal document filed before the concerned legal authority by the defendant (the party who is accused of infringing the trademark) against the plaintiff (the party who owns the trademark). It is a detailed response of the defendant to the plaintiff on allegations of trademark infringement levelled against him.

A counter statement is attached to Form TM-O and submitted to the registry along with the required fee (physical filing Rs 3000 and online filing Rs 2700).

Purpose of counter statements

A counterstatement consists of arguments and evidence from the defendant establishing his fair use and non-infringement of the trademark. The purpose of the counterstatement is to counter the plaintiff’s allegations and rebut his claims that his trademark was infringed. It states reasons as to why the defendant has not infringed the trademark of the owner.

Grounds of defence against a trademark infringement claim

To counter the plaintiff’s claim of his trademark being infringed and to defend one’s use of the trademark, the grounds of defence should be cogent and strong. The defendant should be able to convince the concerned authority that his use of the said trademark does not, in any way possible, create confusion among consumers or cause any loss to the plaintiff.

To establish noninfringement of the owner’s trademark, the following grounds can be proved:

Prior use: The person who gets the trademark registered first has a claim against all the subsequent applicants. The defendant can show that he registered his trademark before the plaintiff and that his trademark was already in the public domain before the plaintiff.
No similarity between the trademarks: Strong evidence can be produced by the defendant stating that the distinctive character of the owner’s trademark is not diluted and that his trademark does not confuse the general public.
Delay and acquiescence: The defendant can establish that the trademark owner has given up his right to claim any relief by remaining silent for a long duration (5 years, as given under Section 33 of the Trademarks Act, 1999) and has thus impliedly permitted the defendant to use their trademark. This is known as the doctrine of Laches.
Permitted use: If the trademark owner assigns the use of his trademark to the defendant, he is believed to have consented to it. Therefore, there is no infringement if the trademark is used by a rightful licensee.
Fair use: The defendant can establish that his use of the trademark is fair and that he is complying with the honest practises in the industry and has no intention to take unfair advantage or create confusion.
Non-use of the trademark by the registered proprietor: If the owner is not using the trademark and is also preventing his competitors from using the said mark, it does not serve the interests of anyone. The defendant, if he can show that there is no use of the trademark by the owner and that the defendant has a legitimate interest in using the said mark, can counter the infringement claim.

Essentials of a counter statement

A counterstatement helps the defendant put his side of the story forward; therefore, a well-crafted counterstatement, along with strong evidence and complete documents, strengthens the case of the defendant.

The following are the things that should be included in an effective counter statement:

Introduction: Complete details of the defendant, including his name, contact details, address, business, trademark registration number, the goods or services for which the trademark was obtained, etc.
Background: The factual background of the case states the claim of the plaintiff, the allegations against the defendant, and the procedural history of the case.
Arguments in support of your use: The most important part. This part includes a paragraph-wise rebuttal of the plaintiff’s allegations. The defendant has to establish non-infringement and list all the grounds on which he is denying the allegations.
Evidence: Evidence in the form of registration documents, communications with the plaintiff, a licence certificate and other supporting documents has to be attached to strengthen the case of the defendant.
Relief sought: The counter-statement has to end with a relief that is sought by the defendant. It can be an amicable resolution of the matter, dismissing the plaintiff’s claim aside or declaring the defendant’s use of the trademark as fair.
Verification: The counterstatement has to be verified for its truthfulness by the defendant.

Conclusion

Drafting a counter statement in a trademark infringement case requires a delicate balance of legal expertise and strategic thinking. By thoroughly understanding the allegations against you and conducting a comprehensive analysis of your own trademark rights, you can craft a compelling counter statement.

In conclusion, a meticulously drafted counter statement is your opportunity to assert your rights, refute allegations, and showcase the merit of your position. Approach it with diligence, backed by legal acumen, and present a compelling defense that stands up to scrutiny.A counter statement thus plays a pivotal role in making the defendant’s case. It has to be drafted while taking care of all the possible allegations that could be made by the complainant. A strong counter statement includes clear clarifications to the complainant’s allegations and is supported by evidence.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Everything that a CS needs to know about insider trading

By

Rachit Garg

-

October 4, 2023

0

This article has been written by Apeksha Choubey, pursuing a Diploma in International Business Law from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Table of Contents

Introduction

Insider trading is a serious issue that can greatly impact the goodwill and sustainability of a company. As a company secretary, it is essential to have a comprehensive knowledge of insider trading laws, regulations, and best practises to protect a company from this malpractice. This article aims to provide an overview of insider trading, its implications, the legal framework, and the role of a company secretary in preventing and detecting insider trading activities.

What is insider trading

Insider trading refers to the buying or selling of publicly traded companies’ securities based on the possession of some material information that is not yet available to the public. This material information denotes information or data that has a substantial impact on investors while making decisions. Generally, it is possessed by corporate insiders, such as directors, officers, employees, or major shareholders of the company, as these corporations have easy access to confidential information that could significantly impact the company’s stock price. Many big insider trading scams happened all over the world, which resulted in loss of goodwill, financial damage and further heavy penalties and imprisonment imposed by the regulators.

Intended declaration of rights issues in the near future, opening another branch or plant at a different location, the chairman of the company resigning to the boards under any internal disputes and the company negotiating with a foreign company to sell a 20% stake are a few examples of material information that could be misused by any director or key management personnel (KMP). When these handfuls of corporations misuse this material information to manipulate the stock prices at the Stock Exchange for their own benefit, this is termed insider information.

Implications of insider trading

In this section, we will understand various serious implications of insider trading:

Legal impact: Insider trading is declared illegal in India, which can result in civil and criminal penalties, including fines and imprisonment. These legal consequences also badly impact the company’s operations and business.
Investor confidence: Insider trading adversely affects investor trust and confidence in the fairness and accuracy of financial market transactions. It creates an unfair advantage for those with access to non-public and material information. Ultimately, it depletes the capital and savings of investors due to the manipulation of stock prices.
Reputational damage: Whenever insider trading scams are disclosed in public, it significantly damages the company’s reputation. Negative publicity and loss of investor confidence can harm the company’s brand image and long-term prospects.

Regulations to control insider trading

Insider trading is regulated by SEBI (Securities and Exchange Board of India) through the Prohibition on Insider Trading Regulations, 1992. In this regulation, various laws are enacted to safeguard the interests of various parties related to the company, directly or indirectly. A few laws are outlined below:

Disclosures by certain persons- This includes initial and continual disclosures related to holdings of securities required by the director or key management personnel (KMP) who resumed office in the company under new appointment. It also covers disclosures of holdings of securities by other connected persons.
Chinese Wall Policy- A ‘Chinese Wall’ is a type of practise in which information known to one person for one part of the business of a company is not available to another person who belongs to another part of the business, directly or indirectly. It prevents the misuse of material and confidential information within a company. By adopting this policy, a company can have control over sensitive information from being misused in some way by the employees for their personal benefit.
Unpublished price-sensitive information- This information is generally related to major company decisions or its securities, which, directly or indirectly, are not available or published in the public domain. It constitutes:
1. Dividend policy.
2. Financial results before the board meeting for approval.
3. Merger, de-merger, expansion, and disposal-related decisions.
4. Change in capital structure.
5. Changes in key management personnel (KMP) or board of directors (BOD).
Penalty provisions- Insider trading is punishable under Section 15G of the SEBI Act, 1992. It prescribes penalties for insiders not less than Rs. 10 lakhs, which can extend to Rs. 25 crore or three times the profit earned through insider trading, whichever is higher.
Code of conduct- The code of conduct should be prepared to regulate, monitor and report on various aspects by compliance officers pertaining to the prohibition on forward dealings in securities by the director or KMP, trading in securities by insider restriction, trading window, pre-clearance of trades, trading plans, and many more.

Role of a Company Secretary in preventing and detecting insider trading

The company secretary role is very crucial in ensuring compliance and preventing insider trading within the organisation. He is responsible for complying with all rules and regulations prescribed by law, keeping watch over malpractices, and maintaining legal papers and other documentation related to law related matters. The company secretary shall act as a compliance officer and ensure that all laws have been complied with to control insider practises. To perform the duties of a compliance officer, it is required that the company secretary have specific knowledge of all applicable laws, regulations and related amendments. He/She will prepare a report and submit it to the board and chairman of the audit committee in relation to the insider trading requirements of a company. He shall perform the following duties:

To establish strong and robust code of conduct, internal controls and procedures as specified in the regulation and get these approved by the Board of Directors.
To implement comprehensive insider trading policies and procedures that outline guidelines for employees, directors, and officers. These policies should cover trading restrictions, pre-clearance procedures, reporting obligations, and consequences for violations.
To frame rules and policies to protect price-sensitive information. Various aspects are required to be taken into consideration while framing policies, such as the flow of information in the company, how it will be protected from unauthorised use, person/department holding it, and effective controls to be put in place to secure it. Implementing the Chinese Wall Policy in the company is one of the most effective methods to develop a better culture among employees.
To ensure strong data protection policy and related information technology. It is very difficult to secure online data nowadays, as it is accessible to the entire world in seconds. Hence, cyber To maintain a record of trading window rules such as close period at time of financial declaration, at time of dividend declaration, public or right issue, expansion, merger, disposal of part of any subsidiary and so on.
To secure and record price sensitive and material information. This list is very crucial as company sustainability depends on these events and leakage of this information results in serious reputational and financial damage to the company.
To prepare a list of key management personnel, directors and other connected persons and their disclosure information related to the holding of securities.
To review, modify and suggest improvements in internal control and code of conduct policies at regular intervals. Every change in business and method impacts the internal controls and their degree of effectiveness. Therefore, it is suggested to review these controls on a regular basis to detect fraud and errors on time and take remedial measures accordingly.
To furnish accurate information as requested by Board and SEBI from time to time pertaining to records maintenance, details of issue reported, trading window compliance, an enquiry of any other document, etc.
Conduct regular training and development sessions to inform employees about insider trading laws, regulations, and the importance of maintaining confidentiality, which will definitely help in creating awareness and foster a culture of compliance within the company.
To implement effective internal controls and monitoring systems to control trading activities, identify suspicious transactions, and promptly investigate potential violations.
To ensure timely and accurate disclosure of material information to the public in compliance with applicable securities laws and facilitate the reporting of suspicious activities internally, encourage employees to report potential violations anonymously and without fear of retaliation.
To collaborate with the legal and compliance department as an ongoing activity and work closely with these teams to ensure alignment of policies, reporting mechanisms and investigations related to insider trading. Regular communication and coordination are essential to maintaining a robust compliance framework.

Conclusion

Insider trading is a severe offence that can have serious consequences for both companies and investors. It is the vital responsibility of a company secretary to maintain strict controls in the company to curb such practises, advocate ethical standards, ensure compliance with laws and regulations, and protect the interests of the company, its shareholders, its investors and the broader financial markets and economy. The company secretary acted as a safe wall between the company’s interests and insider trading activities. It is a real challenge to remain vigilant constantly about the activities of the companies, changes happening inside the company and outside the world impacting the business of the company and be compliant with every part of the prescribed regulations and laws.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

An essential guide to proving liability in a car accident

By

Rachit Garg

-

October 4, 2023

0

According to the World Health Organization (WHO), road accidents are responsible for at least a million deaths and between 20 to 50 million injuries every year.

But despite these staggering numbers, most parties involved in vehicular accidents lack the know-how when it comes to navigating the immediate aftermath of a car crash scene.

If you’ve been involved in a car accident and do not know what to do, the other party you’re up against may take advantage and claim you’re the negligent party just to avoid or reduce their liability.

Now, before you look for a car accident lawyer, you must first be aware of the legalities that surround car accident cases, including the appropriate steps that must be taken immediately after the accident.

Table of Contents

Establishing Liability

Negligence—in different forms—is the most common cause of car accidents. But to establish your right to compensation and prove the other party’s liability, the following elements should be present and must be proven:

Duty – the other party must owe you a duty of care to practice reasonable caution based on applicable laws.
Breach – negligence or breach of duty (to drive safely) must be proven.
Damage – the resulting damage or injury must be related to the other party’s negligence.
Causation – the damage must be an effect of the other party’s negligence.

An example of this is a driver who caused a road accident after texting while driving. Most traffic laws enforce safe driving (duty) and using a phone while driving is prohibited, which makes the act a violation (breach) of duty. If the accident led to collisions (causation) with subsequent injuries and damages on multiple other drivers and vehicles (damage), there’s likely a strong case that will indicate the driver who was texting while driving as the liable party.

The Best Steps To Take When Proving Liability

Do Not Admit Fault On The Scene

Any personal injury lawyer will tell you never to admit fault on the scene of the accident or you’ll be very likely to lose the case before it even starts. Even if you think it’s probably your fault, remember that there could be other causes you may not be aware of. Stick to the facts and stay calm and polite. Avoid engaging in emotionally charged conversations that will only escalate the tension. If you feel unsafe, call the authorities if they’re not on the scene yet.

Collect Detailed Information

You’ll understandably feel shaken when you’re in a car crash scene. But as soon as you’ve calmed your nerves, start taking clear pictures of the scene, especially the extent of the damage. Take note of the date and time of the accident, including the weather and driving conditions.

Don’t forget to take photos of street names and any relevant road signs nearby. Most importantly, exchange contact information with the other parties and write down or take a photo of their license plate numbers. Ask witnesses for their names and contact details too.

Get A Medical Assessment

First responders typically arrive on the scene within minutes. But even if you think you’re unscathed or you’ve only sustained minor injuries, make sure to submit yourself to first aid. Keep in mind that collision injuries may take days or weeks to appear. If you wait before securing a medical evaluation, any hidden injuries you may have sustained could either disappear (which will reduce your evidence) or get worse, especially if you develop blood clots.

You’ll also need a medical report to prove the injuries caused by the accident. If you feel you need a more thorough medical assessment than the first aid you were given, visit the nearest hospital as soon as you’re allowed to leave the crash scene

Research Traffic Laws

If you’re not familiar with the traffic laws in the location of the accident, you must do your research as soon as possible to get an idea of where you stand. There are types of accidents that increase the liability of certain parties, and knowing which one you’re in can serve as the guide to your next move.

Build Your Evidence

Using the materials and information you’ve collected in the scene and afterward, you can start building a case with primary and secondary evidence.

The following can be considered evidence:

Admission of fault by an involved party
Videos and photos
Medical records
Testimonies from witnesses or experts
Criminal conviction of the other party at the time of the accident

Don’t forget to secure hard and soft copies of the above documents for your safekeeping.

File Reports

If the police didn’t arrive on the scene, you’ll have to submit a report either online or in person. If you’ve managed to compile useful evidence, include everything in the report you’ll submit to the police and inform your insurance provider of the same. Ask to see the reports so you can check for accuracy and request an amendment if corrections are needed. A detailed police report may also help you avoid a denied insurance claim.

Retain A Lawyer

If you’d like to bring the case to court, hiring a reliable lawyer will help you through the complex processes involved, from gathering evidence to proving the other party’s liability in front of a jury. But even if you’re partially liable, you may still seek compensation with the help of a competent lawyer.

Conclusion

Proving fault in a car accident is often complex and at times, almost impossible. But by being observant and detailed, and with the help of a lawyer, you can strengthen your defense and build a strong case against liable parties.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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Rights of minority shareholders : principle and provisions

By

Sneha Mahawar

-

October 3, 2023

0

This article has been written by Prasenjeet Kirtikar pursuing Diploma in Corporate Litigation and edited by Shashwat Kaushik.

This article has been published by Sneha Mahawar.

Introduction

In a healthy democratic society, it is very important to pay equal attention to the rights and interests of the minority along with those of the majority. In the same way, for a healthy corporate administration and overall growth of a company, it is essential to address the rights and interests of minority shareholders to avoid exploitation in the hands of majority shareholders. The minority shareholders are those who hold less than 50% shares in the company and thus may have their voice unheard or ignored during the major decisions taken by the majority shareholders. In the existing Companies Act of 2013, there are lots of provisions enacted to safeguard the interests of minority shareholders. In modern times, it has become inevitable to protect the interests of minority shareholders; however, such was not the case from the inception of the corporate era.

This is a fair attempt to understand the evolution of the principal and the current provisions of the Act to safeguard the rights and interests of the minority shareholder.

The Foss vs. Harbottle case

The principle forming the foundation on which the rights of minority shareholders happen to be framed is derived from the famous case of Foss vs. Harbottle (1843). The case was decided by the House of Lords in 1843. The board of directors is elected by the majority of shareholders in the general body meeting to run the affairs of the company; in fact, the majority had the upper hand in every decision and the minority got no voice in any of the company’s decisions and received stepmotherly treatment. Upon an appeal by the minority stakeholders against this oppression, it was held that the court should not interfere in the internal matters of the company unless there is a grave violation of the principle of natural justice with concern to the minority shareholders.

In this way, the case had become a landmark judgement in protecting the rights of the majority in company affairs. However, the exceptions to the rule let down in Foss vs. Harbottle have emerged as a lifesaver for the rights of minorities.

Let’s discuss the exceptions to understand the grounds on which the rights of minorities can be protected.

Exception 1- Ultra Vires act

If any act done by the company management is beyond its powers, that is, ultra vires, the minority has a right to take action against such an act.

Case law

Sh. Kanhaiya Lal vs. Bharat Insurance Co. (1933)

Facts of the case: As per the provisions in the Memorandum of the Company, the loan must be given upon adequate security being available. However, as per the resolution passed by the majority, the loan was passed, violating provisions in the Memorandum of the Company.

Judgement of the Court: The Court held that the act was ultra vires and thus protected the rights of minority shareholders.

Exception 2- Fraud on majority

If the majority suppresses the rights of minorities by passing a resolution to commit any fraud in company affairs, then the rights of minorities must be protected.

Case law

Menier vs. Hooper’s Telegraph Co. (1874)

Facts of the case: There were two companies with the same person in majority on both sides. When there was a conflict of interest between the companies, the majority decided to go for a compromise that violated the interests of minority shareholders; hence, they protested on the grounds of fraud committed by the majority shareholders and appealed in court.

However, the majority raised the defence, claiming that the court cannot interfere in internal matters of the company, referring to the judgement in the Foss vs. Harbottle case.

Judgement of the Court: The Court held that the case is not applicable here as the decision of the majority amounts to fraud.

Exception 3- Prevention of oppression and mismanagement

The ultimate rule of corporate functioning is that the majority decision prevails; however, there can be serious violations and the operation of the rights and interests of minority shareholders. The progress of a company lies in the fact that there should be a perfect balance between the rights of minority shareholders and the powers of major shareholders and almost zero mismanagement of company administration.

If there is any oppression or mismanagement, the rights of minorities can be protected by making an appeal to the Central Government, the Company Law Tribunal, or the court of law.

These agencies have vested powers to prevent operation and mismanagement through the appointment of directors as per the statute.

Exception 4- Wrong doers in control

When the majority of shareholders have taken over the control of management by violating the provisions of the Memorandum of Association and Articles of Association to fulfil their malicious intention, which is likely to harm the growth of the company and the overall interests of the stakeholders.

Case law

Glass vs. Atkin (1967)

Facts of the case: In this case, the defendant fraudulently converted the company’s assets for personal benefit.

Judgement of the Court: The Court held that this is an exception to the Foss vs. Horbottle case, as the directors violated their duties by manipulating their positions and compromising their morals for personal gains.

Exception 5- Individual membership rights

Every shareholder can enforce his individual rights against the company, for example, the right to vote and the right to contest the election of directors.

Case law

C.L. Joseph vs. Jos (1963)

Facts of the case: The plaintiff, being a shareholder, was a candidate for the election of directors but lost the election. However, he was again proposed as a candidate to fill the second vacancy but the chairman raised objections considering his previous defeat.

Judgement of the Court: The Court held that the chairman acted beyond his powers by disallowing the nomination of the plaintiff and thus protecting the individual rights of the plaintiff.

Provisions as to the rights of minority shareholders as per the Companies Act, 2013

Not only the rights of minority shareholders but also the entire corporate affairs in India are regulated by the Companies Act 2013, which was enacted as per the recommendations of the J.J. Irani Committee report. To discuss about the present scenario of rights of minority shareholders, it is necessary to discuss the provisions of the Companies Act, 2013 in relation to the same

Who is the shareholder

As per Section 2(84) of the Companies Act, ‘share’ means a share in the share capital of a company and includes stock. An individual, body corporate, association or company, irrespective of its incorporation, can purchase and hold ownership of a share and is thus called a shareholder. As per Section 2(55)(iii) of the Act, shareholders are also known as members.

The Companies Act 2013 does not define the concepts “majority shareholders” and “minority shareholders”. However, the terms “majority and minority shareholders” are conceptualised based on the percentage of shares they hold. Majority shareholders are those who hold more than 50% of the total voting power in a company, thus having significant influence over major decisions and the growth of the company.

Section 94 of the Act gives minority shareholders the right to inspect certain company records, such as the Memorandum of Association (MOA), Articles of Association (AOA), financial statements, and annual returns, during business hours.

Some more provisions as to the rights of minority shareholders as per the Companies Act 2013 are:

Section 56 of the Act provides for the free transfer of shares and gives every shareholder the right to transfer ownership of the share they own as per their will.
Section 100 of the act gives minority shareholders the right to call for extraordinary general meetings if they are holding at least 1/10th of the total voting power or a lower percentage as specified in the company’s articles.
Section 108 of the Companies Act provides for modern technology of voting through electronic means for certain classes of companies. Exercising voting power through the use of electronic mode was a right that was absent in the Companies Act of 1956. This facility of exercising voting power through electronic mode has proved to be a boon to the shareholders who are not able to attend the meetings or are at a remote location.
As per Section 101 of the Act, the notice of the meeting must be served to all the members within prescribed time, either in writing or through electronic means. According to this section, every single member or shareholder has the right to receive notice of the meeting.
Section 109 of the Act gives minority shareholders the right to demand a poll if they are not satisfied with the passing of the resolution by show of hand. This section ensures a fair voting procedure and transparency in the process of company administration.
According to Section 123 of the Act, it is the right of every registered shareholder to receive a dividend out of the profit of the company for that year as per the declaration made by the company.
Section 151 of the Act gives minority shareholders the right to elect one director as per the prescribed manner. This section is one of the most essential provisions pertaining to the rights of minority shareholders, as it provides for the scope of keeping a check on the absolute power of the majority and valuing the opinions of minority shareholders.
Section 241 of the Act acknowledges the rights of a member of a company to seek justice from a tribunal in cases of oppression and mismanagement of the company in the hands of the majority, causing harm to the interests of such member or any other member/members or against the public interest.
In connection with Section 241, Section 242 talks about power of the Tribunal to address such application/appeal and inquire into the matter. Section 242 also provides vast powers to the Tribunal, including removal of directors and th, termination of any agreement or business transaction with the company.
Section 245 of the Act enshrines the right to carry out “class action” by members if the majority is acting against the overall interest of the growth of the company. “Class action” is the action taken by a group of members having similar interests that is overlooked by the management of the company while taking key decisions.

Every minority shareholder must be treated as a key stakeholder in the affairs of the company administration. His rights must be respected as per the values vested in the principle of natural justice. He must be notified of all key developments and heard by company administration. In short, the company, as a family, must value the opinions and interests of every member.

Landmark judgements

Tata Consultancy Services… vs. Cyrus Investment Private Limited (2021)

The case provides for a landmark judgement on operations and mismanagement in company affairs.

Facts of the case

Mr. Cyrus Mistry was removed from the directorship of various Tata Group companies by passing resolutions in shareholders` meetings. Mr. Mistry and his company, which holds less than a 50% stake, become minority shareholders in Tata Group companies. Therefore, he challenged his removal in the National Company Law Tribunal (NCLT) on the grounds of oppression and mismanagement.

The NCLT held that there was no oppression or mismanagement in the management action. However, this judgement was reversed when Mr. Mistry appealed in NCLAT.

Judgement of the Court

On further appeal by Tata Group in the Supreme Court of India, it was held that just removal from the position of director is not sufficient ground to conclude that there was oppression and mismanagement.

Delhi Gymkhana Club Ltd. vs. Union of India Ministry of Corporate Affairs (2021)

Facts of the case

In this case, the government filed a petition with the Tribunal under Section 241 of the Act – application to the tribunal for relief in cases of oppression. It was also claimed that the affairs of the club were conducted in a way that was “prejudicial to the public interest”.

Judgement of the Court

NCLAT, while discussing the scope of Section 241(2) of the Companies Act 2013, held that the concept of public interest should not necessarily be stretched out to include every citizen of India; even the interests of a section of society can be sufficient to look into. The affairs of the club were prejudicial to the interests of the public, which amounts to oppression and mismanagement.

Conclusion

The exceptions to the principle laid down in the Foss v. Horbottle case highlight the essential rights of the minority shareholders, which must be exercised when the time and need arise. The voice of minorities must not go unheard for the sake of efficient company administration.

The Companies Act 2013, enacted as per the recommendation of the J. J. Irani Committee, has ensured that there is sufficient scope for the minority to express their opinion and safeguard their interests whenever they feel it is appropriate to do so. The act also provides for strong interference by the court of law and by the tribunal in exceptional cases of oppression and mismanagement in the company’s affairs by the majority of stakeholders.

However, achieving the goal of fully securing the rights of minority shareholders is a long way to go. The majority holding a share value greater than 50% has been proven to be an all time influencer in the game of driving the company on the path of growth as well as that of downfall.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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

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Powers and duties of auditors

By

Rachit Garg

-

October 3, 2023

0

This article has been written by Prasenjeet Kirtikar, pursuing a Diploma in Corporate Litigation from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

Every company is established on the finance provided by persons (members) who are not practically in control of the money provided by them. However, to safeguard the interests of the members and shareholders of the company, it has become essential to keep a check not only on the financial matters of the company but also on overall company affairs.

Through the evolution of the modern corporate system, it has become necessary to ensure that every affair of the company administration strictly follows corporate ethics along with the rules and regulations laid down in the corporate laws. The Companies Act of 2013 (the Act) provides for the appointment of a competent and independent auditor to audit the accounts of the company. The auditor, as per the Act, is provided with intensive powers and duties to perform as compared to the role of auditor as per the previous Company Act of 1956.

J.J. Irani Committee report

The Companies Act 2013 was enacted on the basis of recommendations from the J. J. Irani Committee report. The committee was constituted in December 2004 and submitted its final report on May 31, 2005, providing various suggestions pertaining to the modification and modernization of corporate law in India. In relation to the audit functioning in corporate administration, the committee provided its recommendations about the appointment of an auditor, his qualifications, disqualification, remuneration, and rotation. The vital recommendation in relation to the duties of auditors was prohibiting him from providing certain services to a company and its subsidiaries.

As per the committee report, since many stakeholders rely on auditors’ reports to know the financial status of the company, it is the duty of an auditor to conduct an audit without anyone`s influence or self-interest. He must hold high morals and values and work independently. The auditor is to be vested with powers to access books, records, and documents related to accounts at all times.

It has also recommended a committee of the board to keep an eye on accounting and financial matters, known as the auditing committee. The committee has the duty to appoint auditors, examine auditors’ reports and conduct cost audits.

Powers and duties of auditors as per Companies Act, 2013

Chapter X of the Act, from Section 139 to Section 148, talks about the provisions of the audit and auditors relating to appointment, eligibility, qualification, disqualification, remuneration and removal of the auditor.

Now let us cover the significant provisions related to auditors as per the Act:

Section 143 of Companies Act, 2013

Section 143 of the Act exclusively talks about the powers and duties of the auditor and auditing standards.

The auditor of the company has the power to have all time access to the books of accounts and vouchers of the company, irrespective of the place where they are kept.
He can inquire into the matter of loans and advances made by the company.
He can check whether transactions of company is in coordination with the interest of the company
If personal loans are charged to company accounts or company loans are shown as deposits, he will keep an eye on such transactions.
He will comment on the transactions if shares or debentures for other securities are sold at a price less than that at which they were purchased by the company.
He will check if the accounting books are maintained in coordination with the balance sheet.
Even the auditor of a holding company has right to access accounts of its subsidiary company
It is a mandatory duty (or obligation) of the auditor to make a report to the members of the company upon examination of accounts.
The auditor’s report also must state:
1. The extent to which you obtained and received information to complete his audit.
2. His opinion on maintenance of records kept by the company.
3. His comments indicate that the company’s balance sheet and profit and loss accounts are in coordination with books of account and that financial statements comply with accounting standards. If any financial matter has an adverse effect on operation of company administration.
4. His observations as to the internal financial control system of the company.
5. In the case of a government company or any other company owned by the Central or state government, the Comptroller and Auditor General (CAG) has the power to appoint an auditor to look into the financial matters of the company and upon receiving the audit report, he has the power to conduct a supplementary audit and to comment on such an audit report.

During the conduct of such an audit, if the auditor finds out any fraud committed by officers of the company, it is his obligation to report such fraud to the central government within the prescribed time limit.

Section 144 of Companies Act, 2013

Section 144 talks about the roles that must not be played by the auditor, along with his official role as an auditor of the company.

As per Section 144 of the Act, it is the duty of the auditor not to provide the below services directly or indirectly to the company or to the subsidiary company:

accounting and bookkeeping,
internal audit,
design and implementation of financial control system,
investment advisory services,
investment banking services,
management services, and
performing outsourced financial services.

The rationale behind such a provision of mandatory duty lies in the guideline “The maker cannot be the checker”.

It simply means that the one who is formulating, creating or making the system cannot check for its drawbacks or faults.

This is a question of credibility and competency!

Section 145 of Companies Act, 2013

As per Section 145 of the Act, it is the mandatory duty of the auditor to sign his audit report and mention financial concerns having an adverse effect on the functioning of the company, which shall be read in the general meeting.

Section 146 of Companies Act, 2013

According to Section 146 of the Act, it is an obligation on the auditor to attend the general meeting either by himself or through an authorised representative Section 146 also provides the auditor with the right to receive notice of such a meeting and to be heard at the meeting if he wants to express his concern about the functioning of the company or any other financial aspect.

Here, it is also important to note that if an auditor fails to comply with the obligations provided in Sections 139, 143, 144, and 145, he is liable for punishment under Section 147 of the Act and he must refund the remuneration received by him to the company and pay for damages to the company.

Section 148 of Companies Act, 2013

As per Section 148 of the Act, the Central Government has the power to direct the company to appoint a cost accountant to conduct a cost audit other than an auditor under Section 139. The cost auditor appointed will enjoy the same kinds of powers and duties as the auditor appointed as per Chapter X of the Act.

Companies (Accounts) Rules, 2014

Rule 13 of the Companies (Accounts) Rules, 2014 provides for the mandatory requirement for a company to appoint an internal auditor. The internal auditor may or may not be an employee of the company. The audit committee or the board of the company, in consultation with the internal auditor, has the power to formulate the scope, frequency and mode of conduct of the internal audit.

This rule is applicable to:

every listed company,
For every private company, if turnover is more than 200 crore rupees or debt is more than 100 crore rupees,
every unlisted public company having paid up share capital of more than 50 crore rupees turned over more than 200 crore rupees or owed more than 100 crore rupees.

Companies (Audit and Auditors) Rules, 2014

Rule 10A of the Companies (Audit and Auditors) Rules, 2014– In coordination with Section 143(3), clause (i), the auditor’s report shall mention the details of the internal auditing system and comment on how effective or efficient the system is in order to curb the financial losses to the company.

Rule 11 of the Companies (Audit and Auditors) Rules, 2014- It is the duty of the auditor to note his observations in his report pertaining to the disclosure of the impact of any pending litigation by the company, precautionary provisions by the company to sustain any losses in long term contracts, and any delay in the transfer of funds to the Investor Education and Protection Fund (IEPF) by the company.

Rule 12 of the Companies (Audit and Auditors) Rules, 2014 explains the powers and duties of the company’s auditor. It is the duty of the branch auditor to submit his report to the company auditor and he also must report fraud in financial matters as per Section 143 of the Act.

Rule 13 of the Companies (Audit and Auditors) Rules, 2014 explains the powers of the auditor to report any fraud to the central government during the performance of his duty if the amount of fraud is one crore or more. This rule also explains the manner and steps in which fraud is to be reported to the board, audit committee and Central Government.

Companies (Auditor`s Report) Order, 2016

The Central Government, under the provisions of subsection 11 of Section 143 of the Act, has formulated this order and provided guidelines for matters to be included in the auditor’s reports of all kinds of companies, including foreign companies.

This order also provides for directions whenever there is an unfavourable or qualified answer to any question pertaining to the financial audit, the auditor’s report must mention the basis explanation for such an unfavourable or qualified answer. Also, if auditor is not able to express his opinion on any of the matters, he must explain the reasons for the same in his report.

Landmark case laws

Union of India v. Deloitte Haskins and Sells LLP and Anr. (2023)

Facts of the case

In this case, the Ministry of Corporate Affairs (MCA) directed the Serious Fraud Investigating Officer (SFIO) to investigate the alleged defaults with a debt burden of more than Rs. 90,000 crore in relation to the company ILFS and filed the case in NCLT based on the report of the SFIO under Section 140(5) of the Companies Act of 2013 for the removal and barring of the auditor from audit activities. The report of the SFIO also directed the reopening and recasting of the accounts of ILFS. The auditors, BSR & Associates LLP and Deloitte Haskins & Sells LLP, were also given notice.

Issues involved in the case

Whether Section 140(5) of the Companies Act is constitutional?
Whether a petition under Section 140(5) of the Companies Act is maintainable against an auditor who is no longer an auditor of the company?

Judgement of the Court

The Supreme Court held that even though auditors resigned, NCLT still has the power to take action against them. It also upheld the constitutional validity of Section 140(5) of the Companies Act, emphasising that the duty and liabilities of the auditor do not end upon his removal from the service.

Pipara & Co LLP vs. Tourism Corporation of Gujarat (2021)

Facts of the case

In this case, the Tourism Corporation of Gujarat (TCG) terminated the appointment of Pipara & Co. LLP as its statutory auditor without giving any reason.

Issues involved in the case

Can a company, public or private or a corporation fire its auditor without giving any notice or opportunity of being heard?

Judgement of the Court

The Gujarat High Court held that statutory auditors have a right to be heard before terminating their service, and such termination must be according to the law to protect the independence of auditors and the quality of corporate administration.

Comparison between Companies Act, 2013 and Companies Act, 1956

As per the Companies Act 2013, the auditor has powers and obligations to comment regarding internal financial controls and their effectiveness. Such a provision was not present in the previous Act.
Reporting fraud to the Central Government is a legal obligation on the auditor and the Act 2013 provides punishment for the violation of the same. No such provision of duty was present in the 1956 Act.
As per Section 144 of the Companies Act, 2013, there is a provision for certain services not to be availed of by the auditor for the company. Such a provision was not present in the 1956 Act.

Also, the Companies Act 2013 very efficiently provides powers to the auditor to monitor company administration as compared to the Companies Act 1956.

Conclusion

The J.J. The Irani Committee report paved the way for the modernisation of company law in India in the form of the Companies Act 2013. Moreover, the committee recommended efficient, fraud less and transparent corporate functioning. It had recommended the constitution of an independent, competent and efficient auditing system. The Companies Act 2013, absorbing the recommendations of the committee, provided extensive power and obligations to the auditors. According to the Act, the auditors have powers to comment on the financial situation of the company, bring out the fraud, escalate the matter to the central government and also have obligations not to render certain services to the company.

The report of the Companies Law Committee published in February 2016 proposed significant changes related to the rotation of the auditor, his removal and his powers and duties. A link to the report is provided for the reader`s reference.

References

Exploring flexibilities and alternatives to protect traditional knowledge and genetic resources

By

Sneha Mahawar

-

October 2, 2023

0

This article has been written by Rashmi Bagri pursuing Diploma in US Intellectual Property Law and Paralegal Studies and has been edited by Oishika Banerji (Team Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

In a world where startups are popping up in every corner, content creators rule the internet and artisans are finally getting the attention they need. The significance of intellectual property rights (IPR) in this regard must be taken earnestly. IPR forms the sole framework for the protection of creations of the mind, giving the creator an exclusive right over the use of his/her creation for a certain period. However, as the global intellectual property regime developed in accordance with the needs of the western world, it failed to encompass protective measures for traditional knowledge that have been passed down among indigenous people from generation to generation and have been stolen, manipulated, and monetized by Western elements, without any credit to the country of its origin or the people who are gatekeepers of that knowledge. Traditional knowledge protection is not served under IP regime for the creator remains unknown for the same. Further, the disparity between availability of the same in its member nations has made TRIPS not include traditional knowledge under the IP regime. This article explores flexibilities and alternatives to protect traditional knowledge and genetic resources.

IP and traditional knowledge : friends or foes

Using turmeric for healing wounds, or neem for fungal infections are well-recorded practices among Indians. It was the United States of America who once tried to patent the same to monetize it by depriving Indian indigenous communities of the economic benefit of such traditional knowledge. This reference is one of the prime reasons why protection is called for in regards to traditional knowledge.

IPR typically uses two strategies to protect traditional knowledge, namely, positive protection and defensive mechanisms. Positive protection gives traditional knowledge holders the freedom to take the appropriate precautions and seek redress in the event that their knowledge base is misused. Conversely, defensive mechanisms relate to the measures taken by holders of traditional knowledge to restrict the appropriation of their intellectual property rights. This type of knowledge protection aids traditional knowledge owners in defending their IP rights against unauthorised third-party acquisition.

Although the above para reflect on the friendship, the reasons why traditional knowledge has long been neglected by the umbrella of protection, listed hereunder, must be known:

The primary reason lies in traditional knowledge itself. You see, it’s a living body of ancient knowledge, mostly passed down orally, preserved within the local communities, and can take a variety of expressions. This distinctness and variation make it almost impossible to formulate a single piece of legislation to deal with the woes of traditional knowledge.
Currently, India relies on multiple provisions contained in different IP legislations, such as Section 25 of the Patents Act 1970 which talks about pre-grant oppositions to the invention seeking patent. Clause (k) of the provision mandates a party to notify the controller if the patent uses traditional knowledge.
Further, Section 64 (2) of the Patent Act, 1970, which explicitly lays down that if “an invention is not new and, has been publicly used or published in India before the priority date or it is foreseen in the light of the knowledge available within any local or native community in India or elsewhere”, shall warrant revocation of the patent granted. Traditional knowledge impliedly falls under this category.
The other problem is that the present laws all have their limitations. For instance, the Indian Patent Act, 1970, will only protect an invention in India, and ‘biopiracy’ has clawed its roots in the traditional knowledge and genetic resources of the country. Considering this, the Council for Science and Industrial Research, a Central Government agency, had set up a database called Traditional Knowledge Digital Library which lists 4.24 lakh practices and potions from Ayurveda, Siddha, Unani, and Yoga for proactive protection of traditional knowledge.
This, in addition to the provisions in the Biodiversity Act, 2002, that specifically prohibit patenting traditional knowledge, aids in curbing the menace of misappropriating indigenous knowledge and commercial exploitation of genetic resources. However, this mechanism has its shortcomings. TKDL is mired with translation problems and public disclosure can lead to fishing expeditions, making even that traditional knowledge susceptible to misuse that wasn’t in the public arena before.

What is in positive store for traditional knowledge

The Geographical Indications of Goods (Registration and Protection) Act, 1999 which protects products that have a specific geographical origin and possess qualities, or a reputation credited to their origin, has been an effective tool in protecting traditional knowledge and genetic resources. “Darjeeling tea”, “Kashmiri pashmina”, “Bydagi chili” or even “Mysore Pak” and several other products that are attributed to certain geographical places are protected from misappropriation through GI tags that also help in cultural preservation in addition to economic advantages.

However, the individual urge to monetize everything and monopolise collective property has prompted the Indian courts to step in and recognize that traditional knowledge is not up for private ownership. Cases like Basmati Rice Export Development Foundation v. KRBL Ltd. (which ruled that “Basmati” rice was a GI that could not be monopolised by any one company) only necessitated the need for a coherent IP framework to protect traditional knowledge and genetic resources.

International conventions and generic resources : an insight

Talking about genetic resources, although they do not qualify as traditional knowledge, their usage to create new patentable inventions is well-documented. The problem however remains that most of the patents using genetic resources do not qualify for the ‘novelty’ pre-requisite of patents and thus are either not granted or are revoked once this becomes common knowledge. To deal with this issue of misusing genetic resources and depriving indigenous communities of their economic benefits, the Nagoya Protocol on Access and Benefit Sharing of genetic resources was implemented in 2014.

The protocol is an efficacious arm of the Convention on Biological Diversity (CBD) that has over 137 signatories which obligate countries to “establish clear rules and procedures for prior informed consent and mutually agreed terms”, to “provide for the fair and equitable sharing of benefits arising from the utilisation of genetic resources” with the contracting party and to, “take measures to monitor the utilisation of genetic resources after they leave a country including by designating effective checkpoints at any stage of value-chain, research, development, innovation, pre-commercialization or commercialization”, among other things.

Article 8(j) of CBD mandates parties to respect the knowledge and practices of indigenous communities, while simultaneously supporting the wider application of traditional knowledge based on fair and equitable benefit-sharing. Furthermore, while Article 15 of CBD, lists procedural requirements for accessing genetic resources, Article 16 acknowledges traditional knowledge as ‘key technology’ for efficient practices about conservation and sustainably using biodiversity.

FAO’s International Treaty on Genetic Resources from Food and Agriculture also works in tandem with CBD’s Nagoya protocol and aims to “establish a global system to provide farmers, plant breeders and scientists with access to plant genetic materials” and ensure that “recipients share benefits they derive from the use of these genetic materials with the countries where they have been originated”.

Conclusion

On a global scale, although relentless efforts continue to protect traditional knowledge and genetic resources, the absence of a comprehensive coherent framework to deal with their manipulation and misuse is still missing. Governments are demanding defensive protection of genetic resources to prevent biopiracy and misappropriation of genetic resources and have enacted legislation to comply with the prior informed consent requirements of the Convention on Biodiversity. For many members of the World Intellectual property Organisation, it’s now non-negotiable to exhibit the original source of genetic resources. That purpose is served by GIs in India. The merit of the Indian Geographical Indications Act must also be mentioned here, as it does not restrict itself to food and drinks, but also includes handicrafts and textiles unlike the European GI system. Some countries have also called for sui generis protection considering the inadequacy of current IP laws in protecting Traditional knowledge and Genetic resources. Although when these systems are put in place and how efficient they’ll be in governing, protecting and incentivizing traditional knowledge and genetic resources remains to be seen.

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Types of merger and acquisition : an analysis

By

Rachit Garg

-

October 2, 2023

0

This article has been written by Anjali Yadav and edited by Shashwat Kaushik. In this article, we are going to discuss mergers and acquisitions and their major types.

Introduction

The world of business is an ever-evolving ecosystem where organisations continually seek innovative strategies to adapt, grow, and thrive. In this dynamic landscape, mergers and acquisitions (M&A) have emerged as pivotal instruments for companies to restructure, expand their market presence, and harness synergies. These strategic manoeuvres have the power to reshape industries, redefine corporate landscapes, and influence the global economy.

Merger and acquisition refers to the ‘consolidation of companies’. Some merger and acquisition activities includes :-

Purchasing and absorbing another company,
Merger and its formation into new company,
Acquiring some or all of its major assets,
Making a tender offer (a bid to find some or all of shareholders’ stock in company),
Staging of a hostile takeover, etc.

What is meant by mergers and acquisitions

A merger is the collaboration or unification of two or more companies to form a new company in expanded form.

For. e.g.- A+B= AB or C

Acquisition is the process of acquiring or selling one company to another. In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter it’s organisational structure. Acquisition is also known as takeover or, as we can say, acquiring a company takes over all the assets and liabilities of the target company.

It can be held in two ways:-

The acquiring company pays cash to the target company.
The acquiring company buys shares of the target company.

For example, if company A acquires company B, both entities exist but control of management goes into the hands of company A for both companies.

Note: Sometimes mergers and acquisitions are used interchangeably, but they are different. We can say:

Merger- to combine
Acquisition- to acquire

In acquisition, one company buys another’s outright and in merger, two companies come together to subsequently form a new legal entity. Generally, mergers are voluntary and involve companies of the same size and scope.

And in an acquisition, a new entity does not form a new company but in lieu of that, the smaller company absorbs the larger company and as a result, it ceases to exist.

Reasons for mergers and acquisitions

Reasons for mergers and acquisitions are:

To eliminate competition,
Establish a bigger market share,
Create a strong brand,
Reduce tax liabilities,
Set off losses of one entity against profit of another, etc.

Types of mergers and acquisitions

Horizontal M&A

In this type of merger, those companies that operate in the same industry and provide similar services come together; they may or may not be in direct competition with each other. And when they merge, they find greater bargaining power in raw materials and can also buy raw materials at cheaper rates .The idea behind this type of merger is to avoid competition between the units. For example, the bank merger of the 1980s and the merger of HP and Compaq were two different computer companies.

Disney merged with Hotstar as Disney+ Hotstar, an online streaming platform. Integration of Facebook, WhatsApp, Messenger, and Instagram into one Meta platform led by Mark Zuckerberg.

Horizontal M&A leads to:

More markets share,
Less competition,
Reduction in cost monopoly,
Gaining the goods and services of another company,
New distribution channels, etc.

Vertical M&A

It represents a merger of firms involved in or engaged in different stages of the production of simpler products or services. For this, two or more companies dealing with the same product but at different stages may join to carry out the whole process itself. Vertical M&A helps get better control over the entire production cycle, which includes buying raw materials from suppliers and then adding value to the process of producing intermediate products to sell to the next buyer in the supply chain. It is considered to be of two types:-

Backward integration- One company makes steel pipes and for that, he needs steel from steel supplier. For this purpose, the company goes back into its supply chain and merges with or acquires the supplier company.
Forward integration- After preparing steel pipe, you need to sell it through a retailer to the customer, then you come forward in your supply chain and merge with the customer.

For example,

A railway company may join with a coal mining company to carry coal to different industrial centres.
Google’s acquisition of Android for $50 million in 2005 .
In the 2016 acquisition of EMC by Dell for $67 billion, Dell was a manufacturer of personal computers, enterprise server and mobile devices, whereas EMC was a data storage company.

Vertical mergers and acquisitions leads to:

Guaranteed source of raw material,
No raw materials for competitor,
Reduction in cost,
Improve profitable margin,
Reduce flexibility (which may result into new complexity in business management), Operational efficiencies, management control, etc.

Vertical versus horizontal merger

Vertical M&A happens in companies that are operating in the same industry but at different levels or stages of the supply chain. Whereas horizontal M&A occurs in companies that are producing simpler products and also at the same level or stages of the supply chain.

Vertical M&A gains more control over certain parts of the supply chain and horizontal M&A gets a bigger market share or expansion of product offerings.

Conglomerate M&A

Those companies come together because they are totally different from each other and come from totally different industries. Neither they overlap nor compete with one another or the merging companies are neither originally nor vertically related to each other. However,they see benefit in mergers. For example, if a car manufacturing company merges with a telecom company,a textile company may merge with a vegetable oil mill. There is nothing common between them. They are further divided into two:-

Pure conglomerate M&A

This consists of companies operating in totally different industries. W.R. Grace, a chemical business, acquired many different companies that include construction, gas, oil, agriculture, etc., which helped it enter a new market quickly.

Mixed conglomerate M&A

The goals of the company are to expand its product line or market line. Walt Disney’s acquisition of American Broadcasting Company can be considered this type of merger and acquisition.

These are some real life merger and acquisitions of this kind:-

Amazon and Whole food

Acquisition of the Whole Foods market by Amazon for $13.7 billion, which brings the total value of the two companies to $14.3 billion.

This type of M&A would be more challenging for businesses and for its success, we can consider some points like:-

Research

Research the market to see if there is a company merged into this type that is working efficiently and also look for the aspects they followed to make it efficient.

Be clear

Be clear about your goals. Why do you want this type of M&A? What is its need?

Interaction

Keep interaction and organise important personalities of both firms, like the executive, sales and marketing teams.

Know the company culture

Know the company culture because totally different management may affect employees’ willingness to work.

Update and be updated

Teams in the company should be updated with new strategies, opportunities, new products, etc. so that they can work efficiently.

Due diligence

Due diligence should be taken in the finances, legal policies, operations, etc. of both companies. These things should be done with more care and caution, which will prevent the merger from vanishing.

Transparency

Essential processes and information, except confidential ones, should be maintained for employees.

Conglomerate M&A leads to:

Diversification,
Spreading risk,
New idea,
More revenue,
More efficiency,
Expanded customer
Cross selling of their products, which further leads to higher profits for new company, etc.

Concentric or congeneric M&A

When two different companies are operating in two different industries but their target audience is the same, this could be indirectly competing but their products are complementary. And they often use similar technologies and other processes. For example, a car manufacturing company merges with a car insurance company and a TV manufacturer merges with a cable company. They are related to each other in terms of customer groups, functions or technology. But it limits further diversification.

This type of M&A leads to:

Larger market share,
Diversification of products and services,
New and bigger customers,
Improved profits, etc.

Market extension M&A

Two companies come together that make or sell the same kind of product but in different markets. For example,one company makes normal pizza and another company makes pizza with less fat and is healthy when they come together in a market extension M&A. Its main objective is to extend the size of market to reach customers in a big number.

Market extension leads to:

A larger client base,
Different other resources of the other company,
New working professionals,
Improved competitive status,
Improvement of products,
Reduction of external risks,
More profit, etc.

Product extension M&A

In this type of M&A, two different companies make two different products that are related to each other and operate in the same market. After M&A, both companies are allowed to use each other’s resources, which results in a reduction of additional costs. For example, in 1977, PepsiCo and Pizza Hut merged, though both products were different. Because customers wanted to consume them together, they merged. The merger leads to increase of sales by more than $436 million

Product extension leads to:

Access to a larger set of customers,
Earning higher profits,
increasing customer satisfaction,
Cutting down of additional costs, etc.

Reverse M&A

In this type of M&A:

The private limited company merges with a public limited company so that the private limited company turns into a public limited company without any problems or complex processes. And it reduces or ends expensive compliance and also saves from complicated processes, or
A weaker company merges with a stronger company, or
A smaller company merges with a bigger company, or
Loss seeking company merges with profit making company, or
A subsidiary company merges with parent company, etc.

The company which got the control is accounting acquire and who issues share is legal acquirer.

Reasons for this type of M&A:

For selling products at a higher level,
For saving taxes,
To increase marketing network, and
For protecting trademark rights, etc.

Top mergers and acquisitions in India

Vodafone and Idea

We can say that both companies came for merger by ‘Jio’s ‘arrival and ensuring price war. As the telecom business became highly competitive, both companies faced struggles. Vodafone owns 45% of the combined firm, with the Aditya Birla Group owing 26% and Idea owing the rest. Vodafone Idea launched its new identity, Vi.

Walmart’s Acquisition of Flipkart

Walmart purchased Flipkart, which resulted in its entry into the Indian market. Walmart defeated Amazon in a meeting by paying $16 billion for a 77% stake in Flipkart.

Zomato’s acquisition of UberEats

Zomato, an online food delivery and restaurant discovery platform, has purchased the Indian operation of UberEATS’s food delivery service for roughly $350 million.

Zomato to acquire blinkit

Food delivery platform Zomato has agreed to acquire instant grocery startup Blinkit for $569 million in an all stock deal as it seeks to exploit a fast growing market for quick grocery delivery.

Disney+Hotstar

Both are streaming platforms owned by Star Network in India. Disney Hotstar was launched in March 2020 and gave access to Disney shows and movies to Indian consumers.

Conclusion

In conclusion, the world of mergers and acquisitions is a complex and dynamic landscape, characterised by the various types and strategies that organisations employ to achieve their growth and strategic objectives. Through this analysis, we have delved into some of the most common types of mergers and acquisitions, shedding light on their distinct characteristics, advantages, and challenges.

From horizontal mergers that seek to consolidate market share, vertical mergers aiming to streamline the supply chain, and conglomerate mergers diversifying across unrelated industries to friendly acquisitions driven by mutual benefit and hostile takeovers fueled by competition, each type carries its own set of considerations for businesses, shareholders, and the broader market.

References

https://www.educba.com/horizontal-merger-examples/
https://corporatefinanceinstitute.com/resources/management/horizontal-acquisition/
https://efinancemanagement.com/mergers-and-acquisitions/product-extension-merger https://blog.ipleaders.in/
https://neumannassociates.com/general-blog/understanding-market-extension-and-product extension-mergers

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Implied consent in Contract Law

By

Rachit Garg

-

October 2, 2023

0

This article is written by Mayur Sherawat, a B.A.LL.B. student at Christ University, Bangalore. The article talks about the role of implied consent in Indian Contract Law, the types of consent, case laws regarding implied consent, and the jurisprudence of implied consent in foreign courts.

Introduction

For any contract to come into existence, there needs to be fulfilment of the conditions mentioned under Section 10 of the Indian Contract Act, 1872, which are:

Free consent of parties competent to contract,
A lawful consideration,
A lawful object
Not be expressly declared void by contract law.

Among these conditions, free consent can be construed or understood to be the actions of the parties. For a lawful contract, consent may be not be required to be in words; such consent is referred to as an implied consent. In this article, we are going to cover the various dimensions of implied consent

Free consent

According to Section 13 of the Act, persons are said to consent when they agree upon the same thing in the same sense, as expressed by the legal maxim ‘consensus ad idem’. However, this consent must be free. Free consent has been defined under Section 14, stating that for a lawful contract, consent must not be vitiated by or hold any trace of coercion, undue influence, fraud, misrepresentation, or mistake.

Factors vitiating consent

Coercion: is the use of threats, intimidation, or force to impel someone to enter into a contract against their will, rendering their assent involuntary.
Undue Influence: occurs when a dominating party uses a position of authority or trust to manipulate the decisions of a weaker party, thus compromising their ability to offer free and informed consent.
Fraud: happens when one party actively deceives the other by giving false information or concealing crucial facts in order to encourage them to enter into the contract, resulting in consent based on deception.
Misrepresentation: Misrepresentation is the unintentional, not purposeful, giving of misleading information that causes the other party to misinterpret the terms or implications of the contract.
Mistake: A mistake happens when both parties have incorrect perspectives on a fundamental component of the contract.

Types of consent

Explicit consent

Explicit consent refers to an unambiguous agreement given by one party to another. For consent to be explicit in contract law, there must be clear communication. The terms of the contract must be communicated in a manner that is readily comprehensible to the party giving said concurrence. Any legal jargon, phrases, or complex language should be explained in simple terms to ensure complete comprehension by the consenting party.

Implied consent

Implied consent refers to agreement given by a person’s action or inaction that is inferred through circumstances such as those exemplified below. Implied consent is in contrast to express consent, where the agreement is directly and clearly given with explicit words.

Examples of implied consent

Here are some examples of implied consent leading to creation of contracts –

For instance, when you drop off your garments at a dry-cleaning company, you provide the cleaner with implied consent to clean your clothes in exchange for monetary consideration. The cleaner will clean your garments, and you will be charged for the service. Though no specific agreement is made, the act of dropping off the garments and collecting them once cleaned suggests or implies consent to the transaction’s conditions and leads to the creation of a contract.
When you shop at a supermarket and put products in your basket, you are entering into an implied contract to buy those items at the advertised prices, the presence of those items on the shelves is an invitation to offer and not an offer in and of itself. By advancing to the checkout counter, you are expressing your agreement to purchase and pay for the products. Thus, your actions signify your consent, making the consent an implied one.

Cases on implied consent in contract law

Role of implied consent in a principal-agent relationship

A principal-agent relationship is required to establish the degree of liability of the parties upon breach of a contract. The acts committed by the agent are considered to be done by the principal, and hence the breach can also be attributed to being done by the principal. Following the legal maxim ‘Qui facit per alium facit per se’, he who acts through another does the act himself.

In LIC v. Rajiv Kumar Bhasker, (2005) the divisional bench held that the relationship between the principal and agent is based not on a contractual basis but on a consensual basis. This consent may be either express or implied and can be concluded by the court to be present despite the parties expressly professing the absence of such a relationship.

The relationship comes into existence upon the consent of the principal and the agent; however, it must be noted that this consent is not required to be on the subject of the creation of such a relationship but on the evidence that the agent and principal both agree on facts on which the law imposes consequences resulting from such agency. Here such an agreement provides implicit consent, evident from the actions of the parties.

Role of implied consent in the operation of patients

In the Indian scenario, the majority of people below the poverty line requiring medical help are either illiterate or semi-illiterate. They are unable to understand complex legal terms, procedures, or medical concepts. In such a situation, the consent so provided is implied by the lack of adequate knowledge of what is being consented to. The court in such cases may choose to judicially apply implied consent for the benefit of the aggrieved party.

In Nizam’s Institute of Medical Sciences v. Prasanth S. Dhananka, (2009), the issue arose when, due to negligence in a surgical operation, a patient aged 20 years suffered from acute paraplegia (paralysis of the lower half of the body). Here, the consent for the surgery was treated as implied by the medical practitioners, as the complainant had consented to an excision biopsy. However, the Supreme Court held that mere consent for a biopsy cannot be treated as implied consent for surgery unless the situation is exceptional.

These exceptional situations are where there is an impending issue that has rendered the patient incapable of providing consent, and the continuation of the issue can lead to permanent damage or loss of life. For example, in cases of brain haemorrhage, road accidents leading to excessive bleeding, accidental consumption of toxins, etc., medical practitioners can operate on the patient based on implied consent to save the person’s life.

Challenging implied consent in court

Implied consent can be disputed, especially if one party claims that the circumstances or acts do not actually suggest consent. Legal issues may emerge as to whether implied consent was present and legitimate in a certain context. In the case of Ram Bihari Lal v. Dr. J. N. Srivastava(1985), Kantidevi, wife of the plaintiff Ram Bihari Lal, was operated on by the defendant for appendicitis after a suggestion for the same was given by the defendant; however, upon incisions for the surgery, it was found that the appendix was not at all inflamed; instead, the defendant noticed that the gall bladder was blackish and filled with stones. The defendant, without the express consent of the husband, who was waiting outside the operating theatre, removed the gall bladder of the patient. Only after the operation was completed was the information about the removal given to the plaintiff. Later, the patient Kantidevi died a few days later due to the wrong call of the doctor. The defendant argued that because there was consent for the surgery, there was also implied consent for the removal; however, the court held otherwise and awarded damages to the plaintiff.

Bar on the use of implied consent

In certain situations, Courts have expressly barred the use of implied consent to avoid litigation challenging the same. For example, let us consider Duli Chand v. Jagmender Dass, (1990) 1 SCC 169. In the case, the respondent, with the implied consent of the appellant sub-let the premises rented from the appellant to a firm.

Here, the Supreme Court ruled that it was necessary for the tenant to obtain consent in writing for the purpose of subletting the premises. The consent shall also relate to the specifics of subletting or parting with possession. The court observed that this ratio was to serve a public purpose, i.e., to avoid disputes as to whether there was consent or not, and mere permission or implied consent would not do.

In another case,Ghisalal v. Dhapubai, (2011) 2 SCC 298, the Supreme Court held that the consent of the wife for the adoption of a child must be express; it should be either in writing or by a positive act voluntarily and willingly done by the wife. In reference to the case, During the adoption of Ghisalal, which was being performed in the presence of the husband Gopalji, the wife Dhapubai was absent and was on the terrace of the house spectating along with other women. Her presence in the ceremony was merely that of a mute observer, not an active participant. Dhapubai’s consent cannot be considered to be implied just because she was spectating the adoption and did not protest expressly against it.

Jurisprudence of implied consent in foreign countries

In recent years, Germany has seen an increased focus on the notion of express consent within contractual agreements, particularly when it comes to digital platforms and online services rendered by sites. The legal dispute between the Federation of German Consumer Organisations (Federation) and Facebook emphasises the growing necessity of gaining explicit and informed permission from users. The Regional Court of Berlin’s decision in the Federation’s action against Facebook is an important step towards increasing the demand for express permission in contracts, particularly those regarding data privacy and user rights. The court’s judgement highlights the importance of organisations providing thorough information and ensuring that users are fully aware of the use of information taken from them before providing consent for the same.

The court’s analysis in the Facebook case revolved around the idea of “informed consent.” The court in Berlin concluded that the simple agreement of asking to bring about changes in default settings cannot be considered informed consent, especially if users are not made clearly and actively aware of these options throughout the registration process. This position is consistent with the larger view that consumers should be able to make free and uncoerced decisions when consenting to the use of their personal data or activating specific functionalities. Furthermore, the court’s decision that consent statements must be transparent reflects a new legal requirement that contract conditions be clear.

United States jurisprudence

American states, being part of a federal country, have differences in their respective jurisprudence regarding the use of implied consent. Let us consider the role of implied consent with regards to employment contracts. It embodies a legal concept wherein an employee’s actions in the duties and obligations associated with their employment are implicitly interpreted as conferring consent to specific workplace policies, regulations, or responsibilities. The underlying principle rests on the premise that an employee’s continuous engagement within the organisation and understanding the nature of their employment signifies such consent. For example, employees are frequently thought to have impliedly consented to the prevailing at-will nature of their engagement, where termination can occur at any moment, with or without cause, by accepting employment and continuing to work.

Jurisprudence in common law countries

Countries following common law systems including UK and Australia rely heavily on precedents when adjudicating matters on the presence of implied consent. Courts also look into the reasonablity of consequences faced by the party giving alleged implied consent to a contract to decide the validity of the consent given. Courts may also infer consent based on the parties’ conduct, trade customs, or industry practices.

The limits of implied consent have come under more scrutiny recently as a result of technological improvements and the advent of social media giants, particularly in the context of digital and data privacy.Similar to regulations of Germany, the GDPR (General Data Protection Regulation,2016) in the UK and the Privacy Act, 1988 in Australia are two examples of data protection regulations that have been put into effect in the two countries that emphasise the necessity of explicit and informed consent, especially when collecting and processing personal data.

Conclusion

Implied consent plays an important role in creating contractual relationships. The different types of consent, whether explicit or implied, delineate the ways in which individuals can express their agreements. Examples such as supermarket purchases and laundry agreements illustrate how implied consent operates in practice; they also show how implicit agreements are formed during routine commercial transactions as well as in nuanced dynamics within principal-agent relationships. Implied consent’s applicability differs based on jurisdiction. Jurisprudential developments in countries like Germany, where there is growing emphasis on the use of explicit consent, exemplify the evolving dynamics of consent within modern contractual relationships. In conclusion, the concept of implied consent underscores its enduring relevance across diverse jurisdictions and legal spheres.

Frequently Asked Questions

What is the difference between implicit and express consent?

Express consent refers to the expression of the consent in words be it written or spoken, meanwhile implied consent refers to interpreting consent through the action or behaviour of the parties giving consent

Is it possible for implicit consent to be legally binding?

Implied consent can be legally binding. It depends on the courts to consider whether the action or behaviour can be held to be indicative of consent given by parties to a contract.

References

D.S. Chopra’s Cases and Materials on Contract Law and Specific Relief Act , 2nd Edition
Doctine of employment at will, BLS-US https://www.bls.gov/opub/mlr/2001/01/art1full.pdf
IndianContractAct, https://www.indiacode.nic.in/bitstream/123456789/2187/2/A187209.pdf
Reuters.com on Federation of German Consumer Organisations (Federation) and Facebook
The Privacy Act, 1988(Privacy Act)
The General Data Protection Regulation gdprinfo.eu
LIC v. Rajiv Kumar Bhasker, (2005) 6 SCC 188
Nizam’s Institute of Medical Sciences v. Prasanth S. Dhananka, (2009) 6 SCC1
Ram Bihari Lal v Dr. J. N. Srivastava. AIR 1985 MP 150
Duli Chand v. Jagmender Dass, (1990) 1 SCC 169
Ghisalal v. Dhapubai, (2011) 2 SCC 298