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Section 498A IPC

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This article is written by Sanjana Santhosh, a law student at Christ (Deemed to be University), Bengaluru. The article elucidates the nature, significance, and constitutional validity of the offence under Section 498A of IPC along with the potential misuse of the provision with the remedies for its misuse. The article also explains the concept of cruelty and the procedure for seeking protection against Section 498A, along with landmark judgements on the topic.

It has been published by Rachit Garg.

Introduction

The term “domestic violence” refers to any act of violence or abuse, including mental, physical, and sexual abuse, that takes place in a domestic environment, such as a marriage or a cohabitation relationship; the term “intimate partner violence” is another prevalent name for domestic violence. The cultural norms of dowry, male dominance, and joint family structures in India make this phenomenon more common than elsewhere. As a result, these elements contribute further to the likelihood that women may become victims of domestic violence. Where dowry is expected and not received or where the amount of dowry received is not adequate, women often face abuse from both the husband and his family.

Because of the social stigma associated with reporting such matters and the general Indian preoccupation with what other people think, the figures paint an inaccurate picture. When a victim dies from his injuries, commits suicide, or seeks medical attention, only then does the matter make its way to the police and courts. Abuse of a lesser severity is typically concealed. There was no provision in Indian law addressing domestic abuse prior to 1983. Amendment to the Indian Penal Code, 1860 inserting Section 498A was enacted in 1983. ‘Matrimonial Cruelty’ against a female spouse is the subject of Section 498A. With the recent legislation in India, matrimonial cruelty is now a punishable crime that cannot be negotiated out of court.

About Section 498A of IPC

In 1983, with the passing of the Criminal Law (Second Amendment) Act, Section 498A was added to the IPC. The goal of this clause is to prevent the husband or other family members from torturing his wife for dowry and to punish him or them if he or they do so. The general sections of the IPC dealing with assault, hurt, seriously hurt, or homicide applied prior to 1983 to harassment of a wife by her husband or in-laws. However, increased incidences of bride burning and other violence against women, especially young ladies who are newly married, caught everyone’s attention. General IPC provisions were deemed insufficient to address the heinous crimes committed against women. The Parliament decided that three layers of legislation were necessary to address this issue head-on:

  • To define the underlying offence of cruelty to women by spouses and relatives of husbands.
  • To implement policies that require an investigation into specific deaths of women.
  • In order to more easily bring perpetrators of violence against women to justice, it is necessary to amend the Indian Evidence Act, 1872.

In light of this problem, the Indian Penal Code (IPC) was amended to include both Section 498A and Section 304B (dowry death). Subsequently, Section 174 of the Criminal Procedure Code was revised to require inquests to be conducted by executive magistrates in the event of a suicide or suspicious death involving a woman within seven years of her marriage. A new Section 113B of the Evidence Act states that if it can be proven that a woman died shortly after being exposed to cruelty or harassment by a person in connection with a demand for dowry, then it will be presumed that the harasser was responsible for the lady’s death.

The purpose of Section 498-A is to safeguard married women from abuse by their husbands or their spouse’s family members. A maximum sentence of three years in prison and a Rs. 30,000 fine has been set. The term “cruelty” has been broadly defined to include acts of harassment with the intent to pressure the woman or her family into meeting any unlawful demand for any property or valuable security, as well as acts of bodily or mental harm to the woman’s body or health. The harassment based on a woman’s ability to pay a dowry falls under the purview of the section’s final subsection. One element of “cruelty” is engineering a circumstance in which the woman is motivated to take her own life.

Essentials of Section 498A

For this Section to apply, certain prerequisites must be met. The following are some of these:

  1. It’s essential that she should be a married woman. This provision was added to shield wives and female relatives from abusive treatment at the hands of their husbands and/or male relatives.
  2. That woman must have experienced either brutality or harassment. The term “cruelty” can refer to a wide variety of behaviours. To demand a dowry is harsh in and of itself.
  3. Such brutal harassment should have been demonstrated by either the spouse or the husband’s family, if not both.

Nature of offence under Section 498A

Section 498A offence has the following nature:

  1. Cognizable: Cognizable crimes are those where the police can arrest without a warrant, whereas non-cognizable offences are those where the police cannot arrest without a warrant. Law enforcement has an obligation to report and investigate any crime that meets the legal definition.
  2. Non-bailable: If a complaint is lodged under Section 498A, the magistrate can refuse bail and send the accused to court or police custody without the need for a bail hearing.
  3. Non-compoundable: A petitioner cannot withdraw from a non-compoundable case i.e. cannot settle outside court (such as a rape or 498A charge) with the exception of the Indian state of Andhra Pradesh, where the latter charge has recently been rendered compoundable.

Cruelty covered under Section 498A

Cruelty is the intentional or reckless infliction of pain or distress to another person or animal. Under criminal law, cruelty can refer to punishment, torture, victimisation, cruel behaviour, etc. It could also mean ‘inhumane’ treatment towards individuals. When one person intentionally causes harm to another or does nothing when they could prevent harm, this is called cruelty. Cruelty, undoubtedly, is a fairly general phrase that encompasses a vast range of concepts. Any form of cruelty, whether physical, mental, or emotional, is unacceptable. Intentional and unintentional psychological and bodily harm are both protected under Section 498A. 

As per its terms, the following constitute acts of cruelty and/or harassment towards women:

  • To intentionally provoke a lady to the point where she commits suicide or
  • If one’s actions are intentional and could result in serious harm to a woman, one could face charges.
  • Any intentional act that poses a risk to the woman’s physical or mental health or her life,
  • Harassment of the lady with the intent of compelling her or her family members to comply with an unlawful demand for any property or valued security,
  • Abusive behaviour against the woman if she cannot provide the dowry.

Harassment and cruelty, in their ordinary sense definitions, mean to subject someone to unending mental anguish by means of persistent and hostile interference or threats. If the wife or her family is harassed in this way with the intent of forcing them to give up property or important security, this violates Section 498A. Using force or threats to get someone to do what you want them to is called “coercion.”

In the case of Kaliyaperumal vs. State of Tamil Nadu (2003), it was ruled that cruelty is a necessary element of both Section 304B and Section 498A offences. It is possible to be found guilty of a felony under Section 498A of the Indian Penal Code even if you were found not guilty of a felony under Section 304B for a dowry-related death. Section 498A’s explanatory notes define “cruelty.” Although no definition is provided in Section 304B, the definition of “cruelty” or “harassment” provided in Section 498-A is applicable to Section 304B as well. To be considered a dowry death under Section 304B of the IPC, the victim’s death must have occurred during the first seven years of the couple’s marriage, while under Section 498A, cruelty alone constitutes an offence. However, Section 498A makes no mention of such a time frame.

In the case of Inder Raj Malik vs. Sunita Malik (1986), it was determined that the explanation to Section 498A defines the term “cruelty,” which includes acts such as harassing a woman with the motive to compel her or any associated persons into meeting any unlawful demand for any property or any valuable security.

In a case where the husband has an extramarital affair and regularly assaults his wife, the circumstances satisfy the definition of “persistent cruelty” under Explanation (a) of Section 498A of the IPC, and the husband can be found guilty of abetment of suicide under Section 306 of IPC.

The infliction of physical suffering is what is known as physical cruelty. Any form of physical violence, including but not limited to beating, burning, punching, biting, twisting limbs, hitting, strangulation, etc., is considered to be physical cruelty. In most instances, the naked eye will be able to detect physical cruelty. As the term “physical cruelty” implies, this type of cruelty involves the infliction of actual physical pain or suffering on another person. Abuse on the physical level leaves obvious signs, such as bruises and broken bones. Any act of physical aggression that causes harm or poses a risk to one’s life, limbs, or health.

Any form of verbal or nonverbal abuse, such as yelling, name-calling, threatening, or intimidating another person, is an act of mental cruelty. Negative words and thoughts are just as harmful as physical violence. In contrast to physical abuse, evidence of mental cruelty is more challenging to gather.

The Indian Penal Code, specifically Section 498A, punishes both actual and attempted acts of abuse against a person’s mental state. Consequently, if the husband or the husband’s family members subject the husband’s wife to cruelty, whether physical or mental cruelty, that is likely to drive the woman to commit suicide or cause any grave injury or danger to the woman’s life, limb, or mental or physical health, or if they harass the woman with the intent of coercing her or her family members to meet an unlawful demand for any property or valuable security.

The husband or his family members are the only ones who can be held liable under Section 498A. However, the word “relatives” is not defined here. Court rulings suggest that this provision is typically applied to the husband’s immediate family, including his parents, siblings, and in-laws. If the “husband” of the “second wife” marries her while his first legal marriage is still in effect, the “second wife” cannot sue the “husband” under Section 498A for any cruelty committed against her by the “husband” or his relatives, as was argued in the case of Nalla Thirupathi Reddy and Others v. The State of Telangana (2014). The Supreme Court disagreed, citing the legislative objective behind 498A.

Constitutional validity of Section 498A

It was asserted that Section 498A is against Article 14 and Article 20(2) of the Constitution in the case of Inder Raj Malik and others vs. Mrs. Sumita Malik (1986). The Dowry Prohibition Act, 1961 addresses similar issues. Hence, the application of both laws combined constitutes what is known as double jeopardy. However, the Delhi High Court has ruled that this provision does not give rise to double jeopardy. In contrast to Section 4 of the Dowry Prohibition Act, which criminalises only the demand for dowry without any additional element of cruelty, Section 498-A addresses the more serious aggravated form of the crime. It penalises demands for money or valuable security from a wife or her family that are accompanied by violence or other forms of abuse. As a result, a person can face charges under both this provision and Section 4 for the same set of conducts. The courts are given extensive flexibility in this provision to determine how to apply the law and to determine appropriate punishments. This section is not beyond the scope of judicial authority. The judicial system is not given the ability to decide cases arbitrarily.

Although the circumstances surrounding the death by burning of a young married woman in the landmark case Wazir Chand vs. State of Haryana (1989) did not establish either murder or an abetted suicide, the in-laws were still caught in the web of this newly enacted section for the prevention of harassment for dowry. The fact that the girl’s father took many of her possessions from her marital home after her death is evidence that pressure was being applied by the girl’s in-laws for financial and material support from the time of her marriage until her death.

Developments in modernization, education, financial security, and a newfound sense of independence have given radical feminists the power to wield Section 498A as a weapon. Many husbands and parents-in-law have paid the price for their vengeance. When a wife (or her close relatives) tries to blackmail their husband with a claim under Section 498A of the Indian Penal Code, the courts almost always rule that they are fabricating it. The usual outcome of a 498A complaint is an extortionate demand for a large sum of money to “settle the case” before it goes to court.

Complaint under Section 498A

A woman who has been the victim of any form of abuse, whether physical, mental or sexual, should not feel afraid to report it. The victim should report the incident to the police in order to protect herself from further harm at the hands of the husband or his family members. If you haven’t already, you should hire an experienced criminal defence attorney and then submit a First Information Report (FIR). The victim should report the crime to the police right away.

A friend or family member can go to the police station on the victim’s behalf if she is too injured to do it herself or if she does not feel comfortable going there. If going to the police station in person is impossible, then dialling 100, which is the Police Helpline, is the next best option. The police officer receiving such a report must document it as soon as possible; doing so will aid the victim in moving forward with legal action. The first step in pursuing legal action against an accused person or wrongdoing is filing a police complaint, often known as a First Information Report (FIR).

Upon a complaint by the aggrieved wife or by her father, mother, brother, sister, her father’s or mother’s brother or sister, or with the leave of the court, by any other person related to her by blood, marriage, or adoption, the court shall not take cognizance of an offence punishable under Section 498A of the IPC.

The filing of a First Information Report (FIR) or criminal complaint with the police begins the trial or criminal court process. Below is a description of the trial process in detail:

  1. One must first file a police complaint or FIR (Initial Information Report) as the first step. The relevant provision of the Criminal Procedure Code is Section 154. An FIR initiates the legal process.
  2. After the First Information Report (FIR) is filed, the Investigation Officer will conduct an investigation and submit a report. The officer concludes the investigation and makes preparations for it after conducting all the necessary processes, including looking into the background of the case, gathering evidence, questioning potential witnesses, and so on.
  3. The police then present the charge sheet before the magistrate. All of the criminal accusations against the defendant are included in the charge sheet.
  4. After the parties have had an opportunity to present their cases and arguments before the Magistrate, the Magistrate will next define the charges and schedule a date for the trial.
  5. Section 241 of the Code of Criminal Procedure, 1973 addresses the plea of guilty. When the charges have been framed, the accused may enter a plea of guilty. It is the judge’s job to ensure that the plea of guilty was entered voluntarily. Conviction is at the discretion of the court.
  6. After the allegations have been laid out and the defendant has entered a plea of not guilty, the Prosecution presents its case in court, bearing the first (and usually greater) burden of proof. Evidence can be presented orally or in writing. The magistrate can issue a witness summons to anyone and require that individual to bring in any evidence.
  7. When prosecution witnesses are presented in court, the accused or his or her attorney will have the opportunity to cross-examine them.
  8. At this point, the accused may submit any supporting evidence to the courts. He or she is being given the chance to bolster their argument. However, the accused is not compelled to produce evidence because it is the prosecution, or the claimed victim, who has the burden of proof.
  9. If the defence presents witnesses, the prosecution will conduct cross-examinations.
  10. When all evidence has been given from both sides, the judge or court will reach a verdict.
  11. The judgement is almost at hand, and the last stage is oral arguments. Final oral arguments are presented to the judge by both sides (the prosecution first, then the defence).
  12. The court then renders a final decision after considering all of the arguments presented and the evidence presented in the case. The court then explains its decision to either exonerate or convict the defendant.
  13. The ultimate verdict might result in either an acquittal or a conviction depending on whether or not the accused is found guilty.
  14. If the defendant is found guilty, a hearing will be convened to determine the length of his or her sentence in the event of a conviction.
  15. If the situation permits it, one may file an appeal with a higher court. The case can be taken all the way to the Supreme Court if the case is lost in the Sessions Court and the High Court.

Bail under Section 498A

For those who have been arrested but have not yet been convicted of a crime, bail can be used to secure their release from jail pending trial. Offences that are normally penalised by a sentence of three years or less in prison or a fine are considered bailable, and where bail is a matter of right for such offences are called “bailable offences.” It is possible in the current time to obtain bail for a person accused of violating Section 498A of the Indian Penal Code, which was enacted in 1860. It is a non-compoundable, cognizable offence. Only the Magistrate can issue bail under Section 498A once the police have registered a “First Information Report” (FIR) based on a complaint made by the complainant. However, over time, the menacing arrests conducted under Section 498A of the IPC have been limited, thanks to rulings from the Hon’ble Supreme Court of India, such as the Arnesh Kumar and Rajesh Sharma cases (discussed later).

As a result of amendments to the Code of Criminal Procedure, the police are now required to notify the accused of their duty to appear before the police for investigation in accordance with Section 41A of the CrPC. If the accused continues to cooperate with such inquiries by appearing whenever the relevant investigating officer requests their presence, arrests under Section 498A are rarely made. Thus, the court ordered the police to follow the method outlined in Section 41A of the CrPC in an effort to reduce the number of unnecessary arrests.

Actions have been taken throughout time with everyone’s best interests in mind. Pre-trial mediation through the CAW Cell/Mahila Thana, etc., is one example of these procedures. In the event that the woman still desires to file an FIR after undergoing pre-FIR mediation and counselling, she may do so. The FIR cannot be withdrawn by the complainant, but the High Courts have the authority listed in Section 482 of the CrPC to quash the FIR.

But after the FIR is filed, it’s ideal to be released on anticipatory bail. When an accused person petitions the court for anticipatory bail, the judge has the discretion to impose specific restrictions on the defendant. One of the criteria might include depositing a demand draft in the name of the wife or other dependents in an amount equal to the required maintenance, etc.

Appeal under Section 498A

A judgement or order from a lower court can be challenged by filing an appeal with the appellate court. Anyone involved in a case in a lower court can submit an appeal of the case’s outcome. An “appellant” is one who has filed or is continuing an appeal, and “the Appellate Court” is the one to which the appeal has been submitted. There is no automatic recourse for a losing party to appeal a court’s decision to a higher court. Only in those cases where an appeal is expressly permitted by law and if doing so in the required fashion and before the required Courts is an option is it possible to file such a motion. The appeal must also be submitted within a specified time frame.

If there are sufficient grounds, one may file an appeal with a higher court. Sessions court hears appeals from the lower-level magistrate court. It is possible to appeal a decision rendered by the Sessions Court to the High Court and from there to the Supreme Court. If necessary, either the wife or the accused might file an appeal.

If you or someone you know has received a sentence of more than seven years in jail as a result of a trial before a Sessions Judge or an Additional Sessions judge, or any other court, you have the right to appeal your case to the High Court.

Misuse of Section 498A

In India, one of the most common arguments against laws against violence against women over the last 20 years has been that women take advantage of these laws. The police, civil society, politicians, and even judges from the High Courts and Supreme Court have all strongly argued that laws are being “misused.” The misuse claim is made against Section 498A of the IPC and Section 304B, which is about the crime of dowry death. In an article called “Justice for Muslim Women,” which was published in The Hindu, former Justice K.T. Thomas wrote about a similar point of view. The “general complaint” that Sec 498A of the IPC is subject to gross misuse was also noted in the 2003 Malimath Committee report on reforms in the criminal justice system; the report used this as justification for suggesting an amendment to the provision but did not provide any data to indicate how frequently the provision was being misused. It is crucial, then, to address these “arguments” so as to offer a more accurate picture of the current factual condition of the impact of various criminal laws designed to protect women.

Marital and family member abuse are complicated behaviours, yet the judicial system, law enforcement, and cultural attitudes consistently undervalue domestic violence instances because of this. Despite the institutionalisation of legislation and policy to criminalise domestic abuse, the government has not conducted any adequate evaluation of the reforms over the previous 20 years with respect to their deterrence goals. Section 498A was added to the IPC in 1983. The existing level of understanding of the consequences of legal punishments for domestic violence requires an immediate programme of research and development. In stark contrast to the significant efforts of activists, victims, advocates, and criminal justice practitioners in mobilising law and creating policy to combat domestic abuse, law enforcement agencies have done little to no research on the deterrent impact of legal consequences for domestic violence. This research is necessary to dispel the widespread belief that women are utilising the legal system to harass and victimise their spouses and in-laws. When it comes to domestic violence legislation, the state and its agencies need to shift their focus from shielding spouses and in-laws from “misuse” to enforcing the laws’ true intent: protecting women who muster the fortitude to file complaints against their abusers.

A large number of women have taken advantage of the enormous authority afforded to them by the implementation of Section 498A to harass their husbands and in-laws and to gain unfair benefits for themselves. Women seeking vengeance against their spouses use Section 498A to threaten and blackmail their relatives.

The Hon’ble Supreme Court of India has recognised the increasing trend of males being falsely accused of violating Section 498A, calling it a “phenomenon” and “social ill.” As the Supreme Court put it in the case of Sushil Kumar Sharma v. Union of India and Ors (2005), “Legal Terrorism” describes the abuse of Section 498A. In addition to the husband, innocent third parties like elderly parents or distant relatives are often unfairly implicated and made to undergo enormous hardship as a result of the criminal justice system’s misuse of Section 498A.

The purpose of this law, which is to safeguard women in genuine cases of cruelty, is jeopardised by the rising number of fake claims that are being witnessed today. The offence under Section 498A is both cognizable and non-bailable, and educated women nowadays are aware of the enormous power available to them under this section. With a single complaint, a woman can have her husband and his relatives behind bars. Defence of an accusation under this clause can also be challenging, as the woman’s word is often elevated and it becomes more difficult to contradict the narrative established by the woman in her complaint. A woman can force her husband and his family to comply with her requests for divorce, increased alimony, or even blatant extortion once she has filed a complaint. Here, we have a classic example of the misuse of a law intended to protect fairness in true cases of cruelty.

Women are increasingly bringing false claims against their spouses in order to ruin the family or to get rid of them, a trend that goes against the spirit and letter of this provision. Abuse of this provision is on the rise, and many educated women are aware that it is cognizable and non-bailable, so authorities can act swiftly on a woman’s complaint to have her husband arrested.

In Mukesh Bansal vs. State of UP (2022), the Hon’ble High Court of Allahabad has ruled that the Court issued an order requiring all districts to create Family Welfare Committees (FWCs) and bring them functioning within three months. The Court expressed concern that the continued thoughtless abuse of Section 498-A will cause the traditional aroma of our age-old institution of marriage to dissipate altogether. As a result, the Court ordered the following:

  1. No arrest or coercive action shall be taken against the husband or his family members after the FIR has been lodged but before the “Cooling-Period” of two months has expired and the case is brought before the FWC.
  2. Only instances involving violations of Section 498-A IPC, together with no injury under Section 307 and other parts of the IPC in which the punishment is less than 10 years, would be sent to the FWC.
  3. The relevant Magistrate should immediately submit to the Family Welfare Committee all complaints or applications filed under Section 498A IPC and the other associated sections.
  4. Within two months of the complaint’s filing, the Committee will hold a meeting and create a detailed report that will be referred to the Magistrate/police authorities with whom the complainant originally filed the complaint.
  5. Family Welfare Committee members shall receive such periodic training from the Legal Services Aid Committee as the latter deems appropriate.
  6. These Section 498A IPC and allied provisions shall be probed by competent Investigating Officers in response to First Information Reports or other complaints.

In cases like Savitri Devi v. Ramesh Chand & Ors (2003) the Court ruled unequivocally that the rules were being exploited and misused to the point where they were threatening the institution of marriage itself, which was ultimately bad for society as a whole. The Court found that it was necessary for officials and legislators to examine the situation and legal requirements to ensure that nothing like this could happen again.

In Saritha v. R. Ramachandran (2003),  the Court did notice the contrary trend and ordered the law Commission and Parliament to make the offence a non-cognizable and bailable one, strongly condemning the misuse of this clause by a small number of women. The court has attempted to answer intricate issues- What happens when the abused becomes the abuser? It has always been the court’s responsibility to punish misconduct and protect the victim. What options does the husband have in this situation?

The woman can file for divorce from her spouse on this basis, allowing her to remarry or possibly get monetary compensation. A lot of women’s rights organisations aren’t keen on the concept of making it a non-cognizable and bailable offence since they believe that the accused will be able to avoid justice that way. However, this would serve the objectives of justice by providing the individual with a chance to prove himself. When someone has been wronged, justice ensures that they are given a chance to seek restitution.

Justice delayed is justice denied, and when women accuse their husbands under S.498A IPC falsely, the guy who is innocent of the charge does not have an opportunity to receive justice promptly. So, legislators need to propose a mechanism to make this provision neutral so that justice can be served to both the guilty and the injured.

Remedy against misuse

Several precautions the husband and his relatives can take against a fake case of Section 498A case have been listed below:

  1. A defamation lawsuit can be filed under Section 500 of the Indian Penal Code. A man has the right to sue a woman for defamation if she makes false claims of cruelty against her husband or other family members.
  2. Proof of a criminal conspiracy: In addition, a prosecution can be brought against such a lady under Section 120B of the Indian Penal Code, which defines criminal conspiracy as an offence. A spouse can seek redress in court under this section of the IPC if he has reasonable grounds to suspect and can establish that his wife is involved in a criminal conspiracy that has resulted in false charges against him and his family members.
  3. Women typically bring in and try to rely on fabricated evidence to support their phoney Section 498A cases, which can lead to legal action. Section 191 of the Indian Penal Code defines ‘providing false evidence’ as a crime that can be committed in this situation.
  4. In circumstances where the wife has threatened physical harm to her husband or his family members, a counter-complaint can be filed under Section 506, which establishes the penalties for criminal intimidation.
  5. When a wife abandons her husband and moves back in with her parents, the husband has the right to initiate a petition for restitution of conjugal rights under Section 9 of the Hindu Marriage Act, 1955. This is applicable only when the accused is discharged or acquitted in a 498A case.
  6. Seek the counsel of a qualified criminal defence attorney who can advise you on the best course of action for your case.
  7. If you believe you have been falsely accused, it is to gather evidence and documents that support your case. You could collect evidence such as phone calls, video recordings, messages, and so forth.
  8. An FIR can be filed against the wife if the husband has reason to believe that she is fraudulently framing him in a 498A case, is blackmailing him or his family, or has otherwise caused them injury or distress.
  9. Revisions to this statute are warranted in light of recent findings and the growing incidence of violations of this section.
  10. Since the law is being abused to harass many more women in the husband’s family, women’s non-governmental organisations (NGOs) have a responsibility to conduct thorough investigations of complaints without favouring either gender. No woman should be encouraged to press charges against her in-laws for petty issues. It is the duty of international women’s groups to ensure that no baseless complaints are filed against NRIs in an effort to harass and extort large sums of money from them. These groups also have a responsibility to educate the public about the effects of the Act’s misuse through surveys and research. In the event that these groups are found to be facilitating the filing of fraudulent complaints, they should face legal consequences in the jurisdiction in which they are based.
  11. Male victims of domestic violence at the hands of their wives or in-laws have surfaced in large numbers around the country. There is hardly any group that can provide effective assistance to the harassed men and their families by listening to their side of the story and advocating on their behalf to the authorities. The establishment of family counselling facilities in cities around the country is urgently required to aid the affected families.
  12. A rapid trial of 498A cases will not only lead to prompt satisfaction of the grievances of true dowry victims but will also secure justice for the innocents who have been falsely accused.
  13. By decreasing the number of frivolous lawsuits, the judicial system will be relieved of some of its workloads, and legitimate cases will be processed more quickly.
  14. The statute provides a hazy definition of “mental cruelty,” which can be exploited in unintended ways. This needs to be more explicitly stated so that grey areas in the law are closed. Men should have the right to sue their wives for emotional mistreatment as well.
  15. Cognizance should be taken only after an investigation by civil authorities has confirmed the commission of the offence. In order to prevent its abuse, the government should raise awareness among police officers.
  16. The fact that those convicted under Section 498A cannot post bond is the primary reason why the law is so often abused to harass the defenceless. In order to prevent the unnecessary detention of elderly parents, pregnant sisters, and school-aged children, it is imperative that this subsection be made bailable.
  17. Once an FIR has been filed, it cannot be withdrawn, even if the wife sees she made a mistake and wishes to return to the marital home. This should be compoundable in order to save the institution of marriage. In addition, if the spouses decide to split amicably, the ongoing criminal processes will cause significant disruption to their lives.
  18. Only the principal defendant should have an arrest warrant issued after “taking cognizance” or being formally charged. Members of the husband’s family should not be subject to arrest.
  19. Strict action should be taken against those who make charges of a violation of Section 498A IPC when a court rules that such allegations are unfounded. Because of this, fewer people would approach the legal system with dirty hands and hidden agendas. All officials who conspire to unjustly accuse women and their families should face criminal charges. 

Landmark judgements under Section 498A

The Indian legal system has been employing this section to protect women from abuse in the context of marriage. In nine out of ten actual instances, the violence is connected to a dowry dispute, in which the wife is harassed, beaten, and intimidated until she gives in to her husband’s demands for more money and property.

Mohd. Hoshan, A.P. & Anr vs State Of A.P (2002)

The question of whether or not one partner has been unkind to the other is ultimately one of fact. Factors such as the victim’s sensitivity, social background, surroundings, education, etc. all have a role in how severely complaints, accusations, or taunting amounting to cruelty affect a person. What constitutes mental cruelty also differs from one individual to the next, based on their level of vulnerability, their bravery, and their resilience. Decisions on mental cruelty must be determined on a case-by-case basis.

Sushil Kumar Sharma vs. Union of India and others (2005)

Facts 

Under Article 32 of the Indian Constitution, a petition was filed seeking a declaration that Section 498A of the Indian Penal Code, 1860 is unconstitutional and ultra vires, or, failing that, for the establishment of guidelines to prevent the victimisation of innocent people by those with malicious intent. A further petition asked that whenever the court reaches the verdict and the claims made regarding the conduct of an offence under Section 498A IPC were unsubstantiated, rigorous action should be taken against the individual who made the charges.

Arguments

The petitioner claimed that there was no prosecution but rather persecution in these situations. Several judgements were relied upon, in which the rise in the number of fraudulent lawsuits was highlighted. It was argued that the accusers carry more responsibility than the accused. Courts’ compassion in cases of alleged dowry torture is being abused by those who seek to profit from it.

Judgement

The Supreme Court of India did not find any merit in the argument that Section 498A does not have any validity in either the law or the Constitution. The court held that there have been numerous occasions where it was shown that the complaints were not genuine and had been made with ulterior motives. Even if found not guilty at trial, the accused may nevertheless feel shame for their ordeal. Sometimes bad press from the media makes things even worse. Thus, the court must inquire as to what corrective steps might be implemented to stop the misuse of the provision. The provision is valid but does not give anyone the authority to utilise it for retaliatory or harassment purposes. Therefore, lawmakers may need to figure out how to effectively punish people who file baseless complaints or claims. Until then, the problem must be handled within the current framework by the Courts.

Neelu Chopra & Anr. vs. Bharati (2009)

Appellants Neelu Chopra and Krishan Sarup Chopra are a married couple, and respondent Bharti was their daughter-in-law. Bharati claims that her life as a married woman to Rajesh (appellants’ son) was rough due to his and his parents’ unreasonable expectations for doubt and misbehaviour. Accordingly, Bharati sued her husband and in-laws in 1993 for violating Indian Penal Code Section 498A. Since Rajesh passed away in 2006, his heirs are the sole parties involved in this dispute. The Court noted that the complaint lacked specificity about which defendants were charged with which offences and what specific roles each appellant had in the commission of the alleged crimes. The accusations were more specifically levelled at Rajesh, but he was no longer alive to defend himself. It would be an abuse of process to continue prosecuting Rajesh’s elderly parents on the basis of a generalised complaint that did not specify the specific actions that gave rise to the charges. As a result, the complaint was dismissed.

Bhaskar Lal Sharma & Anr. vs. Monica (2014)

Monica married the appellants’ son, Vikas Sharma, who already had two children from his former marriage. The couple’s marriage quickly went downhill, and Monica eventually left her new spouse. After that, she decided to press charges under Sections 498A, 406, and 34 of the Indian Penal Code against her husband and the two appellants (her father-in-law and mother-in-law). In addition to the interim maintenance, Monica asked for maintenance of 2 lakhs each month. As the Supreme Court noted, the prosecution failed to establish any of the necessary components for a violation of Section 498A of the IPC. Without making any attempt at mediation, the respondent employed all necessary coercive measures to ensure the appellants’ presence in India. The Court ruled that the abuse inflicted by the mother-in-law on the daughter-in-law and subsequent threats of divorce did not constitute cruelty under Section 498A of the Indian Penal Code. That being the case, the prosecution failed to establish the elements of Section 498A of the IPC, and the appeals court dismissed the case.

Arnesh Kumar vs. State Of Bihar (2014)

The woman said that her in-laws had made unreasonable demands, including that they pay 8 lakh rupees, provide a Maruti car, an air conditioner, etc. Her husband, upon learning of his mother’s demands, sided with her and vowed to marry another lady in her place. In addition, it was claimed that she was forced to leave the marital house because her dowry demands were not met. The spouse has denied the charges and sought anticipatory bail from the Supreme Court. Since violating Section 498A is a cognizable and non-bailable violation, the Court has observed that women frequently employ it as an offensive tool rather than a defensive one when attempting to intimidate their husbands and their families. On occasion, even the husband’s sick grandparents or far-flung relatives are falsely accused and extradited under this law. The Court has established rules requiring reasonable satisfaction and an adequate investigation into the veracity of the complaint prior to an arrest being made under this provision. The Magistrate may not issue a detention order on a whim or out of habit. Therefore, the Court ordered bail to be set at a nominal amount.

Rajesh Sharma & Others vs. State Of U.P. (2017)

Sneha’s father provided dowry to Rajesh at the time of their marriage. Furious over the sum of his dowry, Rajesh began abusing his new bride. Sneha sued her husband and his family members under Section 498A of the Indian Penal Code. The present appeal was filed by the family seeking certain directives to prevent the misuse of Section 498A of IPC. The primary argument advanced was that, in most instances, all members of the family are involved in resolving a marriage disagreement, even if they are not directly involved in the conflict. These were the Supreme Court’s directives:

Family Welfare Committee

  • Each district must have at least one committee made up of three paralegals, volunteers, social workers, or other willing citizens, formed by the District Legal Services Authorities.
  • The District and Sessions Judge of that district, who also serves as the Chairman of the District Legal Services Authority, shall conduct an annual review of the organisation’s bylaws and operations.
  • No member of the committee may be questioned as a witness.
  • The Committee is responsible for reviewing any reports filed with the police or the Magistrate under Section 498A of the IPC.
  • Within one month of the day the complaint was received, the committee’s report will be delivered to the Authority that received the complaint in the first place. Before that time, no one can be arrested.

Investigating officer

It is recommended that the Investigating Officer for complaints under Section 498A receive training for at least four months (not less than one week), depending on the circumstances.

Bail

After a bail application has been submitted to the Public Prosecutor/complainant with a day’s notice, a decision must be made the same day. If a wife or minor child’s rights to maintenance or other forms of support can be ensured, then the recovery of disputed dowry items cannot be considered a reason for bail.

Video conferencing

The trial court may not mandate the physical presence of all family members, especially those who live in distant locations and may instead give an exemption and allow video conferencing.

Conclusion

Violence against women at home is not only a violation of women’s human rights but also a crime under Indian law, which was created to protect the rights of all its citizens. India has accepted several international conventions that recognise women’s unequal status and include special provisions for women to remedy this disparity, including the Convention for the Elimination of All Forms of Discrimination Against Women (CEDAW). Domestic violence is prohibited in all contexts, including marriage and the family, by the Dowry Prohibition Act (DPA) and the Protection of Women from Domestic Violence Act (PWDA), Sections 498A and 304B of the IPC.

But this Section 498A’s exclusive remedy for females has become a contentious topic of discussion lately. Without legislative action, this impasse will grow into a terrifying social menace. For the sake of the public’s faith in the judicial system, this provision should be updated immediately. Unfortunately, not all women who could benefit from this information or services will be aware of them, and even fewer will actually seek help for domestic violence. Unscrupulous women will utilise this rule as another tool in their arsenal. Everyone who relies on a man will suffer if he is expelled from his own home due to charges of domestic violence or cruelty, whether or not those allegations are accurate. The entire family should not be punished even if the accused man is abusive. It is a complex and significant concern that an innocent man and his relatives are often being subjected to unjust legal persecution through this provision.

Frequently Asked Questions (FAQs)

Is Section 498A subject to the presumption of innocence?

The accused must have their guilt established beyond a reasonable doubt under India’s accusatorial system of criminal law. If the accused is to be found guilty, the prosecution must dispel all reasonable doubt. “Everyone charged with a criminal crime has the right to be assumed innocent unless proven guilty according to law in a public trial at which he has had all the protections essential for his defence,” reads Article 11.1 of the Universal Declaration of Human Rights, 1948.

Article 20 of our Constitution provides for a presumption of innocence for a suspect; nevertheless, the Constitution does not affirm or forbid this, leaving it to Parliament to disregard this provision if it is deemed necessary or advantageous to do so. While the husband does not enjoy the presumption of innocence when facing charges under IPC Section 498A, he does have a higher burden of proof under Section 304B, which is governed by Section 113B under the Indian Evidence Act.

Is it possible to be arrested under Section 498A of IPC without prior police notice?

An individual can still be arrested, but after the Arnesh Kumar judgement, police officers will no longer automatically detain those suspected of violating Section 498A and instead will be required to adhere to the standards set forth in Section 41 of the Criminal Procedure Code. A person against whom a reasonable complaint has been made, credible information has been received, or reasonable suspicion exists that he has committed a cognizable offence punishable by imprisonment for a term that may be less than seven years and which may extend to seven years whether with or without fine if the following conditions are met, is subject to arrest under Section 41(1)(b) of the Criminal Procedure Code. An officer must provide written justification for deciding not to make an arrest under this part. They can make arrests at will, but they must adhere to all applicable laws and regulations.

Is there a difference between the 498A and dowry harassment?

The term “dowry” does not appear anywhere in Section 498A of the Indian Penal Code. In order to “deal effectively not only with cases of dowry deaths but also with cases of cruelty to married women by their in-laws,” the Indian Penal Code (IPC) added Chapter XXA, which contains the solitary Section 498A. This was done in order to “deal effectively not only with cases of dowry deaths.” The Dowry Prohibition Act of 1961 is the piece of legislation that directly addresses dowry. Harassment of a married woman with the intention of forcing her or her relatives to comply with any unlawful demand for any property or valuable security that is in the form of dowry is a violation of Section 498A, which both defines and discusses the act of cruel treatment (both mental and physical) meted out to a married woman. Additionally, this section postulates harassment as a method of coercion.

References


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Drafting an agreement with a child actor

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This article is written by Aparimita Pandey pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute resolution from Lawsikho

This article has been published by Sneha Mahawar.​​

Introduction

Casting adult actors involves a relatively straightforward process where both parties are consenting individuals and come together to work on a project. It is essential to note that the same is not applicable when it comes to casting child actors. A child actor being a minor is not competent to enter into a contract, and thus various laws and guidelines are to be adhered to while engaging child actors in the industry. In this article, we will understand the various intricacies of the laws with regard to children and the methods to draft an agreement with a child actor. 

Agreement with a child actor

With the advent of media industries and social media, children are emerging as key role players in several areas of the industry. As technology has advanced all around the globe children are now growing at a very fast pace and grabbing work opportunities. They have the right skills, ideas, and vision to be a part of big projects and thus it becomes essential to monitor their work and ensure their safety. The National Commission for the Protection of Child Rights (NCPCR) aims to protect the rights of child artists and works towards forming guidelines for their health and a safe working environment and releasing detailed guidelines with regard to child actors. The Child Labour (Prohibition and Regulation) Act, 1986 (“Act”), was amended in 2016 and Child Labour (Prohibition and Regulation) Amendment Rules, 2017 (“Rules”), were introduced in 2017. These amended Acts and Rules specifically seek to provide guidelines for child actors working in films, television, OTT platforms, and reality shows. The NCPCR issued the latest draft ‘Regulatory Guidelines for Child Participation in the Entertainment Industry,’ to expand the scope of its applicability across all forms of entertainment in the media industry on 25 June 2022.

Employing a person under the age of 14 years is prohibited. Section 3 of the amended Act provides that a child can work after school hours or during vacation periods as a helping hand for the family business or enterprise if it is not hazardous and injurious to their health. It also provides that children are allowed to work as artists in audio-visual entertainment industries, films, sports activities, or any other forms of entertainment except for circus. 

A child actor can enter into an agreement with the producer through the means of their parents/guardians by obtaining their consent. The producer has a responsibility to comply with the guidelines and follow the procedures established by law. Rule 2C of the Child Labour (Prohibition and Regulation) Amendment Rules, 2017 provides that a producer shall:

  1. Obtain permission from the District Magistrate by filling out Form C of the Rules which shall remain valid for six months.
  2. Provide the consent of parents/guardians and the list of children participating in the project.
  3. Ensure proper compliance with the legislation and Rules.
  4. Ensure proper facilities of education for the child actors.
  5. No child shall be made to work for more than twenty-seven days consecutively.
  6. A minimum of 20% of their income should be deposited in a fixed deposit.

Drafting an agreement with a child actor

In order to draft an agreement with a child, one must keep the child’s rights and safety as a priority. It is important to safeguard children in the entertainment industry. The agreement should be child-friendly and shall always promise to provide a safe environment for them to work in. 

The following are some essential points to be noted while drafting an agreement with a child actor:

Scope of work

It becomes essential to define the scope of work in the agreement. This would clearly define the boundaries of work that are expected from the child actor and would thus eliminate any possibility of exploitation. 

Terms and conditions

Children are the most vulnerable members of the entertainment industry wherein they are exposed to hectic and stress-inducing situations. Defining the terms and conditions under which a child actor will be performing becomes an essential part of their employment. 

Parental consent

Every contract with a child actor is signed by a parent or guardian. It is mandatory to get the guardian’s consent, who is expected to go through the clauses of the contract properly for the child’s safe working environment. 

Safeguarding child’s rights

A child’s rights should be of utmost importance to both the producer and the guardian. It must be ensured that the producer adheres to the prescribed rules and legislation. According to a report on child artists in India – an explanatory study in Mumbai, India by the CRY Foundation, the contracts are often times framed as per the convenience of the producers. Thus, this forms a prominent issue in the entertainment industry as many child actors come from financially distressed backgrounds and the parent/guardian who consent to such contracts do not really pay attention to the needs of the child.

Working conditions and hours

The working hours for a child actor are clearly defined in the rules, but it is often not adhered to by the producer/director. In most cases, there are verbal agreements that do not clearly define the working conditions of a particular project. It is essential for guardians to keep a check on the types of working conditions the child actor is exposed to during the shootings. A well-defined clause of special facilities required by the child actor in an agreement helps ensure a healthy working environment. 

Consideration and reimbursement

In 2019, a case of child labour was registered before the Kerala State Council for Child Welfare (KSCCW). In this case, the child actors were made to work for long hours and were provided with no remuneration creating a severe issue of child labour and violation of child rights. Parents often get lured by the fame and money that is verbally promised to them by the producer. It is essential to mention the consideration that a child actor would receive clearly. Further, the clause should also mention the time and date of receiving the said remuneration to avoid any postponement of payment. 

Healthcare and support facilities

While the rules and legislations clearly define some vital factors that are to be considered while engaging a child actor in the entertainment industry there are some aspects that are yet not clearly determined. The producer needs to ensure that proper support facilities are provided, and a healthcare team should always be available for the needs of the child actors. All such facilities that are to be provided by the producer should be clearly enlisted.

List of essential clauses in an agreement with a child actor

The following are some of the essential clauses that need to be there in an agreement with the child actor:

Project and parties

This clause includes the details of the project which define the nature of the project and the additional aspects that are to be considered a part of the project which may include promotions and other such events. Further, details of both parties to the agreement are to be mentioned.  It comprises the name, address, age proof, phone number, etc. of the parties. 

Term

This clause defines the duration of the agreement between the actor and producer. It gives a clear understanding to both parties of the duration they would be involved with the project and thus helps them in taking on other projects of similar nature. 

Terms and conditions

This clause defines the terms and conditions of the service to be provided by the child actor. In order to maintain a professional boundary, this clause helps in completing the project on time. It includes the time of arrival, working hours, duties, the quality expected to be delivered by the child actor and other such components that form a vital part of the project. 

Actor’s rights and obligations

This clause includes the rights and obligations of the child actor. A child actor has several rights that are defined under the Child Labour (Prohibition and Regulation) Amendment Rules, 2017 (“Rules”). There are several obligations on the part of the child actor that are to be fulfilled. The child actor must be available for shooting, rehearsals, discussions and any other such event where the producer requires the child actor’s presence.  Such availability shall be limited to the working hours prescribed by the Rules.

Producer’s rights and obligations

This clause includes the rights and obligations of the producer. A producer is expected to provide for each of the rights that are provided for a child actor and adhere to the rules and legislations while engaging with them. The producer will own all the intellectual property rights to the project and all the other components of the project, which include revenue, income, and the right to re-record and make any changes to the project. 

Payment terms

The payment to a child actor is subject to the timely and proper discharge of service by the child actor. Such payment can be made in installments or as a whole at the end of the project. The date and time of the payment shall be clearly mentioned in the agreement, and any delay in payment shall amount to the applicability of a simple interest rate of 2%.

Representations and warranties

In this clause, both parties provide representation and warranties and state that they will fulfill their rights and obligations. It further deals with the consequences of breach of representation and warranty. 

Amendment

This clause states that there shall be no amendments to the terms of the agreement unless both parties duly sign and agree to such an amendment in writing. 

Termination

This clause gives both parties a right to terminate the agreement by sending 15 days prior notice. Such termination can also be initiated in case of a breach of rights and obligations. 

Other general clauses that can be included in the agreement are force majeure, notices, dispute resolution, governing laws and jurisdiction. Some negotiable clauses that can be included in the agreement are exclusivity, indemnity, cancellation, damages, and confidentiality. 

Conclusion

While dealing with a child actor, it becomes extremely important to safeguard the right of the child. Although there are rules and legislation providing for their safety the reality is very different. The casting agencies and producers should be mindful while working with child actors and adhere to the clauses of the agreement. 

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.

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Modern theory of international trade

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This article is written by Hariharan Y of Christ (Deemed to be University), Bangalore. It provides a detailed overview of the modern theory of international trade, also known as the Heckscher-Ohlin Theory. The aspects that are covered in this article are the features, essentials, assumptions, and criticisms of the theory.

It has been published by Rachit Garg.

Table of Contents

Introduction   

International trade has become a vital part of any economy. With increasing globalisation and the opening up of world markets, trade between countries has grown exponentially. Such trade is needed since countries are not completely self-sufficient. They need to depend on other countries for certain goods and services. However, trade is not a novel concept. It dates back to the barter system, in which goods were traded for goods. With the growth of mercantilism in the 16th and 17th centuries, the barter system was phased out. Later, in the 18th century, liberalism became popular, allowing for the free flow of goods across borders. Liberalism thus paved the way for international trade to take place between countries.

International trade has a massive impact on the GDP of an economy. Today, we are trading more goods and services than we previously used to. Global goods exports have increased drastically since 1983, from $1.8 trillion to $18.4 trillion. The trade-in services are around $5.9 trillion. Globally, we trade around $7000 per person per year. International trade has thus become inevitable today.

International trade as a concept is based on certain theories. These theories help explain the patterns of the trade from different perspectives. Currently, there are two schools of thought – the classical theory and the modern theory. The modern theory of trade, also known as the Heckscher-Ohlin theory or the factor endowment theory, states that the exports of a country depend on its factor endowments. If a country has plenty of labour, it will produce labour-intensive products, whereas if it has an abundance of capita, it will produce capital-intensive products. Factors here mean the labour or capital that a country possesses.

This article will discuss the theory of international trade and why there was a change from the classical theory of mercantilism to the modern theory. The modern theory is based on certain fundamental assumptions and theorems, such as the existence of perfect competition, similar technology in both countries, etc. Further, the limitations of the theory will also be discussed.

What is trade 

Trade means the exchange of goods or services between two different parties. Hence, it is a concept where one person sells his goods or services, for which he receives compensation from the other party. The Merriam-Webster dictionary defines it as “the buying and selling or bartering of commodities.” Trade can either be domestic trade or international trade. Domestic trade refers to the trade that happens within a nation, and trade between nations is called international trade.

Trade is a vehicle or an engine that helps create employment, reduce poverty rates, and increase the economic prosperity of a country. Trade based on its types can be classified as wholesale trade or retail trade. Wholesale trade refers to trade in large quantities and generally happens between the manufacturer and the distributors, while retail trade is the selling of goods or rendering of services directly to the consumer. 

What is international trade

International trade, as the name suggests, is the trade that happens between different nations. Every country is not endowed with all the resources it needs to sustain itself. Hence, trade becomes necessary to ensure that domestic requirements are met. While trading initially happened only with goods, trade in services among nations has also increased by a significant amount in the areas of banking, telecommunications, and information technology, among other service-based sectors. 

According to Wasserman and Haltman, international trade is defined as the transactions between residents of different nations. It is based on the concept of resource surplus and shortage. The biggest exporting industry in 2022 was the pharmaceutical and medical manufacturing industry.

Classification of International Trade

International trade can be classified into the following –

Import trade 

Import means the purchasing of goods or availing services from another country. A country imports goods either because it does not have the resources to manufacture such goods domestically or because there are certain difficulties to procure such goods within the country.

  • Export Trade – Export means the sale of goods outside the territory of a country. Here, the goods are produced domestically and sold to another country. Exporting brings foreign exchange into the country.
  • Entrepot Trade – In this kind of trade, the goods are imported from one country to export to another country. Hence, the goods are imported not for domestic consumption but for resale in another country. 

World Trade Organisation

The World Trade Organization is the central body that facilities and regulates international trade today. It was established through the Marrakesh Agreement also known as the Agreement Establishing the World Trade Organization. Before the WTO, there was no central body to regulate trade. The General Agreement on Tariffs and Trade (GATT), 1947 was the only document that regulated international trade for around 50 years until the WTO was established. The GATT underwent many amendments through these years to facilitate trade among nations. 

The WTO is headquartered in Geneva, Switzerland, and was founded on 1st January 1995. Currently, it has 164 members, out of which there are 160 UN Member States along with the European Union, Macau, Taiwan, and Hong Kong. The purpose of this organisation is to reduce tariffs and other barriers to trade such as technical barriers, strict regulations, discriminatory and favourable policies etc. 

The fundamental principles that govern WTO are as follows –

Principle of Non-Discrimination

This principle states that the Members must not discriminate among other Members unless specifically permitted through the WTO regulations. It has two components – the Most Favoured Nation (MFN) principle and the National Treatment policy. The MFN principle states that any kind of favourable treatment given to one Member must be given to all the other Members also. The National Treatment policy mandates identical treatment of domestic goods and imported goods.

Principle of Reciprocity 

Negotiations form the bedrock of the WTO. These negotiations must lead to material results for both the nations which are trading. It essentially means mutual concessions between the Members.

Binding Commitments 

The tariff and other commitments are binding documents on the Members and they are obliged to follow the same. Any dispute that arises during such trade would be handled by the Dispute Settlement Body (DSB) constituted by the General Council.

Transparency 

The Members of the WTO are required to periodically publish their regulations which allows for effective review and administration. The Trade Policy Review Mechanism (TPRM) ensures that periodic reviews of the trade policies are done in regular intervals to ensure that these policies are in sync with the current state of international trade.

Modern concepts under international trade

International trade changes with every passing day. As nations develop, they come up with different ways and strategies to trade in goods and services. There are various ways in which trade can be controlled and facilitated today. Some of them are as follows –

  • Trade Agreements – Countries often enter into trade agreements which can be bilateral or plurilateral. They contain elaborate details about the trade undertaken with details such as the tariff schedules, the description of the products and the legal angles in case there is a breach by one party.
  • The MFN and the National Treatment – The Most Favoured Nation (MFN) clause and the National treatment clause are the two basic principles under the principle of non-discrimination through which the WTO ensures that all members are treated equitably. The MFN clause states that any provision or benefit given to one member of the WTO has to be given to all the other members. The national treatment clause states that the treatment accorded to domestic products and the products that enter the country through authorised means must be given the same treatment.
  • Declarations and Ministerial Conferences – There are various rounds of declaration such as the Doha Declaration which bring about vital changes and developments in trade. In addition to this, the countries meet at regular intervals to discuss and negotiate various aspects of the trade.

Modern theory of international trade: features and essentials

The theories of international trade can be divided into two aspects – (a) Classical or country-based theories; and (b) Modern Theory or the Heckscher-Ohlin Theory.

Classical or country-based theories are based on the concept of growth economics. They were classical economists who were concerned with how the wealth of the nations increased. According to them, foreign trade was important in increasing the wealth of a nation since it enlarged the scope of the market and allowed for specialisation and the division of labour. In the classical approach, two main questions were considered – (a) What product should a country specialise in which it can export?; and (b) In case the countries produced different goods, what would be the ratio of exchange of these goods?

Before the advent of the Modern theory of international trade, there were certain classical theories of international trade which are as follows –

Mercantilism 

It is the first classical theory of international trade which states that a country must give priority to its welfare first before considering other countries. Hence, a country must always look to increase exports and decrease the rates. This is based on the idea that the wealth of the country depends on the treasures that it is holding and hence through exports these would increase which thereby increases the wealth of a nation. It is also called the protectionist theory since the countries are in a defensive mode and trying to protect themselves.

Absolute Advantage Theory 

Adam Smith in his book “Wealth of Nations” propounded the theory of absolute advantage. According to this theory, the economic growth and prosperity of a country depends on the specialisation and the division of labour that a country adopts. The governments must not interfere and try to regulate trade between the nations nor should they try to impose any restrictions on international trade. He was in favour of free trade and stated that government interference would be a barrier to trade and hence harmful to the free trade in a country. 

Comparative Advantage Theory

This theory was propounded in the 19th Century by David Ricardo. As per this theory, a country must export that kind of goods in which there is a beneficial and relative cost advantage as compared to the absolute cost advantage. Even though a country has the resources to produce a certain product, it can still import the same from other countries if it feels that there is a relative advantage in bringing in such products.

The modern Theory is also referred to as the Heckscher-Ohlin theory or the factor endowment theory. It was developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin at the Stockholm School of Economics. This theory states that a country’s exports depend on its resource endowments. A country can either have a capital-abundant economy or a labour-intensive economy. In case it is a capital-abundant economy, it will produce and export capital goods with relative ease, whereas, in case of about intensive economy, it will produce and export labour-intensive goods.

Modern theory is based on the concept of resource or factor endowments. Simply put, factor endowment means the number of resources that a country has for manufacturing and trading. These resources could include land, labour, and money, among others. The number of factor endowments is directly proportional to the number of exports of a country. 

Illustration: Consider the factor endowment as ‘iron ores’. Country A is abundant with these, while country B does not have any iron ores. Hence, country A will specialise in and export iron due to its endowment of iron ore land.

It further states that comparative advantage is the reason why a country chooses to produce and export goods. Comparative advantage essentially means taking advantage of the factors present in abundance in your country. Since these factors are present in abundance, they will be available at a lower cost due to less demand, while products with more demand but fewer factors in the country would lead to high prices. The latter is when the country chooses to import the goods.

Under this theory, the absolute amount of capital or labour is not important, but the amount available per person is what counts. For example, India might have a bigger capital factor than, say, a small country like Austria. But if counted in capital per person terms, Austria might be higher than India,  and this is what is taken into consideration under this theory. 

Features and essentials

The following are the features and essentials of the theory –

The trade depends on factor intensity

Different factors are used in different proportions to manufacture a product. Hence, when we say that a commodity ‘A’ is labour intensive it means that more labour is used in the production of the commodity than it is used in producing a commodity ‘B’. On the same lines, more capital would be used to produce commodity ‘B’ as compared to commodity ‘A’

Illustration: Let us say commodity ‘A’ needs 10 units of capital and 10 units of labour. Here, the capital-labour ratio is 10/10 = 1. In the same way, commodity ‘B’ needs 5 units of capital and 10 units of labour. Hence, the capital-labour ratio is 5/10 = 0.5. Thus, we can conclude that commodity ‘A’ is more capital-intensive than commodity ‘B’.

The theory is based on factor endowments (Heckscher-Ohlin Theorem)

Factor endowments mean the availability or abundance of the factors in a nation. Different countries are endowed with different kinds of factors or resources. Hence, a country with more capital resources will produce capital-intensive goods, while a country with abundant labour will produce labour-intensive goods.

Illustration: Country ‘X’ has abundant capital resources to manufacture cars, while country ‘Y’ does not have capital resources but is labour-intensive. Hence. Country A will produce and export cars, while country B will concentrate on labour-intensive goods such as toys.

The prices of both factors are inversely proportional to each other (Stolper-Samuelson Theorem)

This theorem states that if, say, the price of a capital-intensive good increases its price, then the factor used to produce such good i.e., will fall while the labour wage rates will fall. The inverse is also true, which states that if the price of a labour-intensive goods increases, then the wage rates will increase while the rental rates of the factory will rise. 

The prices of the final goods will equalise the prices of the factors (Factor-Price Equalisation theorem)

This theorem states that when the price of the final goods that are traded is equalised, then the prices of the factors, i.e., capital and labour will also be equalised. However, it is based on the fundamental assumptions of this theory that the technology remains the same and there is perfect competition in the market. 

However, this theorem would fail in its practical application since it is very rare that the technology between two different countries is the same or that there exists perfect competition in the market. A logical conclusion that can be drawn is that the prices would not be equalised, but the prices of the factors would move in the same direction as the final goods.

An increase in the production of one kind of good will result in a decrease in the production of another kind of good (Rybczynski theorem)

This theorem states the relationship between the production of the two different kinds of goods. It states that increasing the endowment of one factor would lead to an increase in the production of such goods. Consequently, it would lead to a decrease in the production of other kinds of goods (based on the other factor).

Illustration: Country ‘S’ has come up with a policy to invest heavily in capital equipment. Hence, the country will start producing more capital-intensive goods,this would result in a decrease in the production of labour-intensive goods.

Free trade in goods increases the aggregate efficiency 

The theory states that when countries undertake free trade, then the aggregate efficiency will increase resulting in a shift in the production of goods in the country. This means that the country will concentrate on increasing its exports and decreasing its imports. This shift in production will increase the efficiency of production in the country. This in turn will result in better consumer prices, ultimately increasing aggregate efficiency and the welfare of the nation. 

However, this theorem also suffers from certain limitations. While the income of the owners of a certain factor will increase, the income of certain factors will decrease. Overall, the aggregate sum of the increase will be more than the decrease. This leads us to the compensation principle.

The compensation principle states that as long as the benefits that are derived from the trade exceed the losses, the excess income that has been derived from such benefits can be redistributed to the losers, which would result in income equalisation.  

Assumptions of the theory

  • The 2-2-2 model – According to this theory, there are two countries, two products and two factors of production – labour and capital.
  • The constant return to scale – There are constant returns to scale for both commodities. This means that in case the inputs of the products are doubled then the output also will be doubled.
  • Technology is identical in the markets – This theory assumes that the same technology is used for production in both countries. Thus, only the factor endowments will differ and all the other circumstances remain the same.
  • Perfect competition exists in all the markets – According to this theory, there are no monopolistic or oligopolistic structures. There is perfect competition and hence economic profits would not exist in the long run and each of the factors is paid according to their marginal product. 
  • The factor density is used to rank the commodities – If a nation is producing two products then one of them will require less of a factor while the other will require more of a factor. This allows us to rank them according to the capital-labour ratio.
  • There are no transportation costs – The theory assumes that there are zero transportation costs. Though they might lead to a reduction in the trade volume, the trade pattern would not change due to the transportation costs. 
  • It is based on free trade and complete specialisation is not possible – The final outputs can be freely traded in the markets as per this theory and complete specialisation is not possible in producing one commodity. Hence, both nations would be producing both commodities. 

Criticism of the theory

The difference in preference

The Hecksher-Ohlin theorem presumes that trade in the country is dependent on the factor of endowments. However, sometimes there are differences in the preferences or differences in the pattern of the demand. There are certain demands that a country has domestically that might not match with the factor endowments.

Illustration: Country ‘A’ and country ‘B’ have the same factor endowments, and as per the theory, trade will not happen since there is no incentive to trade in goods. However, Country A might have certain preferences because they are producing a certain good that they are not producing in another country. Hence, trade is possible between both countries.

Leontief Paradox 

The theory suggests that the relative prices of the factors or the resources are directly proportional to the availability of resources, i.e., in case there is an abundance of the factor in the country, the prices will be lower due to its availability. 

Limiting factors are taken into consideration 

This theory takes into account only two factors – capital and labour. It only studies the relationship between these two factors while ignoring other important factors in trade such as transportation, other external circumstances and economies of scale which have a significant effect on production costs.

The assumptions are idealistic and too simple

The theory is based on the assumption of perfect competition in the markets and identical technology. However, the real world does not work this way. Every country has different levels of technology and having a perfect competition situation is rare. 

It does not take product differentiation into account 

Product differentiation as the name suggests is a strategy used to highlight the unique or distinct characteristics of its product or service to attract customers into the market. The theory does not take this into account even though they may be identical products from the perspective of the functionality of the product.

Illustration: Country ‘B’ exports its paper-cutting machine to various countries due to its cutting-edge technology. Here, even though other countries can produce the goods in their country, they import the machine due to product differentiation.

The trade is not always dependent on the factor proportions

The theory states that countries which have higher capital will produce capital-intensive goods while those with excess labour will produce labour-intensive goods. This may not always hold since countries still export capital goods to another country that is capital intensive, and vice versa.

Illustration: Country ‘T’ and Country ‘V’ engage in the trade of capital goods, though both countries are capital intensive. Here, the presence of the factors is not the only factor that leads to trade between the countries. There are various other factors such as economies of scale, the cost of transportation etc. 

The factors have mobility

The theory is based on the concept of specialisation and the factors are not mobile between the nations. However, we see today that the international flow of capital and labour is frequent. Labour is often imported from labour-intensive countries to undertake production within their countries.

Technology can not be identical 

One of the assumptions of the theory is that technology is identical in countries. However, this is not true since the level of technology depends on the economy and the level of investment in science and technology by the country. Different countries adopt different technologies to advance their economy. This will not be identical due to the differences in the preferences of the countries and the current state of the economy.

Benefits of the theory

The H-O theory has certain benefits which are as follows –

Trade patterns can be observed in a better manner

Before the H-O theorem, it was based on the concept of comparative advantage which stated that trade is based on the opportunity costs based on the technological differences in both countries. However, this theory assumes technology to be identical which means that the trade of the country depends on the factors it is endowed with. This helps us to understand trade patterns in a better manner.

It provides a more realistic approach

Since it is based on the factor endowments of a country it is a more realistic and accurate way of comparing the imbalance of trade (if any) between the countries.

It provides insight into the impact of economic growth on the trade patterns in the country 

 The theory takes into account the growth of the economy and the efficiency of production due to the increase in factor endowments which helps provide insight on the impact of economic growth of the country.

It takes into account the effect of politics on trade

This theory takes into account the prevailing political situation in the country. This enables us to get a holistic view after taking into account the relevant political effects on trade.

Conclusion

The Hecksher-Ohlin theory takes into account both factors – capital and labour. In the long run, the outcome would be such that it would fully adjust to the change in prices. The theory is based on the factor of endowments and how countries use it to their advantage to increase trade. The Ricardian theory attributed foreign trade to resource immobility. However, this theory took into account the factor endowments of a country which acts as the biggest contributor to trade.

Frequently Asked Questions

Why was there a shift in the theories of international trade?

Due to changes in the conditions of society, it changed from mercantilism and absolute advantage to comparative advantage and the H-O model.

What is the importance of international trade theories?

International trade theories provide useful insights into the situations prevailing when these theories were in force. Different countries decide their trade policies based on different theories as per their requirements. Hence, an in-depth study of the theories is important to apply them in the right sense.

Why did Mercantilism phase out of international trade?

Mercantilism as a practice was both a means of wielding state power and a hindrance to free trade. As the trade scenario developed, trade liberalisation policies helped open up the market through which the barriers put forth by Mercantilism were aimed to be reduced.

References

  1. https://www.britannica.com/topic/Heckscher-Ohlin-theory
  2. https://www.investopedia.com/terms/h/heckscherohlin-model.asp
  3. https://www.economicsdiscussion.net/heckscher-ohlins-theory/heckscher-ohlins-theory-of-international-trade/10697
  4. https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/heckscher-ohlin-model-definition
  5. https://www.magadhuniversity.ac.in/download/econtent/pdf/lecture%2034.pdf
  6. https://are.berkeley.edu/~fally/Courses/Econ181Lecture4a.pdf

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New rules for overseas acquisitions : challenges and way forward

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This article is written by Aabir Shoaib pursuing a Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho. 

This article has been written by Aabir Shoaib and has been published by Sneha Mahawar.​​

The Indian Government recently notified the New Overseas Direct Investment rules that have liberalised overseas investments by Indians. This article sheds light on the same along with the challenges and way forward. 

Introduction 

India is currently the world’s fifth-largest economy, with financial experts estimating it to grow to a $3.54 trillion economy by the end of 2022. This size of the economy is derived not only from domestic consumption or exports but also from investments made by Indian companies in foreign markets outside of India.

Today, Indian companies own global brands such as Hamleys UK, Jaguar Land Rover UK, and others. In addition, India’s outbound deal value has risen to USD 7.6 billion in 2022, the highest level since 2018. The trend shows Indian companies expanding into new markets in search of growth.

The Finance Ministry has issued recently, consolidated regulations for overseas investment by Indian businesses in an effort to boost the ease of doing business. The Foreign Exchange Management (Overseas Investment) Rules, 2022 (Overseas Investment Rules 2022) will replace the existing Overseas Investment Regulations and the Acquisition and Transfer of Immovable Property Outside India Regulations, 2015. The Finance Minister also opined ““In view of the evolving needs of businesses in India, in an increasingly integrated global market, there is a need for Indian corporates to be part of the global value chain. The revised regulatory framework for overseas investment provides for simplification of the existing framework for overseas investment and has been aligned with the current business and economic dynamics“, in a statement. 

Last year, the Indian Government, in collaboration with the Reserve Bank of India (RBI), started a comprehensive initiative to streamline these regulations. The proposed Overseas Investment Rules 2022 and the draft of Foreign Exchange Management (Overseas Investment) Regulations were also made available for public notice.

The proposal was formerly part of the Finance Act of 2015, which included a split/distribution of powers between the RBI and the government in terms of capital account transactions. A similar shift in Foreign Direct Investment (FDI) was discovered in 2019 via Notification, which gave birth to the Foreign Exchange Management (non-debt instruments), 2019 (NDI Rules). In addition to the modification, new Overseas Direct Investment Rules (ODI Rules) were announced. The recent revision to the new ODI standards sparked a debate among investors, attorneys, and clients over how investments would now be made in light of the new ODI and Overseas Portfolio Rules (OPI Rules).

The new regime

In the spirit of liberalisation and to promote ease of doing business, the Central Government and RBI have announced a new overseas regime superseding the earlier regime, which is given hereunder:-

  1. The Central Government has issued Foreign Exchange Management (Overseas Investment) Rules, 2022 (dealing with non-debt instruments).
  2. RBI has issued Foreign Exchange Management (Overseas Investment) Regulations 2022 (dealing with debt instruments) under Central Government Notification no: G.S.R. 646(E).
  3. RBI has issued Foreign Exchange Management (Overseas Investment) Directions 2022 (dealing with directions to be followed by authorised dealer-banks) under RBI (Notification no: FEMA 400/2022-RB).

The new regime simplifies the existing framework for overseas investment by a person resident in India to cover wider economic activity and reduces the need for seeking specific approvals. The new regime will also reduce the compliance burden and associated compliance costs.

Overseas investment guidelines under the new regime

The new regulations bring forward a set of path-breaking and important changes and present a full package for the Indian corporate entities to push the pedal on growth and development and expand ambitiously. Moreover, as per the new regulations and guidelines, a lot of changes have also been introduced to the way overseas transactions operate through India and foreign countries with respect to investments made by and from Indian individuals and entities as well as Non-Resident Indians (NRI). 

However, this article shall be discussing only the prominent ones. They are as follows: 

Changes to round-tripping structures and other investments outside of India

For Indian entities (other than resident individuals)

Prior to the change in laws, an Indian-resident other than an individual who wanted to invest in a foreign firm that already had certain investments in India needed special permission from the RBI.

Assume A Company is an Indian business interested in acquiring F Company, say in the UK, which already has a subsidiary in India. Because F Company already has investments in India, acquiring F Company’s shares by A Company would have required prior RBI approval under the previous regime. It has also been noticed in the past that the RBI directs Indian corporations to unwind structures in foreign companies if such foreign companies have an investment (even if existing) in India. This created difficulties (time spent on prior clearances, for instance) for an Indian corporation looking to buy worldwide brands/companies with a presence in India.

According to the new Rules, an Indian entity (company/LLP/ firm) shall not make financial commitments to a foreign entity (with or without control) that has invested or invests in India, either at the time of making such financial investments or at any time thereafter, resulting in more than two layers of subsidiaries, directly or indirectly. As a result, it appears that round-tripping structures, up to two layers of a subsidiary, may not require RBI monitoring for an Indian firm. But, it is still to be ensured and evaluated that the structure of the company exists for a bona fide business structure, for any overseas investment of debt funding. From the standpoint of expansion or acquisition, this is a good move for Indian companies.

The new legislation also greatly enhances the capacity of Indian Entities to acquire properties abroad. Firstly, by allowing deferred consideration, the new regulations clearly empower Indian corporations to use deferred payments in international investments. Previously, non-resident Indians could acquire Indian assets and defer the consideration, but when Indian companies had to make outward remittances, there was a lack of flexibility for deferred consideration, which has now been addressed expressly because there is no cap on the amount and time period of deferred consideration under the current regulations.

Secondly, the new regulations authorise swaps via the automatic method, which will offer the deal structuring process energy and flexibility. Under the previous regulations, there was a lack of clarification as to whether swaps were permissible or not, which resulted in differing opinions from lawyers, accountants, and advisors alike. Furthermore, there was a lack of clarification on which types of swaps were permitted (primary or secondary swaps), which would encourage differing opinions from the legal and financial communities.

According to current legislation, an ODI may be made or held through a share swap. Both types of swaps are permitted through the automatic method, as understood by attorneys and financial advisors.

Thirdly, it also gave a push to the ‘ease of doing business’. In the erstwhile regime, prior RBI approval was required by an unlisted entity for restructuring foreign holdings and writing off overseas investments as losses, and this was usually met with strict regulatory scrutiny and often posed a hurdle for Indian corporations when investing overseas. With the new regulations, the government has been showing a lot of trust and confidence in Indian corporations to invest overseas and diversify their business aspects, with the current regulations allowing Indian corporations to write off overseas investments as losses in case there are losses and allow for the restructuring of the balance sheet of the overseas entity involving right off of up to 25% of the investment if the foreign entity has been incurring losses for 2 years as evidenced by the audited balance sheet of those 2 years. In case the amount of investment is more than $10 million or the company experiences a diminution (reduction in share capital) of more than 20%, a certificate of diminution of value prepared on an arm’s length basis by a registered valuer shall also be required.

For Indian resident individuals

Previously, Indian residents were not permitted to participate in a foreign firm that had a step-down subsidiary. The new rules have caused an amendment to the same.

According to the new guidelines, an Indian person may invest in a foreign entity (without control) that has a subsidiary or step-down subsidiary. Unlike other Indian residents, resident people are not permitted to participate in foreign entities (with control) through an investment/subsidiary. This does not apply to a foreign entity’s gift, inheritance, or ESOP.

When it comes to individual investors, such as startup founders HNWIs and others can invest in listed companies abroad. Individual investors can invest through OPI in unlisted companies, but only in the case of ESOPs (where employees get stock options), sweat equity, or some sort of management shares.

It is a positive step to have parity between persons and corporate entities for round trip structures, as Indian entrepreneurs establish foreign holding companies to obtain private equity capital, which would ultimately fuel major economic growth in India.

Automatic route for foreign investments

Previously, Indian residents needed RBI clearance to make different investments; however, new laws have eased the process for seeking approval, allowing such transactions to be done automatically.

The following are the primary sectors where automatic investments are now permitted under the revised rules:

Power of the President of India to make foreign investments

The new rules offer that a person resident in India may, directly or through a vehicle or step-down subsidiary, make a direct investment or financial commitment abroad through an automatic route in a foreign entity engaged in a bona fide business activity.

Fund and non-fund-based commitment 

Financial transfers to the foreign entity for loans and/or the issuing of bank guarantees to/on behalf of the foreign entity are authorised when the Indian entity has made ODI and has control over the foreign entity. Furthermore, interest should be charged on an arm’s length basis.

Restructuring the balance sheet

Indian residents with ODI in a foreign corporation that has been incurring losses for the last two years have been allowed to reorganise their balance sheets without the consent of the RBI.

The new regulations allow Indian Corporates to write off overseas investments as losses in case there are losses and allow for the restructuring of the balance sheet of the overseas entity involving the right off of up to 25% of the investment if the foreign entity has been incurring losses for 2 years as evidenced by the audited balance sheet of those 2 years. In case the amount of investment is more than $10 million or the company experiences a diminution (reduction in share capital) of more than 20%, a certificate of diminution of value prepared on an arm’s length basis by a registered valuer shall also be required.

Gifting of securities 

A resident of India can now donate foreign securities to a relative who lives in India without the need for RBI approval, which was previously necessary. Furthermore, subject to specific restrictions, transfers of investment in equity share capital including write-offs are permissible via the automated route.

Deferred payment in overseas investment

The new rules have also permitted deferred payment options for acquiring and transferring foreign securities under automatic route. This dramatically increases the ability of Indian Entities to acquire properties abroad. First, by allowing deferred consideration, the new regulations clearly empower Indian corporations to use deferred payments in international investments. Previously, non-resident Indians could acquire Indian assets and defer the consideration, but when Indian companies had to make outward remittances, there was a lack of flexibility for deferred consideration, which has now been addressed expressly because there is no cap on the amount and time period of deferred consideration under the current regulations.

New avenues for overseas investment 

Revised ODI guidelines have broadened the scope of company investments to include new market sectors, permitting investments in the following:

Strategic sector

The rules established a new concept of the strategic sector, which includes energy, natural resources, and any others determined by the government, and in which ODI is now permitted.

Overseas start-ups 

Indian residents may invest in foreign start-ups using their own funds rather than borrowed funds.

International Financial Services Sector (IFSC)

An Indian entity that is not engaged in the financial services sector in India can now invest in a foreign entity that is directly or indirectly engaged in financial services operations, excluding banks and insurance.

Concept of control

The definition of control has been updated. The term includes the right to appoint a majority of directors or to govern management or policy choices as evidence of control. This right may be utilised by an individual or individuals acting alone or in concert. It could be either direct or indirect.

The form of exercising the right in the entity could be: 

i) through their shareholding,

ii) through management rights, 

iii) through shareholder agreements, 

iv) through voting agreements entitling them to 10% or more of voting rights, or 

v) through any other means. 

In addition to the right to appoint a majority of the directors/to control management/policy decisions where the shareholding is less than 10%, even a mere 10% shareholding will amount to control under the ODI Guidelines.

Introduction and differentiation of Overseas Portfolio Investment (OPI) vis a vis Overseas Direct Investment (ODI)

The new amendment also defines a new set of terms that were earlier not defined under the earlier regime, such as ODI and OPI.

OPI refers to non-ODIs investing in foreign securities and excludes investment in unlisted debt instruments or securities issued by an Indian resident who is not a member of an International Financial Services Centre (IFSCs). The classification is important because Schedules I and II of the ODI Rules specify how an Indian entity can make an ODI or OPI. The OPI and ODI limits are different. In the case of ODI by an Indian entity, the maximum for financial commitment in all foreign entities combined is 400% of the net worth as of the last audited balance sheet, but the limit for OPI is 50% of the net worth as of the last audited balance sheet.

Earlier, the investment was operated through FDI or a joint venture and was always qualified as an ODI, and there was always debate on what an OPI transaction was since portfolio and OPI were not defined clearly in the earlier regime. This used to stir up discussion amongst regulatory bodies, banks, and financial institutions, which have their own views about portfolio investment.

The erstwhile law spoke about Portfolio Investment in the context of listed companies when the investment was made around 50% of their net worth. This was debated as a big concern by the investors, who said that this should be extended to all other forms of investment as well because if an investor was a minority shareholder, continual reporting and providing information annually was a bit of a challenge.

Another key aspect is the differentiation of ODI and OPI on the basis of control. The new amendment outlines the definition of OPI with a monetary threshold, which is an investment of 10% in the company. This means that if a person holds 10% or more in an overseas entity, it becomes an OPI. However, if a person holds 10% and control in the company or even without holding 10% if the investor is holding certain voting rights in the overseas entity, it becomes an ODI.

Even with such definitions and clarifications, there’s still some way to go. This resonates a lot with the aspirations of Indian corporations to expand their operations. With a lot of Indian corporations eyeing to become multinational entities, this does seem to be a benefit, especially with the rapid growth and development of the Indian market where corporations can take advantage of the investments through the ODI and OPI routes.

Concept of foreign entity

The new ODI Rules replace the terms joint venture (JV) and wholly owned subsidiary (WOS) with foreign entities, which include companies with limited liability created, registered, or incorporated outside India or in an IFSC, as well as unincorporated entities with core activity in a strategic area. The new ODI directions go on to say that the fundamental criteria are that the liability of Persons Resident in India be clear and limited. Energy and natural resource sectors such as oil, gas, coal, mineral ore, submarine cable system, and start-ups have been identified as strategic sectors.

While the ODI Rules and Regulations are silent in the case of a trust-based investment vehicle, the ODI Directions require that the PRI’s obligation be clear and limited to the amount of interest or contribution in the fund and that the trustee should be a person resident outside India.

Components of overseas investment

The former ODI regulations, which were in existence until August 21, 2022, included a notion of direct investment outside India in JV and WOS, which excluded portfolio investment and foreign commitment (FC). ODI Rules combine the two to define FC and define OPI separately. ODI is the sum of FC and OPI. The designation as an ODI is determined by the nature of the instruments used in the investment, the type of entity used in the investment, and whether or not control has been obtained.

ODI in financial services activity

The ODI Rules allow an Indian entity that is not engaged in financial services activity in India to make an ODI with a foreign entity that is directly or indirectly engaged in financial services activity other than banking or insurance, provided that such an Indian entity has posted net profits in the previous three fiscal years.

In terms of insurance, an IE not engaged in the insurance sector can make ODI in general and health insurance where such insurance business supports the IE’s core operations carried out overseas. According to the new ODI regulations, a foreign entity is regarded as being involved in the business of financial services activity if it engages in an activity that, if carried out by an entity in India, would require registration with or regulation by an Indian financial sector regulator.

NOC from lender bank/regulatory body/investigative agency for ODI

Earlier, there was a blanket prohibition on Indian parties making any investments or financial commitments under the ODI if such an Indian party appeared on the Reserve Bank’s Exporters’ Caution list/list of defaulters to the banking system circulated by the RBI/or on any credit information company or entity under investigation by any investigation/enforcement agency or regulatory body. The blanket ban has now been replaced with a requirement for a NOC. 

Now, any person resident in India who-

(i) having an account appearing as a Non-Performing Asset (NPA),

(ii) being classified as a wilful defaulter, or 

(iii) who is under investigation by a financial sector regulator/investigative agency is required to obtain a NOC from the lender bank/regulatory body/investigative agency concerned, before making any financial commitment or undertaking any disinvestment.

A company under investigation or whose accounts have been deemed NPAs does not require a NOC from the bank or the investigative agency to make an ODI investment. If the company applies for a NOC to either the bank or the investigative agency and does not get a reply within 60 days, it is deemed to be approved. There has also been a lot of flexibility and clarification given to IFSC and debt investments, which were in a bit of a grey area in the erstwhile regime.

Newly implemented pricing guidelines:

Under the previous ODI regime, the valuation of shares was necessary for share transfers, the partial/complete acquisition of a foreign business, and share swaps. However, unlike FDI, the pricing guidelines did not apply particularly to ODI. The new ODI Guidelines have revised this position, and pricing guidelines have been implemented. 

The issue or transfer of equity capital of a foreign entity must now be made at a price determined on an arm’s length basis after taking into account the valuation as per any internationally recognised pricing methodology for valuation, whether it is- 

(i) from a person resident outside India or a person resident in India to a person resident in India who is entitled to make such an investment, or 

(ii) from a person resident in India to a person resident outside India.

Investment by MFs, VCFs and AIFs

These SEBI-registered firms can invest in securities overseas in accordance with SEBI guidelines, up to a total ceiling of USD 7 billion for mutual funds (MFs) and USD 1.5 billion for venture capital funds (VCFs) or alternative investment funds (AIFs).

Any investment in foreign securities (listed or unlisted) by these organisations will be classified as an OPI.

Rollover of guarantees

Roll-over of guarantees is not considered a new financial commitment if the amount on account of the rollover does not exceed the amount of the initial guarantee.

This is a welcome change because, under FEMA 120, a rollover was not considered a new financial commitment unless-

(i) There was no change in the end use of the guarantee or any other terms and conditions except the validity period. 

(ii) The reporting of the rolled-over guarantee was completed in Form ODI – Part I. 

(iii) The notification to the investigation/enforcement agency or regulatory body where the Indian Party was under investigation.

Permitting Indian corporates not engaged in the financial sector to invest overseas in the financial sector

Indian entities not engaged in the insurance sector may make ODI in general or health insurance, which is big evidence of the flexibility provided to non-banking financial companies.

While previously only an Indian entity engaged in financial services could make an ODI in a foreign entity directly or indirectly engaged in financial services activity, an unregulated Indian entity, other than those engaged in banking or insurance activities may now invest in such an offshore entity without the need for RBI approval, provided the Indian entity has posted net profits in the previous three fiscal years. The net profit criterion for the previous two years may be excluded as a COVID relief measure if the firm cannot fulfill the profitability criteria owing to the COVID impact.

Way forward for Indian corporate entities and Indian market in light of the new regulations

The ODI Guidelines’ avalanche of modifications will undoubtedly encourage Indian firms and resident Indians to develop their operations in other nations. Some of these developments, particularly those pertaining to OPI by Indian corporations, have been long anticipated and are being welcomed by market participants.

The Indian corporate and legal sector was waiting for such regulations since the draft rules circulated by the RBI became public since it is a massive step for liberalisation in terms of ease of doing business as it indicates the eagerness and far-sightedness of the government to encourage the Indian corporates to grow overseas and compete with the best in the field.

The new regulations do bring forward a set of path-breaking and important changes and present a full package for Indian corporate entities to push the pedal on growth and development and expand ambitiously.

The two biggest and most significant changes that have been brought about and will eventually allow Indian corporate entities to grow internationally are- 

(a) liberalising the process of round-tripping, blessing it with support systems, and 

(b) permitting Indian corporates not engaged in the financial sector to invest overseas in the financial sector.

Previously, in the absence of these two benefits, the Indian corporates were significantly hamstrung and had to abort multiple deals that never saw the light of the day even when lawyers tried to structure the deals in different possible ways.

The new legislation also greatly increases the ability of Indian entities to acquire properties abroad. First, by allowing deferred consideration, the new regulations clearly empower Indian corporations to use deferred payments in international investments. Second, the new regulations authorise swaps via the automatic method, which will offer the deal structuring process energy and flexibility. Third, it has increased the ‘ease of doing business.’ Previously, an unlisted business needed prior RBI approval for restructuring foreign holdings and writing down overseas investments as losses, which was frequently greeted with severe regulatory scrutiny and often created a barrier for Indian corporations when investing overseas.

Conclusion

The new investment regulations will be a beneficial shift in general. The new regulations will allow residents to access new markets and enhance their portfolios by expanding globally and improving funding alternatives for overseas investments. This groundbreaking action is particularly significant for Indian residents who have established their own enterprises abroad and have been sponsored by a foreign private equity fund, which has then invested in Indian companies through the business.

Given the changing needs of Indian businesses in an increasingly connected global market, Indian corporations must participate in the global value chain. The updated regulatory framework for foreign direct investment simplifies the existing framework for foreign direct investment and is linked with contemporary business and economic trends. Clarity on ODIs and OPI has been introduced, and several overseas investment-related transactions that were previously subject to permission are now subject to automatic approval, considerably improving ‘ease of doing business.’

However, RBI FAQs/clarifications on key topics that are currently unclear are awaited.

References 


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Haryana Shops and Establishment Act

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Independence of judiciary

This article is written by Rachna Kumari of the National University of Study and Research in Law, Ranchi. This article provides an in-depth analysis of the Haryana Shops and Establishment Act, 1958. This article jots down the applicability of this Act, Important definitions and provisions in the Act, the registration process, and important exemptions, amongst other things.

It has been published by Rachit Garg.

Introduction

In the 21st century, the era of globalisation and when every country is working towards making their economy better, we often forget the ones who have the biggest contribution to growing the economy; the workers and employees. 

The Haryana Shops and Establishment Act (hereinafter referred to as the ‘HSE Act’) was enacted in 1958 with the intention to safeguard the rights of the workers and employees. Section 1 of the HSE Act discusses its extent, commencement and application. Further, the Act provides definitions such as, “commercial establishment”, “employee”, “factory”, “inspector”, “register of establishments”, “shop”, “wages”, “young person”, etc. Further provisions like applicability of this Act, the Government’s power to expand the provisions of this Act, conditions of employment for young persons, hours of employment, registration of establishments, leave, wages for close days and during the leave period, enforcement and appointment of inspectors, inspection of registers and calling for Information, notice of removal, power to compound offences, power to grant exemptions, prohibition of employment of children, work of conditions for women, maternity benefits, and power to make rules and repeal are discussed in the Act.  

For the protection of the workers/employees of shops and commercial establishments, the Haryana Shops and Establishment Act provides regulations for the payment of wages, terms of the service, number of working hours, rest intervals, opening and closing hours, working conditions, holidays, maternity leave, etc. 

Applicability of the Haryana Shops and Establishment Act

In accordance with Section 1 of the Act, the application of this Act extends to all the shops and commercial establishments based in the areas notified by the Government of Haryana. Haryana Shops and Commercial Establishment Act follows the Punjab Shops and Commercial Establishments Act, 1958. 

Important definitions under the Haryana Shops and Establishment Act

Definitions are given under Section 2 of the Haryana Shops and Commercial Establishments Act. The most important ones are discussed below: 

Commercial establishment

‘Commercial’ establishment is defined as the premises where any profession, business or trade is carried out for monetary benefits. It includes printing establishments and businesses of banking, insurance etc. Further, the commercial establishment also includes hotels, restaurants, cafes, cinema halls etc set up for financial advancements. In the case of P.B. Nayak and Ors. v. Managing Director, Bhilai Steel Plant and Ors (2021) and Bangalore Water Supply & Sewerage Board v. A. Rajappa (1978) the Apex Court held that an establishment is identified by its actual working, functioning and character and only these factors will decide whether an establishment is an establishment. In the P.B. Nayak judgement, the Court had to decide whether a club specially made for the officers of Bhilai Steel Plant can be considered to be an establishment. The Court referred to the findings of the High Court and pointed towards the definition of a Club from Halsbury, 4th Edn., Vol,6, para 201, P.56 that a club, except as proprietary or an investment club, cannot be considered as an establishment if it is constituted by a society of persons associated together for cultural, spiritual, promotion of sports, politics purposes. 

Employee

‘Employee’ refers to a person who is working for an establishment in his/her entire capacity, whether permanently, periodically, on a contract basis or piece-rate wages. Any family member of the employer cannot be considered as an employee. 

Employer

‘Employer’ can be understood as a person who owns and has complete charge of an establishment, he/she has got the final control over the affairs of the establishment. The definition of employer includes the members of the family of the employer, an agent or manager acting on behalf of the employer.

Factory

‘Factory’, under the HSE, Act, is the same as it is in the Factories Act, 1948, i.e., any premises including the place where ten or more workers are working or were working on the day previously in any part of an establishment where manufacturing is/was being carried out. 

Family

‘Family’ in reference to an employer means: spouse, children, stepchildren, parents, sisters, and brothers if they’re residing with and wholly dependent upon him. 

Shop

‘Shop’ refers to the area where any business or trade activity is carried out or services are delivered to the consumers, it includes offices, store-rooms such as warehouses, godowns etc, be on the same property or any other property in connection with the same establishment, but it doesn’t include the shops linked with the factory where those who are employed in the shop are allowed to avail the benefits provided for workers under Factories Act, 1948. 

The registration process of the Haryana Shops and Establishments Act

Section 13 of the Haryana Shops and Establishment Act discusses the Registration of Establishments. Under Section 13(1) of the HSE Act, the employer of every establishment that exists in areas to which this Act is applicable or where this Act is extended, all the new establishments in such areas, the employers of such establishments shall send a statement in the prescribed form (accompanying the fee as may be prescribed), to the prescribed authority within thirty days. 

The form must include the following details:-

(a) name of the employer and the manager,

(b) postal address and name of the establishment, 

(c) number of individuals employed. 

According to Section 13(2)(i), on receiving the statement and fee prescribed, on being satisfied with the authenticity of the statement, the authority has to register the enterprise in the register of establishments in the prescribed manner and shall issue a registration certificate to the employer.

On-demand, the certificate shall be shown to the Inspector by the employer. 

After every three years, the registration certificate has to be renewed. A grace time of thirty days shall be allowed to renew the certificate after payment of the prescribed fee. 

Under sub-section 4 of Section 13, if there are any alterations with respect to any data contained in the employer’s statement, the employer is duty-bound to notify the prescribed authority in the prescribed manner within seven days after the introduction of changes. On receipt of such notice and after being satisfied with the genuineness, the authority shall make the amends in the register of establishments according to the notice and if required, shall alter the registration certificate.

According to Section 13(5), within ten days of an employer’s closing the establishment, the employer shall notify the prescribed authority in writing. On receipt of the information and after being satisfied with the same, the authority shall delete the establishment’s name from the register of establishments and cancel its certificate of registration.  

Impact of Haryana Shops and Establishment Act on different sectors

This Act is applicable to all the shops and Commercial establishments based in the areas notified by the Government of Haryana irrespective of the services they’re providing. Hence, it doesn’t have any special impact on different sectors. 

Important exemptions

Section 3 discusses the non-applicability of the Act on certain establishments and persons. The establishments upon whom this Act is not applicable are given below;

  • Those offices that come under the Central or state government, the Reserve Bank of India, any administration related to railways or any local authority. 
  • Any air, marine, railways service, postal service, industry related to sanitation, or business that delivers light, water or electricity to people. 
  • Dining cars on the railway. 
  • A lawyer’s office.
  • Any individual employed in the business of any undertaking aforementioned.
  • Any personnel whose employment hours are regulated by the Factories Act, 1948.
  • Any individual whose work is inherently intermittent.
  • Establishments that belong to stamp vendors and petition writers. 

According to Section 5 of the Act, Through a notification, the Government may declare any class of establishments or persons specified therein not to be exempted from the provisions of this Act. 

Important Sections of the Haryana Shops and Establishment Act

Working conditions for young persons

Section 6 discusses the conditions of employment for young persons (a young person is someone who  has attained the age of fourteen but has not attained the age of eighteen years). According to Section 6,  the working hours of a young person, exclusive of intervals for meals and rest, must not cross a total of thirty hours in one week or five hours every day. Without an interval of at least 30 minutes for a meal or rest, a young person shall not be continuously employed for more than three hours.

The government may prescribe more conditions with respect to the employment of young persons. 

In case of any contravention or failure to comply with the provisions of this Section, on conviction, the employer shall be liable to a fine which must not be less than fifty rupees but may extend to two hundred rupees.

Unless the contrary is proved, an individual in respect of whom the offence was committed shall be presumed to be a young person during the proceedings for an offence under this Section. 

Employment hours 

Section 7 is a provision related to Hours of Employment, according to Section 7(1) no individual shall be employed to work in the undertaking for more than 48 hours in one week and nine hours per day. Sub-section 2 states that in case of occasional or extraordinary pressure of work a person may be employed in excess of the hours mentioned above. 

However, the total number of overtime hours by an employee should not exceed fifty hours within a quarter and the person must be reimbursed at twice the rate of his normal wages calculated per hour. 

On any day or in any week, no employer shall employ a person who has previously been employed on that day in that in another factory for a longer period than he should have been, together with the time during which he has been employed on that day or week, exceed the number of hours permitted in sub-section (1). 

In case there are any proceedings against the employer for infringing the provisions of sub-section (3), for his defence, the employer has to prove that he didn’t know and could not know with reasonable diligence that the person was previously employed by an employer of any other factory. 

Section 7(5) states that no person shall work about an establishment(s) or any factory in excess of the time interval during which he may be legally employed under this Act. 

Intervals 

Section 8 discusses the intervals for rest or meals, according to which, except a chowkidar, watchman or guard, no employee shall be allowed to work in an undertaking for more than 5 hours before an interval for the rest of at least thirty minutes. However,  the government by notification may fix such intervals for rest for any undertaking for the entire state or any part as it may consider necessary. 

Holidays 

Section 12 deals with holidays i.e., every employee shall be allowed a holiday with payment on-

1. Republic day, Independence day and Gandhi Jayanti. 

2. Five other holidays in a year in connection with the festivals as the Government may declare. 

Leave

Section 14 discusses leave which states that employees who are employed for more than twenty days are entitled to one paid leave every twenty days. A young individual is entitled to a paid leave every fifteen days.

In calculating leave under Section 14, a half-day or more shall be treated as one day’s leave, and leave for less than half a day must be ignored. If any employee doesn’t take a whole leave provided to him under clause (a) of this section, in that case, that leave must be added to the leave to be allowed to that employee in the coming year. 

When a leave is applied for, it shall be granted except for a valid reason intimidated in writing from the employer to the employee within fifteen days of the application. If the leave is refused and is applied again by the employee, the leave shall be allowed during the year. 

Wages for close days

Section 15 discusses wages for close days and during the leave period, i.e., any person employed for a time period of fifteen days or more must receive wages at a rate which is not less than the average daily wage earned by him/her. On-demand, the employee whose leave has been allowed (not less than five days in the instance of a young individual and four days in any other case) must be paid for the period of leave he is allowed before his leave begins. 

In case the employer doesn’t comply with the rules laid down in Section 16, and a Judicial Magistrate is satisfied that the employer has not paid the due wages of an employee, he shall order the employer to pay the wages along with the remuneration not exceeding eight folds the number of wages held back by the employer. As per sub-section 2 of Section 18 of the Act, the number of wages withheld and compensation payable for the purposes of its recovery shall be deemed to be fine.

Enforcement of appointment of inspectors

According to Section 19 the government, by notification may appoint persons as it thinks capable of being the inspecting officers for the purpose of this Act within local limits as it may assign. The government may also appoint individuals as it may deem fit not below the rank of Deputy Labor Commissioner, to be the chief Inspector or Deputy Chief Inspector under this Act.

An inspecting officer may, within the limits of his appointment-

  1. Enter any establishment which is or which he thinks is an establishment, at all reasonable times and with assistants that are in the service of the government.
  2. Make an examination of the establishment and of any registers, records and notices and evidence of any persons as he may deem necessary for the conformity of the HSE Act.
  3. Exercise any other powers as are important for carrying out the purpose of this Act, except requiring anyone to answer any incriminating question or give any incriminatory evidence. 

Records

Section 20 discusses the records to be maintained by the employer which are as follows-

The employer shall keep a notice setting forth the close day, working hours and the period of intervals of the employees and any such other particulars as may be required/ prescribed in the prescribed form and manner. 

A record of the hours of work, intervals for rest and the number of leave taken by the employee and particulars of all overtime employment shall be maintained. Attendance of every employee shall be marked in a register and in the case of overtime all entries regarding the start and end of overtime shall be marked. 

A picture of every employee who has completed 3 months of continuous service shall be kept. 

In case of any contravention, the employer shall be liable to a fine not exceeding five rupees every day on which the contravention continues. 

According to Section 21, it shall be the duty of every employer to make all accounts or other records required to be kept for the purposes of this Act, and to give any other information in connection therewith, available to the inspecting officer.

Notice of removal

Mentioned in Section 22 of the Act, which states that no employee shall be removed from service without a notice given to him one month in advance or pay in lieu thereof. If any employee is removed for misconduct he shall not be entitled to the notice or pay in lieu of notice unless and until he has been in the service of the employer for a continuous period of three months.

Section 23 discusses notice by an employee which states that no employee who is in service for a period of three months shall terminate his employment without giving thirty days prior notice or salary in lieu thereof. In case of contravention, the employer may not pay the unpaid wages of the employee for a period of not exceeding 30 days. 

Compounding of offences

Section 26A discusses the power to compound offences, according to which the compounding authority as may be notified by the Official Gazette, shall compound the offence committed under this Act. The offender shall be discharged after the recovery of a sum of money not less than fifty percent of the maximum amount of the fine is recovered. 

No offence of the same nature can be compounded if it is committed more than twice a year. 

No penalty shall be imposed unless the person concerned is given notice in writing to inform him of the grounds on which the penalty is imposed. 

Section 28 of the Act empowers the government or any officer empowered by the government exempt from the provisions of this Act for any period it considers necessary any establishment or any class thereof or any employee or employer or class of employees or employers to whom this Act applies on the conditions as the government may think fit.  

Section 29 states that no child who has not completed the age of fourteen years shall be employed. This Section is to ensure the right to life guaranteed under Article 21 of the Constitution of India and the Right to Education for a child under the age of fourteen held in the case of Unni Krishnan J.P. and Ors v. State of A.P. and Ors.(1993). 

Employment conditions for women 

Section 30 discusses the conditions of employment of women-

No woman can be required or allowed to work at night, as an employee or otherwise in any establishment. 

No employer shall knowingly employ a woman or engage in employment during six weeks following the day of her confinement or miscarriage.

The Government may prescribe further conditions in respect of employment of women employed in the business of an undertaking, conditions of the daily period of employment, leave etc. 

Maternity leave 

As per Section 31, every woman employee who has been continuously employed in that establishment for a period equal to or more than six months following her delivery date, is entitled to receive a payment of a maternity allowance for every day during the six weeks preceding and including the day of her delivery of and every day of the six weeks following her delivery, from her employer.

According to Section 33A, no Court can take cognizance of any offence punishable under this Act or any rule made thereof of the abetment of or attempt to commit such offence, save on a complaint made by the employee concerned or by such officer as may be authorised in writing by the Government. 

Critical analysis of the Haryana Shops and Establishment Act

The Haryana Shops and Establishment Act was enacted to ensure the rights, and liabilities of workers/ employees as well as the employers, the safety and security of workers, healthy work conditions and security of the workers. However, when the COVID-19 pandemic hit the world it was very evident that the current laws are not able to secure the workers either economically or psychologically. The Indian migrant workers faced loads of hardships during the pandemic. There was not just scarcity of food, water, shelter, and health but also the fear of getting infected and spreading infection. On top of it, as soon as the lockdown was imposed, many employers either fired their workers/employees or cut their wages so short that they were forced to leave their place of residence and shift to their native place for the time being. During the pandemic, the International Labor Organization (ILO) predicted that because of the pandemic and subsequently the lockdown as many as 400 million workers would be stricken by poverty. With the introduction of new Labor Codes, i.e., the Industrial Relations Code of 2020, Social Security Code of 2020, Code on Wages and Occupational Safety, Health and Working Conditions Code of 2020, changes should be made in the Haryana Shops and Establishment Act as well ensuring that during unprecedented times like COVID, any natural calamity or human-made disaster, these poor, helpless workers don’t have to worry. 

Another aspect that the Act lacks is to give attention to the mental health of the workers. The Act should be amended to include contract workers, gig workers and IT professionals for the benefit of other workers. Further, as this Act exempts offices under the Central or state government, the Anganwadi workers are deprived of their pension and other such benefits. In the case of Maniben Maganbhai Bhariya v. District Development Officer Dahod and Ors. (2022) concerning the contributions of Anganwadi workers towards the nation, the Hon’ble Supreme Court held that the legislature can give a thought to consider the applicability of gratuity being a social security measure, be extended to the employees who have been serving the establishment in an organized or unorganised sector which is contributing to the sustainable development of the country. The Payment of Gratuity Act, 1972, can be reconsidered by the Legislature giving benefits to all the workers working for the sustainable development of India. In this case, the Supreme Court also cited the case of State Bank of India v. Shri N. Sundara Money(1976), Bangalore Water Supply and Sewerage Board v. A. Rajappa and Ors(1978), Steel Authority of India Ltd. and Ors v. National Union Waterfront Workers and Ors. (2001) where a liberal approach was taken for the welfare of the workers. 

Forms for Compliance 

The employer has to comply with the following-

Form A: Intimidation Under Section 10(2)(i) of the Punjab Shops and Commercial Establishment Act

In this form, the employer has to provide details to the Inspector of Shops and Commercial establishments regarding the working hours and intervals for rest of the persons employed in his establishment. 

Form B: Display of Notice

All the shops and establishments have to maintain Form B, i.e., Display of Notice to the Labour Inspector, get the notice acknowledged by him and display it on the company notice board or security entrance gate where it is visible to all employees. 

Form C: Register of Employees

This form contains employee-wise details Name of the Establishment, name of the employee, interval for rest & meals, overtime, leave, remuneration and deductions. 

Form D: Register of Wages

This form contains details of wages fixed, Arrears from last month, wages earned during the month, overtime, wages due, deduction shown in Register – E, advance made on and payments made.

Form E: Register of deduction

This form contains details like the name of the employee, wage, wages payable, the amount deducted, the fault for which deductions were made, date of deduction, and whether the employee showed cause against deductions, amount of deduction and purpose for which utilised, date of utilisation and balance with the employer. In case there are no deductions in a month, the employer can maintain the NIL Register.

Form F: Statement of Registration of the Establishment

Under Punjab Shops & Commercial Establishments Act 1958, New establishments have to fill this form and submit the same to the labour department to register their establishment. 

Form G: Form of change of information

Whenever there are changes in the organisation such as change in the list of directors, work hours, authorised signatory, address etc., the same must be intimated to the Labour Department and this form needs to be filled and submitted to the Labour Inspector. 

Form H: Registration of Establishment

For the purpose of registering their establishments under the Haryana Shops & Commercial Establishments Act, all new establishments have to fill this form and submit it to the labour department. 

Conclusion 

The Haryana Shops and Establishment Act was passed by the government to ensure the rights and duties of employers and employees. It is applicable to all the shops and commercial establishments in the areas notified by the Government of Haryana. This Act introduces various provisions relating to the establishments and lays down the rules and regulations with which employers and employees have to comply. For compliance of all the rules and regulations, the government has made provisions for penalties to be imposed on those employers who do not comply with the Act. Various uncertainties about rules, duties, and rights contributed to the development of this Act. 

Frequently Asked Questions

Does this Act also apply to the establishments set up by the State government and Central government?

No, the establishments set up by the State government and Central government are exempted from the rules and regulations of the Haryana Shops and Establishment Act.

Which establishments fall under the jurisdiction of this Act?

The establishments such as shops, hotels, Commercial establishments, clubs, cafes, movie theatres, etc., fall under the jurisdiction of this Act. 

Is the fee for the registration of an establishment uniform throughout the country?

No, the registration fee for any shop or establishment differs according to the laws of the respective state. There is no fixed fee for registration on a national scale.  

References 


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Cross-border mergers and acquisition strategies for managing human resources

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This article is written by Shoumik Chowdary pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute resolution from Lawsikho

This article has been published by Sneha Mahawar.​​

Introduction

In today’s increasingly complicated and globalized economic climate, Mergers and Acquisitions (M&A) have replaced organic development as the primary means of expansion for many companies. The term “cross-border merger” refers to a partnership between an Indian and a foreign firm. Only mergers with Indian companies were permitted in India. After the Companies Act, 2013 was passed, outbound mergers were authorized with some limits. The Companies Amendment Act, 2017, was pivotal for the legal basis for international mergers. For international mergers, the Reserve Bank of India released proposed rules in 2017. In response, the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, were drafted. New restrictions have eased business in India, helping companies diversify, reform, and consolidate their businesses. It opened new international markets for Indian businesses. While the reasons for most mergers and acquisition failures are primarily financial, a large number of deals also fail due to poor human resources management, including issues such as incompatible work cultures, different management styles, lack of motivation, attrition, want of communication, trust issues within teams and uncertainty of long-term goals. This article explores the human resources management aspect of Mergers and Acquisitions and delves into its importance and role, as well as talks about the various strategies a human resource manager can adopt during Mergers and Acquisitions. Finally, the article also looks at the main challenges faced by human resource managers with respect to Mergers and Acquisitions. 

Importance of human resource management in mergers & acquisitions

The term human resource management (HRM) is used to describe an organization’s systematic efforts to shape the actions of its employees. Managing human resources is a crucial strategic challenge for all firms, but especially so for those engaged in cross-border Mergers and Acquisitions, since employee behaviour has a significant impact on profitability, customer satisfaction, and other essential metrics of organizational success. Human resource management encompasses a wide range of actions any company takes, no matter how big or small. Both strategic plans and routine procedures for supervising employees are part of human resource management. All organizations need to have policies in place that lay out the ground rules for managing employees. Mergers and acquisitions are recognized as significant factor that affects talent management strategies. Talent management is all about finding, keeping, inspiring, and rewarding a company’s most talented managers so that they can keep up their competitive edge. Human resource management may benefit Mergers and Acquisitions by using talent management initiatives. Retention is a crucial aspect of M&A human resource management. Once the company’s leadership has been established, HR professionals should begin working on a plan to keep its most valuable employees from leaving. Many top employees of an acquired organization leave during the acquisition transition because their status is diminished in comparison to the competitors of the acquiring company.

Developing and implementing comprehensive compensation strategies helps to retain talented managers. To ensure the success of the new synergy, it is essential that the leadership team first identifies the most valuable personnel and then designs a remuneration package that will not only keep them happy at work but also substantially motivate them. The acquiring firm’s human resources policies and reward system tend to have the most significant impact on winning over the target company’s workforce and facilitating a smooth transition. Understanding that pay packages are utilized to incentivize personnel towards the new integrated vision is fundamental to designing effective compensation methods. Appropriate compensation is a well-documented inducement for managers to stay with their organization. In most cases, the most contentious parts of negotiation are the terms of employment, including remuneration, benefits, and retention strategies. The structure of the transaction and the treatment of employees may be affected by the political and legal climate in which the Merger and Acquisition deal is reached. To come up with an effective retention and compensation strategy, HR managers need to be familiar with the functions of unions and the varying approaches to employment relations regulation across countries. For example, the stricter regulations on M&A deals imposed by European Union labour rules make doing business in Europe more difficult than in the United States. This is due to stricter laws and limits on employee dismissals for M&As that occur within European borders. Due to the lack of powerful trade unions like those seen in Europe, the United States has a far more transient approach to hiring and firing.

Effective communication is one of the most important ways for a combined firm to get the most out of its people. To successfully implement an M&A, it is necessary to convince employees that they would personally profit from the company’s continued growth. One of the safest and most productive strategies is using numerous communication channels simultaneously. To successfully integrate the two organizations and win over the affected workers’ confidence, it’s crucial that they have a clear understanding that the integration process is fair, impartial, and reflective of their shared interests. Communication reduces employees’ concerns and confusion regarding M&As, builds trust, and promotes integration. The ability to communicate more effectively was determined to be a critical factor in the combined company’s success. It was identified that the connection between communication and performance varied between acquirers from different countries. The purchasing business must successfully deal with these difficulties to achieve M&A performance.

Role of human resource management in cross-border M&A

The outcome of Mergers and Acquisitions can be affected by human resource management at any time during the procedure. Human resource management’s primary concern in the lead-up to a merger is usually to ensure that all applicable laws and regulations are being followed, particularly those pertaining to equal employment opportunity and collective bargaining agreements. Human resources managers can get to work on the merger preparations immediately after a deal is announced by doing things like handling retention agreements and evaluating pay scale disparities. Human resources managers have been shown to have the most significant impact on Mergers and Acquisitions during the integration phase, which is when M&A processes and policies are put into effect. Human resources managers are crucial after an acquisition, especially if there are cultural differences. In many cases, the type of integration varies from country to country,  which will impact business practices and policies.

Integration stage

Human resource management must consider the degree and pace of integration when undertaking Mergers and Acquisitions. Two identified critical aspects that matter in this context are strategic interdependence, or fit, and structural autonomy.  Four-category classification system for the level of integration is based on these two characteristics, with one category for each possible combination of the acquirer and acquired firm size. There are varying degrees of integration between countries regarding M&A deals that span international borders. Within the context of the resources, processes, and values paradigm, the function of human resource management can be analyzed throughout the integration phase of international Mergers and Acquisitions. Human resource management (HRM) is a broad field that incorporates many subfields and subcategories, such as human resource management planning, staffing, training and development, assessment and incentives, organizational design and control, and corporate responsibility. Special attention must be paid to staffing and retention when we talk about resources; training and development; evaluation and reward; and other human resource management systems and practices when we talk about processes; and national and corporate culture at work when we talk about values because the number of human resource management practices involved in an M&A can be unlimited. M&A tactics include overcapacity, product/market extension, and research and development. 

Product or market expansion through merger & acquisition 

Layoffs are a normal part of human resource management strategies in mergers and acquisitions that aim to expand into a new product or market area, even if employee retention is the primary goal. Since the strategic purpose of most mergers is to acquire new product lines or grow into new markets rather than reduce redundant staff, layoffs are not the primary objective of acquiring organizations. The number of people who lose their jobs after an overcapacity merger or acquisition might vary from country to country. The same is true for mergers and acquisitions that aim to expand into new markets. Regarding product or market extension M&As, there is more variety in procedures between organizations than with overcapacity M&As, indicating the need to modify business and human resource management systems and practices. That is, even if the products produced by the merged companies do not overlap, the processes involved in their production and delivery may call for adjustments to other infrastructure. Businesses pursuing the product or market extension M&As have a more significant variation in organisational values than those pursuing overcapacity M&As. When the company buying the other company is bigger than the company being bought, conflicts over resources and processes may be less likely to happen. 

Alternative to research and development

Human resource management is challenged when attempting to substitute research and development (R&D) through M&A. Companies use this kind of Merger and Acquisition to gain access to specialized staff knowledge. Human resource management’s primary focus will be on people and relationships. In several cases, acquired business employees received a substantial stock sale payout. Businesses in different market economies that utilize M&A as an R&D replacement prioritize keeping key employees, just as they do with domestic M&As. In order for M&A to be a viable R&D choice, human resource management must put in place processes to facilitate the transfer of acquired firms’ knowledge to the acquiring firm. Human resource management should promote learning and collaboration. There is little room for inefficient integration when M&A is used in place of R&D, especially when the target industry is IT. Human resource management may need new systems. Using Mergers and Acquisitions in place of research and development can be challenging because the acquiring company is often more bureaucratic than the acquired company, and the two companies shared values can negatively affect the merger. While larger companies may feel liberated by an acquisition, smaller, more entrepreneurial businesses may feel stifled. Using Mergers and Acquisitions (M&A) in place of research and development (R&D) may allow IT companies to maintain consistent values regardless of where they are headquartered. Common values show how necessary knowledge and ideas are in production, and industrial values help solve problems unique to each country. 

Overcapacity in merger & acquisition

A mass layoff is unavoidable due to mergers and acquisitions that result in excess capacity. The success of the merger depends heavily on the human resource management function’s ability to swiftly settle on a downsizing strategy, including the planning and staffing of duties such as outplacement programming. However, downsizing is not the only HR concern; retention concerns may also play a significant influence. Since management in a linked merger (such as an overcapacity M&A) already knows the business of the acquired firm, the turnover rate at the top of the organization will be higher than in an unrelated merger. When two nations with distinct market economies are involved in an M&A, the acquiring firm will be more limited in its options if the target company is in a country with solid worker protection laws and a more long-term perspective on labour relations.

Strategies of human resource management that fit mergers and acquisition

An organization’s human resource management strategy is crucial, but it can only be effective if it’s in sync with the company’s overall goals. Strategy, structure, and human resource management fit tightly, with the strategy being the primary factor. We can propose that for merging enterprises to integrate successfully, their human resource management strategy should be aligned with their M&A strategy. It’s crucial to understand M&A strategies to determine human resource management functions. Furthermore, we rely on three conceptual tools: resources, processes, and values, to assess the match between M&A and human resource management strategies and to help make sense of human resource management difficulties in the various types of M&As. Resources include money, people, brands, and relationships. Human resource management (HRM) in the context of Mergers and Acquisitions entails making choices concerning personnel and retention concerns, with termination choices being particularly weighty. Processes are how firms turn resources into goods and services. Finally, values are the beliefs that guide workers’ decisions and actions. Priorities and decisions are shaped by values.

Geographic roll up 

Mergers and Acquisitions (M&A) occur when businesses look to grow into new geographic markets while keeping their operations at the regional level. When larger corporations buy out smaller ones, they often leave the local management team in place so that business can continue as usual. These Mergers and Acquisitions (M&As) are like overcapacity M&As in that they both entail the consolidation of enterprises; however, they differ considerably in that they often take place early in an industry’s life cycle. Strategically, a roll-up relates to the creation of business gains and aims to generate economies of scale and scope, while an overcapacity merger or acquisition aims to minimize capacity and duplication. Even though people are less easily replaceable in geographic roll-up M&As, the processes and values of the merging entities are likely to be more different than in an overcapacity M&A. But because the company buying the other company is usually bigger than the company being bought, conflicts over status are less likely to happen than in an overcapacity M&A. 

Industry convergence 

Through Mergers and Acquisitions, new industries can be formed out of those which are already in existence but are seeing their borders erode. This form of a merger is uncommon and poorly understood at the present time, making it challenging to assess. When corporations join to save money on research and development (R&D), the acquired company is sometimes given more leeway than usual, and the focus is on creating value through integration rather than achieving perfect symmetry.

Market extension 

Cross-border Mergers and Acquisitions (M&A) allow companies to broaden their operations beyond their home country. Such Mergers and Acquisitions take place when the acquiring and acquired companies are functionally related in production and/or distribution but sell products that do not compete directly with one another or when a corporation desires to diversify geographically, like when two companies create the same product but sell it in different areas. Businesses engage in this form of M&A to fulfill their long-term strategic objectives, and one common motivation is to get the scale and efficiencies needed to compete on a global scale in less developed markets. Success in a merger or acquisition aimed at expanding a company’s product line or market presence is correlated with the size and M&A experience of the two companies involved.

Due diligence 

The due diligence stage begins once a target company has been selected, and company executives begin communicating with one another to share financial and legal data that will help them weigh the pros and cons of a proposed merger. The present moment is ideal for learning about the culture of the prospective company and comparing it with that of the current business. Since the two companies had similar views on corporate principles and ethics, merging them was a breeze. Therefore, cultural due diligence should play a pivotal role in the M&A process during the due diligence phase. It is critical to ensure that cultural assessment is not forgotten throughout an M&A process by including experts in human resources or organizational development on the M&A team. M&A teams should conduct interviews or use a cultural assessment tool to evaluate the culture of firms they are contemplating acquiring proactively. Critical insights into potential synergies and areas of conflict that can arise throughout the cultural integration endeavour can be gained by understanding how the firms’ executives and employees set plans and goals, engage with the marketplace, and reward behaviours. It is crucial currently to do proper homework on the cross-border management skills of both companies. Cross-border acquisitions often change from absorption to reverse acquisition in the acquired firm’s native country. Those in charge at corporate headquarters may misunderstand the significance of on-the-ground operations in establishing the company’s credibility and reputation in the new market because they are focused on abstract concepts like ownership or the implementation of standard operating procedures across all locations.

Substitute for research & development

When companies with cutting-edge R&D or technological know-how are purchased rather than developed in-house, typically, larger, more seasoned companies are the ones doing the acquiring in a reverse merger. In place of research and development (R&D), M&As must keep valuable human resources and accumulated knowledge. Because entrepreneurial people often feel limited by the bureaucratic structure of the acquiring organization, adjusting the newly formed entity’s processes and values is a complex undertaking. The success of this type of international merger or acquisition hinges on the degree of integration achieved by the acquired firm and the adaptability of the acquiring company. Integration issues arise only in certain fields.

Potential target

The standard practice for a company contemplating many M&A targets is to collect a wide variety of relevant data and information on each of them. The opportunity to rapidly expand product lines or move into new geographies, or even eliminate a competitive threat, are all examples of the kind of data that could be useful in determining whether or not an M&A target will be helpful in achieving a given growth goal. As data is gathered on the Merger or Acquisition’s prospective target, it’s also vital to think about how much effort will be required to integrate the two organizations’ operations. The firm’s international business experience is another element in cross-border M&As. M&A activity is more likely and more successful if the target company has prior experience operating in a foreign environment through partnerships, joint ventures, or acquisitions. Similarly, the acquired firm’s M&A and national cultural experience are important considerations. 

Challenges of human resource management in cross border mergers & acquisition

In the past, human resource management has often been given a seat at the table quite late in the M&A process. Many of the human resource management co-workers believe that human resource management should be involved in planning and strategy at an earlier stage. Human resource management engaged late in domestic M&A agreements might result in unrealized synergies and deal value degradation. The consequences of ignoring human resource management in a cross-border merger or acquisition are substantially more severe. The human resources management team is ideally suited to overcome the logistical, cultural, and legal hurdles that prohibit businesses from realizing their full potential and closing deals for maximum value.

insolvency

Legal and regulatory issues

Human resource management needs to collaborate closely with the interdisciplinary team of legal and accounting professionals to successfully handle the additional regulatory and legal difficulties that arise during cross-border M&A negotiations.

Tax issues

Foreign subsidiaries of merging corporations may receive substantial tax benefits from transactions structured as mergers. This benefit may be lost if HR and business teams engage in informal integration initiatives also known as deemed integration, such as merging reporting lines or moving operations to a single location.

Labour and employment regulations 

In some countries, when a merger or acquisition is about to be finalized, it is customary to first meet with labour unions, works councils, or other employee representatives. These entities may be able to obstruct a contract. To successfully address these labour relations issues, human resource management managers must devote sufficient time and resources. Terminating an employee in most countries requires substantial notice and severance, and simple function duplication due to acquisition is typically not sufficient cause. A company’s human resources department also must be aware of any restrictions on modifying employment terms.

Immigrations consideration 

Work permits and visas may be required for some personnel at the acquired company; it is essential to ensure a smooth transition of all relevant paperwork. Even in an asset sale, a change in work authorization may be necessary before a seller’s employee can begin working for a buyer. The purchaser is responsible for completing all paperwork for themselves and their personnel, who will be working on-site at the overseas subsidiary. While doing their due diligence, human resource management should discover these immigration concerns and see to it that they are resolved.

Availability of information 

The amount of information available to the public is substantially smaller, and the accuracy of financial reports is much less certain. As a result, human resource management managers will not only have significantly less data at their disposal during due diligence but will also have to exercise heightened caution when handling sensitive employee information.

Effect of national and corporate culture

Differences in national culture can influence anything from work hours to leadership expectations, which human resource management must take into account when negotiating international deals.

Human resource management functions and duties may shift in different cultural contexts. Human resource management staff members can be both order takers and strategic advisors. Cross-border counterparts may not have as much involvement as you. When performing due diligence and integrating new systems, you may face pushback from subordinates if you are the leader of human resource management. Foreign labour markets are also typically more strictly regulated, something that human resource management directors discover in addition to different reaction times and attitudes toward vacation and work hours. When conducting due diligence, these rules must be carefully considered. Even the questions you choose to ask during due diligence can be affected by factors like the company’s employment policies, plans, and programs. The human capital issue is further complicated by the fact that deal structures can vary widely from one nation to the next. Employees working away from the headquarters may feel powerless, which can have adverse effects on transaction value, productivity, and quality of work delivered on time, as well as cooperation and a willingness to work to resolve employee difficulties. Human resource management executives may face resistance to central supervision from a foreign country despite the urgent need for international cooperation. It is essential to separate genuinely controllable problems from the ones that can be dealt with on a national or even international scale.

Conclusion

Human resource management (HRM) has emerged as one of the most critical measures for guaranteeing the success of M&A transactions, although its contribution is difficult to quantify. Since acquired businesses are likely to introduce new liabilities and risks to the M&A market, HRM due diligence has taken on even greater importance in the contemporary global financial crisis. More difficulty in doing HRM due diligence may arise from the fact that an acquiring business may need to determine whether the acquired firm’s financial troubles are temporary because of the slow economy or permanent due to underlying problems that would persist even if the economy were to improve. Problems that arise from M&As, such as when a country’s preferred level and speed of merger integration do not fit with the target company’s M&A strategy, are also illuminated by the framework. It would be interesting to include other possible outcomes, such as differences in size and experience between the organizations doing the buying and selling.

In the above situation, we have discussed the role and importance of human resource management in cross-border Mergers and Acquisitions. In the role of human resource management, we have elaborated on the three integration stages 1) Product or market extension, 2) Alternative to research and development and 3) Overcapacity.

A critical analysis of strategies of human resource management has been discussed and the challenges faced by human resource management during the Merger and Acquisition have been portrayed too. Looking at the above situation, we can suggest that for human resource management to have a smooth process of merger and acquisition should focus more on the retention of key employees, the creation of new policies and employee benefit programs to guide the company and compensation strategies development.

Reference


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Ownership issues of software : copyright perspective

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This article has been written by Shubhodip Chakraborty pursuing a Diploma in Technology Law, Fintech Regulations and Technology Contracts at Lawsikho. 

This article has been published by Sneha Mahawar.

Introduction

The advent of the computer system brought about a new landscape of innovation in the world of technology and has been almost single-handedly transforming the technology and network space. Any computer is run by two operative platforms, the software and the hardware. From a layman’s point of view, we can put it across as the hardware being the tangible component and the software being the intangible component. Any intellectual property which is granted to either of these components is also different from one another. Often, such hardware components can have protection under the patent laws of the country considering it pertains mainly to the physical devices, which may include computer systems or computer components such as disk drives, memory chips, bus architectures, and monitors. Accessories for computers, such as a keyboard with improved construction, are also suitable for patenting. However, most of the laws regarding IP Rights or, for emphasis, the IP Rights ownership of software are still clouded with several intricacies. Any form of intellectual property rights seeks to reward innovation, novel, and creative ideas for the exclusivity and change it brings to the creator’s innovation.

In this article, we will discuss the idea of copyright protecting the software, and the laws surrounding the same as in who is the rightful owner of the software, and we will also look into the aspect of on whom the IP ownership vest when software is built by an employee of a company. Lastly, we would be discussing and putting forth some of the considerations that need to be undertaken before engaging a software development company to build the software for one’s needs.

Copyright protection of software

Generally speaking, software is protected under copyright laws, with the person who writes the software’s source code or the author being vested with the ownership of copyright over the software. Copyright does not protect the idea or the facts alone, but it protects the way or in the manner, it is expressed and put across in a tangible form. Therefore, only the final tangible medium of expression that can be reproduced is granted copyright protection.

Historically, computers and computer programs were not granted any such copyright protection because, until a time, computer programs were viewed as intangible objects. The copyright laws were further extended to include machine-readable software codes with the same copyright status as ‘literary works’.

The Copyright Act of 1957 includes computer programs, tables, and compilations including computer databases as a part of the definition of ‘literary work’. Section 13 of the Act provides for the categories of work in which the copyright subsists which includes original literary work.

As per the Indian Copyright Act of 1957, computer software that does not lead to a technical effect is granted protection under copyright law. For granting copyright protection, computer software is required to be original and sufficient effort and skill must also be put into it to signify its originality.

Copyright and your development company employees and contractors

As discussed above, unlike other IP rights such as patents, trademarks, etc. copyright does not require a formal registration to own the IP right over the work. Although, formal registration of the copyright has its advantages in the case of proving IP rights in the courts in cases of disputes. infringements, etc. Thereby, the copyright over work vests upon the author upon creation of the same.

In a software development company or any other company, there are two sets of workers or individuals who help in building software or aid in providing the services. The employees are the ones who have been hired to perform the tasks and are on the payroll for their daily performance at work. The other set of workers are the contractors or freelancers, who are hired to provide a particular or specialized service and the completion of such service entails the freelancers or contractors being eligible for a certain fee from the company, thereby their contract with the company coming to an end. The company enters into an agreement with both of these sets of individuals, wherein a clause relating to the IP assignment clears the air as to who owns the IP right when performing services for the company. 

Typically, employers would enjoy the right of ownership of any IP right created by their employees. A separate IP assignment contract may be entered into with the employee. However, the usual practice has been to include the assignment rights under the employment agreement. The software or any such material which is created by the employees is considered to be work made for hire. Thus, the ownership lies with the employers upon creation. The IP assignment clause under the contract is very carefully drafted to ensure that no IP remains with the employee for any creation. 

For a software development company, if an employee writes the code of software, even despite being the author, the copyright for such work would remain with the employer or the company. However, it would be interesting to understand a scenario wherein such an individual has created a software code in his capacity during the official working hours of the company he is employed with. In such a scenario, a company or the employer may have a claim over the software if it falls within the scope of his employment, i.e., if it is related to the industry or scope of services the company performs. A company may also choose to involve freelancers or vendor contractors to perform services for them or even to develop software for the company. In such a case, it is always better to safeguard the IP rights of the company by entering into a work-for-hire agreement with such freelancers, with the freelancers transferring any such right of ownership over the work, created specifically for the company to vest with the company itself. It is upon the company to be aware of the same and ensure such a contract is entered upon with the freelancers. In the United States, there are no mandates that any of the work created by the freelancer, would result in a work for hire unless a contract specifically mentions the same. Therefore, it becomes essential for any company engaging any freelancers, vendors, or contractors to enter into a separate contract wherein the ownership of the IP rights is transferred to the company.

When to have the conversation about copyright with your development team

In the interest of both parties, it would be the best practice to discuss at the very initial stage regarding whom the copyright should vest. Ideally, an in-house software development team consists of individuals who are their employees; thereby they ought to have an IP assignment clause under their employment agreement. However, if they have not agreed upon such a clause, the employer should ensure an IP assignment agreement is entered upon with the development team. Such assignment and ownership of copyright will come into effect upon completion of the development of the software. It is also noteworthy, that such an agreement should explicitly state that it was a “work-made-for-hire”. If any developer would like to have any right to use the software at a later stage or in different projects, the developer must negotiate a license to the software in the same way any third-party would. Therefore, every well-written software development contract will contain a clause designating the code a work-made-for-hire, assigning the code to the client on completion, or granting the client a license to use the code on completion.

Considerations when engaging with a software development company

It has been observed over the years that the biggest software development companies have started engaging external software development teams in order to produce or develop software for them. These companies have perceived various managerial and technical benefits in outsourcing the work by engaging other vendors. However, such benefits also welcomed certain legal concerns which have been overlooked by the market players. Therefore, it becomes crucial for any company which is looking to engage an external party to develop software for them to have a certain checklist in order to prevent such legal ramifications. We have chalked out some of these considerations which need to be delved into before or while engaging a vendor. 

a. Contractual 

One of the foremost important considerations that need to be decided upon by the management would be whether to enter into a formal contract or not with the external party. Entering into a formal contract would lay the foundation for all the other points to follow and would thereby assist in ensuring that certain essential elements are captured and not laid to rest upon a verbal discussion.

b. Ownership

As discussed in this article above, it becomes very crucial to understand and decide upon whom the ownership of the software and the IP rights vest. Both parties should discuss and broach upon the aspect of who would be the owner of the technology and also the intellectual property that would result in the full development of the particular software. However, it may so happen that there would be specific pre-existing IPs or background IPs of these vendors, which may not be transferred to the company considering those are explicitly owned by these vendors.

The aspect of ownership does not end with only deciding upon the owner but also any restrictions that come along with it. Such third-party vendors may be restricted from not disclosing to any other third party, and it shall not be subcontracted to others, etc. 

c. Control of intellectual property

It may be put forth along with the point regarding ownership of IP but it is indeed crucial to decide upon who controls how the IP is controlled and ensure the protection of such IP. Ideally, this vests upon the owner. However, the company may opt for discussing and receiving inputs from the vendor developing the software. 

d. Process management

Strictly from the business point of view, there are certain specifications about the development, its acceptance criteria, development of a beta version, incorporating updates, and delivery timelines, etc. that need to be met with. It is always in favour of the service receiver to understand and have such elements in the contract to align with their needs and requirements properly.

e. Liabilities and infringement indemnity

A provision relating to the liabilities and also the indemnity against infringement of any third-party IP becomes crucial primarily when an external software development team is engaged in performing the services. What needs to be broached upon is whether as service recipients, we are entitled to such indemnities and are such indemnities enforceable in a court of law.

f.  Termination

Lastly, an essential aspect of any contract is the termination of the contract. What needs to be captured in the contract relating to termination is the right to termination and what are the consequences of termination. Consequences of termination are important, especially in the context of the position of the IP upon termination and also the work which was being performed/work in progress. Parties may also opt to specify the reasons or cause of termination.

Conclusion

The usage of external vendors or software developers has been a strategic tool for various companies in the United States and other nations. If one is willing to opt for an external software development team, one must take into consideration the above pointers for conducting the due diligence and understand the ramifications of opting for the same. However, it is all the more important to look into the aspects of IP rights with a lawyer or IP specialist to comprehend the position of IP in the software.

 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.

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Heckscher Ohlin theory of international trade

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International Trade Law

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the Heckscher-Ohlin theory of international trade, which is one of the prime theories of economics according to which countries export goods and services that are the easiest and most plentiful to produce.

It has been published by Rachit Garg.

Introduction 

The post-World War II global economy is better characterised by the Heckscher-Ohlin (HO) model. It is predicated on the idea that trading nations will use similar production technology. Eli Heckscher and Bertil Ohlin, two Swedish economists, had the original idea in 1919. According to the Heckscher-Ohlin model of economics, nations should export the goods and services they can create most effectively and in large quantities. It is also known as the H-O model or the 2x2x2 model, and it is used to assess trade, particularly, the equilibrium of trade between two nations with different skills and natural resources. According to the theory, which is a comparative advantage theory in economics, nations with relatively abundant capital and relatively insufficient labour will tend to export capital-intensive goods and import labour-intensive ones, whereas nations with relatively abundant labour and relatively insufficient capital will tend to export labour-intensive goods and import capital-intensive ones. The export of commodities requiring abundantly available production inputs is emphasised by the model. This article discusses the Heckscher-Ohlin theory of international trade in detail. 

What is the Heckscher-Ohlin theory of international trade

According to the Heckscher-Ohlin theory, what matters is the amount of capital per worker rather than the total amount of capital. A small nation like Luxembourg has more capital per worker than India, but has far less capital overall. Therefore, according to the Heckscher-Ohlin theory, Luxembourg will export capital-intensive goods to India and purchase labour-intensive goods in exchange.

In 1919, Eli Heckscher of the Stockholm School of Economics published a study in Sweden that served as the foundation for the Heckscher-Ohlin model. Further, in 1933, Bertil Ohlin, one of his students, contributed to it. Practical implementation of this theory can be seen, for instance, in the fact that some nations have significant oil deposits but very little iron ore. Other nations, however, have little in the way of agricultural production despite having easy access to and storage for precious metals. For instance, the Netherlands exported over $577 million in U.S. dollars in 2019 compared to imports of roughly $515 million in that same year. Germany was its principal import-export partner. It was able to manufacture and supply its products more successfully and economically by importing on a nearly comparable scale.

Paul Samuelson, an economist, developed the initial framework in essays published in 1949 and 1953. For this reason, some call it the Heckscher-Ohlin-Samuelson model. The Heckscher-Ohlin model provides a mathematical explanation of how a nation should manage its resources and conduct international trade. It identifies the desired equilibrium between two nations, each with their own resources. 

The factor endowment hypothesis was created and expanded upon by Heckscher’s pupil, Bertil Ohlin. In addition to teaching economics at Stockholm University, he was also a prominent politician in Sweden. He served in the Swedish parliament, the Riksdag, and led the liberal party for nearly 25 years. He served as the trade minister during World War II. Ohlin and James Meade shared the 1979 Nobel Prize for economics for their contributions to the theory of international commerce.

The model is not constrained to trade goods. It also takes into account additional production factors, such as labour. According to the model, as labour prices differ from country to country, those with inexpensive labour forces should concentrate primarily on creating items that require a lot of labour. Even though the Heckscher-Ohlin model seems plausible, most economists have had trouble locating supporting data. Other models have been proposed to explain why industrialised and developed nations have historically tended to trade more with one another and less with developing nations.

History behind the Heckscher Ohlin theory of international trade

  1. Since 1933, the Heckscher-Ohlin model has been a particularly popular hypothesis of global trade. Since then, a large number of economists have examined the theory’s applicability to statistics on global commerce. Wassily Leontief conducted the most well-known test. To assess whether the United States was exporting capital-intensive items and importing labour-intensive goods as the theory would suggest, Leontief examined trade statistics from 1947. He made use of input/output tables for replacing American exports and imports. Leontief divided the 200 industries into 50 sectors.
  2. He came to the conclusion that America was actually exporting labour-intensive items rather than capital-intensive ones in 1947 because he discovered that exports were 30% more labour-intensive than import alternatives. It was completely at odds with how people had perceived America’s capital endowments. He was the first to empirically examine the Heckscher-Ohlin model and his findings contradicted the model itself. 
  3. Despite Leontief’s findings, the Heckscher-Ohlin model continued to be a significant contribution to the discipline for the following three decades. Still, economists held that the endowments of various nations had to affect commerce. People eventually began referring to his discoveries as the Leontief Paradox. This new conundrum sparked a number of additional testing of the H-O model by other economists as well as explanations for why the theorem failed.
  4. According to Leontief, the United States actually has an abundance of workers because its labour productivity is three times higher than that of the rest of the world. Tests in subsequent years revealed that the paradox had diminished. Here are a few justifications for the Leontief Paradox:
  • Leontief actually made an attempt to resolve the dilemma by claiming that American workers were more productive than those from other countries. Due to this, the United States exported items that required labour as opposed to goods that required capital.
  • The topic of tariffs and transportation expenses was brought up as an additional justification. W.P. Travis suggested that the Leontief Paradox may have been brought on by tariffs. Then it was determined that only the volume of trade is truly impacted by tariffs rather than the flow. The fact that Leontief neglected to account for human capital is another factor that has been cited as a source of the conundrum. Resources, time, and investment are all required for human capital. The outcomes of his studies would have been significantly altered had he included human capital in the model.
  • Using trade statistics from 1962, Robert Baldwin discovered that American imports required 27% more capital than an American export. Tatemoto and Ichimura conducted a test in the 1950s, when Japan was a labour-rich nation, and discovered that the country’s overall trade did not follow the H-O model. 
  • Japan purchased labour-intensive items while exporting capital-intensive ones. They discovered that it was consistent with the H-O model when they tested solely the Japanese and American commerce. Baldwin investigated India’s global trading patterns. He discovered that India’s exports required a lot of labour, which was in line with the Heckscher-Ohlin theory. He discovered that India was exporting capital-intensive commodities and buying labour-intensive goods when he used his criteria on merely trade between the two countries. This contradicts the H-O model.

Components of the Heckscher Ohlin model

The Heckscher-Ohlin-Vanek Theorem, which forecasts the factor content of commerce, has garnered attention recently. This is because it is challenging to predict the patterns of trade in a world with many different items. There are four major components of the Heckscher-Ohlin model:

Stolper-Samuelson Theorem

  1. The Stolper-Samuelson Theorem, which was created by these two authors, is based on the following key presumptions:
  • One of the two trade nations under consideration for the analysis solely manufactures steel and fabric and uses labour and capital as its only two inputs.
  • The first-degree homogeneity of the production functions for the two commodities is present. It suggests that consistent returns to scale control production.
  • Capital and labour are both fully used.
  • The availability of the two production factors is fixed.
  • Both the product and factor markets meet the requirements for perfect competition.
  • The given nation has a surplus of labour but a shortage of capital.
  • Steel is a capital-intensive good, whereas cloth is a labour-intensive good.
  • The rules governing international trade are set.
  • Neither good serves as an input in the manufacture of the other good.
  • Although both criteria are transferable across two businesses or sectors, they are not transferable between two nations.
  • There are no transportation expenses.
  1. According to the Stolper-Samuelson theory, a country with two commodities and two factors will see a greater than proportionate increase in the price of the associated “intense” factor. On the other hand, Rybczynski establishes the hypothesis that, in a country with two commodities and two productive factors, an increase in the labour force combined with a constant aggregate endowment of the other productive factor leads to an actual decline in the total output of the other commodity and a greater than proportionate increase in the output of the labour-intensive commodity when the terms of trade are held constant.
  2. The Stolper-Samuelson Theorem leads to some important implications that has been laid down hereunder:

Increase in welfare

Trade results in an improvement in the welfare of the production component that is heavily utilised in the growing industry at the expense of the scarce factor. Overall, there has been a net improvement in the community’s welfare.

A better income distribution

Trade increases the proportion of plentiful factors in the GNP (Gross National Product), which improves the equity of income distribution.

Promotional export strategy

The theory has a significant policy application in that it suggests that export promotion, as opposed to import substitution, is a better strategy for achieving development and equal income distribution in less developed nations.

Impact of tariffs and other protective measures

According to the theorem, imposing tariffs and other punitive or protective measures will result in a decrease in imports. That will also reduce the chances of increasing exports. It will continue to keep the abundant factor’s real income at a lower level than the scarcity factor’s. The growth process will be halted as a result, and the income distribution will become unfair.

  1. By authors like Kelvin Lancaster, Lloyd Metzler, and Jagdish Bhagwati, the Stolper-Samuelson Theorem was eventually questioned, altered, and expanded. Metzler abandoned the idea of fixed terms of trade and proposed that, given an inelastic offer curve from a foreign country, the imposition of a tariff would result in an improvement in the terms of trade of the country imposing the tariff through an increase in the internal price of the country’s export and a decrease in the internal price of the country’s import. As a result, fewer import alternatives will be produced, and money will be allocated so that it benefits the factor that is utilised more frequently in the manufacturing of exportable goods. The idea that protection would lead to an unfair income distribution was rejected by Kelvin Lancaster. Jagdish Bhagwati disagreed with the theorem’s general applicability. He talked about potential alternate consequences of protection on the wages of more heavily employed workers. The author wrote that “protection (prohibitive or otherwise) will raise, reduce, or leave unchanged the real wage of the factor intensity employed in the production of goods according to protection raises, lowers, or leaves unchanged the relative price of that good”.

Rybczynski Theorem

  1. Tadeusz Rybczynski (1923–1998), an economist who was born in Poland, created the Rybczynski theorem in 1955. According to this, at stable relative goods prices, an increase in the endowment of one component will result in an absolute decrease in the output of the other good and a more than proportional expansion of the output in the sector that employs that factor heavily. 
  2. According to the Rybczynski theorem, there is a direct correlation between changes in a factor’s endowment and changes in the output of a product that heavily depends on that factor. According to the Rybczynski theorem, changes in a factor’s endowment have a negative impact on the output of a product that does not heavily utilise that factor.
  3. When full employment is maintained, the Rybczynski theorem illustrates how changes in an endowment impact the outputs of products. In the context of a Heckscher-Ohlin model, the theorem is helpful in examining the consequences of capital investment, immigration, and emigration.
  4. Open commerce between two regions frequently results in changes in the relative factor supply between the regions, according to the Heckscher-Ohlin model of international trade. The amounts and types of outputs between the two regions may change as a result. The Rybczynski theorem explains both the results of an increase in the supply of one of these factors and the impact on the output of an item whose production is dependent on the opposite element.
  5. The Heckscher-Ohlin model’s most basic iteration, the Rybczynski theorem implies that two items, like automobiles and textiles, are produced utilising the same two-factor inputs, such as labour and capital, but in different proportions depending on the industry. The auto business is said to be a capital-intensive industry if it employs a larger capital-to-labour ratio than the textile industry, which is referred to as a labour-intensive industry. The production possibility frontier moves outward when either factor’s supply rises while keeping the other’s supply constant, according to the model’s normal assumptions. As a result, the economy can now produce more of both goods. Prior to Rybczynski’s contribution, the majority of economists assumed that this type of biassed growth would lead to higher equilibrium outputs of each good, though with relatively greater growth of the industry that uses more of the growth factor.

Heckscher-Ohlin Trade Theorem 

  1. The traditional comparative cost theory was unable to adequately explain why the comparative costs of producing different goods varied between nations. The novel hypothesis put out by Heckscher and Ohlin probed the fundamental factors that influence variations in comparative costs. They clarified that the disparities in comparative costs are due to variances in the factor endowments of various countries and the various factor ratios required to produce various commodities. Therefore, the Heckscher-Ohlin theory of international trade is the name given to this novel theory. 
  2. Heckscher and Ohlin’s explanation of international commerce is widely accepted among contemporary economists, hence the theory is also known as the modern theory of international trade. Additionally, this theory is often referred to as the General Equilibrium Theory of International Trade because it is based on a general equilibrium analysis of price setting. It is important to note that Ohlin claims there is no fundamental distinction between domestic (inter-regional) and international trade, in contrast to the perspective of classical economics. He is correct in saying that inter-regional trade is only a specific case of international trade.
  3. Ohlin argues that while transportation costs are included in domestic inter-regional trade, they do not serve as a defining factor in separating domestic trade from international trade. Trade is possible because the value or purchasing power of different currencies is determined by their relationship to one another through foreign exchange rates.

Factor Price Equalisation Theorem

  1. The factor-price equalisation theorem is the fourth significant theorem that results from the Heckscher-Ohlin model. The theorem simply states that as countries transition to free trade and the prices of the output goods are equalised between them, the prices of the factors (labour and capital) will also be equalised. 
  2. The implication is that free trade will globally equalise both worker salaries and capital rents. The model’s most crucial premise that the two nations have the same manufacturing technology and that markets are perfectly competitive is where the theorem stems from.
  3. The value of a factor of production’s marginal productivity determines the return on investment in a market with perfect competition. The amount of labour being employed and the amount of capital both affect a factor’s marginal productivity, such as labour. The marginal productivity of labour decreases as the amount of labour in a certain industry increases. The marginal productivity of labour increases as capital increases. 
  4. Finally, the output price that the good in the market commands determines the value of productivity. In autarky, the pricing for the output goods is different in the two nations. Because it influences marginal productivity, a difference in pricing alone can lead to variations in wages and rents between nations. The variance in wages and rents, however, also has an impact on the capital-labour ratios in each industry, which in turn has an impact on the marginal products, in a variable proportions model. 
  5. All of this indicates that the wage and rental rates will vary between nations in autarky for a variety of reasons.
  6. The two nations’ production prices will be equal once unrestricted trade in goods is permitted. Since the marginal productivity relationships between the two countries are the same, only one set of wage and rental rates can fulfil these relationships for a certain set of output prices. As a result, free trade will equalise the cost of commodities as well as wage and rent rates.
  7. Both nations will use the same capital-labour ratio to create each good because they have the same salary and rental costs. However, the countries will generate different amounts of the two things since they continue to have differing amounts of factor endowments. 
  8. In contrast to the Ricardian model, this outcome states that the two nations’ production technologies are thought to differ. Real wages continue to differ between nations even after they adopt free trade as a result; the nation with the highest productivity will have higher real wages.
  9. It might be challenging to determine whether production technologies are unique, comparable, or distinct in the actual world. One could contend that cutting-edge capital can be sent anywhere in the world if equivalent industrial technology is used. On the other hand, one may argue that just because two pieces of equipment are comparable, it doesn’t necessarily follow that the workforce will use it in the same way. Differences in organisational skills, work habits, and incentives will probably always exist.
  10. One way to translate these model results into reality is to claim that, to the degree that nations have comparable production capacities, factor prices will tend to converge as freer trade is achieved.

Purposes of the Heckscher Ohlin theory of international trade

The approach emphasises how when each nation makes the greatest effort to export commodities that are domestically naturally abundant, everyone benefits globally and through international trade. When nations import the resources they lack natively, everyone wins. A country can benefit from elastic demand since it need not rely entirely on domestic markets. As additional nations and new markets grow, labour costs rise and marginal productivity falls. Trading globally enables nations to adapt to capital-intensive manufacturing, which would be impossible if each nation exclusively sold goods domestically. 

Additionally, it highlights the importation of items that a country cannot produce as effectively. It advocates for nations to export commodities and resources they have an excess of while proportionately importing those resources they require. Some nations have a relatively high level of capital, which means that the average worker has access to a wide range of tools and machines to help with the job. These nations typically have high pay rates, which makes it more expensive to produce labour-intensive commodities like textiles, sporting goods, and basic consumer electronics than it would be in nations where there is a surplus of labour and low wage rates. 

Conversely, in nations with cheap and abundant capital, items like automobiles and chemicals that require a lot of capital but little labour tend to be relatively inexpensive. Therefore, nations with a lot of capital should be able to create capital-intensive commodities fairly cheaply and export them to cover the cost of importing goods that require a lot of labour.

Assumptions made by the Heckscher Ohlin theory of international trade about the world economy 

The seven assumptions that were put forth by the Heckscher Ohlin theory of international trade about world economy have been listed hereunder: 

  1. Consumers deal with the same preferences and consumption functions;
  2. All nations use the same production technology;
  3. While the marginal returns to any one factor are declining, the output yields constant returns to scale;
  4. The technical costs of capital and labour per unit differ between the items;
  5. Perfect competition is the foundation of the markets;
  6. There are no restrictions on foreign trade; and
  7. The availability of resources is fixed to a certain degree and is the same across all nations.

Heckscher Ohlin’s theory of international trade in India

Indian emergent markets have grown recently. Trade between major industrialised nations like the United States and other European nations is largely to blame for this. Traditional village farming, modern agriculture, a wide range of contemporary businesses, and a significant quantity of services are all part of India’s varied economy. America and India currently have close cultural, strategic, military, and economic ties. The Heckscher-Ohlin theorem is one hypothesis that analyses the trade between two nations.

The 1990s saw the country start to grow very quickly as markets opened up to foreign competition and investment. India is growing economically and has abundant natural and human resources. India’s economic growth rate was accelerated in the 2000s by economic reforms and stronger economic policy. India’s economy is primarily a domestic market, with 20% of its GDP coming from exports. China, the United States, the United Arab Emirates, the United Kingdom, Japan, and the European Union are India’s top trading partners. India’s economy is primarily a domestic market, with 20% of its GDP coming from exports. China, the United States, the United Arab Emirates, the United Kingdom, Japan, and the European Union are India’s top trading partners.

The capital/labour ratio is the portion of capital to labour employed in a production that is described in the Heckscher-Ohlin model. Thus, the capital/labour ratios of various industries producing various items will vary. Each nation produces two items in the model, hence it must be assumed which industry has a higher capital-to-labour ratio. For instance, if a nation can produce both steel and clothing, and the production of steel requires more capital per worker than the manufacturing of clothing does, then we would say that the production of steel is more capital-intensive than the production of clothing.

Comparison between India and the United States with regards to the application of the Heckscher Ohlin theory 

As India and the United States are two different economies, with the former being developing and the latter exceeding the developed one, a comparison between the two can help the reader distinguish between the theory’s application in economies belonging to different spectrums. 

When compared to its workforce, the US possesses a large amount of physical capital. Developing nations have a sizable labour force despite having little physical wealth. Then, to determine the relative factor abundance between nations, we would use the capital-to-labour ratio. For instance, the United States has a higher ratio of total capital to labour than India. Accordingly, we may claim that the United States has more capital than India. India would be more labour-abundant than the United States because of its higher ratio of total labour to capital. The model presupposes that the only distinctions between the two nations are their varying relative endowments of production components.

Based on the characteristics of the countries, the Heckscher-Ohlin theorem predicts the pattern of commerce between them. A country with an abundance of capital is said to export goods that require a lot of capital, whereas a country with an abundance of labour will export goods that require a lot of work. The reason for this is that a country with an abundance of capital generates goods that require significantly more capital during manufacture. As a result, if the two countries stopped trading, the cost of goods in the country with ample capital would decrease due to the increased availability of goods.

This will be contrasted with the cost of identical goods in the other nation. The cost of labour-intensive goods will be the same everywhere there is an abundance of workers. Businesses will relocate their products to markets with higher prices once commerce between the two nations is open. Because the capital-intensive goods will temporarily cost more in the other country, the capital-abundant nation will export them. The labour-intensive goods will be exported from the country with an abundance of workers since the price will temporarily be higher in the other country.

Challenges surrounding the Heckscher Ohlin theory of international trade

The Heckscher-Ohlin theory is frequently at odds with the actual patterns of international trade, despite its plausibility. Wassily Leontief, a Russian-born American economist, carried out one of the earliest studies on the Heckscher-Ohlin hypothesis. Leontief noted that the United States had a respectable amount of capital. Therefore, the reasoning goes, the United States should export commodities that need a lot of capital and import goods that require a lot of labour. He discovered that the contrary was true: American exports typically require more labour than the kinds of goods that the country imports. The Leontief Paradox refers to his results since they were the exact reverse of what the theory predicted.

The Heckscher-Ohlin theory has undoubtedly been shown to be more accurate, precise, scientific, and analytically superior than the prior approaches to the theory of international trade, but it still has several flaws that have led to criticism from numerous writers.

  1. Although Ohlin’s theory was acknowledged by Haberler to be less abstract, a general equilibrium idea was never developed. It still mostly falls under the partial equilibrium analysis. This theory ignores a number of additional effects, including transport costs, economies of scale, external economies, etc., which also have an impact on the cost of production, in favour of attempting to explain the pattern of trade simply in terms of factor proportions and factor intensities. When multiple factors are simultaneously affecting costs, according to Ellsworth, “it becomes a matter of adding up the influence of all cost-reducing and rising forces to arrive at a net outcome.”
  2. This theory is built on a set of very oversimplified premises, including perfect competition, resource utilisation at 100%, a production function that is identical, constant returns to scale, the absence of transit costs, and the lack of product differentiation. This collection of presumptions renders the entire model wildly unrealistic.
  3. Given production functions, incomes, and expenses, the Heckscher-Ohlin model makes the assumption that fixed amounts of production elements exist. This indicates that the theory examines the course of global trade in a fixed environment. Simply put, the results reached from such a study do not apply to a dynamic economic system.
  4. According to this idea, factors are identical on a qualitative level and may be precisely measured in order to determine factor endowment ratios. However, there are variations in qualitative factors in the real world. Furthermore, each element comes in more than one variation. This poses significant challenges for both determining the trade pattern and measuring and comparing expenses.
  5. The hypothesis ignores the part that product differentiation plays in global trade. Due to product differentiation, international trade may still occur even though the manufacturing agents are the same in two nations. For instance, American machines are sold out in Japan, whereas Japanese machines are sold out in the United States. According to Wijanholds, factor prices do not impact costs in this situation. Instead, factor prices are determined by commodity prices. According to the HO hypothesis, the export specialisation of various nations is determined by the relative factor proportions (or factor endowments). Labour- and capital-intensive items are exported by countries with ample capital, but the former also export capital-intensive goods. It suggests that trade between nations or regions with comparable relative factor proportions will not occur. However, this is untrue.
  6. Prices of variables like raw materials, labour, etc., are ultimately dependent on the demand and prices of finished items because the desire for them is the derived demand. Prices of goods are decided by their utility to the buyers (the force of demand). Thus, according to Wijanholds, “prices are the only facts we can accept. Everything else should follow from that. He believes that the Heckscher-Ohlin theory and the Ricardian theory are both flawed because they overlooked the impact of product differentiation on global commerce and linked cost to factor prices”.

Conclusion 

Even though the H-O model has undergone several tests over the years and has produced a wide range of outcomes, there is still much we may learn about the theory. Numerous economists have attempted to refute the model, yet the theory is still relevant in economics. Since there is no method for calculating a country’s capital, as many studies have noted, calculating the factor abundance ratio for a country is still exceedingly challenging. Before measurement of labour and capital levels within a particular good is especially challenging. The fundamental presumptions of Heckscher-Ohlin are contested by some. They contend that the model is oversimplified because it makes the assumption that there are no technological distinctions between nations, even though we all know that there are. The model is still helpful in international economics, despite the many criticisms.

References 

  1. https://www2.econ.iastate.edu/classes/econ355/choi/ho.htm.
  2. https://scholarworks.calstate.edu/downloads/r494vn21h.

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Evolution of the reverse CIRP mechanism under the Insolvency and Bankruptcy Code, 2016

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This article has been written by Akhil Gupta pursuing Certificate Course in Arbitration at Lawsikho. 

This article has been published by Sneha Mahawar.

Introduction  

A non-performing asset is when an advance or a loan amount has not been returned to the financial institution along with interest for a period of 90 days.  In the real estate sector, there are three parties: firstly, the real estate companies (who develop the properties); secondly, the homebuyers who buy the house or flat (they engage with the real estate developers for the development of the said properties for residential homes); and thirdly, the financial institutions, i.e., the banks and other non-financial banking institutions. Due to such defaults by real estate developers, banks are forced to initiate insolvency proceedings in order to reclaim the loan amount from which the loans are taken for development purposes.  The housing project, as a result, becomes a Non-Performing Asset (NPA). Similarly, if the loan amount is not paid by the home buyer, the respective bank may proceed against the property’s possession and sell it to recover the loan amount lent to the home buyer for the purchase of such property. 

The peculiar issue that arises in the real estate sector is that when the real estate developer defaults on repaying his debt to the financial institutions, then such institutions, being the lenders, would undoubtedly want to take over the possession of the unfinished projects and auction them to recover the loan amount. Homebuyers would only suffer as a result of such action because the possession of the flat(s) would be further delayed due to litigation over the amount and property. Therefore, home buyers suffer due to the tussle between the builders and the financial creditors.

Further, many times the builders declare themselves bankrupt, which only hampers the investment of the home buyers, whose ultimate goal is to purchase one apartment.  As of December 2020, there are about 1,600 cases pending CIRPs and only 462 resolution plans were approved or closed and 350 CIRPs are still in operation under the Insolvency and Bankruptcy Code, 2016.  This worrisome situation has led home buyers and financial institutions to file CIRP applications to the NCLT, urging it to initiate the CIRP so it can complete the incomplete projects and be repaid respectively.

Therefore, the present piece is an attempt to understand the new phenomenon of ‘Reverse CIRP,’ which the NCLAT has come up with to aid the real estate sector and boost economic growth by allowing the particular project to function irrespective of its default.

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Corporate Insolvency Resolution Process under the IBC, 2016 

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) was devised with the aim of being able to withstand the changing economic scenarios and to address the shortcomings of the previous insolvency laws. When any corporate or business entity is not able to repay the amount borrowed from the creditors, then such creditors have the option to go for the Corporate Insolvency Resolution Process (hereinafter referred to as’ CIRP’). Simply put, the CIRP determines whether the corporate debtor or person who has defaulted is actually capable of repayment of such a defaulted amount or not. Such a determination is made through the analysis of the entity’s assets and liabilities by the Interim Resolution Professional. Initiation of CIRP can be done by financial creditors, operational creditors, and corporate applicants under Sections 7, 8, and 10 of the Code, 2016.

Stages in the Corporate Insolvency Resolution Process

Under the standard Corporate Insolvency Resolution Process, the following things happen:

  1. Upon default by the corporate debtor, three parties under Sections 7, 9 and 10 of the IBC, 2016 can file an application to initiate CIRP, i.e., either the financial creditors, operational creditors or corporate applicants respectively.
  2. After filing the application for initiating the CIRP, the adjudicating authority either admits or rejects it accordingly.
  3. If the CIRP application is admitted by the adjudicating authority i.e., the NCLT, then a moratorium is declared under Section 14 read with Section 12 of the IBC, 2016 and the CIRP commences.
  4. After the commencement of CIRP, the formation of the Committee of Creditors happens wherein there is voting for the Resolution Professional who proposes a resolution plan which is either approved by the Committee of Creditors or rejected with at least 66% majority as required under Section 23 of the IBC, 2016.
  5. According to it, if the plan is approved, an application is submitted to the NCLT, and liquidation may occur as and when necessary if the company cannot be revived at all.
  6. In between all these, under Section 12A, there is scope for withdrawal of application for CIRP.

Rights of homebuyers under the Insolvency and Bankruptcy Code, 2016

Initially, the homebuyers were not mentioned in the IBC, 2016. However, in the case of Nikhil Mehta and Sons v. AMR Infrastructure, the NCLAT held that homebuyers qualified as “financial creditors” under Section 5(7) of the IBC. Hence, the homebuyers are entitled to invoke CIRP against a defaulting corporate debtor.

The Hon’ble Supreme Court in the case of Chitra Sharma v. Union of India (2018), recognised the right of the home buyers and appointed a representative for them entitled to participate in the Committee of Creditors of Jaypee Infratech Ltd.

2018 Amendment to the Insolvency and Bankruptcy Code 

Based upon the recommendations of the Insolvency Law Committee through the IBC (Amendment) Act, 2018, Section 5(8)(f) was amended to include an explanation that said ‘financial debt’ includes “any amount raised from an allottee under real estate project.” Further, the amendment was made to the CIRP regulations to include the homebuyers in the category of ‘Creditors in a Class.’ This Amendment was challenged by the real estate companies in the case of Pioneer Urban Land and Infrastructure Limited v. Union of India, wherein the Hon’ble Supreme Court upheld the Amendment relying on the fact that the delay of completion of flats/apartments and the raised amounts from the Home buyers contributes significantly to the development of flats/apartments while it categorically also stated that those speculative investors and those not genuinely interested in purchasing the said flat/apartment could be excluded from the definition of ‘financial creditors.’ Such judgment led to several CIRP applications curtailing the development projects. Hence, another amendment was done i.e. IBC (Second Amendment) Act, 2020 which prescribed a minimum threshold limit for homebuyers to initiate CIRP which was either 10% of the total number of such creditors in the same class or 100 of such creditors in the same class. In the case of Manish Kumar v. Union of India, there was a challenge to the constitutional validity of this threshold limit in the Bill of 2019 but it was upheld by Apex Court. The court, however, was considerate to note that its default date for some home buyers may be different. Hence, all moving an application for CIRP under Section 7 of the Code, 2016 would not be practicable. The Court noted that if there is a default even if it is owed to none of the applicants (home buyers) but even to other financial creditors- even then they are entitled to move the application accordingly. Yet the threshold required to file the CIRP application as on the date of filing of the application must be fulfilled. Many have criticised this threshold limit saying that it favoured the real estate developer over the home buyers. However, the court in this judgment clarified in paragraph 235 that even for financial creditors specifically dealing with allottees there are those who have faith in the project.  

In the case of Bikram Chatterji v. Union of India (Amrapali case), there was a writ petition filed by the home buyers against the CIRP decision of the NCLT. In this case, the mega realty developer defaulted on a payment of around 4.3. billion dollars to the Union Bank for the construction of the company’s Eco Village project in Greater Noida, Uttar Pradesh. The homebuyers were not happy because they had been paying the pre-equated monthly installment before the receipt of the flats and they had even taken loans and were being forced to pay those as well. The Hon’ble Supreme Court held that the claims of homebuyers are above the claims of other financial creditors and government authorities. With this judgment, it was made sure that the authorities and the secured financial creditors do not end up selling the flats of the home buyers who were/are early waiting to get possession of their apartments. 

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Reverse Corporate Insolvency Resolution Process for the real-estate sector

In the Flat Buyers Association Winter Hills vs. Umang Real Tech Pvt. Ltd. case, two allottees joined hands through the flat buyers association of Winter Hills and moved an application under Section 7 of the IBC, 2016 for initiating CIRP against the defendants. The above-mentioned allottees had already taken possession of their respective flats and the sale deed had been registered in their favour. On its admission by the NCLT, Delhi, it directed the financial creditors (allottees) to deposit a sum of Rs. 2 lakhs with the IRP to meet the expenses for performing the functions assigned to the IRP because it is the duty of the IRP to keep the company going concerned after CIRP starts. To keep the company as ‘going concern’ the flats/apartments would have to be completed by the real estate company. However, the amount of two lakhs is insufficient to keep the company going concerned and it was recognised that the financial creditors do not have the expertise to assess the “viability” and the “feasibility” of the Resolution Plan as understood in the Innovative Industries v. ICICI, Swiss Ribbons v. Union of India, and Essar Steel v. Satish Kumar Gupta cases. Hence, the duty of the RP is to maximise the assets of the corporate debtor and balance the stakeholders. Herein, the asset of the corporate debtor is the infrastructure built by it for the allottees. The corporate debtor’s assets cannot be distributed to secure financial creditors, i.e., financial institutions in this case. The NCLAT noted that in most cases, the Committee of Creditors likes to take a “haircut” of the assets of the corporate debtor, but in the present case, there cannot be such a haircut of assets/flats/apartments. Hence, the big question to be solved was whether during the CIRP the resolution could reach finality without the approval of the third-party resolution plan (the plan by the secured financial institutions and by the unsecured financial creditors, i.e., the allottees here).

In this specific case, there were 142 allottees who had defaulted on making payments of their installments due to the corporate debtor. Hence, the IRP issued demand notices to them for making those particular payments, yet they neither paid nor came forward to take possession.

In the case, the NCLAT noted that one of the promoters of Uppal Housing Pvt. Ltd. (one of the intervenors) agreed to stay outside the CIRP but would play the role of the lender as being a financial creditor to ensure that the CIRP reaches its success and the unsecured financial creditors (allottees) would take possession of their respective flats/apartments during the CIRP without any third party intervention. Such a proposal was also accepted by the Flat Buyers Association. One of the financial institutions also agreed to cooperate in terms of the agreement with the condition that they get 30% of the amount paid by the allottees at the time of the registration of the flat/apartment.

The NCLAT noted that in the case of normal CIRP against the corporate debtor in the real estate sector, it shall only be confined to a particular project and not affect any other project of the same real estate company in other places where separate projects are approved by the different authorities, where owners may be different, and the financial creditors (allottees) and other financial creditors are separate. This was done to ensure that the interests of all the home buyers were not affected due to one single project default by the real estate company. This allowed for “project basis CIRP,” which meant that any other allottees (financial creditors) or financial institutions of other projects are not permitted to file a claim before the Interim Professional of other projects, and such a claim will be denied. The NCLAT also noted that the secured creditors cannot be provided with the asset (flats/apartments) by preference over the allottees (unsecured financial creditors) for whom the project has been approved. However, it is pertinent to mention that the NCLAT also observed that in case some allottees seek a refund it cannot be allowed by the adjudicating authority or even by the appellate tribunal in view of the Hon’ble Supreme Court’s judgment in Pioneer Urban Land and Infrastructure v. Union of India, in its paragraph 57, that when the allottees are at default, then on reading the agreement and the applicable RERA Rules and Regulations, they shall not be entitled to any relief including the payment of compensation and/or refund, “We may mention here that once this prima facie case is made out, the burden shifts on the promoter/real estate developer to point out in their reply and in the hearing before the NCLT, that the allottee is himself a defaulter and would, therefore, on a reading of the agreement and the applicable RERA Rules and Regulations, not be entitled to any relief including payment of compensation and/or refund, entailing a dismissal of the said application.”

The NCLAT observed that the real estate developer can also inform the authorities about the fraudulent intent of initiating CIRP under Section 65 of the Code, 2016; such as pointing out to the adjudicating authority the fact that the allottee is a speculative investor and not one “genuinely” interested in purchasing the flat/apartment or in the real estate market falling, the allottee does not want to go ahead to perform its obligation to take possession of the concerned flat/apartment under RERA and wants to “jump ship.” Further, the NCLAT noted that after the allotment is made, the allottee has the option to request the IRP or the promoter to find a third party to purchase the said apartment/flat and get the money back. It is also possible for the allottee to come to terms with the promoter (not the corporate debtor) to seek a refund of the amount.

Therefore, the NCLAT directed the intervenor/promoter to act as a financial creditor/lender, ensuring the project would be completed within the time frame provided by it by the disbursement of the amount. This sum is to be paid by Uppal Housing Pvt. Ltd. and the allottees (financial creditors) during the CIRP. The NCLAT asked the allottees to pay the cost for registration and the balance amount as per the terms of the agreement. Once these are complied with, then the CIRP shall be closed after intimation to the NCLT and the resolution cost, including the fee of the IRP, has to be borne out by the promoter. It also directed that only after the certificate of completion from the IRP and approval of NCLT, the unsold flats/apartments, etc. shall be handed over to the promoter, Uppal Housing Pvt. Ltd. It also stated that the IRP has the authority to sell unsold flats/apartments during the CIRP through a Tripartite Agreement between the Purchaser, IRP, and Promoter (Uppal Housing Pvt. Ltd.) and that the proceeds from such sale must be used to finance the specific project and make payments to financial institutions/banks and operational creditors. After these compliances, the IRP shall move the application to the NCLT with a report of completion asking for disposal of the application under Section 7 of the IBC, 2016 when “Rachna Singh and Ajay Singh (Allottees) have already occupied their flats.”

Criticism of Flat Buyers’ Association v. Umang Real Tech Pvt. Ltd.

There has been much criticism of the ‘Flat Buyers’ judgment’. Some of the criticism is highlighted below:

  1. NCLAT disregarded Section 29A of the IBC, 2016, which clearly states that certain parties, such as “persons acting in concert,” “connected persons” (including a promoter, etc.), and “related parties,” are ineligible to be the resolution applicant. Hence, according to the said section, no defaulting promoter shall be allowed to involve themselves in the insolvency process.
  2. Further, the NCLAT treated the promoters of the corporate debtor as the ‘outside lender’ and not as promoters to work with the resolution professional to distribute the funds, which is barred by the Code of 2016 itself because upon the initiation of CIRP, the activities of the corporate debt or are suspended, which includes even the management.
  3. The resolution applicant requirement as per the Code is the sine qua non. Moreover, the concept of “Reverse CIRP” is not mentioned in the Code, which means the Tribunal went beyond its powers.
  4. On completion of the single project, the resolution professional is to submit an application for the dismissal of the CIRP filed by the financial creditors, which is not what is prescribed by the Code.
  5. NCLAT allows the CIRP to function as an outside financial creditor if the promoter fails to make the required investment outside the scope of the IBC, 2016.
  6. NCLAT ignored the plight of the operational creditors of the real estate developers who maintain the same lender accounts and they were left remedial in the event of “project insolvency,” because they may not have sufficient documents to prove their respective claims.
  7. NCLAT didn’t clarify the moratorium aspect in Reverse CIRP as mentioned under Section 14 of the IBC, 2016.
  8. Sometimes, the allottees of an incomplete project are allotted alternative projects by the real estate developer, but they remain sans remedy in the case of limited CIRP, wherein allottees of other projects of such particular real estate developers are protected for a particular project.
  9. Because the maximisation of assets for CIRP has no effect on the real estate companies’ entire projects, such a decision by NCLAT may cause them to be careless. The companies may even use the funds from the project under the CIRP for any other project as they deem fit. Therefore, there must be a provision in the IBC allowing for paying compensation in the event of late delivery or non-delivery or refund of amounts advanced together with interest.

An overview of the reverse Corporate Insolvency Resolution Process

It is an exception created only for real estate companies. It is the duty of the intervenor/investor to fund the process to complete the development project of the corporate debtor, which can be promoted during the CIRP. There is a specific time frame provided within which the project shall be completed.

The process in reverse CIRP is as follows:

  1. The unsecured financial creditors can file an application for the initiation of CIRP under Section 7 of the IBC, 2016 to the NCLT.
  2. The whole CIRP happens without the approval of a third-party resolution plan.
  3. The CIRP does not affect the other projects of the corporate debtor, which means their company is kept as a going concern considering the interests of other stakeholders, i.e., the home buyers and financial institutions for other similar development projects.
  4. The promoter of a certain company functions as the lender/financial creditor to make sure the project development is completed with sufficient funds and all the dues are taken from the allottees to complete the project and payments are made in respect of the financial institutions on time.
  5. When all the compliances are met, all parties are satisfied with payments, and allottees have been given possession accordingly, then the promoter shall file an application to NCLT for dismissal of the application for CIRP.

In the case of  M/s. Sheltrex Developers Pvt. Ltd. Vs. M/s. Tata Capital Housing Finance Ltd. the NLCT, Chennai Bench held that IBC, 2016 does not provide for “Reverse CIRP,” hence such a mechanism is outside its purview. The Court dissented with the Flat Buyers’ case and held it could not be applied as precedent in the present scenario.

In the case of Ram Kishor v. Union Bank of India (1965), the NCLAT limited Supertech’s CIRP to one project itself. The NCLAT, Delhi, allowed Supertech Ltd. to finish the project by limiting the insolvency proceedings against it by applying the “Reverse CIRP” concept, thereby allowing the company to remain in charge of the execution of the project and letting the original promoter exist.

Conclusion

The courts are there to interpret the laws, not to implement them, as that would cause judicial overreach or “judge-made law,” which is not appreciated by the legislatures because it is the lawmaker’s duty to make laws. Considering the prime aim of the corporate insolvency resolution process is to revive the company through the resolution plan and satisfy the creditors, IBC was formulated wherein under Section 7, the financial creditors can file an application for CIRP. However, over the years, many home buyers caught themselves at bay because many times the real estate developers declared themselves bankrupt, which left the homebuyers not getting the flats/apartments for which they paid in advance to the developers. The Hon’ble Supreme Court in one of the pleas by the homebuyers held them to be creditors under Section 7 of the IBC, 2016, finally giving them the power to initiate CIRP against the developers. But this was being used majorly due to the way many of the real estate companies were getting hampered by the CIRP proceedings. Therefore, to address the issue, an amendment was made to the Code of 2016, thereby creating a threshold limit to make sure CIRP is done in a wise manner. After some time, in the Flat Buyers’ case, the NCLAT came up with the concept of “Reverse CIRP,” wherein it made sure there was a project-wise CIRP, therefore, ensuring that the whole company is not under CIRP. The NCLAT made the promoter an outside lender to act as a financial creditor to finance the project completion by raising money from the allottees and making sure the whole project is completed in due time and all debts are cleared of secured financial creditors as well; failure of which would make them liable under the law accordingly. This particular judgment has been widely criticised by IBC, 2016 experts, who have labelled it judicial overreach and a violation of Section 29A of the IBC, 2016, which prohibits promoters from being involved in the corporate debtor while CIRP is proceeding against it. This judgment has been accepted by some NCLTs while it has been rejected as a concept by other NCLTs in India, saying that IBC does not provide for such a method. It would be interesting to note what the Hon’ble Supreme Court decides with regard to the concept of “Reverse CIRP.”

References 


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Recent verdict by the Bombay High Court relating to sexual relations on promise to marry

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This article has been written by Saylee Chaudhari pursuing Advanced Civil Litigation at Lawsikho. 

This article has been published by Sneha Mahawar.

Introduction

Marriage is a legally and socially sanctioned union between a man and a woman. It gives legal identity and legal rights to both parties. Marriage is something that needs the consent of a woman and a man. The union should be mutual. Culturally, marriage is considered a compulsory ceremony before pursuing any sexual activity. 

Even in some cases, it is observed that the intercourse has taken place even before marriage, with the hope that the boy will marry the girl in the future.

But what if the consent has been obtained by false representation or on the basis of a misconception of facts merely to establish a sexual relationship? Is such an act considered an offence? Is it punishable?

The Bombay High Court, in a landmark judgment, Kashinath Narayan Gharat v. The state of Maharashtra (2021) has clearly stated and explained the offence of cheating and whether the refusal to marry after making a promise to marry would constitute cheating.

Summary of the case

The complaint was filed under Sections 376 and 417 of the Indian Penal Code, 1860. There was a physical relationship between the accused and the woman. The woman complained that the accused had physical relations with her and then refused to marry her. 

The appellant was convicted by a judgment and order passed by the learned Additional Session Judge under Section 417 of the Indian Penal Code for having a sexual relationship with the victim with a promise of marriage. He was sentenced to undergo rigorous imprisonment for one year and a fine of Rs. 5000/-. He was acquitted of the offence under Section 376 of the Indian Penal Code. 

Later, after analysing the evidence on record and the facts of the case, the High Court of Bombay acquitted the appellant of all charges, and the order was quashed and set aside.

Judgment

In this case, both the prosecutrix and the accused were known to each other for three years. It was observed that the consent for a physical relationship was not given under a misconception of the facts, nor was there any evidence indicating that the accused did not intend to marry her. It was further stated that, in the absence of evidence, merely refusing to marry her would not constitute an offence under Sections 376 and 417 of the Indian Penal Code.

insolvency

Legal provisions

The Case revolved around four provisions-

  1. Cheating under Section 417 of The Indian Penal Code;
  2. Rape under Section 376 of The Indian Penal Code;
  3. Section 90 of the Indian Penal code- Consent known to be given under fear or misconception;
  4. Section 374 of the Code of Criminal Procedure, 1973.

Cheating 

The Oxford dictionary has explained cheating as “to trick somebody or make them believe something that is not true.”

Section 417 of the Indian Penal Code deals with “cheating,” wherein dishonest concealment of facts is an offence. The offence is punishable with imprisonment of one year or with a fine or both.

In the present case, the question of making false promises just to establish a sexual relationship has been analysed. In which, a false promise and consent given under misconception of facts are regarded as cheating. Whereas mere refusal to marry is not considered cheating.

Rape 

Rape is a sexual assault in which the victim is forced to have sex, without his or her consent and by using violence. Section 376 further explains that if a man tries to have sexual intercourse with a woman-

  1. Against her will;
  2. By not obtaining consent from her;
  3. If consent is obtained by fear for her or someone she is related to or interested in fear of death or injury;
  4. If she believes that the consent she is giving to is her husband even though he is not her husband;
  5. Consent of unsoundness of mind;
  6. Consent is given if she is under sixteen years of age.

Consent under fear or misconception 

Consent is when someone agrees to something. Such consent must be given without any fear of life or misconception. The consent that is given under fear of or injury to a person or death or misconception comes under this section.

In the present case, consensually establishing a physical relationship will not come under Section 90 of the Indian Penal Code. 

Appeals from convictions

Section 374 of the Code of Criminal Procedure deals with any appeals against any impugned judgment from an accused to Supreme Court and High Court who has been convicted on a trial.

What is a false promise

A false promise is something in which a promise is given intentionally to deceive the person into obtaining something or with full knowledge that such a promise will not be carried out. A false promise is given when the person giving such a promise wants something in return and he/she knows that unless and until such promise is not given he/she will not get that thing.

The false promise will be-

  1. By gaining something in return for the promise;
  2. An intention to not carry out the promise;
  3. To deceive someone into believing that the promise will be carried out in the future. 

Promise and misconception of facts

When consent is given based on a false promise to marry and the maker of the promise has no intention to abide by it but the promise is made just to engage in sexual intercourse; it is said to be the “misconception of facts.” Consent given under a misconception of fact is no consent in the eye of the law.

But a mere breach of promise is not a false promise. 

Sexual intercourse on false promise to marry 

As per the above understanding, a misconception of the facts is considered a false promise. When a person with the intention to have sexual intercourse gives a false promise to marry the girl and later refuses to marry, the false promise is a false promise and is punishable under sections 376 and 417 of the Indian Penal Code. 

Such intercourse under the pretext of a promise to marry is considered rape only if such promise was given solely for the purpose of having sexual intercourse with the girl.

 The misconception of facts would be-

  1. False promise or fraudulent misrepresentation;
  2. Mala fide intention behind giving the promise;
  3. It has to be in proximity to the time; 
  4. Should not be a deliberate choice of the victim. 

Findings of the case

It became crucial to check whether the following things were considered before passing judgment-

  1. Whether the physical relationship was consensual;
  2. That the accused never wanted to marry;
  3. Whether the consent obtained was by misconception of the facts.

It was established that consent for a physical relationship was given willingly, and the relationship continued for three years. There was a social barrier between both of them. There was no evidence of whether the accused fraudulently lied about the marriage proposal to establish a physical relationship. Due to the absence of evidence, it could not be established whether such consent was given under a misconception of the facts, and hence the accused was acquitted of all charges.

insolvency

Relevant case laws

Maheshwar Tigga v. State of Jharkhand (2020)

The prosecutrix and the accused in this case were in a relationship for four years. The prosecutrix alleged that she was raped at the point of a knife. The accused later promised to marry her and continued to have a physical relationship with her. The relationship continued for four years. She even stated that they were engaged. During this time, she stayed with the accused at his house for fifteen days. The prosecutrix further stated that due to religious barriers, the marriage could not be established.

The question, in this case, was whether the promise given was under the misconception of facts and that he never wanted to marry.

 Things were taken into account:-

  1. The prosecutrix in her letter acknowledged that her parents used to beat her due to their relationship
  2. The religious barrier of the accused being a scheduled caste and the prosecutrix being a Christian
  3. The consent obtained was under fear or was given under a deep love affair.
  4. The proximity of time

Under Section 90 of the IPC, consent given under circumstances of fear or misconception of fact is not consent. It was observed from the evidence that a physical relationship was established consensually with the consent occasioned by their love affair. Further, the consent given under the misconception of facts has to be within a proximity of time and cannot be spread over four years. Additionally, the consent given was a conscious choice.

Sonu @ Subhash Kumar v. State of Uttar Pradesh and Anr. (2021)

The case was similar to the present case. In this case, an FIR was registered after the accused refused to marry her. The FIR was quashed, stating that there was no ground to prove the allegation that the promise to marry was based on false representation or inception.

Conclusion

Many times, people misuse laws that are made to protect them to harass other people. It is well delivered after rightful thinking that if there was no intention of cheating someone by giving false misrepresentation and if the relationship established was with mutual consent then the refusal to marry will not amount to cheating and/or rape. It has been observed that women, in particular, are intemperate and fall for promises to establish a physical relationship. It is indeed wrong to play with someone’s feelings, but as per this present case, if the marriage was not possible due to social barriers or any other reasons, then refusing to marry is not cheating. Further, one cannot force someone to marry them. The punishment for rape is for those who suffer and do not consent to or are forced to establish a physical relationship; hence, using such laws only to restrict someone from marrying someone else is misusing the rights. It also affects someone who has really suffered through rape. Such judgments further help to establish the thin line between willful consent and forced consent.

References

  1. https://www.livelaw.in/pdf_upload/bombay-high-court–406599.pdf
  2. https://main.sci.gov.in/supremecourt/2019/11184/11184_2019_33_1501_24138_Judgement_28-Sep-2020.pdf
  3. https://www.livelaw.in/pdf_upload/sonu-subhash-kumar-vs-state-of-uttar-pradesh-ll-2021-sc-137-390179.pdf

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.

Download Now
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